This topic is a spin-off from my initial article How Come We Are Always Told That We Should Invest Long Term. So why are retail investors encouraged to invest instead of speculating? I'll be listing out 3 reasons today. Before we start though, let me define the difference between investing and speculating.
According to Investopedia:
Investing is synonymous with having the intention to buy an asset that will be held for a longer period. Typically, there is a strategy to buy and hold the asset for a particular reason, such as seeking appreciation or income.
Speculating tends to be synonymous with trading because it is more focused on shorter-term moves in the market. You would speculate because you think an event is going to impact a particular asset in the near term.
1. Retail Investors Want To Do As Little As Possible
Many years ago, I was servicing a couple, my best client in the bank and we started off on this investing journey. Even though we agreed that we are investing long-term, I gave him a portfolio with a mixture of tactical funds as well as growth & dividend funds. As a result, I was meeting them every 3 months to make tactical changes on their portfolio. While they were very happy with the profits and the growth, one day the husband asked me, "can we meet less frequently, we are supposed to meet every 1 year right?" So we took profit on all the tactical funds and only the 'buy and hold' remained.
My point is this, do clients want to make money? Yes.. you would imagine this client would be super happy with their gains when we made tactical changes on a quarterly basis, but investing isn't their full-time job. Regardless of the percentage gain, investing carries risk. There's always the chance of losses. For this client, the husband is always flying around. He has no time to meet. To him, he is earning good money from his day-job, relative to speculating, it is 'risk free' good money. Speculating involves taking advantage of short-term opportunities, akin to a life like a trader. If you don't enjoy thinking about markets everyday, buying and holding simply reduces the involvement and still ensures your money is beating inflation.
2. Investors can't react as quickly to mitigate speculation risk
Another consideration and back to my point about making money from the markets isn't your day job is the risk that short-term investing requires faster reactivity. Having a full time job simply means investing will never be your first priority.
Imagine you invested in the US market from 2009-now. If you buy and hold, obviously you would have made money because it's a super bull market. Every speculator knows that if they bought at the dip (green circles) and sold (red circles) at the peak, you would maximized your gain.
The question is would you be free to meet up with your financial advisor/banker/broker or react on your own when the peak and dip happens? From my experience, clients will tell me yes at the start of the investing relationship. In reality, they want to meet at their convenience and usually forget that the market doesn't wait for them. This is the truth, it happens even now during this Covid-19 crisis when markets are dropping. Furthermore, can you be sure you are buying and selling at the right moments every time?
To give you an actual scenario of what happened to me when I was speculating... I wanted to buy more USD to prepare for future investing opportunities.
I saw the drop at the start of the dip and waiting was probably correct because it did drop further for a few more days. The problem was I forgot about it when I got busy. This is the reality of why for retail investors, it's highly encouraged to invest instead of speculate. Many times, clients don't prioritize investing. Missed opportunities are bound to happen if a market timing approach is adopted. Even for me, advisory is my main job. It takes precedence. Making my money work harder outside my day job is additional. Hence, the bulk of my funds are also invested long term and I only take speculative opportunities when I have time. More often than not, I don't have that time luxury.
3. Investing lowers the risk and gives you less stress in the market
Essentially if you are buying to hold for a period of 10 years or more and really adopt that expectation, you won't jump at every single event that is happening in between this time period. In fact, it might simply be a new buying opportunity to add more to your existing holdings.
Looking at the US market, imagine you decided to invest in 2011. There is upwards opportunities right? But, if you adopt a speculating attitude and evaluate on a yearly basis, take a look at the chart.
Stress or not?
Which is scarier? The drop from the black box or the earlier zoomed in image from 2011-2012? The drop from 2011-2012 is so mild compared to the present drop, yet it's a matter of perspective and how the chart is presented. This is the difference between investing and speculating. You save yourself a lot of undue panic.
In fact, if you invested in 2011, you might still be very chill at this moment even if the US market already tanked by more than 20%. In short, I just want to say, if you have a day job, want to spend time with your loved ones when you are free, adopt an investor mindset. You can't want to earn fast money but expect the market to go at your 'own time own target' speed.
Summary
To wrap up this article, I'd just want to point out 3 reasons why retail investors are told to invest instead of speculate.
1. Investing isn't your full-time job, it should be a function of your money simply working harder while you sleep and work. If it suddenly becomes a secondary job to you, it isn't investing anymore. It's a job!
2. Investing buys you time to react to market changes.
3. Investing puts you through less stress and a longer term horizon reduces your risk. For a full overview of why long term reduces risk, read my article on How Come We Are Always Told That We Should Invest Long Term.
Should you decide to get started on your investing journey, do speak with a trusted advisor. Alternatively, you can drop me a message if you would like me to help you with it.
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Disclaimer: The content created are based on my personal opinions and may not be representative to everyone or any organisation. If you have any doubts or queries pertaining to insurance or investment, please seek professional advice from a trusted adviser in an official setting. You may also reach out to me if you do not have a present adviser using the message box under 'Let's Talk'.
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