Investing vs. Speculating

You have probably heard the old saying, “markets hate uncertainty.” This expression is often used to explain a sudden spike in volatility, often caused by unforeseen events or surprising outcomes.

This pattern has been clearly visible in recent months:

Last summer, the UK voted in a referendum to leave the European Union. The result defied “expert” predictions and roiled global markets. Just a few weeks later, however, stock indices, including the S&P 500 and Britain’s FTSE 100, reached new record highs.

Election day in the U.S. provided another dramatic twist. In the morning, polls predicted victory for one presidential candidate, only to be proved wrong that same evening. As the surprise win unfolded, selloffs began overseas and futures markets suggested Wall Street would follow suit the next day. When U.S. markets opened, however, stocks began climbing and continued to surge into the new year.

Neither example here is intended to downplay the significance of each event or suggest quick recoveries are always assured. Both are serious developments which have yet to reveal all their potential repercussions. The point is this: speculation is useless. To benefit, not only must you predict the correct outcome, you must also accurately guess the markets’ reaction.

Markets may not like it, but uncertainty is a constant. It doesn’t just periodically appear; markets grapple with it continuously. Today’s prices reflect the market’s expectations for the future, and the future is never known in advance. This is true no matter how credible the forecaster or obvious the prediction seems.

There will indeed be market corrections, even crises in our future. But opportunities for growth lie ahead as well. Unfortunately, bad days and good days are equally impossible to predict.  Speculators will still try to time their market entrances and exits to avoid bad days. Their gamble, however, necessarily means they will miss good days in the process.

Investors, on the other hand, distinguish themselves from speculators by recognizing returns are compensation for bearing risk. This means accepting bad days to ensure capturing the good ones.  Sensible investors expect to be surprised, so unforeseen developments don’t require portfolio gymnastics. Instead, they rely on diversification and discipline for stability and peace of mind in all conditions.

As a result, investors not only enjoy a higher probability of success relative to speculators, but we’d argue a better quality of life as well.

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