Investment vs Speculation
In this era of low interest rates and gloomy predictions, it’s tempting to put our money in more exciting schemes – especially when they promise vast riches and the envy of our friends. While new arrivals such as cryptocurrencies are often described as ‘investments’, is it really the same as buying stocks and shares? In this post, I’ll explain the basic differences between investment and speculation. Although there are pros and cons to both, it’s important to understand which one you’re pursuing.
Essentially, investment involves buying an asset or security in the hope that its value grows and it provides you with a return. For example, if you bought some shares in a large online retailer, you’d hope the business flourishes and your investment would be worth more. You might receive some dividends (a share of their profits), too. Even if that company failed, you probably wouldn’t lose all your money. As a shareholder (a part-owner of the business), you’d receive a cut from the sale of any assets, such as real estate, equipment, and outstanding invoices.
Speculation, on the other hand, involves a greater element of risk. In most cases, you’re effectively betting that something increases in value. Whereas investment is usually about making good long-term decisions, speculation is all about making a quick return. Some types of speculation are even riskier if there’s no underlying asset. Cryptocurrency is a prime example.
The value of Bitcoin, for instance, is determined entirely by human confidence – there are no underlying assets to realise if it hits the floor. The blockchain, the technology on which it’s built, has no scrap value. When everyone’s excited, one Bitcoin is worth $20,000; when they’re more pessimistic, it plummets to $1,000. If you bought at $10,000 and needed your money back quickly, you’d be facing a big loss. However, if you had other resources and some patience, it might eventually climb back to $20,000 and yield you a tidy profit.
This volatility is one of the reasons why cryptocurrencies are too risky for some investors. Although the stock market has its ups and downs, it doesn’t fluctuate by 1500% in a year, which is what happened to Bitcoin in 2017. When we do see these dramatic highs and lows, it’s usually dotcom companies. The squillion-dollar valuations placed on some mighty companies bear no relation to their underlying assets. There’s not much value to a fancy website and some rented offices. Eventually, everyone realises what’s going on – the bubble bursts and the party’s over.
Speculation can be fun if you know what you’re doing and have the financial resources. But if you borrow money or cash in your savings to speculate, it can lead to misery. For long-term wealth – especially for a pension – it’s worth focusing on investment. You probably won’t see dramatic returns, but there’s less chance you’ll be eating Whiskas in retirement.
Yes, there are some big bucks to be made from speculation if you get your timing right, but you need nerves of steel and money you can afford to lose.
This blog post is for information only and does not constitute financial advice.
If you’d like to learn more about investing, hop over to Meaningful Academy. You can also find lots of free resources on the Meaningful Money website. I’m not affiliated with Meaningful Money in any way, I just think it’s a great website and Pete Matthew knows his stuff.