Investment Strategy Problem #2 for Retirees: Investing vs. Speculating

Are you investing or are you speculating?  There’s a very big difference and it could be costing you dearly!

In the last editions of RETIREMENT GAMEPLAN, I shared the story of Ron and Rita and the damage they did to their investment results because they didn’t understand this crucial distinction.   

One of the main culprits which led to the horrific investment results achieved by the average investor over the last 30 years was speculating instead of investing.  In this edition, I’m going to share the costly difference between the two and how you can determine which side of the fence you’re on. 

As a refresher, here’s what The 2020 DALBAR Quantitative Analysis of Investor Behavior study on the results for the 30-year period from January, 1990 through December, 2019 revealed:

  • The Average annual return of the S&P 500 Stock Market Index from was 9.96% (including dividends reinvested)
  • Over the same 30 year period, the average annual return of the “average” equity mutual fund investor (not investment, but an investor, i.e. a person) was 5.04%

What these numbers tell us is that, while the S&P 500 Market Index delivered a strong average annual return over those 30 years of 9.96%, the average stock mutual fund investor (a person, not an investment) only achieved 5.04%!

What you can’t help but take away from those statistics is that, while it makes all the news, markets or bad investments are not our biggest problem. 

The big problem is what investors “do” or their investor behavior which is driven by their “strategy” or lack thereof.

Are You Investing or Speculating?

The 2nd big reason why I believe the average investor earned 50% less than the market averages each and every year over the last 30 years is crossing the line from investing into “speculating.” 

What does that mean?

A speculator chases price trends

An investor chases value, and what investors know that speculators never know is that price and value are “inversely related.”

So, for example, think back to the early 2000s when high tech internet stock prices were going through the roof.

As their prices rose, the interest in them rose dramatically at the same time.  Investors continued to pour more and more money into high tech internet stocks.  And, nobody was buying what was then referred to as “old economy stocks” like Berkshire Hathaway.

What Speculators Get Wrong

Speculators always respond to price.  And, this means on the way up and on the way down.  They believe that the risk of a particular investment goes down as the price goes up.  So, as the price goes up, the risk appears “lower” to them.

Conversely, as the price of an investment drops, they believe the risk goes up thus leading them to sell it!

Let me repeat that because you definitely want to make a note of it. 

Speculators always respond to price.  And, this means on the way up and on the way down.  They believe that the risk of a particular investment goes down as the price goes up.  So, as the price goes up, the risk appears “lower” to them.

And, conversely, as the price of an investment drops, they believe the risk goes up thus leading them to sell it!

An investor, on the other hand, migrates toward an investment whose price has fallen because an investor knows that as price goes down, the value (and the expected return) of the investment goes up.

Understanding this subtle, but critical difference can make all the difference in your investment results, and your ability to achieve total financial independence and live the rich, full life you’ve earned!

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