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Explaining to Clients Investing in the Stock Market is NOT Gambling

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Investing in the Stock Market is NOT Gambling

A few weeks ago, I was visiting my happy place–the Jersey shore. It was an especially good weekend because my best bud, O-man, was in town for his yearly, week-long visit home. Currently, he lives in D.C. and life is busy. So, we don’t get to see each other that often. Needless to say, we try to make up for it when we do get together.

Friday night rolled around and we decided to head to one of our old stomping grounds–Atlantic City. We had a nice dinner at the Hard Rock Casino and enjoyed my favorite college cover band, Kristin and the Noise.

As we were weaving in and out of the casino floor, I observed all the people gambling. I saw people jump up and down in jubilation and others curse their bad luck. This got me thinking. Is this what my clients feel like? Do they also feel these extreme emotions as stock markets go up and down? To some degree, I know they do despite my best efforts. However, they shouldn’t.

Investing in the stock market is actually the opposite of gambling.

“Oh yea? How can you be so confident that it’s not like gambling in Atlantic City?”

The answer is multifaceted, but let’s start with the basics. Everyone knows when gambling, the house always wins. The reason is that statistically every game is in their favor. Crazy that we still play these games, but the math still holds true. The longer you play any game in AC, the more probable you’ll lose. If you want to know the best way to win in AC, you quit the second you’re up (if you’re even that lucky). Everything about casinos attempt to trick you into playing longer: free drinks, “fake” money chips, no clocks, pumping oxygen in to keep you awake, etc.

But Andrew, this is exactly how I feel when investing in the markets.”

I’m not discrediting anyone’s anxiety when the markets are down and their accounts show a substantial (temporary) loss. The difference here is the chips are stacked in your favor. Unlike gambling, the longer you invest, the better chance you have to succeed. I’ll reference J.P. Morgan’s Guide to the Markets report sourcing Robert Shiller, from J.P. Morgan Asset Management. For perspective, I’ll speak to the U.S. markets referencing the S&P 500. Going back to 1930, if you invested in the S&P 500 and held your investment for one month you would be positive 60% of the time.

“Andrew, that isn’t much better than the casinos.

You may be partially right, but also partially wrong. For starters, you shouldn’t be investing for only one month to begin with. Couple that with the fact that after one month your investment is up a greater percentage of time over every one month period in almost 90 years.

I’m not convinced.”

Let’s keep going then, shall we? If you invested in the S&P 500 since 1930 and held that investment for one year, you would have a positive investment….. 75% of the time. Every calendar year you invested in the U.S. markets and held it to the end of the year, a whopping three quarters of the time you are up. Again, I wouldn’t recommend you invest for such a small period of time. That said, it seems like the chips are getting more stacked in your favor, doesn’t it?

“What about a 5 year period? How many times would I have been up if I held that same investment for 5 years?”

Let me preface by saying this is roughly the time period you should be thinking when equity investing anyway.  The answer: 91% of the time you would have been up! Push that to a 10 year holding period and we are talking about 98% of the time. I’ll hammer my point home by saying if you invested and held for 15 years, it would be 100% of the time.

You see, where most investors go wrong is they get too emotional and lose perspective. In a way, they can no longer see the forest through the trees once their emotions get in the way. I’m here to tell you investing is nothing like craps, roulette, or black jack. When investing, you are the house and your chances of winning are completely up to you. Panic and you lose. Play the long game and you win. It’s that simple.

This is one of the huge benefits of working with a financial planner. They help you build a plan and stick to it. They help put things into perspective and allow you to achieve your destiny, rather than let emotions, or the spin of a wheel, stunt your dreams.

When O-man and I were younger and more naïve, we’d go to Atlantic City like hot shots. We’d play until one of us lost $100. The loser would always have to buy the late night Crown Fried Chicken. I only wish I had future Andrew to guide me. Needless to say, I’d have bought a heck of a lot less Crown Fried Chicken!

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