Are You Speculating, Gambling, or Investing Your Money?

by financialmom on June 18, 2010

in Gambling, Investing

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Are you speculating, gambling, or investing your money?  Do you know the difference? Is it possible you could be speculating and/or gambling with your money, and calling it investing?  You bet it is.

Although there are many definitions and disagreements as to what speculating and gambling are, there are some clear signs you are speculating and gambling with your money, versus investing it.

Gambling

Most of us probably define gambling as activities shown in the picture above, doing things like buying lottery tickets, going to casinos – in other words, playing games to win money.

Gamblers live in the illusion they are in control. Statistics prove you are not.  The thing about gambling is, you are putting your hope on a completely unknown variable called luck.    If you don’t agree with me, read the fine print on the back of any lottery ticket to see your odds of winning.

What is so exciting about gambling? Gamblers believe they can predict the future, beat the odds, and with these special gifts, gain a profit.   Does any of this begin to sound familiar?

Speculating

The speculator, on the other hand, is supposed to be smarter. The speculator uses data and research, along with rational thought, to determine where the best opportunities are.  They take a calculated risk.  Speculators are willing to take a higher risk, anticipating a greater return, and understand they could receive a greater loss.

This supposedly makes it all okay.  Speculators apparently have not read the fine print either (you know, the fine print on the back of every financial prospectus) that says past performance is not a reliable indicator of future performance.

Signs You Are Speculating or Gambling

Here are the signs you are speculating or gambling with your money instead of investing it:

Emotion

If you are basing your investment decisions mainly on emotional reactions to market conditions, such as fear (the markets are going down!), or greed (the markets are going up!), you are not investing.

Following the Crowd

If you are making investment decisions based on office conversation, or your brother-in-law’s recommendation, or anyone’s insistence that everyone’s doing it, you are not investing. By the time these types of conversations take place, chances are you are violating the cardinal rule of investing – buy low, sell high.

Listening to the Media

If you are getting your investment recommendations from magazines, TV, and the internet, I suggest you do a little due diligence before you invest - simply check out the performance of the investments these media outlets recommended a year ago.  Don’t tell me you are surprised either when you see the data.   I’ll say it again, no one can predict the future!

Stock Picking

If someone tells you they have superior knowledge of the financial markets and can pick the next hot stock winners, run. Studies have proven over and over that this is not the case.  Even so-called financial gurus have not been able to maintain their performance over long periods of time.

Market Timing

If you are jumping in and out of the your investments, thinking you can predict the ups and downs of the market for a better overall performance, think again.

What really happens is this – the markets go down, investors sell, and lock in their losses.  They then wait until the markets “look good” again, and jump back in.  Selling low, buying high – again very hazardous to your financial future.

Track Record Investing

If you are picking your investments based on the number of “stars” they have received from a financial ratings agency (star gazing), I’ll again remind you that past performance is not an indication of future results.

There are many other factors that need to be considered when purchasing an investment, the big one being costs – commissions, turnover, and internal costs (such as trading costs) not visible to the investor.

For more interesting history on gambling, speculating, and investing, read the book The Big Gamble, by Jose Roncal and Jose Abbo.  You also can listen to my radio show on this subject or download it to your Ipod on ITunes.

New Profile Pic 2599R Are You Speculating, Gambling, or Investing Your Money?Pamela Otten is CEO of Pamela Otten LLC, a Registered Investment Advisor. She loves to work with women business owners and entrepreneurs, and women in transition due to job change, death, or divorce. Pamela will help you set and reach your financial goals, educate you to understand your investments, and teach you how to do more charitable giving. Pamela is a Qualified Kingdom Advisor (www.kingdomadvisors.org), trained and committed to integrating biblical principles with her investment advice.

cc smallest Are You Speculating, Gambling, or Investing Your Money?Photo Credit – Mike Licht

Financial Planning, Investment Advice, and Investment Management provided through Pamela Otten LLC, Registered Investment Advisor.

The opinions voiced in this material are for general information only, and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, please consult your financial advisor prior to investing.

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