There is a lot that is common between investing and gambling. For one, both are unpredictable, especially when taken one turn at a time. When you are gambling through poker or some other card game, you never know what kind of card you will be dealt in your next turn. Similarly, while investing in stock market and other such assets, you never know where the prices will move the next day. Secondly, both involve money in one form or another, and therefore impact us where it can either hurt us, or help us a lot. So, it is reasonable to think that investing is like gambling. However, there are some differences between the two that should be analyzed before we say how similar they are.
The Risks of Investing and how to Reduce them
Like gambling, investing involves a number of risks. Stocks and other assets such as real estate have to follow the prices that are adjudged by the free market, which can move in either direction. Then there is unpredictability about the kind of asset you have chosen to invest in. Stocks will move differently than real estate. There is also the risk involved with choosing the actual stock, which may behave differently than the broader stock market. All these risks combine to make sure that investing inherently comes with a lot of risk.
However, by careful planning and selection, you can definitely reduce your risk. In fact, by planning well, you can actually reduce your risk to almost zero. One way to reduce your risk is diversification. Your portfolio should be diversified across asset classes, and types of assets. You should invest in stocks, real estate, bonds, precious metals and other types of assets all at the same time. Studies have shown that a diversified portfolio can take very extreme shocks in the value and still give good results because the shocks are to just one type of investment, and not to the complete portfolio.
Be a Long Term Investor
One strategy that can completely reduce your risk to almost zero is being a long term investor. By long term we mean investing for at least 15-20 years, and without taking your money out. Over such a period of time, almost every asset has been shown to give positive results. Even in the case of the Great Depression, stocks had recovered in just a few years time, especially when you take the dividend yields into account. Even the worse possible analysis of the Great Depression tells us that the Dow Jones had recovered in 25 years time, which is not bad for a period that encompassed a depression as well as a World War. Therefore, even if you had invested in the UK stock market at the height of the Great Depression, which was a global depression, even then you would have come out as a winner in two and a half decade time.
Overall, we find that there are definitely risks associated with being an investor, but by diversification and by investing for the long term, you can definitely reduce the risks a lot. Therefore, we can safely say that investing is not really like gambling. With gambling, you cannot take steps to escape the random nature of events, but with investing, you can take steps that increase your odds of better results.
Yakezie Carnival at Family Money Values