Many people use the terms gambling, speculating, and investing interchangeably, but they are not the same.
In fact, understanding the difference between them will help you make better decisions and avoid unnecessary risks when growing your wealth.
Let’s explore those differences to help ensure you get the best financial outcomes, along with some enjoyment from the activity.
Gambling is placing a bet on an uncertain outcome with the hope of winning more than you lose. Gambling involves a high degree of chance, a low degree of skill and of course some excitement. Playing the lottery, roulette, and slot machines can be entertaining; however, they have a negative expected return – meaning that over enough time, you will lose more money than you win.
Speculating is buying or selling an asset with the expectation of making a profit. It tends to involve a moderate degree of chance and skill (cryptocurrencies are a recent example), and it’s usually motivated by the fear of missing out, or “FOMO” as some would say. The returns are unreliable, so sometimes you will make money and sometimes you will lose money.
Investing is allocating money to an asset with the expectation of generating income or capital appreciation over time. It involves a lower degree of chance and a higher degree of skill. Examples are buying shares of a company, bonds, real estate, or index funds. Investing done well is motivated by research, goals, and planning and so has a positive expected return, meaning that over time, you should make more money than you lose.
The main distinction between gambling, speculating, and investing is the level of risk and reward involved. Gambling has the highest risk and usually the lowest reward, especially if continued over the long term. Speculating has a medium risk and a medium reward. Investing has the lowest risk and the highest reward over the long term.
Another difference is the time horizon. Gambling is short-term. Speculating is medium-term and uncertain. Investing is long-term and compounding.
A third difference is the mindset. Gamblers tend to rely on luck and emotions. Speculators rely on trends and opinions. Investors rely on facts and analysis, letting time and compounding do the heavy lifting.
The bottom line is that gambling, speculating, and investing are different ways of using your money to achieve different outcomes. Gambling can be for fun, speculating for excitement, and investing for wealth creation.
Knowing which one you are doing, and why, can help you avoid costly mistakes and achieve your financial goals.
Our speciality is investing and helping people achieve their long-term goals by working with them to create a plan, implement it, and maintain it.
We can also help you understand which of the above you may be engaged in and ensure you are maximising your chances of growing your wealth long term.
