Investing vs Gambling - Don't Gamble With Your Investments
Investing vs Gambling – Don’t Gamble With Your Investments

Investing vs gambling. We shouldn’t confuse the two but often do. And to be fair, some investment decisions look a lot like gambling. Investing gives you ownership of an asset with potential to increase in value over time. In most cases, this asset will provide some sort of income while you wait. This could be in the form of stock dividends, bond interest, or even rental income. Just because investment returns are uncertain, doesn’t make it gambling. Gambling is betting on the outcome of an event. There’s no ownership of an asset and no interest or dividends to receive. These are two completely different things.

Going all in is for gamblers, not retirement savers. When gamblers go all in and win, they are rewarded for the risk. Other times, they get wiped out and walk away from the table humbled. Rather than going all in when the stock market is at all time highs, stick to your plan. The market never goes up forever.

Stay focused on your investment objective, risk tolerance, and time horizon. Let these be your guide. Everything else is just noise and needs to be tuned out. Stay diversified and re-balance your funds to make sure you’re not overly exposed to one asset class. It might be tempting to dial up your risk level when the market it moving up, but remember, markets can change direction fast.

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Investing vs Gambling

While investing involves risk, that alone doesn’t make it gambling. When we associate gambling with investing, some will be quick to dismiss the benefits of owning stocks or other marketable securities. For example, I often hear folks say things like “the stock market is just a casino,” or “I don’t want to invest, I’m not much of a gambler.” This is a misconception of what investing is and has the potential to significantly limit wealth accumulation.

Many investment professionals, especially those held to the fiduciary standard, follow the “prudent investor rule.” This basically means that an advisor should only recommend investments and deliver advice in a manner that is consistent with prudent investing principals. The needs of the investor and/or a trust’s beneficiaries are put first.

For example, let’s say someone inherited $100,000. If the investor or advisor bet all that money in a casino and turned it into $1,000,000 the fact that the bet paid off is irrelevant to whether the move was prudent. If the investor or advisor were following the “prudent investor rule” the bet would never have been made in the first place. This doesn’t mean risk can’t be taken, but the investment risks need to be in line with the investment objective, risk tolerance, and time horizon of the individual.

Here are some investing situations to avoid:

While these aren’t the same as gambling, they can certainly be high risk.

Concentrated Stock Positions – This is when an investor holds a significant amount of one stock. While this practice can be very common among CEOs and other corporate executives it is not advisable for regular investors. Think of this as the opposite of diversification. If all of your assets are tied to one company’s stock and something goes wrong, you could potentially lose everything.

Selling Stocks Short – We won’t be going into a detailed explanation of “short selling” here. What you need to know is that you are essentially borrowing shares of stock, immediately selling those shares (that you don’t own), and hoping the value of the stock declines. Then, you can buy the stock back at a lower price allowing you to keep the difference. Sounds great right? What if the the price of the stock goes up? In that case, you will be forced to buy the stock back at a higher price than you sold and boom, you’ve lost money. In addition, you are required to pay interest for the shares you borrowed.

I see people making risky investments so they can receive a fast payoff and overextend themselves. But, you’d be surprised how much you can save by investing a little bit over a long period of time. You can save even more by investing a lot over a long period of time.

Investing vs Gambling - Don't Neglect Your 401(k)
Investing vs Gambling – Don’t Neglect Your 401(k)

Investing vs Gambling – Don’t Neglect Your 401(k)

As an advisor, I often encounter folks who aren’t participating in their company retirement plans. It is very common for company retirement plans to offer matching contributions to whatever you save up to certain limits.

If someone told you about an investment opportunity that promises to provide 50% return on your invested money, or even better, 100% return on your money, you’d think it was too good to be true right? In most cases it is too good to be true. But in the case of many company retirement plans, companies will put in 50% or even 100% of your contributions (up to a certain limit). An example would be deciding to defer $100 per pay check. You put in $100, and the company matches with $50. There’s your 50% return on investment!

Not all company retirement plans are the same, and of course, there is a whole lot more to participating in a plan than what was mentioned here. Take another look at your company retirement plan. If it offers matching contributions and you’re not participating, you are leaving money on the table.

Market Timing Your 401(k)

Market timing can take many forms. Here’s one way market timing your 401(k) can cost you. A new participant starts deferring a portion of their paycheck into a 401(k) plan. Instead of dollar cost averaging, the participant allocates their contribution to cash where the funds are not invested in a diversified and well allocated portfolio. The participant believes the stock market is due for a big drop and wants to buy in when stocks are cheep. This is not a prudent strategy for several reasons.

What if the market doesn’t drop when the participant expects it to? What if the market stays flat and doesn’t go up or down during the year? People often forget that when you own stocks and bonds in a diversified portfolio, you earn dividends and interest. Most often, those earnings are reinvested to accumulate more shares allowing for compounding returns. If a participant market times in this way, they risk missing out on earnings and compounding returns.

Be an investor with your money. Take calculated risks that match up with your investment objective, risk tolerance, and time horizon. Remember, going all in is for gamblers, not retirement savers.

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3 Comments

  1. Well said, David. I have a question for you:

    If you invest 3-5% of your income, monthly, in 15 different stocks and the same amount into 30+ cryptocurrencies, would that be considered gambling or a good investment? I am investing for the long term as in 10+ years. I will never take out any of the money I have already invested. I am also ready to lose all this money. In case this happens it will not affect me. What are your thoughts, David?

    1. Hi Paul, Thank you for your question and comment. I appreciate you contributing to the conversation. I have zero experience with crypto currencies. Personally, I just don’t feel the need to pursue those investments because there are so many more “traditional” investments that will meet most peoples needs. As long as the 15 stocks are in different areas of the market and different asset classes, you would be diversified. Whether they are a good investment is a totally different question and impossible to know without further information. I think I understand what you are saying about your preparedness to lose all of the funds and not being affected. I would say investing between 6% and 10% of income per year over the course of 10 years and losing it all WILL affect you even if you are prepared to lose all of it. Pursuing a more traditional investment strategy of a diversified mix of stocks and bonds may provide for more steady long term wealth building as opposed to higher risk investments. Please know that this should NOT be considered investment advice. This is purely educational. Thanks again for your question Paul!