Is investing in the stock market akin to gambling? It certainly carries a reasonable amount of risk. Yet, done correctly, investing in the market is not remotely gambling.
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For comparison, consider games of chance. The best one to play is Blackjack. If you play every hand statistically correctly, the odds of winning over a long period of play are 0%, but you will lose less money than with other games. In Blackjack, for every $100 you bet, you will lose just $1 to $2 – and that’s if you play each hand perfectly, which you won’t. Other games of chance have considerably worse odds than Blackjack. Keno and slot machines lead the pack, with a 100% chance of losing up to $50 for every $100 bet over time. Games of chance might qualify as “investing” only if you own a casino (and are the “house”).
That’s quite different from the stock market, where the chance of a positive return over a long period of time, say 10 years, is over 94%. Put another way, the chance of losing in the long term is just 6%, versus 100% with gambling. For every $100 put into the stock market, there is a 94% chance you will gain an additional $96 after 10 years (an annual return of 7%), and I am being conservative. Past performance indicates the annual return for U.S. stocks has ranged from 9% to 14% over the past 10 to 30 years.
The crucial phrase in the opening paragraph above is “done correctly,” which essentially means investing rather than speculating. Speculating (gambling) has a short-term horizon and is typically fast-moving and full of adrenaline and excitement. Investing done correctly, on the other hand, has a long-term view and is very slow moving and boring.
Read the full article here by Rick Kahler, Advisor Perspectives.
