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.