Investing in the stock market isn't completely foolproof. A certain amount of risk is involved, and this leads some people to compare investing to gambling or playing the lottery. But this is a weak, if not completely inaccurate, comparison that prevents a lot of people from building wealth. Here's how.
Photo by Lisa Brewster
I recently talked about this comparison in a conversation with Laurie Itkin, financial advisor and author. She mentioned that the comparison doesn't make sense for many reasons, but mainly because of the odds. When you invest properly, and follow some basic rules, the odds are highly in your favour. But that's not the case with gambling. I asked Itkin to elaborate:
Let's say you spend $5 a week on lottery tickets for 20 years. That's $60 a year or $5200 after 20 years. Will you hit the lottery? Perhaps, but your odds of winning are extremely low. The US stock market on average returns about 8% a year. During the past three years it has done much better but there have been a couple of years where it's done much worse, such as in 2008. But the longer the time horizon, the higher the probability that you will recognise average annual returns of 8%.
The figures vary for Australia, but the principle remains the same. If you're still sceptical, consider the ratio of people who have built their wealth with the help of investing to those who have built their wealth via lottery scratchers.
This isn't to say there's absolutely no risk involved with investing. And that risk, despite the explanation and the odds, might be too much for some. Maybe you don't want to be at the mercy of the market. But, keep in mind, you're still at the mercy of inflation. Without investing, that could end up costing you.
Need even more convincing? Check out this lengthy argument from InvestorGuide.