Investment always comes with a little risk. Whatever gains you may receive aren’t guaranteed, and the higher the expected return, the higher the risk. Most investors respond to this fact with caution and keep the bulk of their investments in lower-risk products. However, some people respond to the lure of high risks and high potential rewards with excitement. In a few people, stock trading begins to behave like a gambling addiction—and, like a gambling addiction, it has dire consequences.
How Gambling Addictions Work
In the past, scientists assumed you could only get addicted to substances that altered your brain chemistry. Today, we understand that external activities alter your brain chemistry every day. When we anticipate good things, the brain drives us to pursue them. When we bite into a tasty apple or a slice of cake, it pours out reward chemicals. This is normally a healthy process which encourages us to get up and do things that are good for us, like cooking dinner, calling a friend, or playing a sport.
However, some kinds of activities can hijack that reward function in ways that aren’t as healthy. They can drive you to spend an unreasonable amount of effort pursuing that feeling of reward—even when the actual reward is far less valuable than the things you sacrifice to get it.
This is what happens in a gambling addiction. The reward chemicals released when the gambler wins are so intense that they produce a temporary high. Yet it takes quite a lot of risk to achieve that. The gambler takes further risks in order to get back the high of their earlier wins. They may spend inordinate amounts of time gambling, risk money they can’t afford, and enter a flow state where time seems to have no meaning. If forced to stop gambling, their brain can even experience withdrawal—not from a drug, but from its own reward chemicals.
Not everyone who gambles will engage in these addictive behaviors. People who are depressed or lack other positivity in their lives are the most vulnerable. Some people may also be genetically predisposed.
Day Trading Addiction
While putting your 401(k) into mutual funds doesn’t have much effect on the brain, high-risk trading can spur the same kinds of excitement and intensity as gambling. The most common type of investing to cause addictive behaviors is day trading, where you move money around throughout the day in order to chase highs and lows in the market. Some day traders do it for a living, but thanks to investing apps like Robinhood, it’s now possible for amateurs to start day trading.
When amateurs first start day trading, they may win a bit at first. This produces an exciting thrill, plus shows just how high the returns can be on this kind of trade—so much more than they could ever get in ordinary investments. So they trade more in the hopes of repeating their first success. Unfortunately, they may find they lose more than they gain. 90% of amateurs lose money on day trading.
And yet, they may reason, it’s possible to earn back what they lost. After that, they trade in the hopes of digging themselves out of the hole of their losses. They may use leverage in order to hopefully gain more than they put in, but this can result in even bigger losses. Borrowing money to invest is also common. Someone who is severely addicted may end up stealing money from joint savings accounts or a loved one’s money, rationalizing it with the hope that they will return the money and more once they win big.
Stories of trading addicts often include massive amounts of debt and destroyed relationships. At that point, it is obvious there is a problem. And yet the day trader will keep trading in the hopes of fixing all the problems their addiction caused.
How to Get Free
However, when you realize you’re in a hole, the first step is always to put down the shovel. Day trading is unlikely to solve anyone’s severe financial problems. Instead, anyone with a trading addiction needs to stop and get control of their problematic investment habits. That means cold turkey: delete the apps, close your accounts, and come clean about any problematic things you’ve done.
Day trading, while exciting, isn’t an important investment strategy. You can have a solid portfolio without any high-risk investments in it. In fact, your money will grow best the longer you leave it alone. If you’re interested in continuing to invest, get a financial advisor and explain your goals and strategy. As a professional, they can optimize your investments without you having to be involved in the day-to-day management of your portfolio.
If you’ve never gotten into day trading, there’s no real reason to start. Odds of turning a profit are low, and there are lots of less expensive hobbies. But if you decide to do it, remember these important rules:
- Trade only with money you can afford to lose, setting yourself a day trading budget that doesn’t encroach on the rest of your portfolio. Never go into debt to trade.
- Track your gains and losses, so that you are aware of your overall record instead of focusing only on the thrill of the moment.
- Pay attention to your mental health and overall well-being, including your relationships. If loved ones express concerns, listen.
- Or, if you’re just doing it for fun, trade on a simulator instead. That way, you can have the thrill of tracking the ups and downs of the market, but with pretend cash.
Real Investment Strategies
If you actually want to grow your wealth, day trading is unlikely to get you there. Instead, invest strategically, in ways that minimize risk and don’t rely on your emotional reaction. A professional financial advisor can help you build a solid portfolio and the strategy to manage it. To meet the right advisor for you, contact us today.