For many, the word “investing” is synonymous with the word “gambling.” And, if you don’t invest the right way, I totally agree. However, if done correctly, investors should be able to push the odds of success in their favor, which is rarely, if ever, true when gambling. To me, this is the biggest difference between investing and gambling. Both certainly entail risk, but one can come with the odds in your favor, while the other comes with the odds almost always stacked against you.
Let’s talk a little more about investors versus gamblers, and then move on to how to make sure you are the latter.
Gambling is generally done for fun or excitement, or sadly, sometimes out of desperation, and over the long term is usually a losing proposition. Unless you are the “house” (i.e., the casino owner), the odds will almost always be stacked against your winning. That doesn’t mean winning can’t happen; you might get lucky from time-to-time, but it is certainly not something you should count on. Now, don’t get me wrong, I am not saying there is anything inherently wrong with gambling, when you can afford it and when you understand that you are doing it. Gambling, in my eyes, becomes dangerous when you can’t afford to lose what you are risking, or just as importantly, when you don’t realize that gambling is what you are doing in the first place – in other words, when you think you are investing, but you are, in fact, actually gambling. The key with gambling is to understand when you are doing it, what you are risking and that you almost certainly have a better chance of losing than of winning. If you are aware and comfortable with all of these things, then by all means, gamble away…
Investing, on the other hand, is not usually done simply for fun or for the “thrill of it,” but instead, to reach a specific goal that would otherwise likely be unattainable. And when done correctly, investing should put the odds of success in your favor. Yes, it is still a risk, but it is a calculated risk, taken with thought and purpose.
This all obviously leads to the question, and really the purpose of this post: how do we become good investors and put the odds in our favor? How do we know if we are true investors, and not just gamblers who mistakenly think that we are investors? To answer these questions, I would say that at the simplest level, it comes down to two things:
First, you must have time on your side. The statistics of investing are certainly in your favor over the long-term, but you need to be sure you have the time to let the statistics do their work. There is no specific definition of long-term, but I would say that, as a general rule of thumb, you need to have a five-year timeframe at a minimum, and having ten plus years really allows you to put the positive odds of long term investing to work for you.
Second, you absolutely have to be an unemotional investor. You need to be systematic, methodical and unwavering over the long term. This is one area of life where you don’t want to ever use the “F” word, and by that, I mean “Feel.” Feelings and emotions are great for lots of things, but investing is not one of them
As you can see, the solution to ensuring you are truly an investor who has put the odds in their favor is relatively simple. Just be unemotional for the long term. However, just because it may appear simple on paper, doesn’t mean it is at all easy to put into practice. How do we ensure we are, and can continue be, long-term investors? How do we force ourselves to be unemotional for the entire time? There are differing ideas on exactly how to accomplish this, but for me, there are three distinct steps that I believe need to be taken in order to give you the best opportunity to accomplish these goals.
- Step 1 – Adequate Cash Reserves
- Step 2 – Adequate Insurance Coverage
- Step 3 – Ongoing Financial Planning
When used correctly, and in conjunction, these three steps should allow an investor to become a long-term unemotional investor, which, as I discussed, is exactly how you become an investor and not a gambler. Let’s briefly look more closely at why each of these three steps is important in our pursuit of unemotional long-term investing.
Cash Reserves –
The biggest difference between investors and gamblers is adequate cash reserves. Without adequate cash reserves, you are never really a good investor, because, as we have discussed, smart investing means investing for the long term. And without adequate cash reserves, how can you ever really know you have a long timeframe? You can come up with the greatest financial plan and long-term investment strategy on the planet, but if you don’t have the time to see it through, because you are forced to access your investment assets sooner than planned, it is impossible to consistently put the odds in your favor. That is why cash is king in any realistic financial plan and investment strategy. Think of cash as portfolio insurance which ensures that you are able to leave your long-term investment assets invested for just that, the long-term.
The same goes for other forms of insurance. This means life insurance, health insurance, auto insurance, disability insurance, liability insurance, and long-term care insurance. Again, without adequate risk protection in place, you will never be certain that you will be able to put the odds of long-term investing to work for you, because again, you cannot be certain that some event won’t come along and derail your long-term plans by forcing you to access your investments. You need to be able to leave your investments alone for the duration, regardless of the roadblocks and bumps that inevitably come along the way. And that is exactly what insurance is meant for.
Financial Planning –
Finally, an investor, as opposed to a gambler, should have a well thought-out and executed financial plan. This is really how you keep the emotion out of the equation. This is how we avoid using the “F” word when investing. A financial plan is like using a good GPS system for your driving directions. A solid financial plan shows you where you are, where you want to be, and the safest or smartest way to get there. Yes, there may be detours and changes along the way, but at least you are starting with the end in mind, knowing full well what you are doing and why. With a clear destination and a clear path in mind, you should be less prone to emotional choices along the way, which has proven to be the best way to actually accomplish your financial goals.
The bottom line is that investing and gambling are not the same. Yes, they both entail risk, and in both there is the house, and there is the gambler, so the real question is, which do you want to be?
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