Investing vs Speculating

As an investor, you probably have a lot of questions, like “Will I be ok?” or “Will my money last long enough?”. These are great questions, but there is a simpler way to think about the answers to successful investing.

Imagine all investments you can trade publicly could fit in a circle.  Those investments would broadly distill into three groups:

  1. Fixed income
  2. Equities and
  3. Property.

Against this background, a more appropriate question for an investor to ask is “where do returns come from?”.

Fortunately, the academic community have been working on this question for many decades, and they can tell us a great deal about where returns come from. Years of research have identified that there are:

  • Two dimensions of fixed income
    1. Term and
    2. Credit
  • Four dimensions of equity return
    1. The market
    2. Size
    3. Relative price and
    4. Profitability,
  • And a single dimension in real estate
    1. The market.

Whether you achieve these returns as an investor depends on a delicate balance of capturing these dimensions and remaining disciplined over time as an investor.


There are broadly two approaches investors can choose between.

  1. The first involves making predictions about the future direction of markets or securities, and actively trading the portfolio to pick winners and avoid losers. Under this approach, diversification is generally seen as a drag on performance. It’s also seen as acceptable to pay higher fees and charges to get access to ‘investment expertise’.

  2. The other school of thought is that successful investing shouldn’t involve forecasting about the future, and that investors are better served by accepting that prices are fair. Under this approach, trading is minimised (because it is costly and impacts net returns) and diversification is embraced as a way of reducing portfolio risk. Likewise, investors who adopt this philosophy are eager to keep costs at a reasonable level.

We generally label the former approach that involves forecasting as ‘Speculating‘ and the latter as ‘Investing‘, and our approach is to be a genuine investor.

Academic research suggests that behaving as a true investor gives you a better chance of having a successful investing experience. With speculating, you may succeed, but because of the effects of chance in speculating, you may also not succeed.

As investors, you can greatly determine the success of your investment program by adhering to certain long-term disciplines.  If you get spooked by short-term noise in the market and feel that you can position the portfolio to profit from ‘news events’, it’s important to understand that this is speculation.

We believe the investor who instead embraces principles of true investing, greatly improves the chances that they get the returns they are entitled to from capital markets.

In summary, if you combine an evidence-based philosophy of investment management with sound financial advice and great investor discipline, we believe you tilt the odds in your favour and maximise the chance of enjoying a successful investor experience.

About Rob Pyne

Rob loves helping people make smart choices with their money so they have the highest probability of achieving their goals. He does this by helping them get financially organised and keeping it that way.

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