There is nothing wrong with wanting to make as much money as possible from your investments, but you need to balance your desire to earn with the risk you’re willing to take. You wouldn’t take all your retirement savings to Las Vegas and bet it all on one hand of blackjack because it would be too risky. By the same token, you wouldn’t stick your cash in a piggy bank and stuff it under your bed because that doesn’t offer any reward at all.
The balance between risk and reward in your investment portfolio comes down to understanding the differences between speculating and investing, and the relationship between the two strategies.
Understanding the Difference Between Speculating and Investing
Speculating refers to the process of investing in high-risk, high-reward opportunities. During the 1848 gold rush in the U.S., those who left their homes and risked it all to find gold out west were known as speculators. In today’s world, speculating can involve investing in things like futures, currency trading, options, cryptocurrency, and buying riskier stocks.
Speculating itself isn’t necessarily a bad thing, but it depends on how much you risk. Even Mr. Wonderful himself, Beanstox Chairman and co-owner Kevin O’Leary, has said many times that Shark Tank investments are but a small portion of his total investment portfolio. The key is to understand that speculating can be very volatile and involves a lot of risk. If you’re trying to limit risk, avoid speculating.
Investing involves putting your money into owning assets expected to bring in a return, usually with an average amount of risk. Typical investments include stocks, real estate, or other assets and are expected to appreciate over time. It doesn’t mean you’re giving up all hope and chances of earning a return, but it takes a much healthier approach to the risk vs. reward equation.
Technically, speculating is a form of investing. However, when the two topics are discussed together, investing refers to lower-risk, lower-reward opportunities like purchasing a home, investing in bonds, buying established stocks, and putting money into certain retirement funds.
Incorporating Both into Your Investment Plan
A term you’ll hear a lot in the investment and banking world is “balance.” A balanced portfolio is a collection of investments that have a strong foundation of stable investments and a few speculative investments that offer opportunities for bigger returns.
When it comes to your investment portfolio, it should be balanced as well. Where you are in your life and how much risk you can afford to take on dictates what the balance between sound investments and speculative investments should look like. For example, the closer you are to retirement, the less speculative chances you should be taking. Why? You have less time to recover from a major setback before you need to start using your saved retirement money. If someone in their 20s loses on a riskier investment, they are more likely in a better position to recover from that loss.
What should you do if you’re not sure how to balance your portfolio or how much risk to take on? You may want to consider using a professional service to help. Apps like Beanstox rely on investment professionals to create personalized ETF portfolios with different levels of risk considered. By answering a few questions, including your age, time horizon, and risk tolerance level, Beanstox recommends a mix of investments appropriate for your goals. It’s that simple.
The Bottom Line
Hopefully, you’ve got a plan in place to save for your future and retirement, or you’re at least in the process of creating one. Understanding the relationship between investing and speculating is a key first step toward building a portfolio with the right balance of risk and reward.