Are You Investing or Speculating?

When I respond to the question, What do you do? with financial or fiduciary adviser. The follow up question is typically What investment looks good now? or I heard gold is the thing to buy. or What do you think of (fill in an individual stock or industry or country) ? or isn’t the market too risky right now?

The image of American economist Merton Howard ...
The image of American economist Merton Howard Miller (1923-2000) (Photo credit: Wikipedia)

These are all questions gleaned  from watching shows like CNBC. The talking heads on these shows continually extol the next great investment, such as, gold, annuities, commodities, a hot industry or a cold industry. These heads may explain why the market is going up or down. It all ends up with a prediction of the future.  Since the markets are more efficient than not this is a useless exercise.

The markets are random and unpredictable.

Investing is not ‘get rich quick’ that is speculating.  This confusion leads many people to fear the stock markets. When a certain stock or industry ‘crashes’ investors are frightened and sell all their stocks. Vowing never to return. Events like the 2008-9 crash are not the norm.

This should not keep you out of the equity market.

You must maintain a long term focus on the markets. If there were no risk in the equity market the returns would not be there for you to enjoy.

Remember, the stock market is the greatest wealth creating tool in the world, IF properly used.

Your goal, as an investor, is to accumulate sufficient wealth to reach your financial goals. This goal must include investing to more than keep up with the real inflation rate. This is why stocks and/or equities must be included in your investment plan.

One of the best tools to accomplish this is develop AND follow an investment policy statement. This investment policy statement acts as your guide during the inevitable ups and downs of the market.

Patience and discipline are your most important attributes to accomplish any goal. Yet, when investing,  they are the most difficult to follow during economic and market extremes.

Accomplish your long term financial goals by doing the following:

  • Own equities
  • Globally diversify
  • Rebalance

Markets have 101 ways to remind us of Nobel laureate Merton Miller’s observation:

Diversification is the investor’s best friend.

Rather than attempting to ‘beat’ the market, focus on improving your career or improving your personal relationships. The rewards will be much greater with far less anxiety.

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