In both cases, you’re placing money into ventures with uncertain outcomes. But the consequences of treating your portfolio as a gambling stake instead of a nest egg are dramatic.
Whereas gamblers in the stock market think short term and trade a few stocks frequently based on little information, investors understand that the odds tip decisively in their favor if they invest broadly and for the long term. An investor has a greater need for education and information than a gambler, Mowen says.
“Investors also have a future focus, and, to me, that’s the hallmark of investing,” he says. Gamblers often have a penchant for risk-taking, which they find stimulating. In addition, they have a tendency to be more materialistic, impulsive and superstitious.
Few of us, however, can be neatly classified as thoughtful and sober or wild-eyed and impulsive. We fall somewhere along a spectrum that stretches between those extremes, says Frank Murtha, a behavioral-finance consultant with MarketPsych, which offers psychological training and other services to financial professionals.
Another way to approach the investing-as-gambling phenomenon is to consider not only how securities are traded but also which securities are bought. One class of stocks is a gamble almost by definition. I’m talking, of course, about penny stocks — those low-priced, high-risk securities for which you’ll almost certainly find solicitations as close as your spam folder. In fact, you might be receiving more penny-stock tout sheets than usual. Alok Kumar, a finance professor at the University of Miami, found that the demand for penny stocks increases in tough economic times.
Further, Kumar compared behavioral patterns of people who bought lottery tickets with those of people who bought “lottery-type” stocks, or penny stocks. His research showed that those who were predisposed to buy lottery tickets favored penny stocks.
People who spent a lot on both tended to be poor, young African American or Hispanic men who lived in cities. Investors in the lowest income group, with annual incomes of less than $15,000, lost an average of $4,725 a year on penny stocks — or about a third of their income. Those with higher annual incomes lost about the same dollar amount in penny stocks — but their losses were a smaller fraction of their income.
If you tend toward the gambler end and have an urge to take fliers, stick some “mad money” in a separate brokerage account with no more than 5 percent of your assets, Murtha advises. As a little extra insurance, make sure a third party can monitor the account and nag you if you seem to be going overboard.
Frick is a senior editor at Kiplinger’s.
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