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Investing versus Speculating

October 18, 2021 By: Todd Schanel, CFA, CPA, CFP®
investing-retirement planning-wealth management-financial advisor

When it comes to determining how to allocate your savings, what is the difference between investing and speculating?

  • Investing is characterized by:
  • Productive capacity: An investment involves deploying capital in a company, property, or other entity that produces something of value.
  • A stream of benefits: The value produced by an investment can ultimately be measured by the stream of financial benefits it provides to its owners. For stocks, that stream of benefits generally takes the form of earnings, cash flows, or dividends. For bonds, the benefit stream comes in the form of interest payments. For real estate, it is the net rental income.
  • Intrinsic value: Investors can apply a risk-based discount rate to the investment’s projected benefit stream to arrive at an intrinsic value.
  • Long-term strategy: Investing generally involves a coherent long-term strategy, designed to improve returns while reducing risk, tilting the odds of success in the investor’s favor.
  • Speculating is characterized by:
  • A bet on price movements: A speculation is a bet that the price of something will go up, not because of its intrinsic value, but because of how much someone else might be willing to pay for it in the future.
  • No benefit stream: Speculative assets generally do not produce any stream of benefits or cash flows for its owner. For example, a bar of gold will never produce a product, pay a dividend, or remit a coupon payment to its owner.
  • No intrinsic value: Because there is no benefit stream, there is no way to conduct an analysis to arrive at an estimate of value.
  • Zero-sum game: Speculation generally involves placing bets against other market participants. To succeed, you need an informational advantage over those other participants, or you need to be lucky.

    • At Core Wealth Management, one of the cornerstones of our investment approach is that we INVEST, we do NOT speculate.  When we consider potential investments to include within our clients’ portfolios, if the “investment” does not meet the “investing” criteria above, we, quite simply, avoid it.

    Why?  Because investing is much more likely to produce a better investment experience over time than speculation.  This is especially true for individuals funding a long-term liability such as retirement.  While speculative crazes come and go, it is long-term investments in great companies that will give us the greatest likelihood of achieving our goals.

    Core Wealth Management is a fee-only wealth management firm located in Jupiter, FL. Our CFP® professionals provide investment management, financial planning and advisory services, while always strictly abiding by the highest fiduciary standards. For more information, contact us today at 561-491-0231.

    Core Wealth Management is a fee-only wealth management firm located in Jupiter, FL.  Our CFP® professionals provide investment management, financial planning and advisory services, while always strictly abiding by the highest fiduciary standards.  For more information, contact us today at 561-491-0231.

    Todd Schanel, CFP®, CPA, CFA is the Principal and Director of Investment Advisory Services at Core Wealth Management.

    The material provided is for informational purposes only and should not be construed as financial, legal, or tax advice. All investments carry risks, including the loss of principal, and we encourage you to consult a qualified professional for personalized guidance. Click here to view our entire blog disclosure.

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