Five Signs That You’re Speculating, Not Investing

Many so called ‘investors’ are really speculators who harbour misconceptions about their investing habit and patterns. While there’s nothing wrong with indulging in a healthy amount of speculation (buying or selling a security based on a chance outcome), overdoing it may continually set you back on your journey to wealth creation – or worse, if you’re unlucky, bring you to financial ruin. Here are six signs that you are most likely a habitual speculator, and not an investor – and that your chances of sustainable wealth creation remain bleak, to say the least.

You’re drawn to trading on ‘tips’ from brokers or friends

You get excited at the prospect of making a quick buck from those shady SMS tips, or from ‘hot stock calls’ from brokers who are hell-bent on churning your moneys to their own advantage. You often put your hard-earned money on the line on a mere ‘hunch’ that the tip coming your way is going to make you rich? Chances are that you’re not making much money from your investments. Even if you’ve had a certain degree of beginner’s luck, it’s likely to peter out over time, eventually sucking you into an abyss of loss making and more speculation in the hope of recouping those losses.

You check your holdings very frequently

You obsessively check your holdings every day, or sometimes – several times a day. You’re glued on to business news channels to monitor the price movements in your top holdings all day, ready to pounce on the slightest opportunity to book profits or minimise losses. Here’s a fact - while it’s healthy to keep track of your investment performance by checking your portfolio once or twice a month, checking your investments too frequently could indicate a speculative mindset that could spawn all sorts of behavioural biases, resulting in losses.

You suffer from an aversion to unrealised losses

The smallest sign of your portfolio slipping into the red sends pulsating waves of panic through your system. There have been many times that you’ve exited a fundamentally good investment at minor losses, only to regret your decision later as the investment turned itself around and flew into orbit, with you sitting on the side lines.

You love the “L” word

When it comes to investing, you simply love leverage, as it amplifies your chances of making quick returns. This results in your generally shying away from accumulating a well-intentioned portfolio of long term winners. Instead, you tend to be drawn to F&O trading, day trading and tactics such as BTST (Buy Today, Sell Tomorrow) that could allow you to take a larger market exposure with a smaller sum of money. Warning – over the long run, this could lead to severely burned fingers. There’s a good reason why Warren Buffet labelled derivatives as “Weapons of Mass Destruction”!

You hold more securities than you can possibly track

Your affinity for chasing quick returns has led to the accumulation of countless stocks, bonds and mutual funds over time – simply looking at your statement leaves you googly eyed! Resultantly, you have little awareness about your asset allocation, the alignment of your portfolio to your risk tolerance levels or financial goals, and so forth. Chances are that you don’t even know if you’re generating a benchmark-beating return! If this is your case, hunker down and get your investment records together, consult a financial advisor and get rid of the ‘lemons’ in your portfolio. Consolidating your portfolio into a well-structured set of potential long term winners is your best bet at wealth creation.