Investing is a deliberate approach to making the most of your money over a specific period of time. Your investments should be balanced against your lifestyle needs – both present and future.
For example, if you have a life changing event in the short term such as a retirement then you should be investing far less aggressively than someone who is 35 who has just paid off all his debts and wants to save for the next 20 years.
Speculation is betting on returns. Particularly in a short space of time.
Here are three things to avoid which will keep you on a path of investing rather than one of speculation.
Using past performance to predict future returns
The big mistake is to take the historic returns of a fund over time and draw a straight line into the future. Returns are affected by many variables and
no one can predict these. If one could just imagine how easy it would be to make a lot of money. Economies and markets follow cycles and assets are affected by these swings over time.
Timing the market
Investing is all about compounding the returns achieved over time. Speculation is about trying to time the top and the bottom of the cycles of various markets. There is a lot of evidence using historic data that clearly shows that if you try and time the market you will get it wrong more times than right. Investors understand how markets move over the long term term maintaining the course through the ups and downs benefiting from the compounding along the way.
Borrowing to invest
Inestors will be aware of their exposure to debt as the cost of borrowing neutralises the returns they get from investments. If you have a credit card debt of 20% and get a return from your unit trust of 15% then effectively you are negative 5%. Investors will deliberate over short, medium and long term objectives ensuring their exposure to debt reduces sooner than later. Speculators will ignore debt believing that they can outperform the cost of borrowing over any time horison.
Investors realise that it all about time in the market. Speculators will bet that the can achieve high rates of return without losing capital – especially in the short term.
Read more from Paul Roelofse at www.investforlife.co.za