Place Your Bets? What to Know About Investing vs. Gambling
The line between investing and gambling is sometimes blurred. It shouldn’t be.
Key Takeaways
While investing and gambling both involve taking risk in an attempt to make a profit, they are inherently different.
Gambling is a short-term pursuit where the individual owns nothing, with negative average returns expected over time.
Investing provides ownership in an asset (for stocks) or an expected return (for bonds), over a much longer time frame.
Investing is a probabilistic exercise where gains are not assured, but it’s absolutely not gambling. As investors, we should be careful not to obscure that line.
Why Investing Isn’t the Same as Gambling
Gambling has a negative expected return over time; otherwise, betting establishments wouldn’t survive. Nevertheless, people are drawn to gambling because it has connotations of making money quickly or easily. In gambling, you tend to be making all-or-nothing bets in which you don’t own an underlying asset or have any claim on future cash flows.
Investing is the opposite. Buying a stock, for example, gives you a share in the ownership of a company for as long as you hold the stock. You’re an owner, not a gambler. A bond gives you an expected return over a known maturity (that is, a yield to maturity) as long as the issuer is willing and able to pay. There’s no all-or-nothing scenario.
Chance Versus Choice
In addition, investors have a vast array of information available to them to determine a security’s attractiveness. That information allows investors to make informed buy-and-sell decisions.
Of course, it’s still possible to lose money in investing. Your judgment could be wrong. Or the company or issuer could fail to perform as you expected.
But it should be clear that this is a radically different exercise than your profit or loss being determined by, say, a ball landing on a certain number on the roulette wheel, or the turn of a card at a blackjack table.
Gambling Terms in the Media
The financial press are constantly blurring this line by using gambling jargon or terms to describe investing. On a popular business channel I won’t name, you can’t go 10 minutes without someone using the word “bet” or “play,” as in “How should an investor play this market?”
Bet, play, take a flyer, double-down, go all in, side bet—these are all gambling terms. Terms to be used at a casino in Las Vegas, not for investment decision-making.
Or how about terms or ideas more commonly associated with gambling than investing? “I’ll stop/sell when I’m even,” is a good example. Spoiler alert: Nobody cares where you bought the stock or whether you have a gain or loss in the position.
That is not a good reference point for your decision. Profit or loss is only relevant for your tax liability. Your entry price should not be a reason to buy more or sell an investment. Rather, your buy-and-sell decisions should be based on a security’s fundamental characteristics and its role in your portfolio. When or where you purchased it in the past never enters into it.
Authors
How Much Risk Is the Right Amount?
All investing involves risk, but there are strategies to help you determine the appropriate risks for your situation.
Past performance is no guarantee of future results. Investment returns will fluctuate and it is possible to lose money.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.
Generally, as interest rates rise, the value of the bonds held in the fund will decline. The opposite is true when interest rates decline.