It’s never been easier to gamble. Looking to place a bet on who will win the Big Game on Sunday? In many states, you just need to open a sports betting app on your smartphone to make a wager. One online brokerage firm even went as far as to offer the ability to bet on this year’s winner, before quickly reversing course.
Sadly, the lines between gambling and investing have been blurred like never before. Many online brokerage firms are enticing their customers to trade frequently by adopting techniques from the gambling industry, such as flashy graphics and frequent alerts. Many firms also steer customers toward risky trades that can become worthless in a matter of hours.
So how can you tell if you are gambling or investing your money?
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
For starters, investing involves owning assets that produce value, such as earnings and dividends for stocks, interest payments for bonds or real assets that generate income or meet consumption needs. Buying assets whose value is solely driven by supply and demand is closer to gambling.
But that doesn’t mean that an investment can’t be turned into a speculation or gamble.
Sound investing involves following these investment principles:
- The first step for investing is setting a long-term goal, like saving for retirement or your child’s education. With a traditional portfolio of stocks and bonds, the more you invest and the longer your time horizon, the better your potential of having a positive outcome. In contrast, the more you gamble and the shorter your time horizon, the more likely your potential of ending up with a negative outcome, given the odds are stacked against you.
- Investing in a diversified mix includes different types of securities so your overall portfolio has balance, which can help to smooth out some of the short-term ups and downs. Gambling often results in an outcome where you win big or lose all the money you bet. Similarly, owning only a single security or trading cryptocurrency increases the risk profile of your financial portfolio.
- Investing provides you with an opportunity to keep your costs low so you can keep more of what you earn, like a low-cost exchange-traded fund (ETF) or a high-yielding savings account. Gambling requires you to make frequent trades to either time the market or reinvest an expiring option. And just because a brokerage may not charge a commission for a trade doesn’t mean that it’s free — on top of spread costs, most brokerages receive payment for order flow (PFOF), a practice where the brokerage pockets a slice of your proceeds every time you trade.
- Lastly, investing requires discipline, which can be much easier with investing than gambling. For example, you can set up an automatic investment plan that regularly invests into a diversified portfolio of stocks and bonds that aligns with your investment goals and risk preferences and voilà — if your goals and risk preferences don’t change, you probably don’t need to change your investment mix. Or as Vanguard founder Jack Bogle used to say, “Don’t just do something, stand there!”
Tune out the noise
Gambling takes a lot of work to monitor your positions and manage your overall portfolio — presenting more opportunities to let your emotions get the better of you.
However, not all brokerages design products and experiences for their success at your long-term expense. Again, most, but not all, brokerages accept payment for order flow, in which the brokerage essentially gets a cut of your proceeds every time you trade.
Of course, all investing is subject to risk, including the possible loss of principal; diversification does not ensure a profit or protect against a loss; investments in bonds are subject to interest rate, credit and inflation risk; and no particular asset allocation can guarantee you will meet your goals.
That said, the more you tune out the noise and focus on the things you can control, the better chance you have for investing success.
Related Content
-
The AI Doctor Coming to Read Your Test ResultsThe Kiplinger Letter There’s big opportunity for AI tools that analyze CAT scans, MRIs and other medical images. But there are also big challenges that human clinicians and tech companies will have to overcome.
-
The Best Places for LGBTQ People to Retire AbroadLGBTQ people can safely retire abroad, but they must know a country’s laws and level of support — going beyond the usual retirement considerations.
-
Financial Planning's Paradox: Balancing Riches and True WealthWhile enough money is important for financial security, it does not guarantee fulfillment. How can retirees and financial advisers keep their eye on the ball?
-
A Confident Retirement Starts With These Four StrategiesWork your way around income gaps, tax gaffes and Social Security insecurity with some thoughtful planning and analysis.
-
Should You Still Wait Until 70 to Claim Social Security?Delaying Social Security until age 70 will increase your benefits. But with shortages ahead, and talk of cuts, is there a case for claiming sooner?
-
Retirement Planning for Couples: How to Plan to Be So Happy TogetherPlanning for retirement as a couple is a team sport that takes open communication, thoughtful planning and a solid financial strategy.
-
Market Turmoil: What History Tells Us About Current VolatilityThis up-and-down uncertainty is nerve-racking, but a look back at previous downturns shows that the markets are resilient. Here's how to ride out the turmoil.
-
Stock Market Today: Stocks Surge to Close a Volatile WeekIt was another day with a week's worth of both news and price action, but it ended on a strongly positive note.
-
Home Insurance: How to Cut Costs Without Losing CoverageNatural disasters are causing home insurance premiums to soar, but don't risk dropping your coverage completely when there are ways to keep costs down.
-
Markets Roller Coaster: Resist the Urge to Make Big ChangesYou could do more harm than good if you react emotionally to volatility. Instead, consider tax-loss harvesting, Roth conversions and how to plan for next time.
