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Whenever you make a financial decision, big or small, you are making a choice. You are either consciously acting on your financial plan, or you are reacting to the current environment.
Consequences will follow your choice, so take care.
Investing vs. Speculation: Understanding the Difference
Almost every financial question you face comes down to one simple question: are you an investor or speculator? In other words, are you really acting on a financial plan based on your specific long-term goals, or are you guessing about how economic events will unfold in the future?
If you are following a written financial plan crafted specifically for you and in no way contingent upon market conditions, you’re an investor. If your plan is hedged due to economic, stock market, or political circumstances, you’re a speculator.
The distinction between being an investor or speculator is dynamic. If you originally make a long-term investing decision, but later liquidate the investment because of changing economic circumstances, you’ve now drifted firmly over to the speculator side of the street.
Particularly for men, there’s also a certain “stubbornness factor” that comes into play when making investment decisions. Just because you can change a flat tire, or fix a leaky faucet doesn’t mean that you can predict the stock market. Many times, this realization is difficult to accept.
The truth is, you don’t have to know what the future holds in order to be a successful investor. You can make plenty of mistakes and still have good long-term results. Every single decision doesn’t have to be a winner because usually a small percentage of your investments will make up for the poor choices.
Understanding “Rational Optimism”
Once you accept that the future is unpredictable, a whole new financial world opens up. Instead of guessing about the markets, you can lean on market history and data to provide a roadmap for investment decisions.
Life is full of surprises, and even high quality financial decisions can sometimes produce poor outcomes. There are lots of ways to define surprises, but essentially they are things that you don’t see today.
Rational optimism, or as Dimensional founder David Booth puts it, “science-based hope,” should guide you in making investment decisions.
Money choices should always be made against the backdrop of what you are trying to accomplish financially. Not what you want next week or next year, but rather what you want to achieve over the next 15 or 20 years.
Practice Conscious Decision-making
It’s not unusual for us to see clients who have difficulty describing how they made particular financial decisions. Sometimes, choices are made without any real reason or justification.
One big step that you can take toward being an investor instead of a speculator is to make your investment decisions consciously, not haphazardly.
You want your financial decisions to be coherent, not confusing. Since your money choices involve emotions, try to think about how you will feel, five or ten years in the future, as a consequence of your money choices. Doing this helps you meld the rational and emotional components that go into conscious choices.
Remember that the financial media have no incentive to help you focus on the future. They are almost entirely interested in the present. Your job, perhaps with encouragement from your financial advisor, is to steadfastly focus on your long-term future. Act, don’t react.
Related: Are You Attracted to “Do Something” When “Doing Nothing” Is Best?