Is Your Investing Strategy Really a Strategy?
SPECULATION, RISK, AND A LONG-TERM PLAN FOR BUYING AND SELLING SECURITIES
Many people are hesitant to invest heavily in the stock market because they consider it similar to gambling or taking too much of a risk with their hard-earned money. With volatility on the rise in our current climate, more investors are pausing to consider the risk they are taking with their investments and whether they should be so bold.
The idea of losing more than they can afford to in advance of their retirement weighs heavier on them than the possibility of capitalizing on the money they invest. Sadly, this type of behavioral bias--fear and herd mentality--can do more harm than good.
The fact of the matter is that if you are investing wisely, then your risk is mitigated by a sound strategy, an investing philosophy that is based on financial science and a long-term view of the outcomes of your portfolio. Sure, there is risk of temporary losses, but you aren’t playing roulette with your retirement savings if you are truly executing an engineered approach.
There are plenty of people, however, who have no plan or strategy for the manner in which they invest and with an approach like that you can bet on one thing – you’d be better off going to the Vegas strip for the weekend. Throwing money into the market with no strategy for tax planning, risk analysis, asset allocation and both short and long-term planning gives you no safeguard from taking unnecessary risks and what that might mean for your assets in the long term. Basically, you’re not investing, you’re speculating and that means your money is at the whims of the market.
Your Wealth and Your Actions
Some people are in the market for the gamble, feeling elated when luck is in their favor. For those who have some extra cash to fund this sort of hobby, I say go for it, but this type of behavior is certainly not something you should count on for your retirement income. The difference between attempting to predict the future of the markets and portfolio engineering is that with the latter you are securing and holding stocks that are suitable for your portfolio writ large and with the former you are looking for a thrill or hoping for the best without planning for the worst.
Those who speculate approach buying and selling in the market from an emotional standpoint and they do so with no strategy or plan. A true investor puts their money into the market with purpose, rationality and a big picture strategy based in the whole picture of their wealth and goals.
Are you an investor or a speculator?
Consider the behaviors and activities listed below. If you align with them, then chances are high you are not taking a calculated approach to your investing practices:
- You love to hear the latest tips and take guesses. We’ve all heard that there is no crystal ball in investing and no one can predict the future of the market. Trying to predict what will happen with individual securities is futile and making investing decisions based on the next big stock trend you hear on TV, on the radio, or on the internet will not serve you well in the long-term.
- You are emotionally connected to your portfolio. Fear, greed, herd mentality, recency bias, etc. (click to see infographic) These are human instincts that drive our emotions and steer us to make decisions. While these are human traits that serve us well in some areas of our lives, there is no place for them in investing. Having a strategy for your investments and portfolio buts a barrier between you and your money. If you tend to abandon a plan in favor of your emotions, then you might be more of a speculator than an investor.
- You like get rich quick schemes. In the world of bitcoin mania, there are plenty of people out there who are looking at the short-term and thinking it would be great to find a silver bullet that will get them a large return in no time. While there are the lucky few who benefit from this type of behavior, the majority of people would be better served with a strategy that maintains steady growth over several years and decades.
- You want to “beat the market”. Efficient market theory (click to watch video) explains that stocks are always accurately priced. Those who think they can beat the market believe that they can see something that the market itself cannot. Using this “information” they try to identify stocks that they think are inaccurately priced and bet on either the losses or gains in these stocks to make a profit. Again, with some luck, this might work once or twice, but the chances are very low that you know more than the millions of other market participants combined. (click to view a presentation)
Gamble if you want to, just don’t bet the farm
If you know that you are gambling in the manner in which you invest, and you enjoy doing that, fantastic! There is nothing wrong with some risk-taking and speculation as long as you know you’re doing it. The problem lies in the fact that some people fail to realize that this type of behavior in not investing and they are leveraging the majority of their wealth in this practice. If you are on track to meeting your financial goals and you have a strategy for 90-95% of your money that you stick to, then by all means, take a ride on the speculation train. Just know that you are playing, you are gambling, and you need to be willing and able to lose everything you are playing with. And, sure, you might just get lucky.