January 14, 2021
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.
Understand the Difference
Speculating refers to the process of investing in high-risk, high-reward opportunities. During the gold rush in the U.S., those who left their homes and risked it all to try and 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 even buying riskier stocks.
Speculating itself isn’t necessarily a bad thing. It depends how much you risk. Even Mr. Wonderful himself, 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, speculating should just be avoided.
On the polar opposite end of the spectrum, we have investing. Investing is the process of putting your money into opportunities that carry an average or below-average level of risk. Investing 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 the 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 more 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, the chances are higher they are in a better position to recover from that loss.
What should you do if you’re not sure how best to balance your portfolio or how much risk you should be taking on? You may want to consider using a professional service to help. Apps like Beanstox rely on investment professionals to create portfolios with different levels of risk taken into account. By answering a few questions, including about your age, time horizon and risk tolerance level, Beanstox can recommend a mix of investments and risk levels appropriate to your goals and tolerances. It’s really that simple.
The Bottom Line
Hopefully, you’ve got some sort of 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 to building a portfolio with the right balance between risk and reward.
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