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Investment vs. Speculation: What’s the difference?

Many people spent 2022 putting money into a 401(k), only to watch that balance stay the same, or even go down. Unfortunately, that’s the way markets are from time to time. I understand that is not very motivating, and you may be questioning some of your decisions. It might have you wondering if you should stay the course or try to jump on the bandwagon of the next big “investment” in an attempt to recover some losses. Before making any decisions, let’s make sure the next big “Investment” is actually an investment and not just speculation.  

What is investing?

Generally speaking, investing is buying an asset that has a reasonable track record of generating income or appreciation over time. There are three big ones: 

  • Stocks – You have ownership shares of a particular company, and when that company is profitable and grows, your share of that company may pay a dividend or go up in value. 
  • Bonds – You loan your money to an entity issuing the bond, and that entity pays you back with interest over time.
  • Real Estate – You buy a physical property for profit that generates income (usually through rent).

Those are the three big categories of investments. Investments will fluctuate, but as long as they are fundamentally solid, they tend to slowly and steadily make money over time.

What is speculating?

Speculating is buying an “asset” that has substantial risk of losing value but also holds the expectation of significant gain.  Often it does not produce anything initially or is not yet profitable with the hope that something will change or somebody will come along and pay more for it later. It’s possible to make a lot of money quickly, but its value can just as easily go to zero.

Here’s an example: Pokemon cards have absolutely exploded again. So many people want to buy these cards from when they were kids, and some of them are selling for ridiculous prices. However, there’s no way to influence the appreciation on those assets because they don’t actually produce anything. They’re incredibly risky, and, if the fad stops, it’s likely the value will crash. 

Investment or Speculation: Which do I choose?

Investments generally have a solid track record of performance, while speculation involves the hope that somebody will come along and pay more for it. It’s Slow and Steady vs. Get Rich Quick.

Investing for slow and steady growth is the time-tested way to help build a dignified retirement fund. That’s not to say that speculative trading doesn’t have its place, but make sure your retirement is on track first and that you are only speculating with money you are OK with losing. 

If you were beaten up by the markets last year, or if you’ve never been in the markets at all and you’re hesitant to put some money in, let’s have a conversation about building the right strategy for you. Contact me at kyrk.davis@familyfinancialpartners.com.

All investing involves risk, including the possible loss of principal, and there is no guarantee that any investment strategy will be successful. For advice appropriate to your specific situation, please consult a financial professional. Past performance is no guarantee of future results.

Article by Kyrk Davis, Wealth Advisor at Family Financial Partners — a financial services firm in Lexington, Kentucky.

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