Have you ever turned on the news, watched a segment about the stock market, and thought, “Huh! I should invest in Tesla!” Substitute Tesla for any trending stock, and most Americans can probably say the thought crossed their minds.
It’s tempting to buy a single stock, bet big, and get rich quickly. It’s true that there’s a lot of potential for those looking to grow their wealth and their savings through the stock market. But betting big like that is also one of the fastest ways to lose it all.
Throwing a big chunk of your money into the latest trendy stock may be how many people think of investing. But that type of technique isn’t actually considered true investing – it’s called speculation, and it can lead to some dangerous habits, especially if your savings are involved. It’s crucial to understand the difference between investing and speculating – and the risk involved in each.
Here’s everything you need to know about speculating versus investing, and why it matters.
Investing Vs. Speculation
Understanding the difference between investing and speculation can help you make smarter, more educated decisions about your financial future.
Many people think that if you buy a single stock, you’re immediately an investor. Unfortunately, that’s not the case. Buying financial assets like a single Tesla stock, just because you feel like it, or because it’s growing quickly, just makes you a trader – and maybe even a speculator. And there’s a difference.
An investor is seeking a return on capital from either generating income (like a dividend, income or interest) or appreciation of their investment over time. True investors realize that there is an assumed amount of risk taken for a targeted “reward” over time. We can’t state those last two words too many times….over time.
A speculator, on the other hand, will rely more on external sources of return, like whether someone else will pay more for your assets. Speculation tends to involve more spur-of-the-moment decisions focused on the short-term. Some speculators may not understand the sector they invest in.
Why does it matter?
Well, if you’re speculating, but you think of yourself as an investor, you may attribute some fluke success to skill or strategy. If you take speculating too seriously, you run the risk of focusing on the immediate future instead of the long term. You may end up throwing more money into the burning fire to compensate.
Big Bets on Few Stocks Can Create Big Problems
The easiest way to get rich quickly with stocks is betting big on a single stock. But a big bet on a single stock may be a quick path to a substantial loss. A solid investment strategy has a few elements of success:
- A goal
- A timeframe
- A measure of risk
It sounds simple, but, like most things in life, it takes some thoughtful planning to get the job done. So how does it all work?
- Start with a goal. When you’re investing, you should come to the table with a goal to start. Do you want to build up your child’s college savings account? Do you want to save for retirement? Do you want to plan on purchasing a home? No matter the goal, there’s a strategy out there for you.
- Have a timeframe. Your goal will dictate your timeframe. If you plan to invest for retirement or your child’s college fund, you will have a clear amount of time on the clock. Meanwhile, a trip or down payment might give you five years.
- Determine risk. In every client interaction we are evaluating risk. This is an important factor. You likely already know that the investment portfolio of a 30-year-old and 60-year-old will look dramatically different. There’s a reason why: the 60-year-old probably is willing to take on less risk right before their retirement. The younger person has a much longer time horizon, especially when it comes from recovering from losses.
You can have an element of speculation in your portfolio, but that means taking on a lot more risk – and some people might not be comfortable with that. It is your hard-earned money, after all. It’s important to decide just how much risk you want to consider and adjust your portfolio accordingly.
Most Americans invest in the stock market via retirement plans, like a company 401k plan. According to the Motley Fool, approximately 32% of Americans invest in 401k plans. 401k plans are an example of being an investor as there is a goal (retirement), a timeframe (for example, 20 years until retirement) and a choice of level of risk as provided within the 401k plan.
The good news about the many innovations in the financial services industry is this: You can invest as much or as little as you want in the stock market in so many different ways to attempt to build wealth. Betting big may not be within your comfort level, but at the very least, you should aim to beat inflation. That’s where investing – and even speculation – come into play. You need to think beyond the initial speculation and plan out a real strategy.
Taking the Smart Approach
Some people handle their money from an emotional state of mind — which is why having a team at your side can be critical to long term success, especially when it comes to investing. It can be tempting to invest in a single stock based on news headlines, but long term financial success is more complex than betting on the latest tech IPO or stock market craze.
Our daily conversations with our clients revolve around thoughtful investment strategies which are linked to life goals and based on a certain tolerance for risk. Consider taking a deep breath and a pause…then follow the above guidelines before your next investment.
Disclaimer: The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.