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| Kris & Tara by Captain Ron's Habitat |
Has anyone taken their summer vacation yet? Kris and I just got back from our scuba diving trip to Bonaire, the Dutch Antilles. What a great trip! We got to see turtles, loads of fish and coral, and special treat of spinner dolphins escorting our boat back to the dock.
For anyone who hasn’t been diving you might imagine it is kinda scary. It can be a scary sport but what makes it relaxing and fun is good preparation. I can tell you I got my initial PADI certification in Saipan in 1998. I didn’t dive for 10 years. When I jumped back in the water without a refresher course I experienced my first panic attack ever. I couldn’t remember how my equipment worked and the sensations of being back in the ocean were not exactly like I remembered. So, I took a step back and relearned my basic skills. Now, I love it again. So my point is the best security comes from education and preparation.
I think the same principles apply to managing your finances. Do you have a clear plan for investing? How much research of the market do you do and how much do you research in a good advisor? Do you have the time and inclination to become an expert?
What sources to you rely on for your information?
I came across some great articles this month and I want to share with you this question: Do you gamble, speculate, or invest your money?
Are you gambling, speculating, or investing your money? Do you know the difference? Is it possible you could be speculating and/or gambling with your money, and calling it investing? You bet it is. Although there are many definitions and disagreements as to what speculating and gambling are, there are some clear signs you are speculating and gambling with your money, versus investing it.
Gambling
Gambling probably brings to mind, visions of Atlantic City or Las Vegas with a spinning roulette wheel or a black jack table. There are so many movies showing either math wizards out to count cards or the old gambler who can read any poker player’s tell. These characters set out to win big and almost always walk away empty handed.
Gamblers believe they can beat the odds and be the exception. Statistics prove otherwise.
What is so exciting about gambling? I think everyone knows of someone who has won some money playing the slot machines. It was an exciting experience to win because deep down we all know that luck was at play—not skill.
Speculating
The speculator is thought to put some research into their decisions. They combine their data with some rational thought to take a calculated risk. Speculators must accept a higher risk for a chance to receive a higher return. The flip side is they are at risk of a greater loss.
Are speculators comfortable with the risk of greater loss? Or, are they blinded by the potential gain? Remember, the fine print on the back of every financial prospectus says past performance is not a reliable indicator of future performance.
Signs You Are Speculating or Gambling
Here are the signs you are speculating or gambling with your money instead of investing it:
Emotional Response
If you are basing your investment decisions mainly on fear (the markets are going down!), or greed (the markets are going up!), you are not investing.
Office Gossip
If you are making investment decisions based on office conversation, or your brother-in-law’s recommendation, or anyone’s insistence that everyone’s doing it, you are not investing. By the time these types of conversations take place, chances are you are violating the cardinal rule of investing – buy low, sell high.
Listening to the Media
If you are getting your investment recommendations from magazines, TV, and the internet, I suggest you do a little due diligence before you invest – think Jim Cramer of CNBS’s Mad Money and his Bear Stearns recommendation. Simply check out the performance of the investments these media outlets recommended a year ago. Remember, no one can predict the future!
Stock Picking
If someone tells you they have superior knowledge of the financial markets and can pick the next hot stock winners, run. Studies have proven over and over that this is not the case. Even so-called financial gurus have not been able to maintain their performance over long periods of time.
Market Timing
If you are jumping in and out of the your investments, thinking you can predict the ups and downs of the market for a better overall performance, think again.
What really happens is this – the markets go down; investors sell, and lock in their losses. They then wait until the markets “look good” again, and jump back in. Selling low, buying high – again very hazardous to your financial future.
Track Record Investing
If you are picking your investments based on the number of “stars” they have received from a financial ratings agency (star gazing), I’ll again remind you that past performance is not an indication of future results.
Healthy Investment Considerations
How does your advisor get paid? Commissions and internal costs (such as trading costs) not readily visible to the investor. Ask the question.
How do your money managers choose stocks, bonds, or funds? There should be a clear process including research of company performance, cash flow review, and management.
Do you understand the investment philosophy? In order to decide if you agree with the approach, you need to be able to understand how the process works. If you cannot understand the investment approach, then it is probably not the best fit for you. You hire an experienced advisor to manage the details but you need to understand the overarching concepts.
Also remember…
If you have questions and would like to learn a little more about me please visit my website www.taraenolan.com.
Cheers,
Tara J
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