gambling

An IFS View of “Stocks or Gambling”

An important component of taking care of ourselves financially is investing. It is crucial when it comes to building financial independence and providing ourselves with income to replace our earnings when we can’t work anymore. Ultimately, becoming emotionally able to set aside funds to provide for our future is one of the desired outcomes of a lot of financial therapy.

One of the emotional blocks to investing is a money script that investing in the stock market is the same as gambling. “It’s too risky. I could lose it all.” If this is the case for you, there undoubtedly is a part of you that is really afraid of what it means to lose it all. That fear may stem from experiences or stories from your family where someone indeed did lose everything. It’s important to sit with that part of yourself for a little bit and bring compassion to it, because it has a really good intention. It wants to protect a vulnerable and perhaps traumatized part of you from experiencing the fear.

When the time feels right, you might ask that part if it would be willing to consider some new information. If it is not, some additional exploration of that fear is probably warranted. If it is willing, the following information might help it with its fears.

First, investing in stock markets includes ownership of shares of a wide variety of corporations. There are thousands of companies in business just in the United States. Investing in the shares of these companies does carry risk. It’s important to understand that markets go up and markets go down. If you invest in the stock market, you’re almost guaranteed to see losses. Your portfolio total may show you have less today than you did last month or last year. It’s crucial to also know that, unless you sell out, those losses are not money coming out of your pocket. Typically, the markets turn around and go back up, so your accounts will regain value.

Staying the course when markets go down is what is so hard for those anxious parts that believe investing is gambling. This belief is a myth. Done correctly, investing in the stock market is not remotely gambling.

Let’s compare the two. (To be clear, I’m not talking about compulsive gambling, which is an addiction and which is a separate topic.) When it comes to gambling, blackjack has the highest probability of winning of almost any game of chance. There is a statistically right way to play every hand. If you do play each one exactly right, your chances of winning over a long period of play are 0%. For every $100 you bet, chances are you’ll lose only one or two dollars. That is less than you’re likely to lose with other games of chance. With keno and slot machines, my brief research shows you’d have a 100% chance of losing up to $50 for every $100 bet over time.

Statistically, when we gamble, there is no chance that we’re going to win over a long period of time. Of course, gamblers do get lucky and win occasionally. That’s part of what keeps compulsive gamblers hooked. But the odds are, if you play a lot and you add up everything over a lifetime of playing, you are going to be behind.

That’s quite different from investing correctly in the stock market, where the chance of a positive return over a long period of time, say 10 years, is over 94%. For every $100 put into the stock market, there’s a 94% chance you will gain an additional $96 over 10 years, which is an annual return of 7%. And those are conservative numbers. The annual return of U.S. stocks has ranged between 9% and 14% over the past 10 to 30 years.

Yes, people have lost fortunes in the stock market. This is why the phrase “investing correctly” is so important. Those who quickly gain or lose huge amounts in the markets typically are not investing. They are speculating. A speculation is investing done incorrectly, and it’s akin to gambling. It’s an attempt to get in quickly, make money as fast as possible, and get out. It’s fast-moving and full of adrenaline and excitement.

I did exactly this in my early 20’s. I had saved $12,000, decided to invest it, and put it all into gold futures and pork belly futures. Those are highly speculative; I won’t even call them investments. I lost everything. And a part of me said, wow, I’m never going to invest again. I didn’t understand that I hadn’t invested in the first place. I went from saving to speculating, and, as is typical, I got burned.

Can you gamble in the stock market? Absolutely. That commonly looks like frequent day trading, putting all your money into one or two trendy stocks, buying futures options or short selling, getting into highly risky cryptocurrencies. These activities are not investing, they are speculating.

It took me years to figure out what investing was. Investing didn’t quench my younger self’s appetite for excitement and control. There’s an example right there of the kind of emotional work that needs to be done around investing. But eventually I learned to appreciate the value of boring investments.

Investing in the stock market looks like putting your money into a mutual fund or an exchange traded fund that holds thousands of stocks around the world, and then leaving that money alone without touching it for 10 or more years. You keep adding to this fund, but you don’t sell it. Now that’s boring. If you get an index fund with very low fees, maybe a Vanguard fund or some index funds at Schwab or other places, you don’t really run the risk of a bad fund manager because the index fund isn’t actively managed. They’re not trying to beat the market.

Almost anyone can invest successfully in this manner. It doesn’t require studying the stock market, picking the winners and avoiding the losers. The key is to keep it boring. This means doing the necessary emotional work so, when those fearful parts of ourselves start getting concerned, our financial management parts don’t panic and sell in order to calm the anxiety of the vulnerable parts. Instead of acting out of panic, you can keep breathing and leave your investments alone, knowing the market will recover.

It helps to know that market ups and downs are normal. This is why investing correctly includes a diversified mix of assets. If your funds are invested in a diversified index fund with low costs, the chances of long-term success are hugely in your favor. This also means having a time horizon of 10 years or more, because another component of investing correctly is to begin as early as you can.

Check out The Financial Therapy Podcast by Rick Kahler concerning this topic.

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