Is investing in markets the same as gambling?
Both involve risk, but unlike gambling, well-advised investing leaves less to chance.
Some people believe that investing your money in market-related financial instruments is just like gambling. After all, you’re ‘betting’ that your investment will rise in value when you buy it, right? However, there’s a big difference: investments work with the laws of probability, while gamblers try to defeat them.
A properly balanced investment portfolio will contain a range of financial instruments with different levels of risk: low, medium and high. Over the long term, statistical probability should deliver returns on that mix of investments within a predictable range. Typically, the longer the investment term, the less risk there is, as the range of returns narrows with time.
When a gambler makes a bet, on the other hand, they’re hoping for improbable outcomes – for example, that a 37-to-1-against chance in roulette will pay off. The gambler relies entirely on Lady Luck overturning the laws of probability to make a return on investment.
Long-term returns vs ‘making a killing’
It’s crucial to understand the difference between ‘investing in markets’ and ‘playing the stock market’. Investing in markets through a well-diversified, broad range of financial instruments – like equities, bonds, listed property and the offshore versions of the same – is a long-term strategy. ‘The benefit of investing in markets is that you harness the compounding of returns by reinvesting earnings and dividends,’ explains Jannie Leach, Head of Core Investments at Nedgroup Investments. ‘The impact of compounding becomes more meaningful the longer your investment horizon is. That’s why you want a lot of equities in your pension fund, as you will be saving for 30 to 40 years.’
Playing the stock market, on the other hand, usually involves investing in individual company stocks in the hopes of ‘making a killing’ – that is, doubling, tripling or even quadrupling your money quickly. ‘In stockbroking the holding periods are generally less than 5 years,’ says Jannie. ‘This is a mild form of gambling, as there’s always a lot of uncertainty around individual shares and their outcomes, even for professional investors. In many cases, when the market reflects the status of the company accurately, the share becomes a value trap – it never grows or doubles in value and you lose money. In my personal capacity, I’ve always viewed my stockbroking portfolio as “play money”. If I make a loss, it won’t harm my overall financial well-being.’
So, before you even consider trading individual stocks, work with a financial adviser to put a long-term investment plan together, with a balanced portfolio of financial instruments designed to spread your risk and deliver reliable returns over 3 or 4 decades.
Your broker should align with your budget and trading style and be aware of your investment goals
Planning your savings and investment journey
Growing your money is a long-term undertaking and is best understood as a journey from life stage to life stage.
- Savings and debt
In your first 3 years or so of earning regular income when you’re starting out, your biggest debt will probably be your home loan. Try to pay off all other debt as quickly as you can to ensure you can save some money in an emergency or discretionary fund. This is money you can put into a savings account that gives you instant access, like MyPocket, or a 24-hour notice account, like JustInvest, so that it is available for unforeseen expenses. You can then use these monthly savings for investment purposes when you’ve fully funded your emergency reserve.
- Long-term savings
When you move beyond your initial savings life stage, you’ll want to invest in longer-term savings vehicles. Some of them may be compulsory, such as a pension fund if you’re permanently employed. But you should also be putting money into things like additional retirement savings, tax-free savings accounts and savings accounts for your children.
- Taking on higher risk
If you add higher-risk investments to your portfolio, like individual stocks and shares, or endowments with a high proportion invested in shares, it’s better to do so with a longer investment horizon. This makes it more likely that the sharp rises and falls in value typical of a high-risk investment will even out over time, to provide average steady growth overall.
Investments for the risk-averse
If you want to avoid high-risk investing completely, there are various low-risk investments that can also earn you decent returns. If you still think investing is like gambling, these are closer to a sure thing:
- Fixed deposits
These are savings vehicles with attractive interest rates. They are available in a variety of flexible options catering for your investment style, budget and stage of life.
- Unit trusts
Unit trusts are managed by professional financial experts, who select a variety of investments for the trust portfolio, based on appetite for risk and the investment term. So, for example, if you want to avoid too much risk or you’re investing for only 3 to 12 months, you could choose a low-risk unit trust with a smaller percentage invested in shares and property. Discuss your unit trust options with your financial adviser.
Reducing risk in stock exchange investments
When you have a solid foundation of long-term investments in place, you may still want to try stock trading for yourself. Provided you remember the risks involved and don’t use money you can’t afford to lose, this could be a rewarding and entertaining addition to your financial management.
The internet has made information about stock markets, and how to invest in them, much more accessible and understandable. You can even build and manage your own stock portfolio digitally, through trading apps and platforms like Nedbank Online Share Trading. Nevertheless, there are some steps you should take first as an individual investor. What do you need to know?
- Learn about the markets
Avoid gambling with your money by researching all the information now available to investors on advisory apps and automated platforms – or seek financial advice from a stock market specialist.
- Know how much you can afford to lose
Always remember that you can lose money on stocks and shares if the markets shift. If you’re considering a high-risk investment, invest only what you could afford to lose.
- Determine your risk profile
This is related to how much you can afford to lose but could also simply be part of your trading style. Discuss the level of risk that best suits your investment goals with your broker or financial adviser and balance the risks across different instruments in your portfolio accordingly.
- Work with your broker
Brokers are investment professionals who study the ups and downs of stock exchanges to provide expert guidance on promising investments. Your broker should align with your budget and trading style and be aware of your investment goals – whether you want extra income for retirement, to pay for your children’s education, or to build up a portfolio that earns more interest.
Nedbank's investment services can offer guidance on all your investment needs, local or international, from advice on what investments fit your financial goals to managing your portfolio.
Nedbank also offers comprehensive advice on share trading and stock market investing, and a full brokerage service.
