Examples of gambling: Currency Trading of Futures and Options (except hedging), Commodity Futures and Options Trading (except hedging), All Lotteries, and Casino games such as cards, table games, or electronic games.
In all these examples the odds are against you because they divide among the “winners” a smaller pie than originally existed!
Difference Between Investing and Gambling
Some people confuse investing with gambling. This is one good reason it’s important to differentiate and compartmentalize saving, investing, and gambling. Most gambling involves risking capital and dividing a fixed amount among winners and losers based on chance. This is different from investing where you place your money in an asset expected to increase in value over time.
The Importance of Compartmentalization
Investors frequently get in trouble because they fail to differentiate and compartmentalize these three very different activities. An emergency fund should be kept completely separate from your investing activities. As pointed out, even if you have the same asset (i.e. Money Market Fund) in each they need to be viewed and treated differently.
Saving is a passive activity for short term goals. Preservation of capital is the primary goal. A separate account for each goal or activity promotes correct thinking and actions consistent with meeting the goals of the account.
Investing is an active activity and keeping accounts separate from saving accounts keeps the asset allocation and diversification process clear and separated from the fund reserved for capital preservation. Keeping funds separate is sound planning and a risk management concept.
Gambling should never be mixed with saving or investing. If someone chooses to gamble it should be with entertainment monies unassociated with saving or investing accounts. Only monies that individuals are willing to lose should ever be wagered in a game of chance.
Keeping saving, investing, and gambling three separate activities in your mind and in your account structure will assist you in building wealth. Too many people gamble with investment money, or invest when they should be saving. Differentiating and compartmentalizing saving, investing, and gambling, is an important first step to a successful investor.
This article has been republished with permission from Arbor Investment Planner.