There’s a grey line between gambling vs investing and I try to stay in the area where it’s clearly defined as investing. For me, I always look at statistics and probability. If I’m putting my money in investment, the highest risk I will take is losing 30% of it on a probability of 20%. This means that I will be fine if in a period of ten years there will be two years of my investment being down 30%. This is because I will be able to handle my expenses within that two years based on my current financial condition. I have a current job and if ever I will lose it then I have unemployment insurance and emergency funds and some accounts that are in guaranteed income.
The worst scenario will be me losing my job and not finding another one after two years and my investment is still down 30%. This will mean that after consuming all my employment insurance, emergency fund, and guaranteed income investment, I will need to sell and withdraw my high risk investment and at that point I will be losing 30% of its value.
Note that this is the highest risk I will take on any of my investments. However, not all my investment has this risk level. There are portions that are in guaranteed income which, arguably, has no risk and there are portions that are in low to medium level risks so things will have to go really bad for me to take a loss of more than 20% in my overall portfolio. This strategy is investing. The chance of me losing all my money is almost zero but then, as I mentioned on my other notes, the reward will not be as high as compared to very high risk investments.
Engaging in a very high risk investment is basically gambling. As I keep mentioning, proper knowledge is extremely important in investing and even if the investment you chose ends up being low risk, it can still be considered high risk if you don’t really have any idea on what it is and what you are doing. Since gambling is high risk, just like in casino your reward can be high and quick but at the same time you have a higher chance of losing everything quickly. You will hear about stories of people who made it big in gambling or high risk investment but for each one of them there are hundreds or thousands who lost their money. You don’t hear about them very often because no one wants to share their story of losing.
Investing in very high risk investments with the hope of gaining significant profit in short time is gambling. Investing using borrowed money is also high risk and can also be considered gambling especially if the money is being put on high risk investments. And the most important thing, investing without proper knowledge and information is high risk and can be considered as gambling. So go through my notes and gain as much knowledge you can so you can learn how to assess the risks that you will be taking. Once you learn how to assess risks then you can increase your chance of success and take the right direction towards becoming a millionaire.