Investing vs Gambling: Why They’re Totally Different

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Investing vs. gambling

Think investing is the same as gambling or scratching off a lottery ticket?

Many people who are nervous about putting their money in the market hesitate because they believe that investing comes down to the luck of the draw.

In other words, they believe their ability to make money investing comes down to pure chance, like the flip of a card or roll of the dice.

Investors and gamblers have one thing in common. They both want to put more money in their pockets. But investing and gambling could not be more different.

Here’s why investing your money can be a way better option than playing the lottery or betting it all on a game of cards:

Put the odds in your favor

Ask anyone familiar with gambling and they’ll say “the house always wins.” Since casinos are in the business of making money for themselves that means you have to lose.

Investing is a much more effective way of making your money work for you. And most importantly, you’ve got a lot more control in where your money goes and how it can grow.

If you bet $1,000 that the roulette wheel hits your lucky number, you’ve got one shot at cashing in. Your odds? 35 to one. That’s a risky bet. And it’s pretty likely you’ll walk away from the casino with less money than when you walked in.

Investing involves a certain amount of risk. But by building a more diversified portfolio with stocks, bonds and holding from multiple sectors (tech, energy, blue chips), you’re balancing out your risk. In other words you’re not betting it all on one investment. If one investment goes down in value, you’ll have other investments that may hold steady.

For example, numerous advisors say an efficient way to manage your money is by applying aspects of Modern Portfolio Theory (MPT). Nobel Prize winning economist Dr. Harry Markowitz conceived the idea for MPT which formed the foundation for portfolio management by balancing risk and return.

The general idea of MPT is that by investing in a diverse assortment of stocks, bonds, and other securities in a multitude of countries, you can minimize risk.

Invest with a plan

The news is full of stories about a lucky someone who won a lot of money at the casino or by playing the lottery. As a result, many people believe this outcome is possible for anyone.

However, losing is nearly inevitable when you gamble. That is, you are almost certain to lose your entire bet with no money left over.

Gamblers hope for a quick win. Investors want to build wealth over time. Fast money sounds great but it isn’t an actual plan to get you to your goals.

Rather than just “win big,” many investors have a specific plan as to what they’re investing for in the long term. This goal, whether it’s saving for a down payment or a child’s college education, should align with your investment strategy.

Once you have a plan in place, you can adjust your portfolio according to your timeline. How much do you need to invest each month in order to get to where you need to be, when you need to be?

The power of compounding

The news is full of stories about a lucky someone who won a lot of money at the casino or by playing the lottery. As a result, many people believe this outcome is possible for anyone.

By choosing to invest your money with a solid strategy you can allow your assets opportunity to compound over time.

Here’s how compounding works:

Imagine you invested $100, and your hypothetical investment averaged a 10%* annual return**.

  • After the first year, your $100 would earn 10%, or $10. So, you’d have $100 + $10, or $110.
  • In your second year, you’d start with $110, and earn 10% of that, or $11. So you’d have $110 + $11, or $121.
  • In your third year, you’d start with $121, and earn 10% of that, or $12.10. So you’d have $121 + $12.10, or $133.10
  • In your fourth year, you’d start with $133.10, and earn 10% of that, or $13.31. So you’d have $133.10 + $13.31, or $146.41

If you held your investment for 20 years with the same average annual return, your initial investment of $100 would be worth $672.75.

That’s just a single $100 investment.  If you open an account with spare cash, contribute regularly, and invest the proceeds in a balanced portfolio of index-tracking ETFs.

Your compounded earnings are calculated on a larger account balance as the money grows.

Key Takeaways

Despite the perception that investing is nothing more than gambling and you are better off buying lottery tickets with your money, this could not be further from the truth.

When you gamble, the odds are not in your favor.  You’re likely to lose your entire bet.

Investing your money by regularly monitoring and contributing can give your money the chance to grow over time.



Footnotes

*If you look at the S&P 500 index over the course of 30 years (1987 – 2017), the annualized return is over 7% without adjusting for inflation.  If adjusted for inflation, the annualized return on the S&P 500 over 30 years is closer to 4.5%, if you don’t include dividends.

**This is a hypothetical example that is demonstrating a mathematical principle. It does not illustrate any investment products and does not show past or future performance of any specific investment. Past performance is no guarantee of future results. Investing involves risk, including the loss of principal.





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