Investing Vs. Gambling: Where Is Your Money Safer?

By Marc Davis | May 09, 2012 AAA
Investing Vs. Gambling: Where Is Your Money Safer?

Many skeptics, and legions of people who have never invested before, regard investing as just another form of gambling. This widely-held, but misinformed view, has kept too many from enjoying the financial rewards of judicious investment in the United States economy, which generally, over the long run, has been profitable.

Although there may be some superficial similarities between the two concepts, a strict definition of both terms - investing and gambling - reveals the principle differences between them. A standard dictionary defines "invest," as follows: to put (money) to use, by purchase or expenditure, in something offering profitable returns, especially interest or income. The same dictionary defines "gamble" as follows: To play at any game of chance for stakes. To stake or risk money, or anything of value, on the outcome of something involving chance; bet; wager.

SEE: The 5 Biggest Stock Market Myths

Gambling
While the above definitions may seem similar, the realities are not the same. In casino gambling, the "house," or the casino, has a mathematical advantage over the gambler, the player. Odds are that in the long run, the gambler will lose.

Below, as examples, are odds against the players for some of the more popular casino games of chance. Odds may vary slightly from casino to casino, and during promotional initiatives; but generally these odds apply, and reflect the player's disadvantage when playing these games.

Game House Edge:
Caribbean Stud Poker 5.22%
Roulette, double zero 5.26%
Blackjack, eight decks 0.63%
Slot Machines 15.20%
Video Poker 5.00%
Craps, Pass/Come 1.41%
Baccarat, Player 1.36%

In sports betting and betting on horse racing, the odds are similarly stacked against the bettor. Wagering on horses is actually a bet against other bettors, because odds are determined by the amount of money bet on each horse. After taxes and the profit to the race track are deducted from the amount bet on the winning horses – the first, second and third finishers in the race – the remaining money is divided among the people who bet on these horses. But the favorite in each race only wins on an average one-third of the time.

In sports betting, a bettor has to put up an additional amount of money beyond the amount bet, which is kept by the "house." This additional commission, "vig" or "vigorish," as gamblers refer to it, is kept by the house whether the bettor wins or loses. The so-called "point spread," the number of points a bettor has to give in any game – baseball, basketball, football, hockey, etc. – imposes additional odds against the player. Even if a bettor wagers on a winning team, if the team does not win by more points given by the bettor, the bet is a loss for the player.

Based on the facts cited above, gambling in general seems like a bad bet, and the gambler is at a disadvantage no matter how smart. Luck, the X-factor, may favor the gambler for a single bet or for a long, but ultimately temporary, run; luck is fickle and unpredictable.

Now, let's look at investing and how it differs from gambling.

Investing
When you gamble, you own nothing. When you invest in a stock, or a stock index fund, you own a share of the company or companies in which you invested. If the company is profitable and issues dividends, you benefit financially. If the price of the stock or stocks you own goes up, you can sell at a profit. Although the stock market has fluctuated up and down over the decades, the general trend has been up. Buy-and-hold stock market investors, therefore, have been rewarded with profits

SEE: Volatility's Impact On Market Returns

Investors in highly-rated corporate or guaranteed U.S. government bonds, have similarly profited long term with little, if any, risk. Well-chosen real estate investments, mainly residential housing, have also appreciated in value.

So, despite periodic highs and lows, the stock market, U.S. government bonds and well-chosen real estate investments have been generally profitable over the years. Nevertheless, any smart financial advisor will tell you that past performance is no guarantee of future performance. The trend, however, is apparent – investments in stocks, bonds and real estate, if held long term, usually pay off.

However, a diversified portfolio is the key element. A mix of various investment products will protect the investor against a downturn in one or more sectors of the economy.

Let's look at stock market data over a 10-year period from 2000 to 2009. The numbers show that market increases far outweigh declines.

Historical S&P 500 Index Stock Market Returns

Year Return
2000 -9.1%
2001 -11.90%
2002 -22.1%
2003 28.7%
2004 10.9%
2005 4.9%
2006 15.9%
2007 5.5%
2008 -37.0%
2009 26.5%

Data compiled on the stock market and on Treasury Bill (three-month U.S. government bonds) and Treasury Bond (10-year U.S. treasury bonds) show a similar up-trend, despite periodic declines.

Residential real estate, principally existing homes, similarly appreciated in value over the long term. According to the National Association of Realtors, on average, the price of existing homes increased by 5.4% annually from 1968 to 2009.

The Bottom Line
So, when skeptics tell you investing is merely gambling by another name, refer them to the data. The data clearly shows that gambling is a no-win venture, and not at all comparable to investing.

The data also shows that the major areas of investment - a diversified stock market portfolio, triple-A bonds and residential real estate - have been profitable over time. Certainly some investments may not work out, and some may even prove disastrous; but which would you prefer, to invest your life savings or retirement fund in a diversified investment portfolio or let it all ride at the roulette or blackjack table?

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