So, you signed up for an investing app and put a few hundred dollars into buying various stocks and investments. Now you wait patiently to see if you’ll be a millionaire or out a few hundred bucks.
This common perception of investing being a form of gambling is only a small part of the story. There are certainly ways people can approach investing that do in fact look a lot like gambling, but others take a route that involves strategy and long-term goals. One of the most challenging realities about investing is that there are no universal answers of what’s right or wrong. Nevertheless, let’s analyze some of the elements that make investing more like gambling or more like strategy.
When it’s like gambling
One of the biggest gambles a new investor can make is to come in with the idea that they’re going to get rich quickly. The truth is, nobody really knows what’s going to happen in a year, or even a month from now. Let’s say you buy stock for a popular airline, but next month there’s a spike in the cost of fuel that drives the value of your stock down. You didn’t know this was going to happen. All you had to go on were the company’s popularity and strong reports of profits over the last few years. If you hoped to make money quickly, this wouldn’t be a great start.
This illustrates the point that short-term investing (less than a year) is somewhat similar to gambling. That’s because we don’t know what outside factors are going to influence the month-to-month or day-to-day values of a company’s stock. True, the company could announce an exciting new project or report better-than-expected profits that drive your stock value up quickly. This is still a gamble, so it’s best to think about your goals and the risk involved before you start choosing investments. Trying to time the market by buying when you think stock values are low and selling when you think they peak can be time consuming and often results in frustration and lost money.
When it’s about strategy
Strategy involves taking a look at the long-term. When you research potential investments, you can get a clearer picture of where they may be headed over time. For example, if you decide to invest in a company that has been increasing its profits most years for the past thirty years, you may decide to make an investment with the assumption that they’ll likely continue doing well in the future. If you’re not trying to make money to use quickly, you won’t be as impacted if there are hiccups in value along the way. Long-term investing is all about looking at trends instead of individual spikes or drops in value. Long-term investors also benefit from companies that pay out dividends throughout the year. These small shares of the company’s profit can boost your earning potential, even if the stock value jumps around.
Retirement accounts tend to use this strategic approach to investing because the money won’t be needed for many years, so the risk is reduced by having more time to wait out the ups and downs. It’s also important to zoom out and consider cultural and technological trends. For example, it may not make sense to invest in a company that makes vehicle GPS devices when many people are moving to using their phones for such navigations. Think about the long-term relevance of what the company does.
When you actually earn or lose money
A final concept worth examining is the idea of making or losing money through investing. There are many influences that cause an investment value to rise or fall, but you haven’t actually changed anything until you sell your investments. If your portfolio value falls, you haven’t actually lost any money unless you sell your investments. Once you do, you solidify those losses and may miss the opportunity for the value to recover. Emotions can cause us to make these hasty decisions that sometimes result in losing money. The same is true of earning money. You haven’t made money until you sell the investments at a higher value than you bought them. The exception is if you own stock in companies that pay you dividends from their profits throughout the year.
Regarding retirement accounts, this concept becomes amplified. If you have money invested and the account loses value, you haven’t truly lost money until you start changing your investments or withdrawing from the account. In some cases, a decrease in value may mean your additional contributions over time are buying investments at a discount. If the account value consistently increases, you might in fact be paying a higher cost for the same investments. It is important to talk to an investment advisor about your retirement investment strategy.