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I’ve mentioned before how the ‘getting started’ is one of the hardest parts of investing. You need to pull the trigger and dip your toe to really learn how the markets work and to see your money grow.
One understandable worry form people who don’t invest is that they see it as akin to gambling.
They may have had a relative who lost a lot of money investing all their pension in a mining company; they may still have images of the stock market crash where company valuations were drastically reduced or, worse still, the company ceased to exist.
But these opinions are often heavily influenced by eye catching headlines that made it to the major tabloids or hearsay down the pub.
Newspapers are never going to publish the reams of people who received steady growth over a 20+ year period. Would you buy a paper with this as the main headline?
Man who invested pension in broad index across multiple years receives average, but consistent, rate of return
Nah, me neither.
So here are five key points I see as to why investing is not the same as going ‘all in’ or putting all your money on black.
You own something tangible
When you buy a share in a company, you’re buying a small piece of that company. It’s yours and yours alone.
With a lot of these shares you can literally see what they represent down your local high-street or business park. You can physically touch a Games Workshop store or taste what Coca-Cola produce.
These aren’t just abstract ideas on a computer screen, these are actual, physical, income producing companies that create and innovate, advance technology or develop new drugs or commodities. These are things that keep people alive, entertain them or make it easier for them to communicate with loved ones across the globe.
Gambling has none of these attributes. It’s merely an agreement between you and the casino or gambling company that a certain thing will or will not happen – usually heavily weighted in the house’s favour. It’s just a number on a screen or a small ticket stub that serves no other benefit than to the two parties involved.
The zero sum game
Most of the betting world is a zero sum game. You win or you lose. There’s nothing in-between.
Gambling risks 100% of your capital as soon as the bet is placed.
On the contrary, investors are able to spread their risk. Buying a world index tracker, for example, buys a stake in all the major companies of the world. If the value of one share falls, there’s a good chance at least one other has risen.
With a world index tracker, you’re not trying to outsmart anyone or second guess the casino. You’re calculating that the value of the world’s markets will rise over the long term. Companies will come and go, but the world market has generally risen if you’re willing to stick it out.
This is what’s known as diversification and is a key principle in giving investors the greatest opportunity to avoid losses over the long term.
The S&P 500 – the standard of the American stock market – has returned an average of 10% since its creation. The keyword here is average. You can see a lot of red here, but positive returns outweigh the negative over the long term.
Time in the market
Speaking of the long term, time is one of the biggest assets to investors. The longer you invest, the more likely the investor is able to ride out any downturns in the market, especially when spreading the investment across multiple shares and/or funds.
Even if the value of your investments fall, there is no limit to the amount of time you can continue to hold if you believe it’ll go back up.
Gambling doesn’t allow for this. Your chances of making money end as soon as the game/ bet is over.
Making informed decisions not guesses
When making a bet, you’re making an educated guess at best.
With investing, companies regularly release financial information on income, debt levels, profit, performance projections and much more. This is all publicly available to anyone who wishes to look at the underlying health of that company.
Understood and read correctly, an investor can make an informed decision, and remain regularly updated on, how the company or fund they’re invested in is performing.
In contrast, the casino is heavily weighted in the favour of the house from the minute you step through the front door. You know nothing about the slot machine or roulette table, and even if you did, it wouldn’t matter who the manufacturer is, or what the dealer’s favourite food is. You have no idea how often the machine has paid out that day, it’s all pure chance.
Obviously, you can study the history or form of a horse, or the win streak of a football team, but, as mentioned above, this is educated guesswork at best. Who would have thought Wigan would beat Manchester City in the 2013 FA cup final off the back of such a poor season against City’s emerging star studded team that would go on to dominate the next 7 seasons?
Making your money work for you
One final main point I want to make is that an investor’s money work for them. While they sleep, their Japanese holdings are busying away; as they’re wrapping up at work for the day their US shares continue ‘the grind’ (hate that phrase) and while they themselves work, their U.K holdings also work in tandem with them.
Many are also ‘income producing’, while the investor doesn’t have to lift even a finger. While waiting for the value to rise, you may also be paid an income in the form of ‘dividends’ – much like earning interest in your standard savings account, but which can be paid out quarterly, bi-annually or sometimes even monthly.
Some companies even have shareholder perks, which can add a nice little bonus to trusting a company with your money.
Gambling has NONE of these attributes. You place a set amount on a bet and don’t realise any gains until the bet comes through. Until the bet is concluded, you earn nothing from it, if anything.
There are of course the similarities. Options trading and day trading mimic a lot of the behaviours of those you might see in gambling.
But trading isn’t investing. You’re not buying into a company because you believe in it long term. You’re buying a price point which you hope to turn a profit on within a short timeframe.
And finally, both involve capital risk and emotional control. But as mentioned above, if you understand what you’re invested in, know your risk tolerance and are in it for the long haul, you stand a good chance of growing your wealth and achieving your financial goals.