- When we invest, we were expecting our money to grow
and earn us a return of some sort over time.
But unfortunately, no one can truly predict
the future with 100% accuracy.
Since this is the case,
when we put our money into something,
with an unknown outcome, are we actually investing?
Or are we speculating that the value will increase?
So then what's the difference
between speculating and investing?
And how do you make sure that you're actually investing
and not speculating, so you don't lose all of your money?
We'll cover all of that and more in this video.
Hey, I'm Jarrad with an A, and on this channel,
we talk about all things personal finance,
investing and financial independence.
Let me be clear up front, you can make money speculating,
and you can also make money off of investing as well.
The difference between investing and speculating,
lies within the amount of risk that you're taking
by putting your money into something.
Risk is a tricky one though,
because all investments come
with some sort of inherent risk.
If there was zero risk and a guaranteed return,
then everyone would be putting their money into it, right?
And we do, Savings Accounts are the perfect example.
Before money is put into the account,
the bank has told us that they guarantee
a certain return on our money.
They even have the option to change that rate over time
if they need to.
The reason they can guarantee this to us
is because they are 100% certain,
that they're going to be able to earn a higher return,
that will cover the interest that they'll pay us,
by using our money for themselves.
The risk is so small,
therefore the returns they give us are super small as well.
Most of the time, our return doesn't even keep up
with inflation, so technically,
we're losing money when it's in the bank.
But this is the price that we pay
for the zero risk rate of return.
Our money isn't going to grow,
but it's gonna be safe.
For the most part when you invest in something like stocks,
bonds, index funds, mutual funds and rates,
and you plan on holding them for a long period of time,
you're taking on low to average risk.
By long period of time,
I'm talking about three to five plus years,
within each of these assets classes,
there are additional levels of risk
depending on how that asset class produces a return.
But when you buy and hold them,
you're not speculating that the price will go up
in a short period of time.
We'll talk more about the additional levels of risk
and how to spot a speculative investment in a second.
Just a quick summary,
investing is when you buy and hold an asset
for a long period of time,
with average to low risk.
Speculating is when you buy and hold an asset
for a short period of time with a higher risk.
Since there's a little bit of grey area with speculation,
we have three ways to determine
whether or not an investment is speculative.
The first is with what goes into value in the asset.
How is that asset going to turn a profit
which in turn will grow your money?
The example that we're gonna use for this part,
is a cryptocurrency like Bitcoin.
Crypto investing has become so common nowadays
that I figured it would be easy for everyone to understand.
I made a comment in passing within a past video
about how Bitcoin is speculative,
and technically not an investment.
Now I had a few people,
get a little butt hurt and flip out on me a little bit.
It made me realize that there's a lot of people
who have no clue what they're doing
when putting money into something like that.
So I figured that it would be the perfect example
to explain why right here.
We can't deny that Bitcoin has value, because it does.
It's a currency that can be traded for goods and services.
But that doesn't make it a non speculative investment.
It makes it money, just like these $100 bills
that I have right here.
For something to be an investable asset,
and not a speculative asset,
we need to look at if that asset produces anything
that will in turn increase its value.
In the case of something like cryptocurrency,
it doesn't produce any additional value
beyond the current market price.
The current price of one Bitcoin,
is only determined by supply and demand.
That's the only way the price goes up or down.
Outside of this, the only way the price would go up or down,
is if additional Bitcoin was created.
At this point, there's only 21 million Bitcoin
out there in the world right now.
And there's most likely not gonna be many more created,
because it's very labor intensive to mine Bitcoin.
Because of that, when you quote and quote,
invest in cryptocurrency, you're speculating
that the price will go up.
Because there is no real way to evaluate
the true value of the currency.
If we look at a company like Apple,
we can make a sensible argument
as to whether or not the value of the company,
will go up or down and why.
Which in turn would increase or decrease
the price of their stock.
If they release a whole new product like the AirPods,
we can expect sales to increase.
If they release a new groundbreaking feature
in their iPhones, then we can expect sales to increase.
The value of Apple will in turn go up,
because it's based on revenue from a real company
that actually sells products and services.
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The next way to determine whether an investment
is speculative or not,
is based on the amount of time that you plan to hold it.
We could take any good investment like an index fund
and turn it into a speculative investment,
by buying and holding it for a short period of time.
In this case, you can think of something like day trading.
That's where you buy an asset like a stock,
with the intent of selling it very quickly.
Someone who does this is trying to make money
based on those slight increases,
and decreases that we see in the stock market
on a daily basis.
Since the stock market is so volatile in the short term,
when you only plan to hold something
for a short period of time,
you're automatically introducing that volatility
into your rate of return.
It's very difficult to successfully make money
in the short term.
When you hold an investment for the long term,
you're less concerned with what it's doing on a daily basis,
because you're introducing a longer time horizon.
The more amount of time that you add to this equation,
the less you'll even notice those constant ups and downs
seen in a short period of time.
Think of it like looking at the ocean from above,
when you zoom out far enough,
you don't see how choppy the water actually is.
But if you zoom in a lot closer,
you can see the waves and how it's constantly moving up
and down and back and forth.
The next way to determine whether or not
an investment is speculative,
is with how risky an asset class is,
based on the nature of what it does to produce a profit
and also its size.
As I already said before, Bitcoin is very risky,
because it doesn't produce anything of value.
Now what about something like a stock
that's tied to a company
that produces products and services.
For this example, we're gonna look at small
and mid sized companies whose stocks
are traded on the stock market.
Now these are usually referred to
as small cap and mid cap companies,
and would be considered speculative investments.
Not at the same level of speculation
as something like Bitcoin,
but it's still on the same spectrum.
The smaller a company, the more risky it is to invest in.
The main reason is because of the fact that
it's not as established as a large company like Amazon,
Home Depot, or Verizon,
Their size at this point is limiting them
from being considered a stable business,
that's gonna be around for many, many years to come,
and produce profits on a consistent basis.
But just because it's smaller,
doesn't mean it's not a good company to invest in.
It just means that it's a lot riskier because,
we don't truly know how they'll perform in the future.
We know that for a large company like Amazon,
to go out of business, it's gonna take a long time
since they're well established
and have multiple streams of revenue.
If you think about it, all of today's large cap companies
at one point, were considered to be
small or mid sized companies.
Over time though, they've expanded their businesses,
offered new products, services
and have positioned themselves
to be successful going forward.
It's fairly risky to invest your money
into a smaller company because
we don't know which ones are going to be
the next Amazon, Home Depot or Verizon.
That's why it wouldn't be a smart idea
to put all of your money into a small or mid cap company
or index fund, due to the high level of risk.
Most people are gonna have more money in large cap stocks
or index funds, and just a little bit
of their portfolio dedicated to something
like those small or mid sized companies.
There's nothing inherently wrong
with doing some sort of speculative investing,
as long as you truly understand the risk that you're taking.
You should be okay with the potential
of this money going to zero,
due to the high risk that's involved.
The only suggestion that I would give,
is to make sure that the amount that you invest,
isn't a large portion of your overall investment portfolio
or net worth for that matter.
I've seen people put all of their cash into Bitcoin
expecting to get rich really quick,
and it doesn't end up very good.
Personally, I would not invest
more than one to 2%,
after I've built up a nice established portfolio,
utilizing taxed advantaged accounts.
If you want to know when to invest
in certain investment accounts,
I'll throw a link in the description of the video
that I made on that topic.
To be transparent, I'll probably put a little bit of money
into Bitcoin, at some point in the future,
but it's gonna be a very, very small amount
that I'm willing to lose.
And I'm also gonna buy it the real way
as opposed to going through an investing app
like Robinhood or Cash App.
Watch these investing videos to your left,
next that I put together specifically for you,
check out the description for more resources and playlists
to help with all,
to help out with all of your personal finance
and investing needs.
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I'll see in the next one friends, adios.