by Mark Zaifman
With stock markets around the globe doing quite well recently, the temptation to speculate, a.k.a. gambling, is back in vogue. John Bogle, the founder of the Vanguard Group appeared on PBS recently discussing this very topic. There are not many professionals in the investment world that hold the stature and credibility of John Bogle, so when he warns of a new wave of investor speculation heading our way, I take his warning seriously.
After a dizzying year of watching the stock market slide lower and lower, seeing stability and growth is a welcome change. It has been reported that there is close to $5 trillion dollars sitting on the sidelines, mostly parked in money market accounts, CD's or high yield savings accounts. It won't be long before a large portion of this money finds its way back into the stock market. Some investment pros think the magic number is 10,000 on the Dow for the big money to get back into the game. Who knows for sure what the magic number or formula will be? But one thing is certain, with interest rates on CD's and money market accounts hovering at 1-2%, it is just a matter of time before this huge pool of money finds its way back into the stock market.
As Bogle said, investing is a long term venture. Long term means that at a minimum, the money you invest in the stock market will not be needed for at least seven years. Ten years would be better; fifteen to twenty-five years would be optimal. And here is why this perspective and understanding is so important. There have been many books written on the topic of “Behavioral Finance”. It is actually the topic du jour at most financial planning conferences these days. Simply put, it focuses on our emotional responses around money. The results are not pretty to look at. As human beings, we tend to sell low and often at the worst times, and we like to buy when prices are high. Studies have also shown we are our own worst enemy when it comes to making smart, long term investment decisions as our emotions override what is in our best interest.
If you are an investor, your long term perspective means the yearly ups and downs of the market are notable, yet you are able to stay detached for the most part from the emotional upheaval most other people are dealing with. Your focus is on the long term, not the short term. You have specific long term financial goals to reach and your asset allocation is in alignment with those goals.
If you are a speculator, you are very interested in the short-term. You make bets, take risks that may keep you up at night, but the thrill of victory when you do score is intoxicating and can become quite addictive. You do not like when people like me call it gambling, even though in your heart of hearts you know that is what it is. Long term investing is what other people do. You watch and listen for trends and the latest investment opportunities that offer large payoffs. If you are a speculator, the stock market feels like one huge global casino. Place your bets.
The Compromise
So how do you take these two diverse personalities, the investor vs. the speculator, and find a middle ground? Here is one suggestion. Open up an investment account and know that the purpose of this account is to speculate. Next, if you have a partner, let that person know exactly what your intention is. You have opened an account to speculate on the market. The money in the account is 100% at risk and could all be gone tomorrow. Transparency is vital here as well. Be willing to share your success stories as well as your losses. Test out theories, watch for trends and most importantly, have fun. Scratch that gambling itch to your heart's content.
In terms of how much to speculate with, here is my suggestion. Add up the total you have invested in retirement as well as non-retirement accounts. Multiply this total by 2.5% and fund your account with that amount. It may not be the amount you were hoping to play with, but it is a start. The better you do, the more you will have to speculate with. Bon chance!
Firewall
If you take me up on this suggestion, you must erect a firewall between your gambling/speculating (GS) account and your long term investment account and never, ever shall the two be co-mingled. This is really important. In the GS account is money you could lose with no material effect on your lifestyle. This is your fun money.
In the long term investment account resides your dreams and plans for the future. This is serious stuff. Here is where you make decisions that are more conservative in nature, balancing growth with risk, goals with lifestyle. It's making decisions today that enable you to reach financial independence down the road.
Peace of Mind
Ultimately, what you are looking to do is create a balance between the part of you that wants to take risk and loves the adrenaline rush that comes with it and the pragmatic, wise side of you that knows you need and desire a long term vision when planning for a financially secure future.
Sometimes the struggle between these two forces can feel quite overwhelming. As the market starts to heat up, the speculator in you; that voice that says: “why are you playing it so safe-come on, let's get going, take more risk”, will get louder and louder, trust me. If you find yourself feeling the urge, you now have a safe outlet to express the inner risk taker that wants to be heard.
Mark Zaifman is founder and president of Spiritus Financial Planning, Inc., a financial planning and investment firm based in the North Bay. Spiritus provides values-based comprehensive financial planning services to individuals and small businesses. He recently advised co-author Vicki Robin on "Your Money or Your Life: Revised and Updated for the 21st Century", published by the Penguin Group in December 2008. He can be reached at (707) 534-9478 or via e-mail at info@spiritusfinancial.com.