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Confusing investment with speculation is one of the most costly errors a novice investor can make in an effort to grow wealth and achieve financial aims.
Unfortunately it is also one of the easiest and most common mistakes to make too. To avoid being drawn in to the ‘speculation game’ make sure to have a financial plan.
As we have already established (in last month’s column) the benefits of investing are available to everybody – they are not merely the domain of the rich. After all the objective of investing is to enable us to realize our financial goals (which in turn enable us to realize our lifestyle ambitions such as marriage, children’s schooling and retirement).
However, we would not normally expect to achieve our personal financial aims by gambling in a casino. Instead we do expect to achieve them by following a carefully considered and adhered to investment plan that takes in to consideration our appetite for risk as well as our investment objectives.
Unfortunately in today’s society the novice investor is bombarded with everyday temptations that are prone to turn him (or her) in to a speculator. There are online brokerages; an almost unlimited supply of information about investments on the internet; and hourly reports on the state of the markets and stocks in all forms of media. In addition society appears to revere the investment risk taker – elevating him (or her) to the status of hero.
However, succumbing to such temptations and expectations is a recipe for financial catastrophe – not success. And although I don’t completely subscribe to all of author David Bach’s (Start Late, Finish Rich) advice there may well be some truth to his saying that “Your life should be interesting, your investments boring.” And even if financial planning appears boring – it is definitely necessary to make your money work for you and help grow your wealth.
Before starting out on a financial plan everybody must have an idea of their aims and objectives as well as their appetite for risk. When it comes to financial planning the concept of ‘one size fits all’ does not apply. A lot depends on the age of the investor and his (or her) tolerance for risk. Of course financial objectives determine the positioning of an investment portfolio.
There are various types of portfolio each with a different allocation of investments. As an example a younger person with many years to work might be suited to a more aggressive portfolio. Such a portfolio might include 71% in equities (stocks), 18% in fixed income investments such as bonds, 10% in alternative investments such as mutual funds or gold, and 1% in cash.
An older person with only a few years to go before retirement might well consider a less aggressive portfolio. Such an investor might be more interested in capital preservation. In this case the portfolio might include 29% equities, 56% fixed income (bonds), 5% in gold and 10% in cash.
The choice, of course, is up to the individual concerned and it is based upon what he (or she) wants to achieve as well as the investor’s tolerance for risk. However, the principle should not change. After all the object of investing is to grow one’s money in order to achieve financial security and to meet certain pre-ordained financial objectives.
It’s a principle Benjamin Graham – the man who mentored the world’s best-known investor Warren Buffet – always kept in mind. Graham’s approach to investing as set out in his book The Intelligent Investor was as follows – “An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.”
So to avoid speculation it can pay (quite literally) to have a financial plan. It can also pay to have a financial professional advise you on putting together a plan – in view of the fact that the financial world and financial investment vehicles are becoming more and more complex.
So if you are considering the prospect of growing your wealth make sure you keep in mind the following quotation from notes in Benjamin Graham’s book The Intelligent Investor “people who invest make money for themselves; people who speculate make money for their brokers.”
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