Here's an alarming statistic: Most people think that investing is as risky as gambling. Specifically, per a 2019 MagnifyMoney survey, 55% of respondents held that opinion. Some ways of investing can certainly be risky, but overall, basic stock market investing is not an exceedingly risky endeavor -- especially if you approach it with the proper perspective.
Below is a closer look at the difference between investing and gambling.
Image source: Getty Images.
Gambling is risky
Let's face it -- gambling, kind of by definition, is risky. The odds are against you, sometimes to a massive degree. Think of the Powerball lottery grand prize, for example. The odds of winning it were recently 1 in 292,201,338. In fact, the odds of winning any prize were 1 in 24.87.
You'll face much better odds playing various casino games, but even there, the odds are against you. After all, they would have to be for the casino to make its own money -- and to keep all those neon lights glowing in Las Vegas.
Some extreme investing approaches can be risky
It's true that some ways of investing money can be risky. These approaches include:
- Investing in penny stocks -- those generally trading below around $5 per share
- Trading in options, using "puts" and "calls." (Some kinds of options trading are actually very low-risk, but others can be high-risk.)
- Investing "on margin" -- i.e., with money borrowed from your brokerage
- Dabbling in cryptocurrencies, especially if you don't know much about them
- Trading commodities, perhaps via futures contracts
- Day trading, where you buy and sell stocks throughout a day, holding them for hours or less
- Foreign exchange trading -- often referred to as "forex"
- Shorting stocks, where you're betting that they'll fall
See? There are many risky ways to invest. It can even be risky when you invest in a straightforward manner in some well-known stocks -- if you're not well prepared.
When you're ready to invest
To see if you're prepared to build wealth via stocks, see how many of the criteria below you can meet:
- You have a long-term focus and aim to build wealth over years or, better still, decades.
- You're free of high-interest-rate debt and have an emergency fund at the ready.
- You are investing with money you won't need for at least five, if not 10, years.
- You understand that the stock market can be volatile, and market crashes happen now and then.
- You have learned how to study stocks to determine whether they're high-quality and priced attractively. You've learned to read and understand financial statements, too.
- If you don't want to study and invest in individual stocks, you understand why you might just stick with index funds -- and build wealth powerfully that way.
Basic stock market investing can be low-risk and high-reward
Once you're ready to invest, you can do so via a regular, taxable brokerage account or via a 401(k) or IRA, among other options. Let's assume you opt to invest mainly via low-cost index funds. That's a solid choice, even approved by Warren Buffett.
A low-fee S&P 500 index fund will deliver roughly the same return as the S&P 500 index of 500 of America's biggest and best companies. Over many decades, that return has been close to 10%. So let's go with 8%, to be slightly more conservative. Check out how your money can grow over time at that rate in the table below. Clearly, while an 8% gain may seem small, it can really compound over time -- with astounding results.
|
Growing at 8% for |
$7,000 invested annually |
$15,000 invested annually |
|---|---|---|
|
5 years |
$44,351 |
$95,039 |
|
10 years |
$109,518 |
$234,682 |
|
15 years |
$205,270 |
$439,864 |
|
20 years |
$345,960 |
$741,344 |
|
25 years |
$552,681 |
$1,184,316 |
|
30 years |
$856,421 |
$1,835,188 |
|
35 years |
$1,302,715 |
$2,791,532 |
|
40 years |
$1,958,467 |
$4,196,716 |
Data source: Calculations by author.
That doesn't look too risky to me, because it's simply math. Keep adding to your investments, and they're likely to grow over time. And if you're investing in the S&P 500, you're essentially investing in the American economy, "betting" that its biggest and best companies will keep growing -- as they have for many decades.
Buying shares of stock or shares of index funds makes you an actual part owner of these big businesses. Your stake in each will be modest, but you'll be betting on growing enterprises filled with employees motivated to help the companies grow. You will be more likely to win than to lose. That's much, much better than gambling.
