Nationwide: Betting, Prediction Markets Sap Wealth-Building

Add Nationwide to the growing list of financial services firms cautioning that retail prediction market traders and sports bettors are making mistakes when they direct capital away from standard investment accounts to pursue higher-risk gains.

In a recent report, Mark Hackett, chief investment strategist at Nationwide’s investment management group, echoes an increasingly familiar refrain: Betting, be it sports or on prediction markets, and standard investing both involve risk, but the forms of risk are vastly different and too many young investors don’t see the differences.

Over time, the longer market participants remain invested, the more their stakes compound and wealth accrues. Hence the case for long-term investing. However, the longer a bettor bets, odds work against them, increasing the chances that the only winner is the house.

Going in the Wrong Direction

A recent Betterment survey called attention to the issue of young people are relying too heavily betting as an alternative to old-fashioned investing. It points out that 26% of Gen Zers view wagering as an integral part of their long-term investing strategies. Making matters worse is that 52% of that demographic admit to moving money away from brokerage and retirement accounts into sports betting accounts.

That jibes with older studies indicating that in the years since regulated sports wagering proliferated in the U.S., bettors didn’t redirect cash that was used for other discretionary pursuits to wagering. Rather, they cut back on investing and saving to fuel their betting habits.

Hackett says that’s concerning, adding that fear of missing out (FOMO) and the desire for instant gratification are steering some young people away from sound wealth-building principles into prediction markets and sports betting.

“Before worrying about the odds of the next wager, investors should make sure they’re playing the right game,” he adds. “One game (gambling) is built around prediction and is often marketed or perceived as a path to wealth creation. The other (investing) is built around economic ownership and long-term wealth creation. History suggests the latter has been the far more reliable path.”

Long-Term Investing Beats Quick Fixes

Other studies indicate bettors and retail prediction market participants, particularly young men, turn to those pursuits to fill various voids in their lives, but the problems they’re having can be compounded by activities that can prove detrimental to long-term wealth accumulation.

Hackett points out that prediction markets and sports betting offer short-term enticement, distracting some participants from the long-term superiority of the stock market.

“Just look at the historical record of the S&P 500 Index. When looking at monthly returns, stocks have been positive about 64% of the time,” concludes the Nationwide strategist. “Extend that period to a year and the probability of positive returns rises to roughly 79%. Over even longer periods, stocks have been positive for every rolling 16-year period since 1928. That’s the exact opposite of gambling.”