When I think about critical differences in trying to build wealth and financial well-being, one couple in particular comes to mind —I’ll call them Kevin and Christine. For a long time, they behaved as if there were no difference between investing and betting.
Shortly after graduating from college in the early ‘90s, each found a good job, Christine in marketing, Kevin in engineering. When they met—and even after they married—they enjoyed a fair amount of economic freedom. It was a type of freedom fortunate 20-something-year-olds can have, not always sensible in every regard, but cushioned by seemingly sufficient cash.
With the assuredness of youth and increasing stock-market awareness fed by the new 24-hour financial news cycle, Kevin and Christine put their sights on building an investment stash—for, well…”whatever,” as they put it.
But in buying this security and that security recommended by media commentators, friends and their stockbroker, they missed an important point—having to do with time and objectives. All the time they thought they were investing, they were actually just betting.
If they were still taking that approach, Christine would be betting that her Apple stock will keep rising (she loves her iPhone). And Kevin would be counting on Ford to quadruple again in the next 10 months—recouping some of his earlier losses. Oh, and since one of their friends has reported remarkable recent gains from high-yield bonds, Christine and Kevin would now have been wondering if maybe they shouldn’t try some of those.
When you try to guess the direction of financial markets or individual securities right now, you are in truth only betting. In betting, you stake money on the outcome of a contest or an issue: Will this horse or that one win? Betting focuses on a particular event without the future in mind. It’s more a form of (often expensive) entertainment than serious financial management.
Make it Personal
Investing, on the other hand, is making use of money for future benefits. Investing aims at long-term results. Those long-term results should involve specific personal objectives—say, education, retirement, a business opportunity.
With investing, you must decide what kinds of assets make sense for your objectives, your present situation, long-term goals and short-term needs—before you pick individual investment instruments. This up-front decision is critical, even more so in volatile times like the last two years, and way more important to building wealth and achieving your objectives than picking this stock, that bond or these horses. It’s not difficult, especially with knowledgeable guidance. And in results, over time there’s a world of difference from those visits to the racetrack.
Now, unless you spend full time on financial markets—and have extensive training and experience—you are probably better off having professional fund managers pick individual stocks and bonds. After weighing the benefits, including the reduction in risk from diversified portfolios, Christine and Kevin decided to leave the calls on Apple, Ford and the thousands of other possibilities to the pros.
Chapters of hope
The difference between investing and betting brings me to another, broader difference in the way people approach their financial future. Another, slightly older, couple helps me make the point.
John and Fran, we’ll call them, have been married for 25 years. They have been raising three great kids in a community they love. But in moments of retrospective pessimism John and Fran describe the time spent raising their family as chapters of hope: “I hope we can afford another one.” “I hope one of us doesn’t get laid off.” “I hope the kids are smart enough to get college scholarships.” “I hope we can put enough away to retire some day.” “I hope taxes don’t cripple us in the next few years.” “I hope one of us doesn’t get in an accident.”
One day Fran returned from work with what John describes as a stricken look. At lunch a co-worker and good friend had told about her father’s rapidly deteriorating health, her husband’s stress from increased work in the face of job cutting at his firm, and the need to tell their son that they couldn’t afford his first-choice college, which had just accepted him.
Back home, Fran told John, “I don’t want to hope things won’t happen to us. I want to start knowing what we will do if something does happen.” That was the day Fran and John started planning.
Recognizing the difference between hoping and planning is just as important to long-term financial well-being as recognizing the difference between betting and investing.
Planning your financial life includes investing, of course, but a good deal more. Planning links all the aspects of one’s finances—with benefits that Fran and John quickly realized once they started. As with investing, planning is a process. After defining their objectives, they reviewed their-present financial situation—income, debts, savings, investments, major risks and more. Then they chose a strategy to reach their objectives: what to save, how to invest, how to manage the risks, and so forth. It might sound intimidating, but it’s not. With a professional providing the technical analysis and laying out the choices (ok, Fran and John had help), the process is neither difficult nor time-consuming. But oh, what a difference in the long run!