Gambling Vs Investing
Differences between gambling anD investing In its simplest form, gambling is when a person gives money specifically for the mere chanceof receiving more money. Chance is the probability that a particular outcome will occur—e.g., on a spinning roulette wheel, how likely it is that a ball lands in a red compartment marked “thirteen.”.
- Gambling Vs Investing Advice
- Gambling Vs Investing For Dummies
- Gambling Vs Investing
- Gambling Vs Investing Stocks
Recognizing the differences between saving, investing, and gambling will help you compartmentalize each, and avoid common mistakes. It’s an easy mistake because not enough people think it through, and the terms are used interchangeably in our culture. Keeping saving, investing, and gambling three separate activities in your mind and in your account structure will help you be more successful at managing your money and growing your wealth.
- Day trading is a cousin to both investing and gambling, but it isn’t the same as either. Day trading involves quick reactions to the markets, not a long-term consideration of all the factors that can drive an investment. It works with odds in your favor, or at least that are even, rather than with odds that are against you.
- Some types of investing, such as day-trading, are very much like gambling. Anything that requires 'luck' above wise decision-making and long-term planning should be avoided. Most long-term investments return a profit over time, making them much more like buying bonds or certificates of deposit than rolling dice in a casino.
What is Saving?
Saving is the act of preserving income for a future use; or an amount of income that is not currently consumed. Very simply saving is income that is not spent or put at risk.
In other words, saving involves money put aside for the future with capital preservation the primary goal. It’s possible to save toward investing activities. For example, you may want to transfer money from savings to investing when your emergency and short term goals become fully funded.
Examples of Saving would be: Bank Savings Account, Money Market Mutual Fund, CDs, U.S. Treasury Bills or Savings Bonds.
Items you might be saving for: An emergency fund, a car, or an event such as a vacation or wedding.
What is Investing?
The act of placing money in risk assets expected to grow from producing a product or service of benefit to others. Investing generally involves putting the original investment at risk with the hope of higher returns than savings.
Investing is having a claim on an entity that produces a product or service with the goal of profit and the risk of loss. Investing is different from saving because your investment is at risk. While there are many different levels of risk an investor may be willing to take; the primary goal of investing is not preservation of capital but long term wealth building. The best investments have growing cash flow and divide an expanding “pie” among the stakeholders.
Examples of Investing: Individual stocks, bonds, most mutual funds, most ETFs, etc. Real Estate used as rental property or for production of goods and services. Buildings such as factories, office space, retail space, etc.
Investing involves the possibility of profits and losses based on performance of the asset.
Example of Difference Between Saving and Investing
Here is an example where the same asset can be saving or investing depending on where it’s placed. A money market fund can be saving in your emergency fund account, but it also can be investing if located in your investment portfolio account.
A money market fund within your investment portfolio should be treated differently than a money market fund for short term savings. The money market in your investment account serves the purpose of lowering portfolio asset correlation and can be used to buy risk assets when opportunities arise. A money market in your emergency fund is for capital preservation and should not be touched unless you have an emergency.
What is Gambling?
Gambling is accepting risk based on chance. Almost all gambling involves risk that exceeds the expected reward. In other words, gambling usually involves dividing up a fixed pie among winners and losers based on chance. In most gambling there is an additional factor such as costs, fees, or odds that results in dividing a shrinking pie.
Examples of gambling:
Currency Trading of Futures and Options (except hedging), Commodity Futures and Options Trading (except hedging), All Lotteries, and Casino games such as cards, table games, or electronic games.
In all these examples the odds are against you because they divide among the “winners” a smaller pie than originally existed!
Difference Between Investing and Gambling
Some people confuse investing with gambling. This is one good reason it’s important to differentiate and compartmentalize saving, investing, and gambling. Most gambling involves risking capital and dividing a fixed amount among winners and losers based on chance. This is different from investing where you place your money in an asset expected to increase in value over time.
Additional Reading:
10 Investing Principles Fundamental To Successful Outcomes
The Importance of Compartmentalization
Investors frequently get in trouble because they fail to differentiate and compartmentalize these three very different activities. An emergency fund should be kept completely separate from your investing activities. As pointed out, even if you have the same asset (i.e. Money Market Fund) in each they need to be viewed and treated differently.
Saving is a passive activity for short term goals. Preservation of capital is the primary goal. A separate account for each goal or activity promotes correct thinking and actions consistent with meeting the goals of the account.
Investing is an active activity and keeping accounts separate from saving accounts keeps the asset allocation and diversification process clear and separated from the fund reserved for capital preservation. Keeping funds separate is sound planning and a risk management concept.
Gambling should never be mixed with saving or investing. If someone chooses to gamble it should be with entertainment monies unassociated with saving or investing accounts. Only monies that individuals are willing to lose should ever be wagered in a game of chance.
Keeping saving, investing, and gambling three separate activities in your mind and in your account structure will assist you in building wealth. Too many people gamble with investment money, or invest when they should be saving. Differentiating and compartmentalizing saving, investing, and gambling, is an important first step to a successful investor.
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Disclaimer
While Arbor Investment Planner has used reasonable efforts to obtain information from reliable sources, we make no representations or warranties as to the accuracy, reliability, or completeness of third-party information presented herein. The sole purpose of this analysis is information. Nothing presented herein is, or is intended to constitute investment advice. Consult your financial advisor before making investment decisions.
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Right before the 2010 Super Bowl, a page 1 article in the February 5, 2010 Wall Street Journal opened with this sentence:
Gambling Vs Investing Advice
“Investors are sometimes accused of treating the stock market like a casino. Now, one Wall Street firm wants to treat casinos like the stock market.”
The article details the decision of a Wall Street bond-trading company to take over the management of sports betting at a new Las Vegas casino. Lee Amaitis, the company executive who runs the betting operation, says the firm got into sports gambling because “we wanted to turn gamblers into traders.” Using sophisticated financial-markets software, bettors can not only bet on the final outcome, but also make wagers on events during the game, such as whether the next pass might be completed, or who kicks next field goal.
On several occasions, the article noted similarities between investing and gambling. The article even featured a bond trader-turned-professional gambler who said “Wall Street is just a form of legalized gambling.”
Is investing just a form of gambling? For many investors, the answer may be “yes.” But it doesn’t have to be. And it probably shouldn’t be.
In July 2000, Tom Murkco, the CEO of Investor-Guide.com, published an essay titled “What is the difference between gambling and investing?” While Murkco noted that many aspects of gambling and investing might appear similar, there were several distinct and easily defined differences.
For either investing or gambling, the beginning of Murkco’s definition is the same: An activity in which money is put at risk for the purpose of making a profit.
But while the purpose of gambling and investing is identical, the methods by which the purposes are achieved are drastically different.
Here are Murkco’s distinctions:
When someone invests…
- sufficient research has been conducted;
- the odds are favorable;
- the behavior is risk-averse;
- a systematic approach is being taken;
- emotions such as greed and fear play no role;
- the activity is ongoing and done as part of a
- long-term plan;
- the activity is not motivated solely by entertainment or compulsion;
- ownership of something tangible is involved;
- a net positive economic effect results.”
When someone gambles…
Gambling Vs Investing For Dummies
- little or no research has been conducted;
- the odds are unfavorable;
- the behavior is risk-seeking;
- an unsystematic approach is being taken;
- emotions such as greed and fear play a role;
- the activity is a discrete event or series of discrete events not done as part of a long-term plan;
- the activity is significantly motivated by entertainment or compulsion;
- ownership of something tangible is not involved;
- no net economic effect results.
When defined this way, it’s easy to see the differences between investing and gambling. It’s also easy to see that because of the methods some people use to invest, their behavior may more closely resemble gambling.
For example, industry studies have repeatedly shown that the behavior of mutual fund investors often accounts for poor investment performance. Because they don’t approach investing systematically, emotions like greed and fear may cause people to make impulsive decisions, with little or no research. Not surprisingly, the results from these methods more often resemble the returns from lottery tickets.
Not Gambling with Your Investments: Easier said than done?
In his book, Snap Judgment: When to Trust Your Instincts, When to Ignore Them, and How to Avoid Making Big Mistakes With Your Money,author David Adler says it’s the psychological component of investing that is the most difficult to manage. Adler contends that behavioral research shows many individuals have an almost over-whelming set of hard-wired dispositions to take gambles rather than make investments. Adler quotes Andrew Lo, an MIT professor of finance:
“The same neural circuitry that responds to cocaine, food, and sex has been shown to be activated by monetary gain as well.”
Gambling Vs Investing
For some people, the thrill of investing/gambling can be addictive. But when the stakes are one’s financial future or retirement, or your children’s college education, the need for a thrill shouldn’t come by jeopardizing one’s investments.
Gambling Vs Investing Stocks
This imperative to not compromise investing by gambling highlights one of the greatest benefits of working with a team of financial professionals: Besides receiving informed advice, a financial professional can often serve as a protection against gambling with your investments, by encouraging you to make sound decisions based on good research that have a high likelihood of success.
Take a moment to consider the last few major financial decisions you’ve made in the past year. Then look at the list above. Did you make an investment or take a gamble?