Why Investing Isn’t Gambling, It’s Owning the Casino

Investing isn't gambling, it's owning the casinoMillennials aren’t investing for their future, with only 33% of millennials currently owning some form of stock, bond, mutual fund, or other investment. While the reasons vary, many millennials refer to the stock market as gambling, just too risky. But the reality is, investing in the stock market isn’t gambling, it’s owning the casino.

Millennials currently have a negative savings rate, but over half of us gamble in some form. We are willing to play table games, slots, or bet on sports even though we know we’ll lose in the long term. It is about time we tipped the odds in our favor and put our money in a place where we can actually win.

The odds are tipped in your favor

Everyone who has ever been to a casino knows that the odds are set for every game to ultimately benefit the casino owner. The casino owner wins by having hundreds of people play every day and over the long term. That slight edge for the casinos adds up over time to significant cash earnings. It works the same way for investing.

Looking at daily data back to 1928, there hasn’t been a 30 year period in history where you lose money invested in the stock market, even after adjusting for inflation. There are bad cycles and bad individual years, but over time the volatility smooths out and the long-term growth benefits the investor. The person who buries the money in their back yard or keeps it in a savings account because it is “safer” loses wealth from inflation almost every year.

Wealth gained by investing $10,000 instead of putting it in savings accounts

Looking at every 30-year period from 1928 through today, I compared the inflation-adjusted values of $10,000 for someone who invested the money versus put it in a savings account. On average, the person who doesn’t invest gave up over $24,000 in wealth. Before inflation, that loss is over $80,000. History doesn’t guarantee future results, but in every single 30-year period in the last 89 year, the person who invested beat the person who didn’t. The longer you invest the more likely you are to build wealth and the more wealth you build. Just like running a casino.

Sometimes you lose

Casinos have odds on every game on the casino floor. They know what percentage of the time they are supposed to win and how much money they are supposed to win. That expected win is called the casino’s “hold” and it determines the profitability of the whole casino. But the odds don’t always play in their favor.

Just like sometimes you can flip three heads in a row with a coin, sometimes the casino has to pay out big jackpots or has an off night, and they see weaker hold. On nights with weaker hold, the casino owners don’t decide to just throw in the towel. They don’t panic that this means their business is broken. They open up the next day and know that long-term, they win.

Percentage of time investors beat savers historically based on time horizon

It is the same with investing. The fewer years you keep your money in the market, the higher the probability of losing has been historically. But with a 10 year or greater investment period, investors have beaten savers more than 9 out of 10 times. If you can remember that your odds of winning improve every additional year that you keep your money in the market, you will probably come out on top long-term. There will be day-to-day losses sometimes, anyone who lives through 2009 knows that pain. But if you can avoid the panic and stay invested, you’ll be on the path to building wealth.

You have to optimize your portfolio

Every game on the casino floor has a different cost to own and operate and a different hold rate. Slot machines from different companies have different algorithms and success rates. New table games are being tested all the time. So, to optimize profits, casino owners are always working to keep the best pieces on the floor. Games people love playing, but that are still making the casino money.

While successful, long-term investors aren’t trading in and out of specific stocks and mutual funds all the time, they do watch their costs and performance. If a fund manager ups their fees or an investor discovers another provider with substantially lower fees, they make the switch. If they realize they are invested in the S&P 500 index instead of the Total Stock Market Index, they make changes to increase their diversification. Good investors don’t nitpick, but they also know to check in with the costs of their investments, fund performance, and personal goals every 6 to 12 months. They optimize and adjust to make the most money.

Investing in the stock market is like owning a casino, except better

Investing in the stock market sets you up to win long-term. The odds are tipped in your favor and you build wealth best by using a hands-off approach and only occasionally making small changes. But while investing is more like owning a casino than gambling in one, it is actually a much better deal.

Casino owners disproportionately make money from the undereducated and elderly. Their business models aren’t always popular, with many calling gambling a “tax on the poor.” Investing doesn’t mean having to take money from someone else, it means believing in the long-term growth of the global economy. Believing that people will continue to innovate, build, and grow and putting your savings in a place where your wealth can grow with it.

Stop believing that investing is a gamble, and step onto the other side of the table.  Invest and make money in your sleep.

Do you believe investing is like gambling? What worries you about the stock market? Let me know in the comments! 

12 Comments

  • Grant @ Life Prep Couple June 1, 2017 at 11:50 am

    I like that analogy. I will definitely use that in the future. Every body wants a guarantee and the thought of losing money is just too much for them. And people want to spend the cash they have on things they don’t need. It isn’t like the people staying out of the stock market are buying up a bunch of CDs instead.

    Reply
    • Chelsea June 1, 2017 at 7:13 pm

      Totally agree, Grant! The idea that you are going to save without investing has proven time and time again not to be true. That money leaks out somewhere, and you end up far worse than if you had invested.

      Reply
  • Brian Doyle June 1, 2017 at 12:35 pm

    This is a great point about the long term advantages of the market. Well written and supported, thank you.

    Reply
    • Chelsea June 1, 2017 at 7:13 pm

      Thank you, Brian!

      Reply
  • Ms. Raggedly Rich June 1, 2017 at 2:17 pm

    It took me the longest time to get over my fear of the stock market and invest – reading this just makes me even more confident in my decision to trust the index funds and stop letting my money waste away in a savings account!

    I think you’ve made a perfect analogy – it’s like gambling if you’re trying to beat the house, but as long as you change your perspective and become the house, you’ll be fine!

    ( Barring a world-wide catastrophe. In which case, there’s probably more pressing things to worry about and money will be useless anyway. )

    Reply
    • Chelsea June 1, 2017 at 7:14 pm

      It is great that you got over your fear! It can be hard to stay invested through a cycle, but in the long-term, it is worth it. Thanks for reading, Ms. Raggedly Rich!

      Reply
  • Full Time Finance June 1, 2017 at 3:30 pm

    It’s hard for people who have gotten burned to get back into the market. I have a family member that pulled out during 2008. I’ve basically taken over their investments and put them back in the market last year. They certainly did themselves no favors losing out on gains over the last decade.

    Reply
    • Lily June 1, 2017 at 5:04 pm

      Oh that sounds just like my parent’s friends. They just panicked. I was too young (high schooler at the time) to know what they were saying it.

      Reply
    • Chelsea June 1, 2017 at 7:16 pm

      Yeah, if they pulled out they view down cycles as things that you never recover from because you can’t if you pull your money out at the bottom. And trying to show them what would have happened if they left the money in makes people defensive. It is good that you are helping out a family member. Hopefully, it helps them recover some of the value they lost.

      Reply
  • Xyz from OurFinancialPath June 1, 2017 at 7:11 pm

    This a great way to see it! Another great tip (to stay in the same analogy) is to never look at the dice. The less you look at your balances often, the better you will be.

    Reply
    • Chelsea June 1, 2017 at 7:17 pm

      Love that! I only check my investments every 6 months for that exact reason. I don’t want to see all the little fluctuations. Thanks for sharing!

      Reply
  • Mustard Seed Money June 3, 2017 at 7:33 am

    I always remember that quote it’s not timing the market but time in the market that counts. This is so true and while the house may lose in the short term, over the long term the house always win. This is definitely the philosophy that I’ve taken and it’s worked out really great 🙂

    Reply

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