Gambling vs. Speculation

Many investment advisers suggest using a portion of your investing funds to engage in speculation.  (Even I did back when I created my little investment pyramid.)  For many people, there’s a natural tendency to gravitate towards speculation, and if you don’t take care to limit the amount of money you put at risk, speculation can eat up a great deal of your portfolio.  To prevent that, the suggestion is to put five to ten percent of your portfolio value into speculative ventures.  You’ll get a taste of the rush of speculation while still keeping the vast bulk of your money in the safe investments that might be kind of boring, but will provide slow steady growth over time.

So, once you know how much money you can speculate with, it’s time to hop into the car and drive to Las Vegas, right?  (Or to Atlantic City, for those of us nearer to the east coast.)  Well, not quite; there is a difference between speculation and gambling.  If we go to Dictionary.com, we can find speculation defined as: engagement in business transactions involving considerable risk but offering the chance of large gains, and gambling defined as: to stake or risk money, or anything of value, on the outcome of something involving chance.

What does this difference between gambling and speculation mean to us?

In a nutshell, it means that gaining more knowledge should improve our results in speculative ventures, but not in gambling.  This sounds reasonable: gaining more knowledge about how international currency rates fluctuate should (emphasis on should) help you make more money in the Forex markets, for example, while no level of mastery will improve your odds at the Roulette wheel.  (We could make an argument that knowing more about a sport and the particular teams playing could improve your ability to make money on sports betting; but the spreads on most games will change it back into a more luck-based outcome, at least in theory.)

The plan for your speculation should be to gain knowledge into the particular method or methods of speculation, attempt to figure out your best choices, and put a small portion of your investment money into these vehicles. If you’ve chosen your speculative vehicles correctly, you can see your money value greatly increase; the high level of leverage and risk offered by most speculative methods means that great profits (and equal or greater losses) are possible.  Should your speculation rise in value, your best course of action will be to take some profits, put them into safer vehicles like mutual funds, and if you want, to keep speculating with the ‘House’s Money’, to use a gambling term.  If you lose some or all of your money, take your losses (you did remember to keep your speculation to a small portion of your investments, right?), rethink your speculation, and if you still have the desire to speculate, put a small portion of your new investment money into speculation.  In this way, you can get the thrill of speculating and some of the potential profits, while keeping the bulk of your money safe.  Remember, it’s not how much you have, it’s how much you keep.

The goals for your gambling should be to have a fun time, keep your losses to a minimum, and hopefully, wake up in your own bed.  (And of course, if you do by some thin chance emerge with more money than the amount with which you started, take it and put it into secure investments.)  Like speculation, you should keep gambling to a small portion of the money you put into safer investments.  Unlike speculation, you should not hold any expectation that sliding quarters into a slot machine will return a great deal (or any) of your ‘investment’; remember, all those lovely casinos are built on the losses of you and other gamblers.

There is one final similarity between gambling and speculation: neither is necessary for your financial well-being.  Feel free to avoid both, as long as you also resist any urge to take more risk than needed with the rest of your portfolio.  Consider both gambling and speculation as safety valves, allowing you to vent your more ‘eager for a big win’ tendencies, provided that you maintain the bulk of your portfolio in secure, safe investments.

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