Should you participate 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 to money has been asked of me already.

Building wealth is a preoccupation by many and investing one’s money is a crucial endeavor to wealth building.

Investing is the act of committing money, expecting it to grow in value. However, investing will always entail risks, which means there will always be a 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 in 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 money quickly. Personally, I am not against speculative investing but I want to emphasize the dangers of speculative investing. One of today’s most popular forms 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 their 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 1 bitcoin was only $.0008 and someone paid 10,000 bitcoins just to purchase two pizzas! By December 2017, bitcoin value was already above $17,000 per coin.

Cryptocurrencies

The astronomical (and seemingly impossible) growth of bitcoins continues to fuel the frenzy for speculative investments. True to the nature of speculative investments, bitcoin value hovered for a long time at $6,000, very far from its peak value just a few months after its high that year.

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 nonexisting and most that still exist are performing poorly. However, bitcoin and other cryptocurrencies once again soared in 2021, peaking above $60,000, causing a big stir in the investment market. But again, and as expected, bitcoin went down significantly and stayed at the $16,000 range for a long period.

In April of this year, bitcoin soared once more to a high of about $68,000 and stayed for a few days before coming down to about $59,000 as of this writing. Will bitcoin hold at that value or can we expect another crash soon? We will soon find out.

READ: PH crypto market booms as bitcoin soars to $69,000

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 of 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 rules to follow in investing is this: 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 a big possibility of loss of money when you invest? If you can’t, stick to more conservative investments.

Speculative investing requires great wisdom

Investing requires wisdom and speculative investing requires great wisdom. Even if you have a very high tolerance for risks, it is always prudent to limit your exposure to speculative investments.

On a personal note, I invest in speculative instruments, particularly cryptocurrencies, but I make sure that I am also properly diversified. No one wants to wake up realizing that half the value of your money is gone, or worse, all of it.

The Bible offers wisdom in investing, lots of it but let me cite two that I often share with 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

It’s such profound wisdom from the book that 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 that 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 at RFP Philippines. To learn more about financial planning, attend the 107th RFP program this May 2024. Email [email protected] or visit rfp.ph.