May 25, 2013
What defines the difference between an investor and a speculator? Why should you care?
What defines the difference between an investor and a speculator? Why should you care?
Investors do their research, identify the asset allocation that fits their particular situation, buy no-load index mutual funds, take emotion out of their decision-making, and re-evaluate their situation as needed. Speculators try to outmaneuver/outsmart the next guy. Whenever I make a decision in life, I like to be educated on the topic. If I act like a speculator, I will lose. If I take the time to educate myself (like investors do), I will become a wise and efficient investor.
Another fine answer, Katherine. The speculator is concerned with NOW. They want to make money quickly in the market and that generally means trading in and out as they attempt to time the market. This manic type of behavior increases cost as they pay commissions buying and selling and it also increases taxes as they incur short-term capital gains with every sale (that is if they actually made money). The speculator thinks he/she is smarter than the next guy (sorry Charlie, but you’re not). When you buy someone else is selling. When someone is buying, you are selling. Greed and fear play a big part in the life of a speculator.
The investor leads a much more sane and tranquil life. Just as Katherine stated, they identify their asset allocation, buy cheap no-load mutual funds (they never pay a commission) and then they rebalance every few years as needed to get back to where their asset allocation is desired. There is no timing the market. They don’t really care what the market does on a day-to-day basis. It is irrelevant to them. They simply set up their purchases automatically and let time and compound interest do their magic.
The investor sleeps well at night as they follow their plan which runs over years and decades. The speculator sleeps poorly as he has no plan and is concerned about his investments as they deal with minutes and hours. Do yourself a favor. Become the wise and efficient investor. You, me and Katherine can sit around and laugh at the hyperactive speculators that drive themselves crazy on a daily basis trying to figure out what to buy and sell. We know better.