Many people are hesitant to invest in the stock market, because they consider it similar to gambling. With volatility on the rise in our current climate, even investors are pausing to consider the risk they are taking with their investments. The idea of losing more than they can afford to before their retirement is at the forefront of decision-making for novice and experienced investors.
But this type of behavioral bias can do more harm than good, and can be the difference between investor behavior and speculator behavior. If you are investing wisely, your risk is mitigated. A wise investing philosophy is based on a long-term view of the outcomes of your portfolio, because while you may experience temporary losses, you aren't playing roulette with your retirement savings.
There are plenty of people who have no plan or strategy for how they invest. Throwing money into the market with no strategy for tax planning, risk analysis, asset allocation or short- and long-term planning gives you no safeguard against unnecessary risk or its impact on your assets in the long term. If you don't have a strategy, you're not investing, you're speculating, and when you're speculating, your money is at the whim of the market.
Your wealth and your action
Some people are in the market for the feeling of gambling, the feeling of elation when luck is in their favor. 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 suitable for your portfolio, 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 and a big-picture strategy based on their wealth and financial goals.
Are you an investor or a speculator?
If your actions reflect the following behaviors, chances are 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 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 online will not serve you well in the long-term.
- You are emotionally connected to your portfolio. Fear and greed are human instincts that drive our emotions and steer us to make decisions. While these traits 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 puts a barrier between you and your money.
- You like get-rich-quick schemes. In the world of cryptocurrency 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 or decades.
- You want to "beat the market." Efficient market theory explains that stocks are always accurately priced. Those who think they can beat the market believe they can see something the market itself cannot. Using this "information," they try to identify stocks 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.
Gamble if you want; just don't bet the farm
If you know you are gambling with your investing and you enjoy it, there is nothing wrong with risk-taking and speculation. But some people fail to realize this type of behavior in not truly investing and that they are leveraging (and risking) 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 percent to 95 percent of your money that you stick to, gambling with the remaining 5 percent to 10 percent is OK, as long as you know you're gambling. You also need to be OK losing everything you are gambling. If you aren't, a sustainable, long-term strategy for your wealth, taxes, investments and legacy is in your best interests.
(Editor's Note: This column originally appeared on Investopedia.com.)
— By Timothy Bock, CEO of Summit Portfolio Management