Dear Carrie: My boyfriend is on his phone all the time trading stocks. Sometimes, he makes a lot of money quickly, and other times, he gets upset because he loses. Overall, though, he says it’s fun and that I should invest, too (right now, all of my money is in savings). To me, it all feels like gambling and scares me. Am I missing something?—A Reader
Dear Reader: I can’t say for sure what your boyfriend is doing, but I think you’re onto something important, with the recent GameStop episode being the latest and most extreme example of stock speculating gone awry. Online tools have made it very easy to trade stocks with a simple click, often at no cost. Although this is convenient, it also allows people to buy and sell stocks without carefully thinking through their decisions. And therein lies the potential problem—and the distinction I make between sound investing and wild speculating (or as you say, “gambling”).
Your question also brings me back to when I was in my early 20s. Like you, I had always been a good saver, but I was at a loss when it came to choosing investments for my first IRA. I turned to my father, whose advice was simple: “Pick two broad-based equity funds and split your money.”
Like your boyfriend, I wanted to see a quick profit, and was sorely disappointed. It took me years to understand the wisdom behind my father’s words: Building wealth through investing isn’t about hot stock tips or fast trades but about starting early and participating in the markets consistently throughout one’s lifetime.
I was fortunate that my father got me started on the right foot. True investing isn’t like gambling. And it’s much more than saving. It’s serious business, for sure, but it can be immensely rewarding and potentially a great way for both you and your boyfriend to reach your long-term goals.
Saving and Investing Work Hand in Hand
Saving and investing are completely different animals. But despite their differences, they work hand in hand in building long-term wealth and financial security.
Saving money is spending less than you earn and setting that money aside for the future—whether that’s for an emergency or for a specific goal such as a vacation or a new home. Most savings are held in conservative accounts that are safe and easily accessible but have minimal growth potential. That’s appropriate for short-term goals, but your savings are likely to lose value over time when taking inflation into account.
When you invest, on the other hand, you’re using money to try to make more money. As your investments grow in value, that growth can compound. Over time, this can lead to significant gains. Time is an essential ingredient, helping to smooth out market volatility. That’s why when you have a long-term goal such as a child’s education or retirement, investing is especially important.
Gambling and Investing Are Totally at Odds
By contrast, gambling and prudent investing have nothing in common. When you gamble, you’re taking on risk for which you’re not likely to be compensated. The longer you stick with it, the worse your odds become.
I can’t be sure, but this sounds a lot like what your boyfriend is doing. Slick trading screens and rapid response times can be mesmerizing and may encourage excessive risk-taking. Consider what professional or institutional traders are doing. Unless he’s carefully doing his research and thoroughly understands a company’s financials, competitive landscape, and management strengths and weaknesses—and then considers how that company fits into his overall portfolio—he’s just rolling the dice every time he trades.
Prudent investing isn’t about quick trades, but about staying invested and having a long-term horizon. It’s not about “winners” and “losers” but about building a solid portfolio from the ground up, customized to your individual needs and goals. Yes, investing always involves risk, because markets go down as well, and companies sometimes go through rough times. But experienced, disciplined investors know how to mitigate those risks with a combination of proper asset allocation, diversification, and a healthy dose of patience.
It makes me think of the tortoise and the hare. Gamblers are looking for shortcuts to quickly reach a big jackpot, but more often than not, it’s the slow and steady investors who reach the finish line first.
Not Investing Carries Risks
I’ve talked a bit about the risks inherent in investing, but I think it’s important to also appreciate the risks of not investing. By keeping your money in savings, you’re losing the opportunity for growth that investing can provide.
And you’re not alone. Big swings in the market scare away a number of people—including many young adults. According to the Federal Reserve of St. Louis, only about half of millennials (those born from 1981 to 1996) are invested in the stock market.
I find this reluctance very troubling. As evidenced only last year, some scared investors jumped out of the market at exactly the wrong time, sealing in their losses. It’s equally tragic that so many people also missed one of the fastest and steepest recoveries of all time. Year in and year out, the risks of not investing are very real and powerful.
Taking Your First Steps as an Investor
I’ve always felt that reading as much as you can and asking questions is the best way to learn about something new. Investing is no exception, so I encourage you to seek out trusted resources and experts. New apps and platforms like robo-advisers, target date funds, and subscription-based planning make creating a diversified portfolio easier (and cheaper!) than ever, but aren’t a substitute for doing your own research and creating a financial plan. These can be great solutions, but you should take the time to understand your risk tolerance time horizon—and ask questions before you invest.
That’s not to say investing has to be boring. In fact, I think investing is endlessly fascinating. I’m a firm believer in broad-based mutual funds and exchange-traded funds because of the immediate diversification they can provide. But you can also explore individual stocks with a portion of your money, perhaps through fractional shares.
Thanks very much for your astute question. I wish you the best on your path to being a lifetime investor—and learner.
Carrie Schwab-Pomerantz, a certified financial planner, is president of the Charles Schwab Foundation and author of “The Charles Schwab Guide to Finances After Fifty.”