How to Invest Without Throwing the Dice
If you’re interested in investing and personal finance, chances are you’ve had a conversation (cough – argument) about whether or not investing is gambling. There certainly are plenty of opinions – ask two people and you’ll get two different ideas.
Francesca Nicasio, a Content Marketer at Payment Depot, thinks that investing is like gambling. She says:
“I think investing is a form of gambling. You’re risking money on an outcome you don’t control in order to make more money. Research, advice, and strategy can reduce (but never eliminate) your risk exposure with investing whereas gambling will always be a matter of chance. Investing is the safer bet, but it’s still a bet.”
While Joe Flanagan, a Senior Employment Advisor at VelvetJobs, disagrees:
“Investing is a probability game. I don't see it as gambling if educated correctly and with the knowledge and discipline to enter and exit investments while maintaining correct risk management. Many investors study for years to be successful at what they do and are successful with the correct strategies in place. Because of this, investing is not gambling if done correctly.”
There is always an element of risk in investing, but you can make strategic decisions when you invest. Sure, experienced poker players apply advanced math-based strategy while playing, but the average Joe who is throwing craps or putting it all on black is relying on chance.
Here at Axos Invest, we aim to provide the resources and tools you need to make smart decisions about investing. We don’t tell you what to do, we give you the means to figure it out yourself.
Let’s explore some of the strategic methods investors might use:
Diversification
You’ve heard that you shouldn’t put all of your eggs in one basket or not to count your chickens before they’re hatched. Let’s get out of the farmyard and talk about what this means when you’re investing. Simply put, you spread your investments across different equities, funds, and other securities to attempt to lower the volatility of your portfolio.
A diverse portfolio puts your investments in different baskets. If one basket doesn’t do well in a certain market, hypothetically, the other baskets can balance out your total portfolio. Also, the contents of your portfolio aren’t set in stone. Whether you use a self-directed trading platform or a robo-advisor, portfolio adjustments are available.
Research
Poker players might study probability and betting strategy, but there isn’t much to study when it comes to roulette and slots. However, you should always do your homework before investing. Whether you’re choosing a robo-advisor or using a self-directed trading platform, you need to educate yourself about what you’re getting into. Investment research is often divided into quantitative and qualitative analysis.
Quantitative analysis includes researching a company’s financials. Look at Form 10-K and Form 10-Q to review a company’s balance sheet, income sources, revenue, and expenses. That being said, these forms are comprehensive and it’s easy to be overwhelmed by figures if you don’t know what you’re looking at. You might want to focus on:
- Revenue
- Net income
- Earnings and earnings per share (EPS)
- Price-earnings ratio (P/E)
- Return on equity (ROE)
- Return on assets (ROA)
These data points provide the details of a business’s past and predictive performance.
Qualitative research, on the other hand, tells the rest of a company’s story. Some of the questions you might want to investigate before investing in a stock include:
- How does the company make money?
- What is the company’s competitive edge, and who are its competitors?
- What is the history or reputation of the management team?
- What are the long-term risks for the company?
Of course, these points relate specifically to individual stocks. If you chose a mutual fund, an ETF, or another type of security, you still need to research your options to make the best choice for your portfolio.
Taking advantage of time
The stock market fluctuates daily, and it’s easy to get caught up in perceived wins and losses, much like a growing or shrinking pile of chips at the blackjack table. However, when you look at the long term, you have the potential for growth. Historic Standard & Poor’s 500 stock index data from 1968-2018 indicates a compounded annual gain of 9.7%*. Obviously, the stock market has its ups and down, but when it comes to investing, long-term gumption could leave you better off.
Instead of freaking out about stock market dips, you can choose to ride out the waves and give your portfolio time to recover. Additionally, any potential returns on your portfolio could compound with time. Whereas, when you put your money into a slot machine – when it’s gone, it’s gone.
Todd Ramlin, Manager of Cable Compare, gives his perspective:
“On the surface, investing and gambling look similar but judging them by their results over time show them to be quite different. Investing is like gambling since they both involve risking capital with the hope of making a profit. In both cases, the goal is to minimize risk while maximizing reward. Over the long run, however, the odds will be in an investor’s favor but not a gambler’s. In gambling, the player doesn’t do any work, doesn’t purchase any assets, and any gain is based purely on chance. For investing, there’s an element of chance, but an expectation of gain over the long haul, since doing the proper research and investing strategically in assets can reduce the risk.”
Investing can be a risky venture, but when compared to gambling, it has a few differences that might work to your advantage. Learn more about the Axos Invest offerings today.
*https://www.berkshirehathaway.com/letters/2018ltr.pdf
* Axos Invest, Inc., and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transactions.
Axos Invest, Inc. Investment advisory services provided by Axos Invest, Inc., an SEC registered investment advisor. All rights reserved. For information about our advisory services, please view our ADV Part 2A Brochure, free of charge, at https://www.adviserinfo.sec.gov/Firm/150953. Brokerage services are provided by Axos Invest LLC, a member of the Financial Regulatory Authority (FINRA) and the Securities Investor Protection Corporation (SIPC).
These views are subject to change at any time based upon market or other conditions. The information, analysis, and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual or entity.
Please keep in mind, past performance is not necessarily indicative of future results. All investments carry risk and all investment decisions of an individual remain the responsibility of that individual.
This blog post was published by Axos Bank on July 26, 2021, and last updated on July 26, 2021.
