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Investing and Speculating
- Difference between investing and speculation is a matter of risk tolerance, with speculation being closer to gambling.
- The truth is that there’s no clear cut line between them, as all investing carries risk.
- Still, there are differences worth knowing about, no matter what your financial goals might be.
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Investing is a long-term play
- Investing is most commonly thought of as an attempt to profit on transactions, stocks, or assets.
- Often, there is a “safety first” approach, as the most conservative-minded investors will trade off higher returns in exchange for reduced risk.
- Safe investments can include bonds, buying property, loans to low-risk borrowers, or investing in blue-chip stocks.
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Passive Investing
- To ensure the highest margin of safety, choose an investment that gives consistent returns.
- The most conservative investor will avoid short-term market volatility by investing in assets over the long-term, often decades, called “passive” investing.
- This strategy has performed well for investors like Warren Buffett.
- The longer the money is invested, the more it will compound, making it less susceptible to short-term, double-digit dips in the market.
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“I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.”
WARREN BUFFETT
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Speculation is focused on short-term gains
- Speculation follows the saying: “With great risk comes great reward”
- Speculation is the act of putting money into investments that have a higher probability of failure, while also sometimes paying off with a big reward.
- Speculators tend to trade more frequently, and they’ll wager on higher-risk markets such as commodities, cryptocurrencies, or in shares of small or distressed companies.
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Speculation is not Gambling
- Just because speculation carries a higher risk doesn’t mean it’s all gambling, however.
- The same level of scrutiny and research that’s applied in long-term investments can be applied to short term cycles and market behaviour.
- However, when people make trades based on zero knowledge of what they’re investing in (like crypto, often times), then it’s basically gambling.
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Risk is a spectrum
- The difference between investing or speculating, is not about what you buy, but why you buy—and that varies for people based on their financial goals.
- For example, a low-income earner near retirement won’t want to chase a short-term upswing. In contrast, someone with more wealth might want to reduce their exposure to just stocks or bonds, so they might be happy investing a small portion of that wealth in high-risk intangible assets like crypto.
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Know your risk appetite
- Know the difference between low-risk and high-risk investments.
- Knowing your own risk tolerance.
- Your risk tolerance depends on your age, financial status, and retirement goals
- Consider consulting with a financial advisor to walk you through the trade-offs that come with investing and speculating.
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