Saving, investing, gambling: Three separate activities, yet many still conflate them — especially investing and gambling.
How often have you heard an investor talk about a hot new “investment” they’ve made?
Take the most recent trend of investing in cryptocurrencies, for example. For a lot of people, this is not an investment, but a gamble. The investor may be acting on a tip from a friend or relative, hoping for a quick (very profitable) return. They’ve probably done very little research — if at all. Maybe your friend has decided to put some money in a penny stock, hoping for a quick return.
There are plenty of examples like this in the world of investing. Investors make high-risk bets, acting on very little information. The hope is that there’s a high payoff in a very short time period. In these cases, just because you didn’t walk into a casino doesn’t mean you’re not also gambling with your financial future.
Investing is rooted in research, risk management, and for the most part, has a long-term horizon. Both gambling and investing offer a potential future return. But understanding the differences between these two activities is key to long-term financial success.
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Saving is simple, and a bedrock aspect of personal finance. Building a surplus of wealth — for example, putting away a percentage of your income each month — is the primary role of saving. Your savings may be designated for something in particular: a down payment on a new house, a car, emergency fund, dream vacation, etc. If this is the case, and you expect you’ll use the saved money relatively soon (within 3 years), it’s best left in cash or cash equivalents with no risk to the capital.
Examples of saving include putting money into a savings account or purchasing short-term Guaranteed Investment Certificates (GICs). These will not offer a financial return (you may receive negligible interest) but they ensure your funds will be available when needed. It’s a no-risk, no return strategy.
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Investing involves preserving and growing capital over the long term. It’s the key to building wealth. Any savings not intended for use in the short term should be put to work and invested.
Investing is higher on the risk spectrum than saving. That said, when decisions are informed, based on knowledge and research, and handled by an experienced professional, the risk can be minimized for maximum return. Furthermore, it’s worth noting that investing is a long-term game. If your investment horizon is 5+ years, investing is the best option to grow your wealth.
Examples of investments might include:
- Owning stocks or bonds of publicly-listed corporations (ex. Amazon, GM).
- Owning income-producing real estate, like rental properties.
- Owning a business, or a portion of a business.
The best way to preserve and grow your wealth over time? Investing in a strategy that aligns with your risk tolerance and financial goals.
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Gambling is a risk-taking activity that’s undertaken on chance — often a slim one!
It’s simple: the difference between investing and gambling is one of expectation vs hope.
When we talk about investing, there is every expectation that your savings are being invested to deliver (though never with 100% certainty) comparable yield and risk-adjusted return.
Gambling, however, does not come with any set expectations. It’s grounded in the hope that the gambled savings will produce a return. Gambling often has binary outcomes: you win it all, or you lose it all. Investing usually comes with rewards comparable to the risk of the investment.
Riskier investments can deliver higher returns, although this is never guaranteed. Less risky investments are likely to deliver fewer losses than riskier ones, though again, this isn’t a certainty. When you gamble with your savings, you risk the chance of losing it all or a significant portion.
Under the umbrella of gambling, you’ll find decisions such as:
- Using $10,000 to buy dozens of Loto-649 tickets because the stake is $75 million.
- Lending money to a friend of a friend’s distant relative, in the hope that his “once-in-a-lifetime” investment will start delivering you $1,000 monthly profit checks next year.
- Buying thousands of US dollars today, believing that your investment will double in a week’s time thanks to exchange rate differences.
Unlike most investment decisions, which look to preserve and grow capital, gambling decisions usually don’t expect to preserve capital. There’s only the hope that it grows.
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Investing Vs. Gambling – Knowing the Difference
Both investing and gambling can offer profit. Both expose you to losses. And both carry elements of risks.
Due to these high-level similarities, investing and gambling activities can be confused. For example, conscientious savers, who have built a sizable nest egg through hard work and prudence, will hear about an “opportunity” with great potential. They will rush to invest in it without understanding the risks.
That’s NOT investing, it’s gambling. Hoping to reap the rewards from a financial decision, without understanding the risks that such decisions entail? That’s gambling.
That same opportunity could be a good investment. If you’re well informed, the opportunity has been researched, analyzed, and shows good reward potential for the risk, you’ll take it as a sound investment decision.
Another difference between what constitutes gambling and what governs investing is diversification. Good investments (like a balanced portfolio of stocks and bonds) have built-in diversification as part of their risk-mitigation strategy. With gambling, the risks and rewards are usually concentrated into a single “opportunity,” with no safety net in case something goes wrong.
More significantly though, when you invest – whether it’s in stocks, mutual funds, or property — you actually “own” a piece of that entity. For instance, investing in 100 shares of Apple Inc. makes you a part-owner (to the extent of the value of your investment) in Apple. There’s no such ownership when you gamble – it all belongs to the House!
Investing is about long-term benefits, while also managing risks in between. So, if you are faced with an “investment opportunity” that doesn’t offer any risk management, that “opportunity” is likely to be a gamble. Stay clear of it!