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Author of Investcraft is a Financial Blog that focuses on helping individual investors navigate through the complexities of the stock market. Both individuals hope to provide keen insights on the trends of the market as well as individual stock analysis. If you’re looking for... More
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  • Investing vs Gambling 0 comments
    Apr 7, 2010 3:06 AM | about stocks: GOOG

    I think there’s a very fine line between investing and gambling. Both an investor and a gambler will take risks but it’s the taking of “unnecessary” risks that separates the two That’s not to say that a gambler can’t win big — I’m sure someone who dumped their entire life savings into Google (NASDAQ: GOOG) when it first went IPO is probably retired today. But on the other hand, a true investor has a clear plan — he/she has a time-frame/exit strategy and understands the importance of diversification.

    Rather than go into a long philosophical discussion about investors vs gamblers, I’ll just illustrate some key bullet-point differences between the two:

    Investors tend to:

    - Invest in aggregates such as mutual funds, index funds or a small quantity in a large number of stocks.
    - Knows when to take losses (you can’t win them all)
    - Understands the importance of investing “defensively”. That includes taking profits when a certain goal is reached, rather than focus on “how well the company is doing”. This is an extremely difficult rule to follow and requires a lot of discipline because it could involve taking money off the table no matter how great the company might be doing.
    - Usually has a good allocation of assets and always has some percentage of assets in cash. This allows him/her to take advantage of buying opportunities when the market sells off irrationally (refer to March 2009 — imagine if you had a lot of cash to scoop up all the great bargains that month).

    Gamblers tend to:

    - Allocate a disproportionate amount of money into one stock. (i.e. put all their eggs in one basket)
    - Has no clear plan or exit strategy
    - Doesn’t understand the importance of taking losses (i.e. doesn’t know when to quit)
    - Loses interest in his/her holdings when the market starts tanking. Starts neglecting his/her portfolio.

    But I also think that your money should always be working for you and not sitting idly. That doesn’t mean you should put all your money in stocks. I recently found this great American Express One Card that actually comes with a 2.75% APY High-Yield Savings account. 2.75% is a heck of a lot better than the 0.1% regular savings account you get at Bank of America these days or the 0.4% high-yield savings account there. A wise strategy would be to put some cash that’s in your brokerage account (which usually doesn’t earn you much of, if any, interest) and depositing it to that 2.75% APY savings account. It’s not a CD or require any time commitments so you can withdraw anytime and put it back into your brokerage account when you see some buying opportunities in the stock market. But this is a perfect example of making your money work for you at all times.

    Ok, that’s all I have to say for now. Happy investing and as always, do your own due diligence before making decisions with your money! 

    Disclosure: I currently have no position in GOOG.
    Stocks: GOOG
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