Rick Kahler: Investing, done correctly, has risks but is not gambling
Is investing in the stock market akin to gambling? It certainly carries a reasonable amount of risk. Yet, done correctly, investing in the market is not remotely gambling.
For comparison, consider games of chance. The best one to play is Blackjack. If you play every hand statistically correctly, the odds of winning over a long period of play are 0%, but you will lose less money than with other games. In Blackjack, for every $100 you bet, you will lose just $1 to $2—and that’s if you play each hand perfectly, which you won’t. Other games of chance have considerably worse odds than Blackjack. Keno and slot machines lead the pack, with a 100% chance of losing up to $50 for every $100 bet over time. Games of chance might qualify as “investing” only if you own a casino.
That’s quite different from the stock market, where the chance of a positive return over a long period of time, say 10 years, is over 94%. Put another way, the chance of losing in the long term is just 6%, versus 100% with gambling. For every $100 put into the stock market, there is a 94% chance you will gain an additional $96 after 10 years (an annual return of 7%), and I am being conservative. Past performance indicates the annual return of US Stocks has ranged from 9% to 14% over the past 10 to 30 years.
The crucial phrase in the opening paragraph above is “done correctly,” which essentially means investing rather than speculating. Speculating (gambling) has a short-term horizon and is typically fast-moving and full of adrenaline and excitement. Investing done correctly, on the other hand, has a long-term view and is very slow moving and boring.
Can you gamble in the stock market? Absolutely. Done incorrectly, putting money in the stock market is not investing at all. It is all-out gambling, with the chances of losing money similar to playing any game of chance.
What does gambling in the stock market look like? Some common examples of gambling often smoke-screened as “investing” include:
- Frequent trading of securities (day trading)
- Undiversified “bets” on single stocks
- Trying to buy low and sell high
- Buying naked puts, options, and shorts
- Playing futures markets
- Playing cryptocurrency markets
All of these activities are speculating, not investing.
What does investing in the stock market look like? It could be putting your money in an Exchange Traded Fund (EFT) or mutual fund that holds thousands of diversified stocks around the world, like a global index stock fund, and leaving that money alone without touching it for ten or more years. That is boring. It doesn’t require studying the stock market, picking the winners, or avoiding the losers.
Almost anyone can invest successfully. The key is to keep it boring by not panicking when markets decline by 50% (which they can do) and not selling when you think they are high. Once your funds are invested in an index fund with low costs, avoiding action is your friend. The chances of success are hugely in your favor.
Of course, there is a caveat: that you have a time horizon of 10 years or more and don’t need any of these funds in the short term. As ethical financial advisors will tell you, markets fluctuate and there will be times when your portfolio will decline in value. Over the long term, however, the chances are high that it will increase. This is why a diversified portfolio, left alone, is investing and not gambling. This also why investing, done correctly, includes starting as early as you can.
Rick Kahler is president and owner of Kahler Financial of Rapid City.