How do you make your money work for you? Do you take it to the casino and bet on black? Do you have fun at the race track? Do you save into your 401(k) and put the money into an index fund? Or do you buy individual companies each week on Robinhood?
Each activity may win or lose you money in the future. Does that make it investing, speculating, or trading? Each word means something different and it’s important for you to understand how you are using your money.
Let’s give a quick breakdown:
- Trading: Exchanging assets of value in the hopes someone will pay more than you did.
- Speculating: A wager that you will receive some payoff in the future
- Investing: Using knowledge and research to make an educated allocation of resources.
I see a lot of speculating under the guise of investing - and that’s dangerous. The risk of speculation not only includes the potential to lose money but also confusing luck with skill. That can lead to risking too much of your hard-earned money in irresponsible ways.
Make sure that you understand how you are putting your money to work.
Mike: [00:00:00] Welcome to financial planning for entrepreneurs and tech professionals. I'm your host, Mike Morton chartered financial counselor and financial advisor. Are you speculating trading or investing your money? The language you use is extremely important for understanding the framework and potential outcomes.
Find out the difference on today's on-air radio show with Matt Robeson.
Matt: [00:00:24] I'm Matt Robinson. Please check out all of our podcasts at beyond politics, podcast.com or wherever you get your podcasts. And don't forget to subscribe. We really do appreciate it. I'm welcoming back as always, Mike.
Of Morton financial advisors, Mike, how are you?
Mike: [00:00:44] doing well this morning Matt though. It's been a bit rainy recently. When will this rain end
Matt: [00:00:49] You are a master of understatement as always. I can imagine the people who lived around Noah saying, it's been a bit rainy recently. When is this going to end? And the answer being a little disappointing. I don't know. But look, things go up and down, which is a, not a bad segue over to the world of investing.
And one of the things that's hard to deal with. In the investment world is the fact that things do go up and down. It's really hard to have the steely nerve, to watch things fluctuate in the market. And it introduces to me the topic you wanted to hit on today, which is the distinction among trading speculating and investing and the different approaches and mindset one needs to have.
Depending on which way you're looking at what you're doing. First of all, could you just lay out what is the difference between trading speculating and investing?
Mike: [00:01:43] Yeah.
this came about, I was reading a recent. Article in the wall street journal by one of my favorite writers Jason's wife who was lamenting about this, that the journal often use the word investing no matter how people are using their money in order to make money. And they would use the word investing, , of course you wouldn't use it for horse racing per se, but even if it was like, Hey, I'm going to invest in cryptocurrencies or many people are investing in cryptocurrencies and are they really investing or are they speculating?
And so it was a really cool article and it brought it to mind that it's important to know the difference in how you're using your money. To make additional money because you want to have the right approach. So using the wrong terminology might lead you down a path over many years or many decades where you'll be.
Underwhelmed with the performance of your portfolio, or you won't make as much as you were hoping to. So let's talk about those three words, trading speculating and investing, trading pretty straight forward. In terms of just starting us off, it's trying to exchange an asset of value in hopes that someone will pay you more.
You are trading one type of asset for another. And you're hoping by buying an asset, you'll be able to trade it through someone else. For more value. Speculating is a wager that you will receive some payoff of higher value than you put into that asset. So you're speculating that it's going to grow or that someone again will pay you more for that in the near or far future.
And investing is using knowledge and research to make an educator. Allocation of resources. So you were investing in things that you have researched things that you know, and understand, and with the hopes of course, that it will make more money.
Matt: [00:03:29] Got it. I can already see how at the very least it's useful to be clear with oneself and to delineate among the terms. It sounds to me like. You're not making any moral judgements here. It's not like any of these things. These activities is bad, wrong, or morally superior to another. It's just a matter of clarity.
It's a matter of understanding what you're about.
Mike: [00:03:54] you want to know which of those you're engaging in with which sets of money, because you want to have reasonable expectations about.
how it's going to work out so very quickly, if I was going to say Matt, let's go to Vegas and put some money down on the roulette wheel and put it on black.
You'd say, okay, I quickly understand what's going to happen with that money in a matter of less than a few seconds, it's going to either. Double or it's going to turn into zero. Okay. I know where to place that mentally, that amount of money, maybe I'm comfortable at 50 bucks, a thousand bucks, maybe $0.
I understand that. But when you're saying investing in a single company or a fund, that's low-cost index. Or in cryptocurrency, how do you mentally compartmentalize that and say, this is this type of money . What are the chances? It goes to zero where the chances of doubles, one of the chances that chugs along for many decades, you want to make sure you understand where that money is and how it's going to work out for you. Yeah.
Matt: [00:04:48] it's true. I would never say, Hey Mike, you want to go to Vegas and do some advance. That would be, that'd be a lot of fun for the same reason. The movie trading places just wouldn't make as much sense. If we said speculating places. Let's talk about trading for a second, because as soon as you gave sort of the definition of trading, I actually thought of that.
Trading places. And I thought, the little speech Dan Akroyd gives to Eddie Murphy, it's look, it's just buy low, sell high. That's pretty much it. That sounds like pretty much what you're describing here. So let's talk trading. What do we need to know about trading? Is it just buy low?
Sell high? Yeah.
Mike: [00:05:23] Basically. Yes. So that's the easier one to tackle because speculating versus investing, we'll get into maybe a little bit more, but trading is simply that you were purchasing an asset and hoping that it's going to go up in value and then sell it in the maybe near future or far future. So these could be things, any type of asset, of course, traders, quote unquote, the public stock market, trading individual stocks or funds, but it could be real estate.
It could be artwork, collectibles, you buy something, some art and hopefully you can, sell it for more future. If you were in the business of trading assets, you sorta know you're in that business. And I use that word specifically because this is something you're going to be spending quite a bit of time.
Understanding, whatever the assets are trading, understanding them and spending your time for making those trades. So whether it's an hour, a day, an hour a week, whether it's full time, you were in the business of trading and making money by doing trades
Matt: [00:06:22] and there are people who their job is to day trade. And they're doing a little bit of speculating. They're doing a little bit of investing, but really what they're trying to do is find those little margins and they're really focused. The trading aspect of it.
I think it's worth mentioning just from a practical standpoint, that it used to be the case that you really did need to pay someone to do trading for you. Now there's all kinds of ways that you can do it at an ultra low cost. So if what you're interested in doing is trading, it sounds to me like it's important.
If that's what you're about, it sounds like those fees that you pay. To execute. Those trades become super important as part of that activity.
Mike: [00:07:04] well, everything becomes important. The fees of course, and day trading became a thing 20 years ago or so because of the reduction in fees and the online access and the internet. Now you can sit at home and do this. And so it became more of a thing. So with the public stock market, of course, We have an understanding of what traders are doing day traders.
And they're trying to make money by exchanging trading your own time, in terms of trying to make money for that time. By sitting there online and watching the screens and doing those things, activities, and that's perfectly valid. And so that's why I started with trading because it makes more sense, like you said, speculate and invest.
Those are going to, run a little bit different realm than sitting there and doing trades making trades. Now, in terms of that, to understand that the trading you're going to have a system for that, everybody's going to have a system, whether you're trading real estate assets, or artwork or baseball cards or public stocks, hopefully you have a system you're not randomly, just buying things that, that strike your fancy.
And then, turning around and trying to sell them for more next week or next month or next year, hopefully I have a system you've got spreadsheets, you've got data, you've got a way to go about these things. And so that's where trading has that system. And whereas speculating and investing may have less of that.
So the traders, I'm not as quote unquote, worried about, you kind of know what you're getting at.
Matt: [00:08:23] It also seems like there's a little bit of a suggestion in this distinction of timeframe if you're trading and especially if you're day trading, it's right in the name of it, you're looking at a shorter term. Window here in order to achieve those margins. But you suggested a moment ago that for most people, the distinction between speculating and investing is going to be the more important one.
I get the sense that most of our listeners here are not really going to be day traders. They're not really looking to do a lot of volume of turning over with the assets that they're holding onto. So let's, turn to speculating versus investing for a second. I'm speculating. What are some examples?
Of instances of speculating that people might confuse with investing.
Mike: [00:09:09] So when I use the word speculating, what we're getting at is that as an individual, putting your money into an asset and without doing necessarily a lot of research, that's what the word speculating means. Okay. So now this could be anything really, but let's keep it in the stock market.
So it could be the public stock market, an individual stock or company you think, wow, this thing's going to the moon. It's been growing really fast. I'm going to put my money into this individual stock. If you have not done fundamental research, you don't know exactly what their business plan is for the next five years.
You've read their financial statements. That's speculating. That's just simply saying, I think this will go up in value. And so I'm going to put my money into that. So that could be a single stock or a single business that could be cryptocurrencies will be the big one these days. Everyone's talking about, Hey, I'm gonna buy some Bitcoin because it's been going up like crazy. But again, if you don't understand the future value of that is in fundamental research, then that is the definition of speculating.
Matt: [00:10:12] Are there segments of, and I'm going to air quote here, even though it's useless for our radio and podcast listeners, are there areas of investing that. Almost, they almost become speculating because there's really no amount of research that you can do to deal with the fluctuations, the variability in asset value.
I'm thinking about crypto here. I'm also thinking about. For example foreign investments, foreign stocks, where , there's only so much information you're going to be able to get, and it really begins to become, look, there's not a rational way to predict the future or to even have a thesis about it.
And so what you're saying is I'm letting go of the rope here. I can just say, I know that cryptocurrencies have a lot of fluctuations. I'm just hoping to get lucky here. And if you know that going in, this is a separate question. So is that true? And if you know that going in, is that okay?
Mike: [00:11:12] everything's okay. I'm not here. Like you said, I'm not here to make a judgment , however you want to use your money in whichever assets you want to put your money into. I think that you highlighted exactly the difference though, is that there's always a way of creating a thesis, right?
There's always a way of saying here's what I expect again, let's go back to the Las Vegas. Okay.
Almost 50, 50 chance. I double my money or it goes to zero. I know how to think about that. So the same is true with any of these that you should, if you want to invest, you should always have a thesis and a process for what you expect out of that money.
So in the cryptocurrency, you could say that Matt. I don't really know my thesis is X, Y, or Z that something's going to happen. And therefore I'm going to put in a, a thousand dollars and depending on what happens, I will, react or make a further decision. That would be fall in the realm of investing.
You've got a thesis. You go in with amount of money, you have a process for how you might add to that money or reduce that money or get in and out that if it's very process oriented and you were thinking about the future, Then that is much more along the lines of investing, even if it's very hard, given market forces, economic forces, pandemics, you never know what's coming next.
That's always true. But going in with them, a process and a thesis and an understanding of what you might do, depending on the outcome is much more along the lines of investing than just going in and saying, oh, this thing's hot. I'm going to put money into it.
Matt: [00:12:41] So without making any of those moral judgments, although by the way, side idea for you, you should start a business called stern lecture, financial advisor. See how many people sign up for that? Without casting any aspersions. What are the risks and dangers of speculating and should people really be doing it, given those risks and dangers
Mike: [00:13:02] Yeah, absolutely. I think if you go in with eyes wide open, then it's fine. , but the dangers
of speculating when you think you're investing. All right. So now everybody listening can think, Hey, here's where some of my money is. Is that a speculation or is that investing right now? You can start coming with this distinction.
And the concern is that. If you're really doing speculating with your money and not investing, so you've got $10,000, you've put a couple of thousand at a cryptocurrency. You put a couple of thousand to Airbnb, a couple of thousand into Google and Amazon. And you think I'm investing for the future and you haven't done fundamental research on all of those or have a thesis or a process or anything that we've talked about.
Then you may or may not get. Most returns on assets are a matter of luck. And of course, and go back to the horse racing or Las Vegas trips. Obviously we understand luck, move up. The spectrum individual businesses can get very lucky or unlucky depending on regulatory risks, changes in the economic environment, the market environment.
So a lot of your return. Turn out to be lucky when they are narrowed down to a single stock or a single asset. And the risk is you think, oh man, I've been killing it for five years. I know what I'm doing. Okay.
When you've really been speculating and not investing.
Matt: [00:14:19] If you were to flip a coin 50 times over time, someone is going to get 50 heads and if it happens to be you, you might think that you've got a special skill. You don't that's okay. But you don't. So I can see what you mean. Like you don't want to get into your own head about this.
And it's interesting to me because. I could almost see people going through the example. You just laid out in the saying, all right so I have a little bit too much of my money in crypto or something. That's really more of a speculation. So what, and I think that kind of betrays the psychology of people don't value, not getting something in the future.
I'm using a lot of double negatives here. People don't value a failure to make a gain as much as a loss. And I think if you just turn it around in your own head and say to yourself what if I took your 10,000 bucks? And then I just assessed a fee of $500 on you. A nice, solid 5% on you.
You wouldn't like that. Took $500 your money. That's essentially the same thing that you're doing. If you're putting way too much of your assets into something, that's a speculation way, too high of a risk, but people don't tend to think of it that.
Mike: [00:15:35] that's Right,
it's hard to predict the future. It's hard to predict your future selves. We. Estimate the amount that we will change in the future or the amount that our assets will change in the future. So in terms of speculation, yeah. You're risking a lot of money when you are speculating versus investing.
And it does all come down to timeframes. So one thing I like to think about too, Matt is not a, oh, you might lose 10%. Of course we never want to use percents. Let's use, oh, you've got a $10,000 in cryptocurrencies you might lose $3,000. How would that feel? The other way to think about it is put it this way.
You were hoping to go on a nice beach vacation next year. You will no longer be able to go on your beach vacation.
Matt: [00:16:18] right.
Mike: [00:16:19] How does it that feel so,
Matt: [00:16:20] The more tangible, the better.
Mike: [00:16:22] Exactly. Exactly. So we try to always put it in terms of that understanding. So that's a great way of thinking about it, Matt. So if you're listening.
You can think about some of your money that is in more speculative versus being invested for, across a low cost index fund portfolio. And think about how much money might be at risk, depending on if it goes down or goes down.
Matt: [00:16:45] You're essentially paying more for the privilege of taking on that risk. So how, what about the other side of the coin then? How do you distinguish investing? How do you think about and define that?
Mike: [00:16:59] so luckily there are a lot of great tools now , people could be out there saying exactly that question, Matt, how do I? Okay. You're telling me, I need to spend some time doing fundamental research and having a thesis and a process I want to do. So the good news is you can just rely on a lot of the academic research in terms of public stock markets or public markets and investing.
And there are now very low cost tools to be able to easily rely on that research and invest based on that?
research. So that's where I always start. You can have simply a two or three. Portfolio or even a one, the target date funds are fantastic. They are spread across thousands of companies, super low cost.
And that's where the academic research has lots of papers about, yeah, this, this tends to work out for everybody over the longterm, assuming capitalism still works. So you can just invest in that and set it and forget.
Matt: [00:17:54] There's always a temptation. And to me, this stands out as part of the distinction between speculating investing. There's always a temptation to say look, if the whole crowd is doing it, then how are you going to do a lot better than the crowd? If everyone's doing it, I sound like the color of money.
If everyone's doing it, then everyone's doing it. But you're going to get what everyone gets and, that might be humdrum. But I think that's your point in a way, is that yes you want to be grounded in kind of what the vast bulk of investors and the market is doing because over time you are going to realize.
Even normal returns are very solid and they're going to help you accomplish your goals. And sure. If you go off on your own path and you do things that are more speculative, you do things that are cutting edge small firms. You put your money into a new enterprise that your cousin is starting.
You could make abnormal returns. But you also could pay a lot for the privilege of trying to get those abnormal returns. And you're probably not going to
Mike: [00:19:00] There's no free lunch out there. So it's annoying to just think, oh, I'm just going to get what everybody else gets. It's so boring and frustrating. And I get that. But Yeah.
Also the good news is it costs you no energy whatsoever. You never have to think about it. So that's a huge bonus.
Now, there is the fear of missing out. We've talked about this before that, know, you're going to keep reading, these different assets, whether it's a cryptocurrency or a stock or a new IPO, that's just going bananas and ah, shoulda, woulda, coulda, I thought about doing that and didn't do it.
So I'll do the next one. Okay.
You might, but in aggregate, You're not going to do as well. And the other thing to think about is in terms of just getting those market returns and how boring it is, you're also missing out on fees. You're massively missing out on trading fees. Other fees in terms of investing on hedge funds or higher cost index funds or targeted funds or whatever it is you are missing out on the wall.
Taking your money. You get to keep all that money just by being in that super low cost target date, fund, or index.
Matt: [00:20:05] one final question for you. You delivered a really interesting insight on a previous episode, we did that. You really shouldn't think about your home. As an investment and most people do, they think of it as real estate. They think about it as an asset that they're investing in and people talk about the value of their homes and flipping homes and et cetera, really fascinating, important insight.
Don't think of that, way. Are there other examples of things that people think about as investments that really aren't.
Mike: [00:20:35] that's a good question. The housing, yeah. Is the first one that comes to mind. It really depends, lot of things could be like your artwork and collectibles could fall in that. If you're not going to get rid of them, if you're literally just collected. Then it's not an investment either.
You know what I mean? Maybe for your errors. But if it's things that are not part of, if you're not going to use the money in the future for living on, then it's not really an investment for the future.
Matt: [00:21:01] Mike Morton financial advice. Thank you so much.
Mike: [00:21:04] Thanks, Matt.
Thanks for joining us on financial planning for entrepreneurs. If you like, what you heard, please subscribe to and rate the podcast on Apple iTunes, Google play Spotify, or wherever you get your podcasts. You can connect with me on linkedin or mortonfinancialadvice.com. I'd love to get your feedback. If you have a comment or question, please email me at firstname.lastname@example.org. Until next time thanks for tuning in