We often hear the refrain that investing in the stock market is like gambling, and we can understand the temptation of that comparison. Both involve risk, you can win or lose (sometimes in a big way), and you don’t know with certainty what’s going to happen next. On the surface, there are definitely similarities to consider.
But there are two fundamental differences between investing and gambling which explains why one is a good long-term financial strategy and the other is not. First, in a casino, the house always has the edge – sure, you may have a streak of good luck and win some big hands, but the longer you stay at the table, the more likely it is that you’ll lose money. The stock market, however, is just the opposite. While stocks can swing wildly one way or another, the longer you remain invested, the more likely you are to make money. Second, gambling is a zero-sum proposition. On any given bet, one side wins a set amount while the other loses it. In a diversified portfolio, however, positive returns are not limited by the potential losses of another party.
To realize the intrinsic edge of a stock market investor, it is critical to remain invested through the ups and downs. Trying to time the market (buying and selling to take advantage of anticipated price changes) would force one to forfeit this advantage. Market timing may be tempting, but it is almost never consistently successful – neither for individual retail investors nor for the so-called smart money behind institutional forecasting. Market timing is one surefire way to turn the advantages of the stock market into the disadvantages of gambling.
The statistics tell a clear story – over the long run, gambling is a losing proposition while the stock market is a winning one.
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