Is the Stock Market Just Gambling?
Gambling is in vogue right now. Thanks to the increased prevalence of online betting, bettors wagered a staggering $16 Billion on Super Bowl 57. After a rough 2022 in financial markets, investors are finding it hard to tell the difference between their 401(k) and their online sportsbook account. I cringe whenever I hear somebody say that the stock market is like a casino. Sure, the green and red numbers and the up and down arrows make it *feel* like a casino, but there is one key difference (besides free drinks): the odds are easily in your favor with your investments. Let me explain.
Why to Invest in Stocks
Holding money in stocks is a bet on the ability of humans to innovate and on the ability of corporations to turn those innovations into profits. If you hold them long enough and diversify sufficiently, the odds are high that you will turn a handsome profit. There are two key phrases in that last sentence: “long enough” and “diversify sufficiently.” Using the S&P 500 as a proxy for the market, over 95% of rolling 10-year periods are positive. Translation: if you sit tight, chances are your money will grow in the next decade. The problem is ten years can feel like an eternity, and emotions like fear and greed tend to throw us off. If you think humans will stop innovating, that is your right, but I’ll take the other side of that bet every time.
Why to Invest in Bonds
Bonds are less uncertain than stocks, but as we saw last year, that doesn’t mean they can’t go down in value. Investing in bonds is like playing the bank to companies or governments. You lend money to the borrower for a stated period of time, they pay the interest along the way, and then they give your money back at the end. The greater the probability that the company won’t be able to pay you back, the higher the interest rate you will require. Stated that way, bonds should be boring, but last year felt like a casino. To explain why let’s assume you bought a $100 bond paying 2% in 2021 with the expectation of getting your money back in 2031. In that scenario, you are on schedule to earn 2% on your investment unless you need to sell before 2031. If you wanted to sell last year, the price someone would have been willing to pay went down for various reasons. If you held and are still holding, you are still on track to earn that initial 2%.
As retirement funds have shifted from pensions to 401(k) plans, the onus is on the individual investor to make prudent investment decisions. It is a big responsibility! Without sounding too dramatic, the fate of one’s retirement depends on their ability to make good decisions throughout their life. Thinking that the market is a casino, or a zero-sum game with the odds stacked against you, is a precursor to some potentially harmful decisions. Working with a financial advisor can help cut through some of the noise and provide you with clarity.
Author: David Rath, CMT, CFA
Questions or comments? Send us a note (I personally respond to every message).