For the longest time, I assumed investing was for the wealthy. I assumed the Stock Market was for the elites of society, and nothing was riskier. But every day, people make money mistakes riskier than the Stock Market.
As we think about how society utilizes its money, there are many things people do with their money that is far riskier than investing in the Stock Market. You hear all the time how people lose everything in the Stock Market, and how it is a vehicle of fear. Take all your money out of the bank and hide it under your mattress!
In all reality, the Stock Market isn’t as bad as it seems. There are things to do with your money that are far worse than investing. Read these 7 biggest money mistakes and let’s shift the mentality on why you should invest.
Is the Stock Market Really That Risky?
Before diving into things worse than the Stock Market, we need to ground ourselves in what the Stock Market is.
What is the Stock Market?
A place where you can buy and sell ownership of publicly traded companies.
I wrote an in-depth article to explore the Stock Market for beginners, you can read it here at A Guide to the Stock Market.
As you invest in a company in the Stock Market, you become an owner (a very small owner) of that company. Along with being an owner, you get to earn in the profits of the company as well.
Investors are rewarded in two main ways:
- Share Price Increases (Capital Gains)
- Dividends
Find good, quality companies, invest with a margin of safety (you can learn about this from legendary Benjamin Graham, Warren Buffet’s teacher) and you will surely do well.
The Direction of the Stock Market, Up and to the Right
Okay, so we know that you can invest in companies (good companies) and get rewarded as an investor.
But how do we know we won’t lose all our money?
By studying history.
And you don’t have to look far to see the proof.
This tweet below illustrates the Dow Jones Industrial Average from 1896 to 2016. Over this 120-year timeframe, the market experienced many bull markets, recessions, wars, world-altering events, and more. The big takeaway is that the Dow continued to move up and to the right.
120 years of stock market history in one chart: pic.twitter.com/6Piu23ZdZf
— Compounding Quality (@QCompounding) July 5, 2022
As an Investor, Time is on Your Side
As an individual investor, also referred to as a retail investor, you answer to no one. You aren’t responsible for managing millions of other people’s money. Having to constantly buy and sell all the “hot” stocks.
Since there is no outside pressure, you are able to remain calm and patient. Patience and time, are huge factors of success for investors.
Why is time so important then?
I mentioned this in my article on the Pros and Cons of Trading vs Investing, but the probability of a stock price increasing increases when it’s given more time.
Essentially, the odds of a stock price increasing in one day are the same as flipping a coin.
In the grand scheme of things, the Stock Market doesn’t seem that bad. And to put it into better perspective, here is the list of mistakes people make with their money that are riskier than the Stock Market.
1. Holding Your Money in Cash is Riskier than Stocks
Cash is king. That’s what they say.
But is it?
What does cash actually get you?
You can pay for things. Bills, rent, mortgage, food, etc.
But can cash help you build wealth? It might help to have the liquidity, and the ability to use it right away. But there are no returns for cash.
How much money is that money in your piggy bank earning at home? Zero. Nothing. Nada.
If you need that money immediately, then I understand.
Even though there’s no risk in holding cash. There’s also no reward. That is the mistake.
You can’t expect to grow wealth and become financially independent, by doing nothing.
To me. That is riskier than the potential chance of losing in the Stock Market.
2. Using Savings Accounts, No Risk but Little Reward
If holding your money in cash is, no risk no reward, there’s gotta be something better than that.
The next best thing is putting your money into a savings account. Much like cash, there’s no risk, however, there is now a reward…a very tiny little reward.
Many banks and credit unions offer savings accounts alongside their checking accounts, and here is where you can actually start to earn money. By holding money in your savings account…wait for it…you can earn 0.10%!!!
For every $1,000 you have in that account, you can earn $1 per year.
I’m sorry, that’s pitiful.
Remember, the Stock Market has averaged 11% since World War 2. And we know that if you buy and hold for 10 years, the probability of not losing money is 97%.
In 10 years, that $1,000 in the savings account will be $1,010.05. If you had put that $1,000 in the Stock Market with an 11% return and held it for 10 years, it would grow to $2,839!
The risk of losing that money over a 10-year period is very low, and the rewards are so much greater than 0.10%. Having your money sit in that savings account is truly pitiful and a big mistake.
3. Playing the Lottery; Go Big, or Go Home!
Ahhh the lottery, who doesn’t love buying a ticket, picking 6 different numbers, and watching those ping pong balls rattle around?
Just imagine, you play the Powerball and win the $1 billion Jackpot! (Pretend we live in a world with no taxes…) Such little risk and such a great reward! Why on Earth would you want to build wealth over 15, 20, or 30 years of investing in the Stock Market? (I type that with a thick layer of sarcasm.)
I think you probably already know the answer.
While it may seem low risk, only $2 to purchase a ticket, the odds are not in your favor. The Powerball consists of 5 balls with numbers between 1 and 69 and a 6th ball with numbers between 1 and 26. The odds of getting all 6 correct, which is the Jackpot, is 1 in 292 million. For context, there are roughly 330 million people living in the United States. If everyone played the lottery…only one of them would win.
If you consider the probability of success, a 10-years in the Stock Market has a 97% chance of not losing money. Winning the lottery ticket has a 0.00000034% chance of winning.
Maybe the payoff isn’t the same, but one has a much greater chance of succeeding. The other will waste $2 after $2 after $2…
4. Playing Lottery Scratch-Off Tickets
A subset of playing the Powerball lottery is the scratch-off tickets you can get at the gas station.
While these may be more appealing due to their higher probability of winning (sometimes as high as 1 in 2 or 1 in 4 odds), you will never win long-term. You may win one game…but then lose the next 4 or 5.
Again, the probabilities of winning aren’t high enough to justify playing over and over again. You’ll never get ahead and just keep losing and losing. One step forward, three steps back.
Turning a $10 win from a $2 scratch-off ticket, to buying $20 more of scratch-off tickets to only win $5, and rinse and repeat. Not going to work out. Please stop.
The whole goal of investing and building wealth is all related to building a foundation that can grow upon itself. Buy assets, that will produce money, that will eventually buy more assets…that will produce more money… and on and on.
I will say, I do love using scratch-off tickets as White Elephant gifts near the holidays. Nothing better than to win $5 in a game with friends, family, co-workers, etc.
5. Gambling in the Casino, Another Way to Hit it Big!
Casinos have manufactured everything about their business with one goal in mind: to keep you playing. From the layout to the lighting, free drinks (when at certain tables), the air, the food, everything is meant to keep you inside. Why? They know if they keep you playing, you will eventually lose.
I will say, the odds or probability of winning casino games are higher than the lottery, but this comes back to my first point. Casinos want you to keep gambling. If you never win, you’ll give up and go home. But win one or two hands, endorphins kick in, excitement builds, and you keep on playing.
To understand if gambling at casinos is riskier than investing, let’s look at some numbers.
Odds of winning popular casino games:
- Black Jack – 48% to 50%
- Craps – 50%
- Roulette – 47% (for a color green/red) 2.6% (single number)
- Baccarat – 45%
As mentioned, much better odds of winning. But there’s so much psychology behind the scenes. You might feel like you have more control than the lottery, but they’re still games. Cards. Dice. Spinning wheels. Or, you could do a little research into companies in the Stock Market, find quality companies to invest in, and wait and watch those investments grow organically over time. Time is still on your side as an investor!
6. Sports Betting
Perhaps a sub-set of gambling at a casino, but sports betting has become wildly popular in the past several years.
Fantasy Football skyrocketed in popularity as people played season-long leagues, along with the other main sports: baseball, hockey, basketball, etc. Casinos have also had their hand in the sports betting world for a long time. Odds of winning the Super Bowl, horse/dog track racing, etc.
But now, many states within the United States allow for sports betting right from your phone, for future games and even live games! Companies like DraftKings, Fanduel, and MGM have all made it very simple for the Average Joe to make bets while sitting on their couches.
And just like casinos, the thrill of placing a bet on your home team to win the game and it all coming true…it’s exciting! However, there are some VERY smart people who work for these companies who decide the odds of each bet (machine learning probably helps a lot in this area.) To the point where each bet is a coin toss. 50% chance to win.
To be honest, I do sports betting. I budget it as a form of “entertainment”, and I definitely know my limits. But I am AMAZED on how accurate the odds-makers are. When they create the Under/Over of points scored in a game, it’s amazingly close. Almost like they can predict the future…
However, it is still riskier than investing in quality companies or the Stock Market. These companies, Fanduel, DraftKings, etc. want you to keep playing. Because they know in the long run, they will win. I know if I buy a quality company that grows its earnings by 10% each year, I will be rewarded as a shareholder.
It may not be as exciting, but investing builds long-lasting, repeatable wealth.
7. Using a Credit Card for Rewards but Still Carrying a Balance
Deviating from the “Lottery” and “Gambling” world, I wanted to focus on credit card rewards.
How do credit card companies attract people to apply for their credit cards? Rewards.
In my head, I have an endless loop of commercials that talk of “Cash Back” or “Airline Miles” or “Points”…
But what you never hear in these commercials are the interest rates.
No one wants to talk about them. It’s the ugly truth behind credit cards. It’s how these companies make money.
“Earn 2% cash back! Oh, but if you carry a balance month-to-month I’m going to charge you a 20% interest rate.”
Guess what? If you make a $1,000 purchase, and get 2% cash back, you’ll get $20. But if you don’t pay it off in the next month, with a 20% interest rate, you’ll accrue $16 in interest. You’ll only have made $4…assuming you’ll pay off that $1,000 the next month. Because if you don’t, there’s another $16 in interest added to the account. And you are now in the red.
People make the mistake all the time, of thinking they can “game the credit card reward’s system”. They’ll use one credit card to get cash back when they go out to eat…and another credit card for high-dollar purchases to get airline miles…or pay utility bills each month as “passive” income. In theory, it sounds amazing. In practice, it doesn’t work. Unless you are super disciplined, (which most Americans are not) it is a losing battle.
Why do you think credit card companies give out these rewards? Aren’t they going to lose money by giving out cash?
No.
They know people will carry a balance. That balance will make them money in the long run.
And people think the Stock Market is risky! Credit cards are WAY worse. Trying to “game” the credit card system will never pan out long-term.
8. Drinking Starbucks Coffee – A Path to Financial Ruin (not really)
You will never gain Financial Freedom by buying Starbucks every day on your way to work!
…Just Kidding.
How you decided to spend your money on consumer spending WILL NOT ruin you.
So often you see “experts” claim, “TO GET OUT OF DEBT YOU NEED TO STOP GOING TO STARBUCKS! STOP BUYING COFFEE!”
This is not true. You need to live your life. We only have this one life. If getting a cup of coffee or a latte makes you happy, then go for it! $5 isn’t what’s keeping you in debt.
But those who think buying lottery tickets is a healthier use of money and look down on those who buy “overpriced coffee” have it all backward.
Set a budget! Focus on what matters to you. If you want to spend X% per month on coffee, then do it. But thinking that if I put $100 on the Detroit Lions to win the Superbowl this year, will be a better use of $100 than buying coffee…is just silly. (As a hardcore Detroit Lions fan, I can personally tell you that is not a good bet haha!)
Summary – Money Mistakes Riskier than the Stock Market
Investing is for everyone.
Investing is such a better option than what people currently do with their money.
What I have learned through investing; The goal is to have your money, make more money.
Look at all the above examples. Cash and savings accounts, don’t make any money. They sit there collecting dust. And I didn’t even mention how inflation eats into those numbers! The lottery, casinos, and sports betting may offer that “quick win” to wealth, but it’s not sustainable. Just flush your money down the drain. Well, don’t, you might clog your drains and have to hire a plumber.
The problem people have with investing is when they hear “it might take years to get X% return”….they tune it all out. They shut down. People want instant gratification. They justify not investing because “it’s too risky”.
With time and patience, you can be a great investor!
Thanks for reading! I hope after reading this, it shapes how you think about investing and it’s not as scary and risky as it seems.
Disclaimer
Levelzeroinvestor.com is not a registered investment, legal or tax advisor or a broker/dealer. All investments / financial opinions expressed by Levelzeroinvestor.com are from the personal research and experience of the owner of the site and are intended as educational material. Although best efforts are made to ensure that all information is accurate and up to date, occasionally unintended errors and misprints may occur.
Thanks for such an interesting read, Brett! 👍
I was very much like the past you. I thought I had to be rich to invest, so I only started at 35. Better late than never, but I had to do a lot of catch-up.
Many people are afraid to invest due to knowledge deficit. While it’s true that every investment comes with some degree of risk, it can be managed if one takes the time and effort to gain the relevant knowledge.
It’s also true that many people take greater risk on a daily basis. Just by leaving all their money in a regular savings account exposes them to inflation risk. 😓
As for lottery, considering the odds, it’s as good as flushing money down the toilet, yet many (including my mum) continue to risk their money this way.
Everyone wants to get rich quick, but the reality is, wealth takes time to grow. Acquire financial knowledge, invest with your eyes open and be patient.
Well said!
I think the key point you made was “knowledge deficit”. It’s easier not to learn something new. It’s easier to do nothing. People want to be “rich” but don’t want to put in the work. There is no “easy” button.
And don’t get me started on inflation and savings 😐
Thanks for reading, greatly appreciate it!