Ask yourself one simple question: Are you investing in the market, or are you gambling on the market? Not sure? Many people think it is the same thing, but it’s not. Knowing the difference could determine whether you have a comfortable retirement or have to live on your Social Security.
Let me give you an example of what I mean. Suppose you have an opportunity to buy an equal share in each of the 32 National Football League (NFL) teams. This means you are entitled to your share of all the profits of all the teams from ticket sales, concessions, TV revenues, merchandise sales, and the increased value of the teams over time. Now, you don’t know which teams will do well, win the Super Bowl, or be more profitable than others. Also, the market value of each team will fluctuate over time depending on how profitable each team is. The beauty of this is that you don’t care who wins and who loses because you own them all. Regardless of who wins the Super Bowl, you are going to get your share of all the revenue of every game.
Now, let’s look at another way you could go about this. You don’t have to buy the teams; all you have to do is bet on the outcome of the games. You can go into any casino in Las Vegas and place your bets. Not only can you bet on who will win the Super Bowl, you can bet on the total number of points scored, who scores first, even who wins the opening coin toss. But just because you make a bet on the Super Bowl in your office pool does not make you a team owner. In one case, you are making an investment, and in the other, you are gambling on an outcome.
In one, the odds of making money are high and in your favor; in the other, the odds of winning are low and against you. One is long-term investing, and one is entertainment. The fact is, you can bet on almost anything that has an unknown outcome, including the stock market.
The gambling industry spends a lot of money trying to convince you that you can win big by playing their game. The more you play, the more they make. Unfortunately, the financial industry does the same thing. Those who encourage this type of behavior—brokerage firms, the financial media, and some money managers—stand to make more money if you gamble on the market than they do if you simply make long-term investments in the market.
So how do you know which one you’re doing? First, do you understand your investments? If you don’t, that is a sign your investments are too complicated. Like my example of owning the NFL teams, it is very easy to own a broadly diversified mix of stocks in low-cost, no-commission mutual funds. By doing this, you become a long-term owner in all of these companies and are entitled to your share of the profits and increases in value over time. Yes, there will be fluctuations in market value along the way, but you are still making your share of all the value generated by these companies over time. This is exactly how great investors like Warren Buffett have created substantial wealth over the years.
How do you know if your advisor is gambling with your money? First, ask them if they are trying to time the market in any way or if they are trying to beat the market. Are they doing any of the following?
- Recommending you buy or sell based on “resistance levels,” “support levels,” or other buy/sell indicators on charts—the magic crystal ball approach.
- Buying puts or calls or futures contracts. These are bets on the future price of a stock or an index of stocks.
- Making frequent trades or buying mutual funds with high turnover. These are indications a money manager is trying to outsmart the market.
- Are they explaining trading losses as statistical anomalies or “black swan” events? These are rare events that you can ride out if you hold long-term investments but can create very severe realized losses when you are holding short-term bets.
All of these and many more are ways people are gambling on the market. Do not do this with your retirement money. Money that you don’t need to spend for 5 to 10 years, or longer, should be invested in long-term investments. Any money you need within 5 years should be invested in short-term high investment grade bonds, CDs, and savings in the bank. If you want to gamble, budget out your entertainment money, and go to Vegas. You’ll probably lose it there too, but at least you will get a vacation out of it. Kenneth J. Simpson is a financial advisor with Onyx Financial
Advisors, LLC, an independent fee-only registered investment advisor firm located in Idaho Falls, Idaho. He can be reached at (208) 522-6400 or at www.OnyxFinancial.com.