Opportunities for investing and speculating aren’t tricky to find.
During the Covid-19 pandemic, lockdowns fuelled a boom in online trading. People had more time on their hands and, in some cases, spare cash due to reduced expenditure.
The price of “Stay at home” stocks, such as Amazon, Netflix and Zoom, performed exceptionally well.
Cryptocurrency trading boomed. At one stage, we saw adverts for “Bitcoin” splashed across the side of London buses.
With all of this going on, it’s easy for the lines between investing and speculating to become blurred.
What’s the difference?
This isn’t the definition you’d find in the Oxford English dictionary. However, when I speak to people speculating in stocks and cryptocurrency, “winning quickly and big” is generally their primary driver.
Online trading provides an immediate speculative opportunity to do this. And, of course, the chance to lose quickly and big.
It’s the edge of the seat, high-risk stuff and, in my experience, often done without a clear goal in mind.
Long-term investing is usually done with clear goals. Frankly, the investment journey itself is pretty dull for investors a lot of the time, compared with the thrill of speculating!
If you see a financial planner such as ourselves, or you’re already a client, conversations aren’t going to be about speculating. Instead, they will be about investing sensibly to meet long-term goals.
Investments should be a tool to help you achieve goals that secure and improve your and your family’s lives. These goals include investing:
-For a comfortable retirement with the peace of mind that you will not run out of money, no matter how long you live and what life throws at you.
-For children’s / grandchildren’s education or house deposits, for example.
-To provide a safety net in later life, in case long term care is needed.
-To pass on a legacy to loved ones.
For a long time, interest rates were at rock-bottom levels. They have risen recently as central banks get to grips with rising prices. Even with higher interest rates, cash in the bank effectively goes backwards once the impact of inflation has been factored in over several years.
The temptation is there for people to speculate some of this money to get a better return. That temptation becomes significant when fueled by TV adverts suggesting we “trade” online.
If you are going to do this, it’s essential to go into it with your eyes wide open and to try to do it like an investor rather than a speculator:
-Be as diversified as possible; invest globally in companies/stocks that do different things (or ideally, in investment funds that hold a wide range of stocks for you)
-Remember that trading stocks is a high-risk activity – you must be prepared to lose a lot of your money potentially.
-Keep an eye on over-trading. There will always be something doing better than what you have. Jumping around constantly, like trying to second guess the quickest check out till at the supermarket, is likely to be counterproductive in the long term.
-Look at the price falls that your favoured stocks may have experienced to get a feel for the volatility (ups and downs) inherent within all stocks.
-Have a cash buffer in the bank if things go pear-shaped when you need cash to pay for something.
The proliferation of online trading platforms and the speed at which trading can be done on a smartphone makes trading very accessible, and you don’t need a financial adviser to do it.
The critical thing to ask yourself is, am I investing or speculating, and which should it be?