What is the difference between investing and speculation?
The vast majority of people who choose to speculate end up losing most of their money. Speculation is a shortcut to getting poor. Getting rich requires investing and investment is characterized by slowly getting richer. Investing is about balanced risk and a long time horizon.
Get rich slowly vs. Get poor fast
Risk
Risk is a difficult concept to understand when it comes to getting a return from the portfolio. On the one hand, it is not possible to get a return without taking a risk. But few people really want to take on a particularly high risk.
Let’s make it clear:
No risk, no return
It takes risk to generate a return and thus get richer. The question is, how much risk?
The answer to how much risk you need to take is not quite simple. This is a very individual question.
Your risk tolerance, which is the risk you should reflect in your portfolio, consists of both risk ability and risk appetite. The first more objective and the other more subjective. It’s about finding a balance that suits your personality.
What is speculation
Speculation is generally characterized by:
- Very high risk
- Short time frame
- Very few assets
Drawing things up all black and white when it comes to investment and speculation is difficult.
Generally, speculation is considered very high risk because you are either betting with or against the market.
Another characteristic is that the time horizon is very short. When you hear on the radio, on the web reading or on YouTube, that people “invest” with a time horizon of minutes, hours, days or weeks, this is speculation. Known as day trading.
In fact, I would go so far as to say, anything under 3 years is speculation and that the spread between 3 years and 5 years is probably also more speculation than investment. But it is a personal opinion.
If you look in the prospectus or the central investor information document for most funds with shares, you will find a recommendation:
Recommendation: This fund may not be suitable for investors who plan to withdraw their money within 5 years.
Vanguard Total Market Index
It is a bit of a hint that supports the opinion that anything under 5 years is not a sufficiently long time horizon if you are an investor.
In addition, speculation is characterized by the fact that very few horses are often played. Put another way; portfolio consists of very few assets. For example, it could be 1 or 2 shares in a day
Unless you are highly skilled and lucky then Speculation is getting poor quickly.
Examples of speculation
- Putting 50% of your portfolio in the hottest tech stock
- Trading in options or leveraged securities
- Investment for borrowed money
- Constantly changing strategy because you think you can spot a gap in the market
What is investing
Investment is generally characterised by:
- A balanced risk
- A long time horizon
- A balanced portfolio
The balanced risk comes from an acknowledgment of what creates a balance in the portfolio. If you are high risk tolerance, a balance can be 100% shares. If you are more defensive, the content may be 50% shares and 50% bonds.
Investment is characterised by a long time horizon. Minimum is 5 years, but preferably much longer than that. The market, regardless of the asset, is moving in waves and short time horizon means the risk of having to sell in a time of crisis is far too high. It’s not a balanced risk.
If you are in fact in the process of finding a place for your savings, because the money is to be spent in a few years, then you should not invest it.
Investing is about thinking long-term and not eating the marshmallow right away.
Examples of investment
- That you buy a broad diversified index fund every month
- That you think and make long-term decisions
- Knowing your risk profile and adjusting your portfolio accordingly
- You risk only money that you do not rely on the short term (You can afford to lose)
Conclusion
The vast majority of people who choose to go the speculator’s way end up losing most of it. Speculation is a shortcut to getting poor. Getting rich requires investment and investment are characterized by slowly getting richer. Investing is a balanced risk and a long time horizon.
Invest to Get rich slowly vs. Speculate to Get poor fast