Fund your Retirement

Retire like a tortoise

The difference between investing and speculating

Having recently started on our series of articles about ‘retirement’ we feel it’s essential to explain a few core principles that will underpin your retirement savings.  They will set the basis for all your future actions and guide you in terms of where you start to build your retirement wealth and how you go about doing it.

The first of these fundamental principles is to understand the difference between “investing” and “speculating”. You’ve likely never considered the difference before, nor seen the need to, but in the context of your retirement planning there is only room for one.

The discussion around investing and speculating ties in with a future discussion we’ll have on the “risk-reward” payoff, which we’ll get to in about three article’s time. When you get to this risk-reward article, it might make sense for you to come back to this one and read it again, in light of your new found appreciation for “if it sounds too good to be true, it probably is”.

Good retirement plans are supposed to be boring.

As we have stressed before, investing in a solid retirement plan is an exercise in patience and self-discipline. There will even be times when it gets downright boring. If in the years to come you step back and look at your retirement efforts to date and sigh at what a boring exercise it’s been, then chances are you’re on the right track.

There will, however, be times when it may seem attractive to depart from good judgment and go in search of shortcuts and things that seem too good to be true, only to discover that they in fact were. Speculation is attractive both in terms of the returns that it purports to offer, as well as the sense of progress it presents.

Shortcuts are usually longcuts.

Speculation has no place in a long-term retirement plan as its foundation is not based on the viable and long-term standard on which all sustainable retirement assets should be based: a determined value based on fundamental analysis of an income stream. In other words, it should generate an income return over time.

There are some exceptions to this, but this should be your safe definition until you’re more equipped to fend for yourself.

As you will see in our future articles, speculation is full of hidden risk that preys on your weaknesses and impatience. Speculation becomes even more dangerous the older you get, if you’re a late starter with your retirement savings.

Numerically speaking, early savers benefit the most from a sound retirement plan as they have the most time on their side. It’s when people try to find shortcuts that speculation creeps into your life.

We’ve listed below some pointers to help you figure out whether you’re an investor or a speculator.

You’re probably an investor if:

  • You take the time to research whether something is appropriate for your investing appetite and needs.
  • You consider what return an asset might give you over time: interest, rental or dividends amongst others.
  • If there is a solid prospect of earning a real return over the long-term.
  • You approach your investment decisions with the long-term in mind. You think of owning your underlying assets, and not essentially renting[1] Remember that long-term allows you to benefit from the massive force of finance – compound interest.
  • You’re not overly vexed by the ‘ups’ and ‘downs’ in the value of your assets
  • Your retirement plan leaves you feeling bored and you’re constantly scratching your head as why people think this is such a difficult exercise.
  • You need only make a few annual decisions about your investment, like ‘buy’ and rebalance your portfolio.
  • You legitimately expect reasonable

You’re probably a speculator if:

  • You’re lured by the ruse of a generous investment return, giving little thought to the underlying mechanics of the investment product, and are happy to dive right in, often tossing aside an existing retirement plan.
  • You base investment decisions on emotional ones: “Everyone else is doing it” and “I’d better hurry in case I miss the next price spike”.
  • You focus solely on the price of something and not on its core value[2]. You’re only interested in “making bank” when the price one day explodes into the stratosphere.
  • You think compounding is for people with too much time on their hands.
  • You panic when the price of your assets goes down and you rush to sell what you can before it gets worse.
  • Managing your assets consumes your time and attention, requiring you to make lots of decisions on a regular basis.
  • You’re trying to gauge which way the stock market will go and base your decision to buy something on that. Buying Sasol shares because you think the price of oil is going to go up is speculation.
  • Most of your time is spent ‘hoping’ for a high return.
  • You continually hold out for high
  • From time to time you dip into your assets to fund your lifestyle.

 So what is trading?

Trading is a verb that, in your case, should only ever describe the thing that someone else does at a financial institution, while investing your money. You should not be trading forex on your weekends, or trading anything else for that matter, unless it’s a collectible card game.

So what’s the difference between saving and investing?

We like to think of saving as something that you do to secure your short-term needs and wants. Like your emergency fund and a targeted savings account for your next holiday.

Investing is generally associated with the long-term and always applies to your retirement.

You cannot invest in a bank account or a money market unit trust as the prospect for a real return in the long-run just doesn’t exist.

Sounds like you really hate speculating?

There is a time and place for speculators to do their thing, but you should never be one where your retirement is concerned.

Some speculation is good. Among other things, speculators generally ensure that a fair price is established for shares on the stock exchange, allowing us investors to pay a fair price for something.

Left unchecked and when investors forget themselves, speculation can lead to price bubbles and large price crashes.

If at some stage you feel like you want to dabble in some speculative buying of something, be it unit trusts or shares, then by all means, but make sure that you don’t do it with money that you have earmarked for your retirement investing and preferably do it in a separate account, away from your retirement money.

Conclusion

Building and funding a retirement plan takes time. That’s the unfortunate reality of it all. There are no shortcuts.

With time behind you, even your boring RA, plodding along, year-on-year, can transform from mundane to magnificent. Besides, you’re far better off looking for excitement somewhere other than finance. Try sky-diving, downhill mountain-biking, or bungee jumping.

But get Life Insurance before you go.

The Editors

 

[1] Jack Bogle has discussed this notion of long-term ownership and short term renting.

[2] Over time the price of something as well as its intrinsic value should converge, but you don’t want to necessarily get caught in between when everyone else thinks the price is more than its intrinsic value.

1 comment on “Retire like a tortoise

  1. Pingback: My pension fund is dropping – Take charge of your money

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