By now, you’ve probably heard about the Gamestop/Reddit saga on Wall Street. Since there’s a Netflix movie coming about the topic, I won’t go deep into detail, but the short version is this:
A group of retail investors (individuals who manage their own investments), noticed and attacked a trend in the stock market. Some people felt that an opportunity arose to play against the large hedge funds and the war was on. It made national news and a ton of money changed hands over the course of a few crazy weeks.
In the end, there were still more losers than winners and life goes on, but what is the real takeaway here? Were all of those people investing or speculating? What is speculating, exactly, anyway?
Let’s dive in like Jerome Bettis through the gap for a goal line touchdown.
What is Investing?
First, it makes sense to define the words we’ll be using.
Investing is used as a broad term, but in the context of your retirement planning, wealth management, or any future goals with gains in mind, investing means taking a calculating approach to growing your money through compound interest.
Starting with assessing your own risk profile, an investment strategy can be tailored to match your comfort level and financial goals.
Investing typically involves something known as long-holding. By holding on to certain stocks, bonds, and funds, you can benefit from the overall upward trends in the market, rather than falling into the many dips that make the news.
True investment is thoughtful, minimizing risk to maximize returns.
What is Speculating?
Speculating can be very calculated as well, but is much riskier.
Data and research can dictate the movements, but speculating, by its definition, is theorizing without firm evidence. While that can result in a big win—such as buying Gamestop stock for $10 share and watching it rise to $458 per share—many more individuals who saw that rise and got in on the ride will lose money now that the stock has fallen back down.
Speculating in the stock market is at the highest risk levels, especially with stocks that have high volatility, which is a fancy way of saying they are all over the place.
Many dollars will be made (and lost) on speculation of stocks. For example, many people believe that Tesla is a speculative stock, since they don’t make as much money to warrant their market value as other companies do. The other side of that argument finds individuals who think that the company is more about the future technology, rather than sales.
Tesla is an example of a stock that is technically both massively speculative, but also an appropriate investment based on an individual’s risk tolerance.
Wait…they can both be good?
Financial terms can be tricky this way, like the Boise State 2007 Statue of Liberty play in The Fiesta Bowl (wasn’t that amazing?)
And while you might be thinking, “Oh, this is where this informational resource becomes a sales pitch…” and rolling your eyes, of course it is, because if you’re reading a post called Investing vs. Speculating, you can definitely benefit from some guidance on the matter!
A financial planner can help you navigate the playbook of your portfolio, surely, but a financial quarterback takes things to the next level.
While many of the retail investors of the world have made savvy picks, earned tons of money, and really beat the market, how many of them correctly tax-protected those gains, ensuring that none of their hard-researched dollars goes to a hefty IRS bill?
A typical financial planner may not also be a CPA. Tax protection + compound interest = your financial freedom.
Not to oversimplify, but the real difference between investing and speculating is knowledge. The more you know about the moves you’re making, the closer you’ll be to investing.
Speculating can be a valuable asset in a comprehensive strategy, much like Tom Brady still uses the QB sneak to get first downs, even though it makes no sense for him to take that damage.
You want to have every tool in the shed if you want to get the job done right. Right?
Investing can be intimidating, complicated, and confusing. The Financial Quarterback not only guides you through the entire play, but your entire game (cheesy alert)…of life! Truthfully, there is risk in both investing and speculating, but with QB$ under center for your next snap, you’ll have the most information at your disposal to make the best decision for you and your family.
Consultations don’t cost anything, so let’s talk about your financial future, your goals, and which plays make sense to get you down the field to score.