Having recently started on our series of articles about ‘retirement’ we feel it’s essential to explain a few core principles that will underpin your retirement savings. They will set the basis for all your future actions and guide you in terms of where you start to build your retirement wealth and how you go about doing it.
The first of these fundamental principles is to understand the difference between “investing” and “speculating”. You’ve likely never considered the difference before, nor seen the need to, but in the context of your retirement planning there is only room for one.
The discussion around investing and speculating ties in with a future discussion we’ll have on the “risk-reward” payoff, which we’ll get to in about three article’s time. When you get to this risk-reward article, it might make sense for you to come back to this one and read it again, in light of your new found appreciation for “if it sounds too good to be true, it probably is”.
As we have stressed before, investing in a solid retirement plan is an exercise in patience and self-discipline. There will even be times when it gets downright boring. If in the years to come you step back and look at your retirement efforts to date and sigh at what a boring exercise it’s been, then chances are you’re on the right track.
There will, however, be times when it may seem attractive to depart from good judgment and go in search of shortcuts and things that seem too good to be true, only to discover that they in fact were. Speculation is attractive both in terms of the returns that it purports to offer, as well as the sense of progress it presents.
Speculation has no place in a long-term retirement plan as its foundation is not based on the viable and long-term standard on which all sustainable retirement assets should be based: a determined value based on fundamental analysis of an income stream. In other words, it should generate an income return over time.
There are some exceptions to this, but this should be your safe definition until you’re more equipped to fend for yourself.
As you will see in our future articles, speculation is full of hidden risk that preys on your weaknesses and impatience. Speculation becomes even more dangerous the older you get, if you’re a late starter with your retirement savings.
Numerically speaking, early savers benefit the most from a sound retirement plan as they have the most time on their side. It’s when people try to find shortcuts that speculation creeps into your life.
We’ve listed below some pointers to help you figure out whether you’re an investor or a speculator.
Trading is a verb that, in your case, should only ever describe the thing that someone else does at a financial institution, while investing your money. You should not be trading forex on your weekends, or trading anything else for that matter, unless it’s a collectible card game.
We like to think of saving as something that you do to secure your short-term needs and wants. Like your emergency fund and a targeted savings account for your next holiday.
Investing is generally associated with the long-term and always applies to your retirement.
You cannot invest in a bank account or a money market unit trust as the prospect for a real return in the long-run just doesn’t exist.
There is a time and place for speculators to do their thing, but you should never be one where your retirement is concerned.
Some speculation is good. Among other things, speculators generally ensure that a fair price is established for shares on the stock exchange, allowing us investors to pay a fair price for something.
Left unchecked and when investors forget themselves, speculation can lead to price bubbles and large price crashes.
If at some stage you feel like you want to dabble in some speculative buying of something, be it unit trusts or shares, then by all means, but make sure that you don’t do it with money that you have earmarked for your retirement investing and preferably do it in a separate account, away from your retirement money.
Building and funding a retirement plan takes time. That’s the unfortunate reality of it all. There are no shortcuts.
With time behind you, even your boring RA, plodding along, year-on-year, can transform from mundane to magnificent. Besides, you’re far better off looking for excitement somewhere other than finance. Try sky-diving, downhill mountain-biking, or bungee jumping.
But get Life Insurance before you go.
 Jack Bogle has discussed this notion of long-term ownership and short term renting.
 Over time the price of something as well as its intrinsic value should converge, but you don’t want to necessarily get caught in between when everyone else thinks the price is more than its intrinsic value.