Investing or Gambling? This isn’t an either/or question for you. It’s a question about which of these money management approaches you use when it comes to how you invest your money. For many people, it’s more of a both/and approach.
You see, for many people, putting money into retirement accounts, 401ks, IRAs, or anything similar is like an investment and a trip to the casino all at the same time. It feels like investing to them, but the way that they think of money and what they understand about what they’re doing is a lot more like gambling. The average investor simply doesn’t understand the rules of the game and their main approach is to rely heavily on “hope” or “good luck” to win in the end.
After a decade of working in this industry (I am retired now), I can tell you that this is not a compliment, nor a good thing.
So here’s how you can make sure that you’re doing it right.
Investing – not Gambling
Investing is, by a broad definition, the expending of money with an expectation of a return in the future. So, by that definition, investing can be a wise and proper thing to do.
You realize that you need to invest into your future so that you can have money to use when you get there. You do this by setting aside some of it today. Good decision so far!
But when does investing become gambling?
Again, a definition is in order.
Gambling is playing a game of chance with money. It’s risky because it’s being played with a hope for a return in the future.
Let’s be honest. Doesn’t the definition of gambling sound more like what you do?
For many, the expending of money is purely gambling when it comes to their investing and financial portfolios. They are putting money into the stock market – which feels to them like investing – but it’s their attitude towards the investment that makes them gamblers.
Here’s what I mean: True investors understand the rules of investing. They are not written down, per se, and they are not listed on a document where you have to sign a statement saying that you know what they are before you invest. But they’re there. And they are real.
But they’re there. And they are real.
For example, one of the basic rules of investing is to not invest into something that you don’t understand.
This is not to say that you are a broker yourself or a wall street guru. You don’t have to understand everything. But it means that when asked to re-state your objectives, goals, timeframe, risk tolerance, and needs for the money that you’re investing that you can do that and you can clearly state how the investment you are making may possibly help you to reach a specific goal.
Does that describe you when it comes to investing? Or are you more like the majority of people that I would work with in my former days as a Private Wealth Manager? These are people who would come in and not be able to articulate the basic rules of wise wealth managers:
- What’s your clear objective for this money?
- What’s your real risk tolerance for this and does this investment match that?
- What do you need to have happened in order for this to be a wise decision?
- Do you really understand that money can go UP and money can go DOWN, or are you just saying that right now?
You see, wise investors know how to think about the length of time that they will are commited to an investment. They know how risk/reward scenarios play out (sometimes good, sometimes bad). They know how to articulate what they want and how the investment has the potential to help them do that.
They do NOT necessarily understand financial calculations, complicated matters, or every possible question you throw at them.
But wise investing requires understanding the basics. Because, after all, you’re just gambling with your money if you don’t!
Further Reading: Here’s an article on how to consider investing your first $1,000-$5,000 wisely.
Or this book that will challenge your ideas on wealth in a good way: God and Money.