Speaking to a number of women as to why they don’t invest one common theme emerged, many of them see investing as gambling.
When looking at the definition of gambling there are commonalities between the two. Gambling is defined in the Cambridge Dictionary as “risking money on the result, when participating in a game of chance to make money”.It is clear both investing and gambling involve choice and risk.
There is always risk no matter what you do with your money, if you keep it under the bed it could lose value because of inflation, or worse be lost in a fire. If you put it in the bank, again inflation pays a part especially when the interest you can earn on your bank savings is somewhere around 0.50%. Or the bank may go bankrupt and if your deposit exceeds the Financial Services Compensation Scheme maximum or the bank was not covered, you lose. Finally, if you have invested it in the stock market and the market crashes you may lose capital.
There is however no more certain loss than through gambling. While there may be wins along the way to entice you back into the game, the odds are generally stacked in the houses favour and history has shown over the long term the house wins.
The above points do not provide much comfort that investing is not in fact gambling so let’s break it down further.
Both aim to minimise risk and maximise profits
It is stock market investing that truly provides the tools to do this. The only tools gambling has in this regard are intuition, emotion, maybe some psychology or simply choosing not to participate. To minimise the risk from investing we have a number of guiding principles:
A passive investment in an Index tracker fund referencing the top equity index in your home country is a simple diversification strategy. Consider the likelihood of Amazon, Apple, Microsoft, HSBC and BT all going bankrupt together.
Access to information
Companies listed on Regulated Stock Exchanges are subject to stringent initial and ongoing reporting requirements to ensure that investors have sufficient information to make informed decisions.
Gambling on the other hand is an opaque game of chance with limited to no information sharing.
Gambling is all in
Once you have entered your gambling transaction you are all in. That is that. There is a binary outcome. You win or you lose. Simple.
Investing is the act of putting your money to work to provide an ongoing return and future capital growth.
Legendary investor Warren Buffett defines investing as “… the process of laying out money now to receive more money in the future.” Simply put, investing is putting your money to work in different types of investment options, to earn an income and hopefully grow your money over time.
Investing can provide an ongoing income by way of dividends from shares or interest from bonds as well as capital growth on the funds invested. If the market crashes, you may suffer a loss of capital. This is a paper loss and will only be crystallised if you sell. If it is a general market decline and you choose to ride it out, your investment is likely to recover the capital over time. If on the other hand the crash in the share price is related to the financial health of the company, there are ways to mitigate or minimise the loss which could include selling the position.
The outcome for invested capital is not binary and as has been historically evidenced, if invested in a well diversified portfolio of mainstream liquid assets, there is a high chance of a positive outcome over the long term.
In Conclusion, Investing based on proven mainstream low-cost strategies will over the long term produce outsized returns.
When looking at the cumulative return of the stock market versus the chance of winning the lottery my money is on the surer bet.
The cumulative return on the FTSE 100 since 2007 was 74%, which equates to an average annual return of 5.7%. This is not at first glance overly impressive but when you consider this includes the Global financial crisis where the index dropped by 31% at one point and ultimately returned a negative 28.3% over that year it does give some confidence that the market will consistently provide a positive real return over an extended period of time.
Compare this to the potential win of the UK Lottery. You have a 1 in 14 million chance of winning the lottery which is even less chance than being struck by lightning, a 1 in 10 million chance in the UK. I prefer the likely option, I am sticking my money in the market, and I confess, maybe playing the lottery occasionally.