When you picture the stock market, what comes to mind? A bunch of flashing screens, lunatics sitting around yelling and frantically waving cash in the air, waves of emotion surrounding the ups and downs of winning and losing. Kind of reminds you of another scenario…
Is investing gambling? Investing is frequently compared to gambling, and we understand why. Both involve risk, reward, and varying levels of uncertainty. However, there are two major differences between a trip to the casino and investing in the stock market. The trick is to participate in passive, long-term investment. We’ll explain.
The stock market fluctuates, as might your stack of poker chips, and it’s easy to get caught up in the moment. The difference? There’s no trend of “winning” when it comes to gambling, particularly if you’re gambling at a casino, where the games are designed for you to lose. Therefore, the longer you gamble, the higher the probability you’ll walk away with less money. On the other hand, the U.S. stock market has historically risen over time, so when it comes to investing, long-term gumption could leave you better off.
The reason investing sooner could increase your overall returns is because of the benefits of compounding. Think of compounding as the miracle of rabbits breeding. The more time the rabbits have, the more they’ll breed. The cute lil’ bunnies will then likely produce more bunnies, who will then produce more bunnies, and so on and so forth. The quicker the bunnies start breeding, the more opportunity there is for more bunnies to be born and begin breeding of their own.
While we can’t guarantee this will always happen with investing (there’s always a chance the world will end, after all), the same concept applies. The sooner you begin your initial investment, the more opportunity there is for returns to potentially compound. The more money for you. Score.
Barring the fact that you’re a professional poker player who’s able to count cards and read facial expressions, your gambling “strategy” likely never works out. However, investing is aaaaaaaaall about strategy. The right strategy, that is. If you maintain a diversified portfolio and partake in passive long-term investing, you could reduce your risk of losing money over the long term.
A diversified portfolio means you’re investing in lots of different asset classes. When you’re betting on your favorite basketball team winning a game, you’re only betting on one single outcome. If it doesn’t pan out, you lose. However, when you diversify your portfolio, you’re “betting” on various asset classes, and thus spreading out risk. In other words, you’re not putting all of your eggs (or cash) in one basket.
Passive investing is a strategy focused on building a portfolio that isn’t intended to react to short-term freakouts (read: market volatility). Over the long term, research has shown that time and time again, passive investing has worked better than picking hot stocks to try and beat the market. So the next time you read the news and everybody’s predicting the end of the world, ignore the hype and turn back to your cup of coffee.
Bottom Line – Is Investing Gambling?
Even though they both involve risk, investing is different than gambling. Investing not time constrained and far more strategy-based than throwing down at the casino. While investing is arguably less fun than playing blackjack, it’s probably more exciting than the slot machines.