Gambling vs Investing: How to Tell the Difference
It's easy to get caught up in the excitement of placing a bet on the Big Game, but beware of letting that emotion drive your investing decisions. Keep these investment principles in mind.
It’s never been easier to gamble. Looking to place a bet on who will win the Big Game on Sunday? In many states, you just need to open a sports betting app on your smartphone to make a wager. One online brokerage firm even went as far as to offer the ability to bet on this year’s winner, before quickly reversing course.
Sadly, the lines between gambling and investing have been blurred like never before. Many online brokerage firms are enticing their customers to trade frequently by adopting techniques from the gambling industry, such as flashy graphics and frequent alerts. Many firms also steer customers toward risky trades that can become worthless in a matter of hours.
So how can you tell if you are gambling or investing your money?
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For starters, investing involves owning assets that produce value, such as earnings and dividends for stocks, interest payments for bonds or real assets that generate income or meet consumption needs. Buying assets whose value is solely driven by supply and demand is closer to gambling.
But that doesn’t mean that an investment can’t be turned into a speculation or gamble.
Sound investing involves following these investment principles:
- The first step for investing is setting a long-term goal, like saving for retirement or your child’s education. With a traditional portfolio of stocks and bonds, the more you invest and the longer your time horizon, the better your potential of having a positive outcome. In contrast, the more you gamble and the shorter your time horizon, the more likely your potential of ending up with a negative outcome, given the odds are stacked against you.
- Investing in a diversified mix includes different types of securities so your overall portfolio has balance, which can help to smooth out some of the short-term ups and downs. Gambling often results in an outcome where you win big or lose all the money you bet. Similarly, owning only a single security or trading cryptocurrency increases the risk profile of your financial portfolio.
- Investing provides you with an opportunity to keep your costs low so you can keep more of what you earn, like a low-cost exchange-traded fund (ETF) or a high-yielding savings account. Gambling requires you to make frequent trades to either time the market or reinvest an expiring option. And just because a brokerage may not charge a commission for a trade doesn’t mean that it’s free — on top of spread costs, most brokerages receive payment for order flow (PFOF), a practice where the brokerage pockets a slice of your proceeds every time you trade.
- Lastly, investing requires discipline, which can be much easier with investing than gambling. For example, you can set up an automatic investment plan that regularly invests into a diversified portfolio of stocks and bonds that aligns with your investment goals and risk preferences and voilà — if your goals and risk preferences don’t change, you probably don’t need to change your investment mix. Or as Vanguard founder Jack Bogle used to say, “Don’t just do something, stand there!”
Tune out the noise
Gambling takes a lot of work to monitor your positions and manage your overall portfolio — presenting more opportunities to let your emotions get the better of you.
However, not all brokerages design products and experiences for their success at your long-term expense. Again, most, but not all, brokerages accept payment for order flow, in which the brokerage essentially gets a cut of your proceeds every time you trade.
Of course, all investing is subject to risk, including the possible loss of principal; diversification does not ensure a profit or protect against a loss; investments in bonds are subject to interest rate, credit and inflation risk; and no particular asset allocation can guarantee you will meet your goals.
That said, the more you tune out the noise and focus on the things you can control, the better chance you have for investing success.
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