Investing Is Not Gambling. Here's Why

I have a friend in her 40s who has never owned a stock in her life. In fact, she doesn't even have a brokerage account or IRA. She keeps all of her money in cash, tucked away in a savings account that, for years, earned minimal interest.

See, in my friend's view, investing in stocks is akin to gambling. And I'm sure she's not the only person who feels that way. 

But investing and gambling really are two different beasts. And the sooner you realize that, the sooner you might get on board with the idea of buying stocks or other assets and growing your wealth over time.

You get to actually own something when you invest

When you throw $20 into a slot machine, you're not buying something of value. You're simply buying the opportunity to potentially make money if that machine ends up being kind to you (and that's a very big "if"). 

When you buy stocks, ETFs, or bonds, you're buying an asset of actual value that can be measured. If you put $20 into shares of a given stock, you own those shares -- meaning, you own a stake in the company you're investing in. 

This isn't to say that you're guaranteed to make money on your investment. Your $20 in stock might end up being worth $15 in a few months if the company or broad market underperforms.

But either way, investing means actually getting to own assets. When you gamble, you don't own a thing. 

You can mitigate your risks

Both investing money and gambling carry risk. But with the former, you can mitigate your risk by investing on a long-term basis.

Over the past 50 years, the stock market has delivered an average annual return of 10% before inflation, as measured by the S&P 500 index's performance. But this doesn't mean the stock market has returned 10% every single year during that period. 

In fact, during the Great Recession, which occurred between December 2007 and June 2009, the S&P 500 fell roughly 37.5%. So someone who invested money in, say, June 2007 and sold their stocks two years later would've been looking at major losses. 

But the market has also managed to recover since then. And over time, it managed to deliver an average yearly 10% return despite having lost 37.5% of its value during a 19-month period. 

The point, therefore, is that if you pledge to hold onto your investments for many years, there's a good chance you'll come out ahead financially in the long run. Your portfolio value might decline at times, such as during periods of broad market turbulence. But overall, you're likely to make money if you invest for several decades in an index like the S&P 500. 

Now, you can argue that it's possible to make money by gambling, too. And it certainly is possible. But there's really nothing you can do to mitigate your risk when you throw money into a slot machine. There are ways to mitigate your risk as an investor. And that's an important point to keep in mind if you're the type who insists on keeping all of their money in savings because you think buying stocks means gambling your money away.