Stephen Ahern
Learning to invest is much like learning a new language. A lot of people understand enough about how investing works to get by, but don’t have a deep knowledge of all the complexities and concepts that should be part of a robust investment strategy. The first things new investors should understand is what their risk tolerance is and the difference between investing vs. speculation.
Building an investment knowledge base enables you to make more informed decisions, perhaps hone in on different types of investments and how to choose/rely on/seek advice from an investment advisor.
The distinction between these two terms may seem confusing, considering speculation is technically a type of investing. It’s also much riskier than traditional investing, which is why it’s critically important to go into speculative investments with your eyes wide open (and, of course, with the guidance of trusted investment advisors).
Investment vs. Speculation: Three Key Differences
- Investing is generally done with the expectation of steady gains; speculation is done with the understanding that everything is at risk. When we talk about “investing,” we’re generally talking about putting money into an asset that you believe will gain value over time. Buying a piece of real estate that you plan to flip or buying stocks in a company whose profits are increasing are simple examples of investing. It’s always possible that you’ll ultimately lose money on those investments, but you have a reasonable expectation that they’ll become worth more than you paid for them.
Speculation is the process of investing in assets that are known to be volatile. They could gain a lot of value very quickly, in which case a speculator can turn around and sell them to make a big profit just days or weeks (or sometimes minutes) after making the original investment. Or, those assets could become worthless at any time and the speculator loses their entire investment. Cryptocurrency is a prime example of a speculative asset. Some investors made millions on crypto investments overnight, while others have lost every dollar they put into crypto.
- Investment decisions may involve personal motivations; speculation is purely profit focused.
While some investors make decisions based purely on financial factors, others use investing as an extension of their personal beliefs. We’ve seen a significant increase in ESG investing in recent years. For example, an investor buying stock might choose to focus on companies that work on renewable energy or do other “green” work. They might also avoid investing in certain companies if they have personal reservations about the company’s ethics, or are concerned about the company’s long-term future.
Speculation tends to be more “black and white.” Speculators look at whether an asset is likely to make them a fast profit, rather than the underlying performance or principles of a particular company. These investments aren’t expected to be long term so speculators don’t have to think as much about what companies they want to align themselves with for the future. The key question that drives speculators is essentially: “Is this investment likely to make a lot of money very quickly?”
- Different asset types tend to be involved in investment vs. speculation activities.
Some securities, such as stocks, may be traded as part of either traditional investing or speculation. However, certain assets (including mutual funds and investment-grade bonds) are more commonly associated with investing. In addition to cryptocurrencies, other common speculative assets include commodities like gold and silver, “junk” bonds and even collectibles such as fine art and other items that are prone to dramatic price fluctuations.
Investment vs. Speculation: Which is the Right Strategy for You?
Anyone who's thinking about dipping a toe into the world of speculative investments should consider two very important factors: risk tolerance and research. Investors must be financially and psychologically prepared to lose everything they put into speculative assets. Not all investors have the risk tolerance that’s necessary for speculation (and that’s okay). It also doesn’t have to be a binary decision. If you’re willing to take a risk with a portion of your money, invest the majority and choose an amount to speculate with.
It’s also important to take the necessary time to research any investments you might consider making, which can be challenging in the fast-paced speculation environment. Skipping the research because you feel like a time-sensitive deal is too good to pass up is akin to a home buyer forgoing an inspection because there’s competition from other buyers. The phrase “act in haste, repent at leisure” seems fitting for impetuous investors who jump into speculation without doing their due diligence and consulting their advisors. These can be very expensive mistakes.
Contact Sachetta, LLC With Specific Questions About Investment vs. Speculation and Your Portfolio.
Sachetta’s investment advisors are here to help our clients understand the risks and advantages of any investment strategy they might want to consider. If you have further questions about investment vs. speculation (or about any other investment terms, trends or concepts you don’t fully understand), we’re happy to talk. Contact us today.
Stephen P. Ahern, CPA/PFS, CFP®, AEP®, MST provides individual financial, investment, estate and tax planning and small business consulting to a diverse base of clients including key top-level executives, high-net-worth individuals, business owners, venture capitalists, and entrepreneurs. Stephen co-founded and served as President of Wealth Management Advisors, LLC for twenty-one years before joining the Sachetta team