My wife and I just returned from a short vacation to a local casino. We went there to see our favorite comedian and decided to make an overnight trip out of it. This included hitting the casino floor to test our luck. We had a great time and surprisingly won back almost all the money we started with.
More than once I heard skeptics compare investing to gambling. “What’s the point? I might lose all my hard-earned money!”
Yes, it is true that you could put all your money on one stock and lose it all. But that would also be a ridiculous and non-advised investment strategy. Taking a more common approach and investing in an index fund would have quite different odds.
You see gambling is much different than investing in many ways:
• Gambling is my word against yours. I think when I pull this lever, I’ll get 3 diamonds in a row. You don’t. The winner gets to keep my quarter.
• Investing is you and me work together. We both want this company to do well, to prosper, and make us both rich.
• Gambling is when the house sets the rules. Make no mistake – the rules are not in your favor.
• With investing, the market makes the rules. The market determines who wins and loses. A good company should already have a really good idea about how the market with perceive them.
• In gambling, you’ll always be the loser. Maybe not in the beginning, but eventually. Over the long run, the house is always the winner.
• With investing, everyone wants to win – that’s the foundation of a strong economy. Over time, you’ll always be a winner.
When you invest in a mutual fund that follows an index, you’re putting your money into something that millions of other people also want to succeed. If you’re wondering if the market will “let you win”, remember that economists often declare that since the 1920’s the market has returned an average rate of approximately 8% year. I think if you were to survey your average gambler, they would not be able to (honestly) brag the same types of return.
One of the saddest things I witnessed while at the casino were the rows and rows of elderly folks pumping credit after credit into the slot machines. With the push of a button (they don’t even pull the lever), they blow anywhere from 25 cents to a dollar per spin. There they were, with their loyal players’ club card on a string connected to the slot machine like an IV unit. Through the smoky haze, they remained determined and un-phased by the loss. They were hoping to hit it big. And they were willing to bet their life savings on it, little by little.
When it comes to gambling, it’s important to keep it in perspective for what it really is – entertainment. There are many nights where a night on the town costs between $50 and $100. If your night on the town happens to be a trip to the casino or playing on gambling site (every once in a while) and that’s all you spend, then great. If you happen to win some of that money back, even better. But don’t forget. It’s all just fun.
All-in-all, gambling is not a retirement plan. And investing is not gambling.
Photo credit: Microsoft Clip Art