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Gambling
We might as well get gambling out of the way first because a common misconception about investing is that it is synonymous with gambling. Gambling is pure speculation when you gamble, you are taking on a very risky situation and hoping for a result that will benefit you. More often than not money is involved in a game of chance that results in winning or losing.
If you are gambling in a casino as most people do, then chance is not all that you are up against. There are certain statistics for different kinds of games in which you gamble. One example would be with a roulette wheel such as the one pictured above. A bet is placed on a certain number or on a certain color while a ball is spun inside the wheel until it stops in a pocket. If you were to take the least risky bet and pick black or red then your chance of success is approximately 47.4%. This is because a roulette wheel contains 18 red pockets, 18 black pockets, and two green pockets. The probability of red or black is (18/38=47.37%) This also means that the opposite is correct. The casino (or the house) has approximately a 52.6% chance of winning each time.
The point is that the odds are not in your favor, it is very risky, and it is not investing. A highly speculative or gambling mindset is not one to be used in your investment portfolio. Go ahead and gamble or make highly speculative investments, but only do so with money you are willing and able to part with.
Investing
Unlike gambling, investing is a long game. Investing is also technically speculation, but if your investments are broadly diversified then your risk is spread out. Investors do not need to leave their hard-earned cash to chance if their money is spread out between different types of assets at ratios that are appropriate for their risk tolerance.
A well-diversified portfolio has been studied throughout history to easily return 7-8% after inflation. While this is not a crazy return on investment (ROI) the compounding effect it could have if gains are kept reinvested can lead to some seriously big numbers. The “magic” of compounding interest is what makes well-diversified level headed investors rich slowly over time.
With proper investing, the odds are always in your favor. Consult an expert or educate yourself on what it takes to invest properly and slowly for the long run. What you will find is that most of the time the most boring of investments and investment methods are what lead to the greatest returns over time.
Recap:
- Gambling is pure speculation and high risk.
- Only gamble with money you are willing and able to lose.
- Investing is a long term game.
- Consult an expert or educate yourself on proper investing.