This post was written by Derek. 

What are your current views on investing? Do you consider yourself to be a conservative investor or somewhat of a risk-taker? Do you track your investments often or do you visit your investments once a year with your broker? What is it that makes your practices any better than a homeless man that clutches a lottery ticket?

What Do I Mean By Gambling?

When you think of gambling, what is the first image that pops into your head? For me, it’s the casino!  Thousands of people flood the casino doors each night with hopes of “striking it rich”! Many, however, leave with empty pockets and dilapidated dreams. Those that are “financially wise” might look down on these risk-takers because they are not investing as one should. But, for those that are putting their money into random investments without truly understanding the risk, are they really any better than these casino junkies?

I Would Consider You a Gambler If…

• You Choose a Stock Based On Its Cool Name – When the stock market is continually on the rise, many people just throw their money in because they like the sounds of the company name or quote number. They figure it doesn’t matter what the company does as long as the stock market is going up…they consider themselves smart because they are investing. Investing based on a company name was popular just before the Great Depression hit. If you are making transactions with this method, beware of the crash. It’s coming.

• You Are a Day Trader – Day traders look for a certain movement in the market. If they see that their best stock picks have taken a double-dip and is now on the rise, they might jump in with thousands of dollars for only a few minutes. If the market goes up, they are golden, but what if it takes a dive?! This is where the gamble can really hurt you. If you are interested in stock market day trading, don’t do it. There are very few winners.

• You Base Your Financial Transactions on Your Friend’s Hot Tips – Have you ever asked yourself where your friend was getting those hot tips from? Just like with any gamble, sometimes you’ll win, and sometimes you’ll lose, but without any sound research you’ll lose much of the time. This practice is almost as bad as day trading and can really get you into trouble in a hurry.

• You Chose Your Investment Based on the Returns From the Last 5 Years – I have to admit that I am guilty of this myself. When I was younger and less experienced, I would take a look at my 401(k) options and choose 2 or 3 that had very high returns in the past 5 years. It sounds like a great method, but since my investments will most likely be in this fund for 40+ years, perhaps I should base my decision on something more than a measly 5 years. Take a look at funds that have been around for 20+ years. Choose an industry that you feel is on the rise. And, research the company’s debt in relation to its assets. Do they have sufficient cash flow? Dig a little deeper than percentages. Stocks can easily take a turn for the negative in another 5 years.

Choose to Invest, Not Gamble

When you’re investing, do your research. Understand that stocks can go down as easily as they can go up. If you do not have the time or knowledge to perform the appropriate research, seek the advice of a financial professional.

Have you ever thought of investing as gambling? After reading this piece, do you feel like you’re a gambler or an investor?