Should you dabble in speculative investing?
As a personal finance advocate, being asked about investments and investing is a daily occurrence to me. I often joke that every question relating money has already been asked of me. Building wealth is a preoccupation of many, and investing one’s money is a crucial endeavor to wealth building.
Investing is the act of committing money and expecting it to grow in value. However, investing will always entail risks which means there will always be the possibility of loss of money. In investing, one needs to understand and accept the risk-return relationship: high returns entail taking high risks while low risks will result to low returns. In other words, your returns or growth will depend on your willingness to take on higher risks. Risk can be categorized as low, moderate, high or speculative.
Speculative investing has been popular among many nowadays because of the desire to grow their money quickly. Personally, I am not against it, but I want to emphasize the dangers of speculative investing. One of today’s most popular form of speculative investing is cryptocurrency (i.e. bitcoins) but there are many other speculative investments out there. To simplify, speculative investments are easy to identify by looking at its potential yield or gain. Investments that can give you very high returns like 30 percent or even 1,000 percent in a year is definitely a speculative one. In 2011, the value of one bitcoin was only $0.0008 and someone paid 10,000 bitcoins just to purchase two pizzas. By December 2017, bitcoin value was already above $17,000 per coin. The astronomical (and seemingly impossible) growth of bitcoins continue to fuel the frenzy for speculative investments. True to the nature of speculative investments, bitcoin value today is about $6,000, very far from its peak value just a few months ago. Bitcoin is only one of the many cryptocurrencies out there and their success is far from encouraging with half of cryptocurrencies issued in 2017 now nonexistent, while most that are still existing perform poorly.
Another popular form of investing is the stock market. While not all stocks traded in the stock market are considered speculative, many of them are. Investors trade those stocks because their price volatility or movement. Speculative investments can also be found in real estate, business and many other forms of investment.
One of the most important rule to follow in investing is “never invest in something you do not understand.” While investing is not rocket science, it does require some studying. Because of poor understanding, many are duped into investment scams. Knowing how particular investments work will make you a good judge to determine what is a legitimately speculative investment from an obvious investment scam. Another factor to consider is your risk tolerance. Can you accept the big possibility of loss of money when you invest? If you can’t, stick to more conservative investments.
Investing requires wisdom and speculative investing requires greater wisdom. Even if you have a very high tolerance for risk, it is always prudent to limit your exposure to speculative investments. On a personal note, I invest in speculatives, particularly cryptocurrencies, but I make sure that I am also properly diversified. No one wants to wake up realizing that half the value of his money is gone, or worse, all of it. The Bible offers wisdom in investing—lots of it—but let me share two that I often share to others:
“Wealth gained hastily will dwindle, but whoever gathers little by little will increase it.” Proverbs 13:11, ESV
“But divide your investments among many places, for you do not know what risks might lie ahead.” Ecclesiastes 11:2, NLT
Such profound wisdom from the book is not only timely but also timeless.
Aside from the “how” and “what” of investing, you must also know your “why.” Investing, and most decisions we make with money, always show the condition of our heart. Ask yourself why you are investing to begin with, what is the purpose? Always remember that money is only a tool and not the end goal. I believe that we are only managers of what we have and we truly do not own anything. The Bible says “The silver is mine, and the gold is mine, declares the Lord of Hosts” (Haggai 2:8, ESV). As a manager, every action I take with money makes me accountable to the true owner, hence the need for prudence.
Remember “For where your treasure is, there your heart will be also.” Matthew 6:21, ESV. INQ
Randell Tiongson is a registered financial planner of RFP Philippines. To learn more about personal-financial planning, attend the 94th RFP program in March 2022. To inquire, email [email protected] or text at 0917-6248110.
