Opportunities for investing and speculating aren’t difficult to find.
Lockdowns have fuelled a boom in online trading while people have had more time on their hands.
“Stay at home” stocks such as Amazon, Netflix and Zoom have soared.
London buses have “Bitcoin” adverts splashed across them, as the price of cryptocurrencies has also gone through the roof.
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, but when I speak to people speculating in stocks and cryptocurrency, “winning quick and big” is generally their primary driver.
Online trading provides an immediate speculative opportunity to do this. And, of course, the chance to lose quick 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, usually to meet long term goals.
The 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 pass on a legacy to loved ones.
We all know that interest rates are at rock bottom levels. Cash in the bank effectively goes backwards once the impact of inflation has been factored 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 adverts on TV, 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 you possibly can be, investing in companies/stocks that do different things (or ideally investment funds that hold a wide range of stocks for you).
-Remember that trading stocks is a high-risk activity – you have to be prepared to potentially lose a lot of your money.
-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 previously experienced so that you get a feel for the volatility (ups and downs) that are inherent within all stocks.
-If you stray into cryptocurrency territory, look at the downturns that cryptocurrency has experienced in the past and ask yourself, if this happened with a substantial amount of money, how would I feel, how would I react, what impact would it have on my life? Can I get the money out easily if I need it?
-Have a cash buffer in the bank in case things go pear-shaped at a time 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 doesn’t need you to have a financial adviser to do it.
We have heard of several cases where people have encashed a large portion of their pension or savings to take up speculative positions in a few stocks or cryptocurrencies, which have shot the lights out recently.
Some of these people have got off to a flyer with these investments, but how prepared are they if things turn the other way quickly?
As is the case with everything in life, it’s about that sometimes dull “B” word…balance.
We have some clients who have their own accounts, holding a handful of stocks or cryptocurrencies. They run them themselves outside of the main investments that they hold with us.
Often, it’s in things that they are interested in personally and in which they believe. Sometimes it’s just a tiny amount for fun!
They have the comfort of knowing that most of their wealth is invested sensibly and widely diversified, with an appropriate amount of cash held in the bank.
The critical thing to ask yourself is, am I investing or speculating, and which one should it be?