When engaged in the activity of investing, we sometimes mistake speculation for investing. Understanding and identifying when we are investing and when we are speculating can improve our decision-making process.
Investing is generally long term in nature with a focus on asset ownership. It can be pretty boring, like watching paint dry. Speculating is often short term with a focus on price movement. It can be very exciting – triggering emotions ranging from euphoria to despair.
Identifying Speculative Assets
A speculative asset may be something new and/or unproven. For that reason, they are generally defined as being higher risk with the potential for greater return.
Speculative assets face increased uncertainty. For instance, we don’t know how they may respond in various economic situations, how essential they will become and whether government regulations will be supportive.
This increased uncertainty often results in wide swings in prices. Even assets that have been hugely successful, had periods of significant drawdowns in their (earlier) speculative phase.
Points to Ponder
As you make your investment decisions, be sure to:
- Identify what is an investment and what is a speculative bet
- Understand potential outcomes of speculation, including the possibility of losing money
- Be sure the proposed change is in line with your plan and desired level of risk