It is well known that investing is similar to gambling in the way that it also involves risk and choice. However, there are some key differences that distinguish these two activities. To make sure that you are investing for long term financial success and not gambling your hard-earned money, continue reading the article below.
What is investing?
Investing is a viable way to build your nest egg and overall wealth over the long term and involves allocating your money to a particular asset which may include cash investments, fixed interest, shares or property. How you distribute your money will hinge on the amount of risk you wish to take on which will be contingent on your goals and objectives, current financial position and investment time horizon. To understand more about the meaning and importance of asset allocation, click on the following link.
According to data from Goldman Sachs the average 10-year stock market return is 9.2% p.a., with the S&P 500 index experiencing annual returns of 13.6%. Despite these positive figures, the average return per year looks very different as markets experience volatility year to year. The Wall Street Journal has suggested that only 13.5% of gamblers end up winning, and the number of big losers is far higher than big winners.
What is gambling?
Gambling can be understood as staking something such as a bet on a contingency. This means that an individual is risking a certain amount of capital on a future event taking place that is not sufficiently certain and involves a high level of chance. Although professional betting may involve some risk management, the odds are often stacked against gamblers.
What are the key differences?
The key underpinning of both investing and gambling is to maximise returns whilst minimising risk. However, the main difference is that the ‘house’ often the casino, has a mathematical advantage over players that increases the longer they play. Conversely, the stock market cyclically appreciates in value over a long-term time horizon. Although this does not guarantee investors a positive return every year, investing over a long-term period of time will allow individuals to enjoy the benefits of long-term growth.
Another distinguishing characteristic between investing and gambling is the ability to mitigate loss. For gamblers, making a losing bet means that they have completely lost their capital. Investing on the other hand provides individuals with an array of ways to minimise the potential of losing their capital such as time and the types of assets they wish to be exposed to.
Risk is measured in time, and it is one of the most important factors in investing. A general rule of thumb is that the greater an investor’s risk appetite, the longer they should be invested in the market for. This allows for their investments to recover in the event of volatility and market downturn as well as enables for the holdings to increase in value over time. This is not possible with gambling, as once the ‘game, race or hand is over’ you no longer have the ability to continue profiting or recover your losses. You have either made or lost money.
Another difference is that investing in the share market can provide investors with income either through fixed income, dividends from shares or the increase in value of the asset once it is sold. This is a defining difference between investing and gambling and highlights how investing is a more viable method of growing your current funds or capital.
Information and Research
Some gamblers may like to research about the players they bet on similar to the way investors gather information on companies or particular stocks they may like to invest in and how they have performed in the past. This provides both investors and gamblers with the opportunity to make more informed choices and to potentially increase their chances of winning or receiving a positive return. However, there is a key difference in the accessibility and availability of these two types of information.
Investment research is publicly available, and the information provided by research houses or the companies themselves is subject to regulations to ensure it is accurate and is appropriate for investors to rely on. This is not the same for gambling information as a player at the casino has no idea how those who have come before them have fared and it may not even impact whether they are successful or not.
This is not to say that there aren’t investors who take gambles or adopt an extremely risky approach to investing. Both ASIC and the Reserve Bank of Australia have previously provided warnings to retail investors about the risks of day trading. This was based on data which suggested that the average investment holding period was down from around four days to one day, meaning that many new investors were ‘day-trading.’ Historical trends have also shown that day-traders lose more than they win and therefore it is a good idea for investors to avoid playing the ‘game’ and remain invested over the long-term instead of trying to time the market.
If you would like to get on top of your current investment strategy and ensure it will enable you to achieve your financial goals and objectives, please click the link to organise a complimentary 20-minute consultation with an EPG Wealth adviser.