Worried that investing your hard-earned money is the same as throwing dice or spinning the roulette wheel?
Here’s the thing. Investing and gambling are actually very different.
Investors and gamblers both want to make money on their money. But the approach and odds couldn’t be more different.
Here’s why investing your money can be a better option than buying a lottery ticket or betting it all on a high-stakes game of poker.
Think about your odds
You’ve heard the old saying that “the house always wins.” Casinos are in the business of making money. That means the odds are stacked against you coming away from the table with all your chips and more.
If you bet $1,000 that the roulette wheel hits your lucky number, you’ve got one shot at cashing in. Your odds? 35 to one. You could walk away with nothing. Not only that, you’ve got no say in the outcome. It’s all up to the wheel and the person spinning it.
Investing can be a more effective way of making your money work for you. And most importantly, you’ve got more control as to where your money goes and how it can grow. You can choose stocks with a history of growth and value or bonds that pay returns on a fixed schedule. You’re in charge, not the dealer.
There’s risk and there’s risk
Putting all your money on the blackjack table is a stressful strategy. Even if you’re on a lucky streak, you could lose all your winnings, or worse, end up with lot less.
Yes, investing involves a certain amount of risk. But you can balance out that risk by building a diversified portfolio with stocks, bonds and holdings from multiple sectors (tech, energy, international stocks). If one sector gets hit, you’ve got others that may be doing well. If stocks go down, you’ve got bonds.
This is diversification at work.
Invest with a plan
Here’s another difference between investors and gamblers. Gamblers want to make fast money. Investors want to build wealth over time.
Investors with a strategy think long-term. Rather than just “hitting it big,” they think about something they want in the future, a goal. This may saving for a down payment for a home, a dream trip around the world, or a child’s college education.
Once you have a plan in place, you can adjust your portfolio according to your timeline. How much do you need to invest each month in order to get to where you need to be, when you need to be? An investment calculator is a better tool than a sheet of odds at the track.
Word of the day: Compounding
Investing allows the earnings from your investments the chance to compound over time.
Here’s how compounding works:
Imagine you invested $100, and your hypothetical investment averaged a 10%* annual return**.
- After the first year, your $100 would earn 10%, or $10. So, you’d have $100 + $10, or $110.
- In your second year, you’d start with $110, and earn 10% of that, or $11. So you’d have $110 + $11, or $121.
- In your third year, you’d start with $121, and earn 10% of that, or $12.10. So you’d have $121 + $12.10, or $133.10
- In your fourth year, you’d start with $133.10, and earn 10% of that, or $13.31. So you’d have $133.10 + $13.31, or $146.41
If you held your investment for 20 years with the same average annual return, your initial investment of $100 would be worth $672.75.
If you want to build a real nest egg, step away from the poker table. When you gamble, the odds are not in your favor. Investing your money by regularly monitoring and contributing can give your money the chance to grow over time.
*If you look at the S&P 500 index over the course of 30 years (1987 – 2017), the annualized return is over 7% without adjusting for inflation. If adjusted for inflation, the annualized return on the S&P 500 over 30 years is closer to 4.5%, if you don’t include dividends.
**This is a hypothetical example that is demonstrating a mathematical principle. It does not illustrate any investment products and does not show past or future performance of any specific investment. Past performance is no guarantee of future results. Investing involves risk, including the loss of principal.
** Stash is an affiliate partner with Washington Square News
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