My least favorite line in financial planning might be: “Playing the stock market is just gambling with your money.”
Yeah, it really isn’t.
First, I have to dispute the word playing. I know why it fits in this sentence. For me, a trip to Las Vegas or Macau is “playing.” You may enjoy staying at home and “playing” at online casinos…..
….but it isn’t investing. It’s fun.
Don’t get me wrong….investing can be fun too. I enjoy it. (I’m enjoying the most horrible-odds investing game of all, our “Grow Your Dough Challenge”….see how I’m doing here) I’ve also found that the more I know about it the less I see it as “magic” and the more I understand some key principles
Play the Odds
Whether you’re gambling live at a casino like Harrahs in the USA or hanging out in your pajamas in Australia at an online casino like Gaming Club, hopefully you know enough to play the odds. All games in a casino aren’t priced the same. According to Forbes, the best odds in a casino are craps, where you have nearly a 50% chance of winning. Want to play the wheel of fortune and bet on the joker coming up? The house has a 24% better chance of winning than you do.
That’s why, when I’m in a casino I play craps. Sure, it’s fun, but I also really holding on to my money.
It’s The Same With Investing
Investing also has “odds,” but they change depending on how long you invest. As an example, a savings account earning 1% interest (wouldn’t that be nice?) would hold onto your money nicely for a short term need. However, if inflation continues at 3%, you’re going to watch your principle erode over time.
Stock are the opposite. According to Vanguard, your average return in the stock market between 1926 and 2006 was 10.45%. However, over one year, your results experienced swings most of the time +/- 20% of this number (standard deviation). That means that while you might return 30%, you could just as likely return -10%. However, over a 20 year period, your average return was 11.42%. While that’s not much better than the one year return, check this out….that number usually fluctuated by only 3.34%. That means that most of the time, your returns over longer periods of time were between 14.76% and 8.08%.
I’ll take that bet. The point? There are odds with investments, too, just like at the casino. While savings accounts are horrible long term investments, stocks are rotten during the short run.
When looking into your investments, treat it like you would a casino….if you want to win at the casino. Go to the table that provides the best odds over your timeframe and invest there. It’s much more fun than just “playing” the investing game, isn’t it?
Done by Forty
Now that we’re saving for rental properties, we’re finding a little beauty in the old savings account. Yeah, it sucks to be earning under 1%, but it’s nice to know that we’ll have the money there in a few months when the HUD comes in…
This is the best laid out explanation of why savings accounts are good short term and investments, long term, that I’ve seen. It’s kind of crazy to think that you could be facing such a huge loss one year only to gain it back and then some the next. Plus if you pulled that money out of your investments early, imagine the penalties. Savings accounts have their place!
Greg plays craps for that exact reason. I cannot stand that stupid game though. Too much standing!!!
Lean on the table! It’s a blast. When the table gets hot, it’s really fun to watch everybody makin’ money together….
I much prefer to invest rather than gamble! I tried playing $6 hand blackjack on my cruise and I was nervous the whole entire time. It took all of the fun out of it even though I only lost maybe $5-$20.
That’s the way I look at it, Lance: fun money. If I lose $20 over a two hour period, that was just the “cost” of my enjoyment. Cheaper than going to a movie theater and getting popcorn!
Natalie @ Financegirl
I love this analogy! For me, I just stick to ETFs because I can’t spend the time learning about individual stocks while I’m focusing on other things like paying off my student loans.
That’s definitely the best course, Natalie. It matters, though, what ETF you use. The “stocks” I talk about in the piece are every bit as volatile in an ETF as anywhere else, if you’re looking short term.
I love casinos just as much as I love the stock market. The parallels are everywhere. I love watching all of the white-haired retirees sit at slot machines. They’re too conservative to try any other game. So, instead, they just lose one penny after another – very similar to their CDs and Savings slowly disappearing due to inflation.
I also love the self-proclaimed ballers that lose $900/day for 3 days. But, you’ll never stop hearing about that 4th day, when they won $700. Who cares about the net loss of $2k?
I’m glad you brought up craps – as I think it represents the stock market as a whole. It’s well-known that craps presents the best odds. But, how many people walk up to a craps table and just watch? They see all of the moving parts, the bets, the #s, the dice and they get overwhelmed and intimidated. Rather than take the time to learn the game with the best odds, they instead walk down to the uncrowded blackjack table where the odds are stacked against them.
Lastly, I have to close by saying how much I love poker. It’s the ONLY thing I’ll “play” at a casino. I much prefer my “odds” against irrational, impatient n00bs than the house. Much like investing, a little patience can yield great results.
Hilarious! I play craps because of the odds (and because I like the general fun feeling when the table’s rockin’). But you’re exactly right….and I hadn’t thought about it: poker is MUCH better odds for a good player, because most people play like idiots.
My problem with poker is only those players who are SO aggressive that I can’t figure them out. It’s frustrating folding to someone who’s working their way through with 8-3 and then sticking with them when they’ve got pocket kings…..