Investing isn’t gambling if you do it right.
Yes, I know I sound like your sister-in-law’s nephew, who is three weeks into his six week day-trading career, cornering you at Thanksgiving as you wait at the wet bar to top up your tequila to recover from hearing your second cousin recount her failed third marriage.
He’s not wrong, though. Investing isn’t gambling. Gambling isn’t investing. “I just put $50 into an index fund” has a very different ring to it than “I just bet $50 on a Nuggets-Avalanche-Reds parlay.”
We’re getting evidence that many people are replacing investing with gambling. A bunch of smartypants academics wrote a paper examining what happens after states legalize sports betting.
They found that sports betting legalization lead to the average household putting $50/quarter less into their brokerage accounts. The amount grew steadily over the first three years after legalization as sportsbooks attracted more customers. This implies that people were taking money they otherwise would have invested and gambled with it.
That’s fine for people who have an extra $50/quarter to spend. Remember that this was the average. Most people would be far better off investing that $50.
The average sports book has a 7.7% [1]take rate. That means for every $100 bet on sports, you will lose $7.70. The longer you bet, the more you bet. The more you bet, the more you lose. If you are playing a game where you expect to lose money, that’s not investing. That’s entertainment.
Compare that to investing in the stock market. The longer you play, the more you win. If you were to buy and hold US stocks over any 20-year period going back to 1950, the worst you would have done is to average a 6% annualized return. That’s 3x your money at worst. That’s a very different outcome. Investing isn’t gambling. It’s way better.
Your sister-in-law’s nephew may have had a point… if only it was the point he was trying to make.
Kevin Shuller is the Founder/CIO of Cedar Peak Wealth Advisors. This post is for informational purposes only and is not intended as financial advice.
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