Stop deluding yourself into believing that you are investing in the market when in reality you are only speculating. This confusion can harm your investment portfolio more than a market crash. If you are unaware whether you are an investor or a speculator, the market could be a very dangerous place to find that out.
It’s important to understand the difference between the two as this could decide if you are looking to build wealth or if you are gambling.
The following criteria & your outlook can help you understand where you stand. Let’s find out which side you lean on:
Investor actions are based on facts and data. Investors decide whether a new addition to their portfolio is good or bad for them after proper research. Their actions are always based on fundamentals and rarely on sentiments. Speculators’ actions on the other hand are based only on guesswork, rumours or tips received from others. They don’t know what they are getting into and how it will help them in building their portfolio.
If you are investing your money with the understanding of what you are buying, you are an investor.
- Time Horizon
Investors always go for the long haul. They know that in order to build wealth, one has to be patient and give time for the power of compounding to work its magic. Speculators are always looking to make a quick buck. Their vision is almost always short term. While investors believe in buy and hold speculators follow in-and-out, always finding new venues for making more profits quickly. One can say they believe in buy & hope instead of buy & hold.
If you have long-term vision you are an investor.
Investors are always careful with their hard earned money. They never put too much money in a single investment. They reduce their risk by diversifying into different investment classes, even if it reduces their returns as a result. For example, even if the stock market is doing good, a wise investor would still keep some amount of money in bonds or cash equivalents to save themselves in case of a sudden crash. Speculators on the other hand only want to maximize their profits. So they invest in just one investment class in the hope that it will give exponential returns. They consider diversification as a hindrance to earn higher returns.
If you opt for proper diversification, you are an investor.
Investors start their journey with a well defined goal plan. Their investment decisions are based on what will help them achieve those goals in future. This means they have a clear vision and they know what they want out of their investments. They don’t let emotions or market fluctuations overpower their decisions. This is in complete contrast to speculators. Speculators have no defined road-map for their finances. They generally buy what is hot and follow others in order to make a profit from their investments. They have no clear idea as to what they want, and buy based on emotions and latest market trends.
If you invest with a proper goal, you are an investor.
- Market Volatility
Investors know they don’t have any control over the market, therefore they don’t let market volatility affect them. Moreover, since they are in for a long term, they know that short term volatility will not have major impact on their investments and remain confident and clam. Investors take advantage of volatility. Speculators get entangled in volatility. Since their vision is short term, they are always worried about the market and keep checking their portfolio frequently. Speculators depend too much on rumours because they are not confident about their investments.
If market volatility doesn’t affect you, you are an investor.
So, what’s your result? Are you a speculator or an investor?
Being a speculator is not the worst thing in the world. Just keep in mind that you only speculate with money that you can afford to lose. Because speculating in the stock market is like gambling in Vegas: you might make bad decisions, lose money and end up drunk.