Recognizing the differences between saving, investing, and gambling will help you compartmentalize each, and avoid common mistakes. It’s an easy mistake because not enough people think it through, and the terms are used interchangeably in our culture. Keeping saving, investing, and gambling three separate activities in your mind and in your account structure will help you be more successful at managing your money and growing your wealth.
What is Saving?
So just what is the difference between gambling and investing, is it really so easy to split the two activities apart? The Dictionary.com web site says: Gamble: “To bet on an uncertain outcome, as of a contest. To take a risk in the hope of gaining an advantage or a benefit.” Invest: “To commit money or capital in order to gain a financial return.”To put simply, the difference is. Peter Lynch ran Fidelity’s Magellan fund for 13 years, from 1977 to 1990. As an active fund manager he racked up an impressive 29% annual return – about double the market’s 13.3% during that.
Saving is the act of preserving income for a future use; or an amount of income that is not currently consumed. Very simply saving is income that is not spent or put at risk.
In other words, saving involves money put aside for the future with capital preservation the primary goal. It’s possible to save toward investing activities. For example, you may want to transfer money from savings to investing when your emergency and short term goals become fully funded.
Examples of Saving would be: Bank Savings Account, Money Market Mutual Fund, CDs, U.S. Treasury Bills or Savings Bonds.
Items you might be saving for: An emergency fund, a car, or an event such as a vacation or wedding.
What is Investing?
The act of placing money in risk assets expected to grow from producing a product or service of benefit to others. Investing generally involves putting the original investment at risk with the hope of higher returns than savings.
Investing is having a claim on an entity that produces a product or service with the goal of profit and the risk of loss. Investing is different from saving because your investment is at risk. While there are many different levels of risk an investor may be willing to take; the primary goal of investing is not preservation of capital but long term wealth building. The best investments have growing cash flow and divide an expanding “pie” among the stakeholders.
Examples of Investing: Individual stocks, bonds, most mutual funds, most ETFs, etc. Real Estate used as rental property or for production of goods and services. Buildings such as factories, office space, retail space, etc.
Investing involves the possibility of profits and losses based on performance of the asset.
Example of Difference Between Saving and Investing
Here is an example where the same asset can be saving or investing depending on where it’s placed. A money market fund can be saving in your emergency fund account, but it also can be investing if located in your investment portfolio account.
A money market fund within your investment portfolio should be treated differently than a money market fund for short term savings. The money market in your investment account serves the purpose of lowering portfolio asset correlation and can be used to buy risk assets when opportunities arise. A money market in your emergency fund is for capital preservation and should not be touched unless you have an emergency.
What is Gambling?
Gambling is accepting risk based on chance. Almost all gambling involves risk that exceeds the expected reward. In other words, gambling usually involves dividing up a fixed pie among winners and losers based on chance. In most gambling there is an additional factor such as costs, fees, or odds that results in dividing a shrinking pie.
Difference Between Investment And Gambling Comparison Chart Printable
Examples of gambling:
Currency Trading of Futures and Options (except hedging), Commodity Futures and Options Trading (except hedging), All Lotteries, and Casino games such as cards, table games, or electronic games.
In all these examples the odds are against you because they divide among the “winners” a smaller pie than originally existed!
Difference Between Investing and Gambling
Some people confuse investing with gambling. This is one good reason it’s important to differentiate and compartmentalize saving, investing, and gambling. Most gambling involves risking capital and dividing a fixed amount among winners and losers based on chance. This is different from investing where you place your money in an asset expected to increase in value over time.
Additional Reading:
10 Investing Principles Fundamental To Successful Outcomes
The Importance of Compartmentalization
Investors frequently get in trouble because they fail to differentiate and compartmentalize these three very different activities. An emergency fund should be kept completely separate from your investing activities. As pointed out, even if you have the same asset (i.e. Money Market Fund) in each they need to be viewed and treated differently.
Saving is a passive activity for short term goals. Preservation of capital is the primary goal. A separate account for each goal or activity promotes correct thinking and actions consistent with meeting the goals of the account.
Investing is an active activity and keeping accounts separate from saving accounts keeps the asset allocation and diversification process clear and separated from the fund reserved for capital preservation. Keeping funds separate is sound planning and a risk management concept.
Gambling should never be mixed with saving or investing. If someone chooses to gamble it should be with entertainment monies unassociated with saving or investing accounts. Only monies that individuals are willing to lose should ever be wagered in a game of chance.
Keeping saving, investing, and gambling three separate activities in your mind and in your account structure will assist you in building wealth. Too many people gamble with investment money, or invest when they should be saving. Differentiating and compartmentalizing saving, investing, and gambling, is an important first step to a successful investor.
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Disclaimer
While Arbor Investment Planner has used reasonable efforts to obtain information from reliable sources, we make no representations or warranties as to the accuracy, reliability, or completeness of third-party information presented herein. The sole purpose of this analysis is information. Nothing presented herein is, or is intended to constitute investment advice. Consult your financial advisor before making investment decisions.
Investing in the stock market and gambling at a casino are often compared and deemed to be very similar ventures. Both the difference between investment and gambling involve risk and choice in hopes of future profit. Investors and gamblers have to decide how much they are wanting to risk.
Some traders typically risk between 2% and 5% of their capital base. Long-term investors often spread their money across different investments in order to try and minimize potential losses as a form of risk-management.
Risk-management in gambling is also proficiently sought after by professional gamblers. They look at whether odds are in their favor before they make a bet. A key comparable principle in both gambling and financial investing is to minimize risk while maximizing profits.
Difference Between Investment and Gambling
However, there is a huge difference between investing and gambling when it comes to stopping losses. In gambling, particularly in sports gambling, there are no loss-mitigation strategies due to the activity being so speculative.
Stock investors however can set up stop losses on a stock investment which is the simplest way to avoid unnecessary risk. If stock drops 10% below its purchase price there is an opportunity to sell that stock to someone else and still retain 90% of the risk capital.
Difference Between Investment And Gambling Comparison Chart 2019
However, if you put a bet on that states that Tottenham Hotspur Football Club will come first in the Premier League, you cannot get any money back if they come second. You will lose everything you’ve put on, which isn’t the case when it comes to stock investment. Gambling is mainly to do with pure chance, and there are a lot more loss-mitigation strategies when it comes to financial investments.
Time is another difference when it comes to comparing financial investments and gambling. Gambling is a time-bound event whereas financial investing can last several years if not longer. Some companies that pay dividends even reward investors that have purchased shares in the companies for risking their money.
As long as you hold onto their stock, companies can pay you money. But when you’re gambling, you either win or lose your capital – there is no in-between.
The way both investors and gamblers play the odds and try to look for an edge to help enhance their performance is a huge similarity between them. When it comes to gambling, particularly games such as blackjack and poker, players often study behavior, mannerisms and patterns in order to gain useful information which will help them when it comes to their own betting.
Difference Between Investment And Gambling Comparison Chart Pdf
Stock investors study trading patterns by interpreting stock charts in order to accurately predict where the business might be going in the future. However there is a difference in terms of how much information is available to both investors and gamblers. Information is valuable when it comes to both sectors, but stock and company information is always readily available and in the public domain.
Difference Between Investment And Gambling Comparison Chart 2020
Unsurprisingly, there is a limited amount of information when it comes to gambling. Sitting down at a poker or blackjack table in a casino gives you next to no information other than whispers about whether the table is hot or cold – all of which is relative to the other tables in the room. Essentially, gamblers go in almost blind other than from the information they can read and know about the players around them.
Although the idea that investing and gambling are somewhat similar isn’t untrue, there are far more differences that similarities when it comes down to aspects of information and time. Both involve risk and revolve around maximizing profit, but in general, investors have a much better chance at success than gamblers.