To invest or speculate - that is the question.
Though the two terms may sound alike on the surface, they're actually two quite different things -- and, in our opinion, one should not be part of your strategic financial plan.
Investing vs. Speculating: Viable Wealth Strategies?
The difference between speculation and strategic investing can be night and day. The way Premier approaches portfolio management, investing is a long-term approach to wealth management, in which investors make decisions based on relevant, credible evidence that's backed up by peer-reviewed research. Speculation, on the other hand, can be thought of as a long-term or short-term process. However, in either case, stocks and bonds are bought or sold based on hot market trends, news of the day, past performance, timing the market, and even "gut feelings". In our opinion the practices of stock picking and marketing timing are not reliable ways to grow your portfolio.
Investment Professionals: Are they Really Know-It-All Investing Gurus?
Given that the average investor's rate of return is just 2.6 percent from 2003 to 2013, according to the 2014 Dalbar's Quantitative Analysis of Investor Behavior, why do so many investors keep listening to investment professionals who represent themselves as fortune-telling experts who magically know which stocks to pick and exactly when to buy and sell?
The blame lies, in large part, on the financial media. For years, the media -- and many investment professionals, as well -- have advanced the idea that investing is complex. And, as with most complex issues, many people instinctively turn to so-called experts to make sense of complicated scenarios, such as volatile markets.
It's easy to see why some investment professionals position themselves as stock picking gurus with the power to predict the future. However, relying on some hypothetical crystal ball when making speculative stock picks isn't a viable investment management solution. Rather, investing for the long-term is a more rational approach.
Investing for the Long Term: A Rational Wealth Management Solution
To illustrate this point, let's take the S&P 500 as an example. Though a properly diversified portfolio wouldn't put all of those investment eggs in a single S&P 500 basket, reviewing this index's performance over the last two years is telling.
The S&P returned 11.7 percent in 2014; an investor who reinvested their dividends would have a return over 14 percent. In 2013, returns with reinvested dividends was over 32 percent, and in 2012, 16 percent. Essentially, an investor who bought at the start of 2012 and held on until the end of 2014 while reinvesting dividends would have a return of more than 74 percent.
Most investors, however, significantly under performed these aggregate returns over this two-year period. Why? Because they listed to the so-called experts and engaged in speculation, rather than long-term investing.
In fact, during this two-year time frame, many respected financial gurus predicted bearish trends, such as Mark Hulbert -- who went so far as to compare the 2014 market to the 1929 market -- Paul Lim, and many, many others ... but their dire foretelling was proven wrong.
This is just one example that illustrates how no one can predict the future. No one can tell you which way the market will go, let alone which stocks to buy and when to jump in and out of the market, with any certainty. Don't be a speculator. Be an investor. It may not be quite as exciting and glamorous, but you'll make up for it with financial peace of mind.