BLOG: Why investing isn’t the same as gambling

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Written by:
13/06/2014
Never invest money you can't afford to lose - a 'golden rule' of investing?

I would argue that anybody that uses this rule doesn’t understand what investing is at all. I don’t like it and it definitely isn’t ‘golden’.

Why? Well I think it’s detrimental to anybody thinking about investing because it makes it sound like gambling; either you’re going to win or you’re going to lose, and that just isn’t the case.

Investing is about selectively and thoughtfully buying assets aimed at achieving an identified goal over a specific period of time at an amount of risk that you’re comfortable with.

What the rule actually applies to is speculating, which isn’t really applicable to the most investors at all.

Let me explain:

Investing: this is putting money aside into assets in a controlled, well-structured manner, usually diversified across a range of asset classes, countries and sectors.

This is money that you’re saving for an identified objective and usually money that you can’t afford to lose in its entirety, such as saving for your retirement, a deposit on a house, or simply giving yourself peace of mind knowing your hard earned money is working for you. You’re generally looking to achieve returns over the medium to long-term, building an asset base that you can access at some point again in the future.

Speculating: this is putting your money into an asset (maybe a single small company stock) hoping that it will multiply in value if it’s successful, but understanding that it could become valueless if it isn’t.

It involves a lot of risk and could be akin to ‘informed’ gambling. I would say this is where the rule applies. Some people may say that this is still investing, and they wouldn’t be wrong, but if anything speculating is simply the highest risk form of investing you could engage in.

My point in showing you the difference is that investing is not something to be seen as gambling, where you’re risking all of your money on an event that has a finite life, such as the spin of a roulette wheel. Investing is something to be done to provide yourself with the opportunity to achieve better returns than cash over a specified period of time, while remembering that all investments – even cash – carry some risk of loss and, as is oft quoted, the value of investments can fall as well as rise.

One important thing to do prior to investing is to determine your capacity for loss, or in simple terms, the amount you are prepared to potentially lose in the short-term in order to meet your longer term objectives. This will help you understand the amount of risk you are able to take in order to achieve your goals. Risk can be managed and as long as you diversify your investments sufficiently, you can be safe in the knowledge that it is unlikely you will ever lose all of your money.

James Priday is managing director of online platform Strawberry Invest

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