Investing in the stock market over many decades offers most people an incredible opportunity to build wealth.
Does that surprise you? If so, you’re not alone. Over the course of my career as a financial planner, I’ve found that many people look at the stock market with skepticism, anxiety or even fear.
To these people, investing money in the stock market doesn’t look any different than walking into a casino and putting your life savings down on black at the roulette wheel. It doesn’t seem like a reliable way to grow assets.
Instead, it looks like gambling.
I can understand why people feel this way — especially if most of what you know about the stock market comes from mainstream media headlines and talking heads on CNBC. It always feels like things are slightly out of control, and while you may hear about a big winner, there sure are a lot of losers, too.
Here’s the thing: You can gamble when you invest. But that doesn’t mean all investments are speculative bets that rely on luck to help you make money.
In fact, at my firm we specifically advise against making speculative investments. When we help investment clients, we design a thoughtful strategy designed to help portfolios earn a reasonable return over time while avoiding excessive risks.
Unfortunately, this kind of investing doesn’t make headlines. It’s boring — as it should be! No drama is a good thing when you’re investing for the long term.
Instead, it’s speculative betting that grabs people’s attention and can make all investing feel like gambling. We need only look at the latest market madness to see how it plays out.
The Latest Gambling Saga: GameStop’s Rise and Inevitable Fall
At the end of 2020 and throughout January 2021, a group of individual investors banded together in an online forum to pump up the price of a beaten-down stock: GameStop.
GameStop, a company arguably in trouble and certainly the target of short sellers (or those who bet against the future increase of value of a company’s shares), traded at about $18 per share before the madness began.
As the users of the subreddit who started the rally, Wall Street Bets, piled into GameStop, the share price rose to a high of $483 in January — a gain of over 2,500% in a three-week span.
As of late February, GameStop traded around $43 per share.
People should be afraid to lose all of their money if this was representative of strategic investing. But it’s not. The GameStop saga was a raw display of pure speculation. People gambled on the stock. And just like in a casino, a lucky few won big. Most everyone else went home with lighter pockets and losses.
Other Ways to Speculate in the Financial Markets
This is just one example, of course. Speculating happens in all kinds of ways when it comes to the financial markets.
In financial terms, you’re speculating, or gambling, when you engage in any business transaction that risks a substantial loss in pursuit of the chance to rake in a large gain.
Gambling is often easily influenced by herd mentality. It’s driven by emotion. There’s no analysis or fundamental reason why you’re choosing this stock or that asset. That’s what makes it speculative.
Are You Gambling or Investing, and How Do You Know?
If the GameStop rally was a classic case of speculation that is not representative of wise investing, it’s fair to ask what true investing actually looks like.
There are many strategies that can work, but they all rely on systematic, rules-based systems that remove emotion and guesswork. To give you a sense of what this can look like, here are a few of the ways I personally invest:
Contributing to a Retirement Plan
Contributing to retirement plans, such as a 401(k), 403(b) or some kind of IRA (traditional, Roth, SIMPLE or SEP), is a good way to invest strategically. I invest in my company 401(k) through Vestwell as a way to build assets for my eventual retirement.
I use dollar cost averaging to contribute money to the account. That means I contribute the same amount, at the same time each month, and I don’t deviate from that, regardless of what the market is doing at the time.
I’m not concerned about day-to-day or even month-to-month market movements. I’m focused on the long term, and the data shows the market gains value over time. “Over time” might not even mean years — it’s…