Is Retirement Investing Really Like Gambling?
Many of our clients understand the importance of developing and maintaining a long-term investment strategy. However, there are also those who approach retirement planning as if they were in Vegas- looking to make some easy money, but quick to pull out if they hit a losing streak.
While it’s never fun to lose money, it’s important to realize both the similarities and differences between investing and gambling.
Similarities:
- You take risk for the purpose of making a profit- typically, the greater the risk you take, the greater the potential for reward and losses.
- Chance of immediate success- odds are almost always against you when you gamble, and your odds on short-term investment success are also reduced.
Despite the similarities, the differences between the two are far greater, namely:
- Investing should involve a logical and systematic approach – whereas gambling usually involves emotion. When you gamble and win, you feel the cards are falling your way so you continue to ride the hot hand. If you’re losing you might try another table or double down. With investing, your emotions should not be part of the decision-making process.
- Investing generally rewards those who have a long-term strategy and plan – unlike gambling, which is mostly a game of chance. You increase your odds of winning by staying in the market, in good times and bad, and maintaining an appropriate investment plan.
- Investing involves setting up a long-term plan for a delayed benefit – while gambling is about seeking immediate results. You either win or lose money in each hand of poker while in investing you only make or lose money when you sell an investment (which may have been held for 5 years or longer)
- Appropriate investment strategies seek to minimize your overall risk as much as possible – while gambling is about seeking risk. With investing, a well-diversified portfolio actually helps reduce the level of risk you are exposed to.
With the recent market volatility, it is easy to compare investing to gambling, which is why I wanted to emphasize that investing requires a long-term mindset. Instead of gauging success or failure on a daily basis, focus on long-term results such as five, ten and twenty year periods. In addition, I believe it’s imperative to couple this long-term focus with an investment strategy that’s based on you risk tolerance and the time you have until retirement.
If you feel like you’re gambling with your retirement plan, please feel free to contact me or another Smart401k Investment Advisor at 1-877-627-8401 or info@smart401k.com .
Jeff Studebaker, Investment Advisor
February 4th, 2009 at 10:32 am
Not a bad comparison but you should take it a step further and show how investing can be gambling. The person who is “day trading” and calling themself an “investor” is more like a gambler than an investor. This person puts down a “bet / buy” that the individual stock (equated to a number on a wheel) will go up or down within a days or hours timeframe. This is similar to someone betting a specific number will come up on a roulette wheel because it came up the last 2 out of 3 spins. It’s gambling nevertheless, especially when you consider the unknowns involved in this “bet”.