The words "speculating" and "investing" often get used interchangeably. And that's not surprising, since they describe somewhat similar concepts.
In both cases, you are laying out money with the hope of gaining a return in the future.
And to muddy the waters further, marketers are prone to use the words to either cast aspersions on or bring legitimacy to products. "Don't speculate on the stock market. Instead, invest in these collectible coins."
Most people will tell you that if you put money into something hoping for a short-term gain, you're speculating. But if your goal is to realize a gain over the long-term, you're investing.
Henry Ford described the difference this way: "Speculation is only a word covering the making of money out of the manipulation of prices, instead of supplying goods and services."1
In other words, you're not hoping your capital leads to greater output. You're just hoping the share price jumps.
Lifehacker financial writer Mike Winters says that the difference is more a matter of risk tolerance, with speculation being closer to gambling. "The truth, though, is that there is no clear cut line between them, as all investing carries risk."2
So rather than two clearly defined ways of handling your money, speculation and investing are at either end of a spectrum.
At the comparatively lower-risk end you may consider instruments like bonds, blue chip stocks, and certain kinds of real estate products. At the higher-risk end you have get-rich-today investments like penny stocks, volatile commodities, and leveraged funds. Each of these has the possibility of a sudden, substantial gain, but also carries a sizeable risk of losing your initial investment.
Winters points out that most people investing for retirement will want to steer somewhere in the middle. To preserve future purchasing power, you’ll need to pursue inflation-beating returns, but you don't want your nest egg wiped out because of a few bad bets.
"The stock market," he writes, "(has had) a historical return of roughly 11% per year, on average. The 'average' part is important, because the longer money is invested the more it will compound, making it less susceptible to short-term, double-digit dips in the market."
Even more important than knowing whether an investment is low-risk or high-risk, is knowing your own risk tolerance.
Winters concludes, "And since so much depends on your age, financial status, and retirement goals, consider consulting with a financial advisor to walk you through the trade-offs that come with investing and speculating."
Your trusted advisor will not only help you create a long-term plan, and help you understand how your investments are working in concert toward your goal, but he or she will also hold you accountable to stick to your roadmap when "opportunities," volatility, and other distractions are tempting you to change course.
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