Investing is NOT the Same as Gambling, Ep #88

A listener recently messaged me and said that investing in the stock market—when it’s this volatile—feels like gambling at a casino. Intrigued by her observation, I dove into some research. In this episode of Retirement Made Easy, I share the results of my research and answer the question: Is investing in a volatile market the same as gambling? Don’t miss it!

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You will want to hear this episode if you are interested in…

  • [2:58] Check out FREE resources at RetirementMadeEasyPodcast.com
  • [4:22] Is investing in a volatile market the same as gambling?
  • [10:21] You’re gambling if you’re trying to time the market
  • [11:44] Company earnings drive performance 
  • [13:37] How have things changed since the 1950s? 
  • [15:58] Submit questions that you want answered!

The odds of winning at popular casino games

I can’t argue this fact: The stock market has been extremely volatile in 2022 (which we covered in episode #87). But you should not base your investments on short-term volatility. Instead, a wise investor invests long-term based on meeting long-term goals. If you’re talking about day-trading, it does feel more like gambling to me. I’ve known multiple people who’ve lost their shirts trying to day-trade. That’s not investing. 

But how does long-term investing compare to gambling? Bloomberg wrote an article published on 12/31/2020 that compared investing to gambling. According to the article, these are the odds at winning at various casino games:

  • You have a 40% chance of winning at a slot machine
  • You have a 44.7% chance of winning at roulette
  • You have a 48% chance of winning at blackjack
  • You have a 48.6% chance of winning at Craps
  • You have a 46.6% chance of winning at poker
  • You have a 23% chance of winning at Keno

Note that they are ALL under 50%. The casino knows that the longer you play, the lower your odds become, and the more money goes back to the house. That’s why they offer free “refreshments”—to keep you hooked longer. 

This study then looked at the Dow Jones Industrial Average from 1901 to 2020. If you were invested for an entire year in one-year rolling periods (120 different timeframes), your odds of making money was 74.2%. The longer you let time work for you, the higher your odds of success. 

  • Three-year periods: Your odds of making money were 86.5%.
  • Five-year periods: Your odds of making money were 90%. 
  • 10-year periods: Your odds of making money were 97%
  • 15-year periods: Your odds of making money were 99.9%

The longer you stay invested, the higher your odds of success.

DISCLAIMER: Obviously, I wouldn’t advise you to invest all of your money in one basket. This is for illustrational purposes only. 

When are you actually gambling?

People who are diving in and out of the market and trying to time it are the one’s gambling. Why? Because they’re short-term focused. They’ve lost sight of their long-term goals. It’s similar to the people who buy a new car every year or two. They’re always “investing” in the newest shiniest toy. But it’s hard to build wealth if you’re buying a brand new car every year. They take the depreciation and eat it upfront. Dave Ramsey would tell you—unless your net worth is $1 million—you should never buy a brand new vehicle. Buy an older vehicle and pay cash for it. Let the initial owner eat the depreciation.

Company earnings drive performance 

Another Bloomberg study on the S&P 500 looked at performance and earnings. The long-term trend was upward over time. The study also looked at the S&P 500 Stock Market Index and found that there was a 97% correlation. It was driven by the earnings of the companies—which makes sense. So what drives performance? The company earnings behind them. Successful investing over the long haul gives you an optimistic outcome for the future. 

Why do I believe it’s getting better all the time? Listen to the whole episode to hear a study done by Stephen Moore and Julian Simon comparing the 1950s to current day America. 

 

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