Don’t Turn a Good Investment Into a Speculative One

Investing and gambling are often confused with one another. The differences between investing vs gambling were discussed in the preceding post. All investments sit somewhere on the speculation spectrum. Those further toward the investment end have higher odds of success and less extreme outcomes. Unfortunately, we can also do things to change an otherwise good investment into a speculative investment. We all must take some risk by investing, but also avoid turning good investments into speculative investments. Learn about those potential pitfalls in this post to avoid undermining your investing success.

investment risk return

Five ways to turn a good investment into a speculative investment:

Too-Long or Too-Short Investment Holding Period


Buy & hold the market forever. Not individual stocks.

Holding the whole market is a bet that the economy will grow and companies will grow profits with that. Historically that has been a pretty safe bet. However, that is an investment over a long time period. The stock markets fluctuate on a day-to-day basis. If you buy and sell with a short-term horizon, then that is called trading. Even with buy-and-hold investing, you are best off investing over decades to take advantage of the long-term trend.

Holding individual stocks forever may also be sub-optimal. The dominant companies of 10, 20, 50, or 100 years ago are not the same ones as today. Railways and coal gave way to electronics and computers, then the internet & social media. No one knows what the next shift will be over the next 10 years, let alone the next 50. As the engine of the economy shifts gears and directions over long time periods, the composition of major stock indices shifts too. Passive index investing is an easy way to have that managed for you.


Speculative Trading

With trading, you are betting that you know which way the market will move in the short term. You try to “time the market” to buy low and sell high. To succeed at that, you must predict the future with some precision. Not once, but twice. Once when you buy and again when you sell. It is a speculative investing strategy based on precisely predicting short-term unknown developments.

Longer-term “buy and hold” of the broad market has historically performed well. I don’t know of any trading strategy that I could implement that has reliable long-term outperformance. There are some people or machines who can beat the market by trading. You and I are probably not among them.

buy and hold returns

Speculative Real Estate Investing


Important characteristics of real estate as an investment.

Real estate investing is a bet on the future supply and demand for the property. That is influenced by changes in interest rates, political policy, demographics, and development. These are all more slowly moving forces than those that move the stock market. So, prices can take longer to move up and down. Real estate is also not priced frequently. You don’t truly know the value before it is priced and successfully sold.

Buying and selling real estate also has high transactional costs (realtor & legal fees, land transfer taxes). The maintenance and management costs must also be factored in. If you have forgone maintenance and updating, then you will likely have to accept a discount when you sell.


A long time frame matters even more with real estate.

Together, the costs and market factors mean that most real estate investments require a long time frame to tilt the odds toward a profit. A short-term purchase of real estate is dependent on a short-term price increase large enough to out-size the costs. That can easily be speculative.

Further, the risk/reward is usually magnified by the use of debt (leverage). Leveraged investing requires a long timeframe and discipline to stick to that. The discipline forced by a mortgage is helpful. However, breaking a mortgage early comes with penalties. That magnifies the importance of planning before committing.

Most people are happy to talk about their real estate gains. In contrast, those who bought near a peak are silent for periods of 10-15 years while they are underwater. Well, maybe they do say something. But, all I can hear is “gurgle gurgle gurgle”.

speculative real estate invesments

Do not confuse personal-use real estate with investing.

Do not confuse personal-use real estate with an investment. Over the long term, when you account for leverage and the various costs of ownership, personal residential real estate has historically returned slightly above inflation. The decision of whether to rent or buy real estate is more about lifestyle preferences than an investment.

A real estate investor makes a profit by buying the property at a discount and then developing it or waiting for market conditions to result in appreciation. They collect income along the way to offset costs. Further, professionals often invest in different types of real estate far beyond single detached homes. Regardless of the niche, they make business decisions and either take on work or pay someone else to.

Being “all business” is hard when you mix personal emotions and social pressures into it. Unfortunately, those most vulnerable to this are often those earlier in their lives when they don’t truly know where their career and family life will go over the next 10-15 years. Even if a good investment, their time frame commonly gets shortened or they limit their career and life options to hold onto their real estate instead. It is why I cringe when I hear about medical students, residents, or first-year attendings buying real estate. I am not alone.

Forced Unplanned Trades

The Worst Speculative Investments


Exceeding your risk capacity may morph investing into trading.

Risk capacity is the financial ability to take risks and absorb potential losses. Exceeding risk capacity can force an investor to shorten their timeframe to meet a cash flow need. A long-term investment suddenly becomes a short-term one because you did not plan enough for the unexpected.

For example, if you spend most of what you make on your basic living expenses and do not have an available emergency fund or access to a low-cost line of credit, then you have a low-risk capacity. You could easily be forced to sell an investment to pay for an unexpected expense. You may have intended to buy and hold for a long time frame. However, life happens and you may need to sell a few weeks, or months later.


Worse than speculative trading. Unplanned trading.

Not only is that a more speculative “trading” time frame, but it is also an unplanned trade. The few people that succeed with trading, plan the trade carefully to manage risk and then trade their plan. Further, the risk of someone having a cashflow crunch and bad things happening in the markets or economy commonly coincide. The markets tank, anticipating a downturn, and whatever is causing the downturn hits your personal financial life too.

When investing for more intermediate time frames, like 3-10 years, you must assess your risk capacity to choose an asset allocation that suits it. That can also change with the financial flexibility that you will build over that time period and how much you could tolerate a prolonged downturn in a more aggressive portfolio.

short investing time frame

Emotion-Induced Trading

Risk tolerance is the emotional ability to stomach risk without deviating from the plan. When an investment swings up or down in value, that is called volatility. Volatility tests our risk tolerance. Humans are wired to want what is desirable (and expensive since everyone wants it) and shun what is not (and usually cheap). Buy high and sell low.

If we exceed our risk tolerance, our emotions may get the better of us during a market downturn. That could cause us to sell. What was planned to be a long-term investment becomes short-term. Functionally, that morphs long-term investing into short-term trading. Even worse, an unplanned trade at the worst possible time.


Avoid an accident. Deliberately assess your risk tolerance & capacity.

It is hard to know how you will really behave when some unknown future crisis strikes. However, attempting to estimate it is part of deciding on the appropriate asset allocation for your portfolio. It can be as simple as a questionnaire or you could use a comprehensive risk tolerance assessment like I built into my DIY Investor Hub. If you are using a financial advisor, then helping you to make this assessment and coaching you away from making emotional mistakes is one of the main areas in which they can add value.

Since it is vital to not exceed your risk capacity or tolerance. You should use an investment mix that doesn’t exceed either of them.

Overleveraging is like speeding.

If you buy equities while you still have student debts, then you are investing with leverage by not paying those loans off instead. That may not be a bad idea, if done in a balanced and deliberate way. Leverage can boost returns. If you add in another loan from your brokerage to invest, that is called investing with margin. Some even use their lines of credit to plump their portfolio further. Leverage, leverage, and more leverage!!!

Like driving a car, some speed within safe limits gets you to your destination faster. Similarly, too much speed increases not only the likelihood of an accident, but also the severity of the consequences. Similarly, punching the accelerator by overleveraging to make a speculative investment enhances the risk.


Too much leverage can provoke your inner emotional investor beast.

speculative investments

Even when used judiciously, leverage magnifies wins and losses. That translates into more volatility to stoke bad investor behavior. It is like poking your inner Hulk Investor in the eye. More leverage makes for some harder eye-pokes. If that riles your emotions, then you are exceeding your risk tolerance.

As mentioned, that could shorten your investment time frame when the beast wakes up, you sell, and it smashes your investing plan. The investor beast is not the only threat in a pin-striped suit when you are using leverage to invest. The banker can also stop the music at a bad time.


Credit and margin calls.

With both lines of credit and margin accounts, there is a risk that the lender will call in the loan. That usually happens because they are afraid that you may not pay it back. Commonly, that coincides with your investments tanking. The lender doesn’t care about the impact that has on you. Nor are they willing to risk whether you can hold through to the other side of a major bear market.

You may be forced to sell investments to repay the loan. A long-term investment becomes a short-term unplanned trade. Again, at the worst possible time to sell. To further heighten the risk, if you were counting on your line of credit as an emergency fund, then your risk capacity may also be much less than you were banking on.

Bad Habits to Make Investing Speculative

Exceeding risk capacity or risk tolerance can inadvertently morph a long-term investment into a short-term one. Leverage magnifies that risk. We may also increase risk through bad habits that lower our risk tolerance threshold. A level of investment on the speculation spectrum that would have been tolerable becomes intolerable and provokes a mistake. Here are some common traps and tips to avoid them.


Ignore the popular media, braggarts, and your brother-in-law. 

Financial media wants to make investing look exciting. It is how they get the audience for which they are paid. Scary and sensational headlines get the most views. So, there is usually no shortage of articles and commentary about how scary the current situation is. At all times, whatever it is. Avoid daily financial news media to avoid its emotional provocation. You aren’t missing out on insider information. If it is on TV or the internet, it is priced into the market. Same thing at the water cooler, the doctor’s lounge, or your brother-in-law’s house. It is all short-term information and you are investing long-term.

Those playing with highly speculative investments love to talk about them. They are usually based on an interesting narrative or idea. Of course, there is also much less talk about the ones that don’t work out. Highly speculative investments have a long sexy tail with the most probable outcome being a loss and the occasional outsized win.


This time is always different for us. But not likely for humankind. 

Humans are pretty centered on the recent past and our personal perspective. It is always new to us. So, we are constantly living in unprecedented times. This time will be different. Those noises really ramp up when we have a bear market. Whatever the precipitant. Those precipitants also usually make for great news stories and narratives. Just remember that bear markets are common. The chart below has a clear upward trend.

long term investing

The above chart has spanned two world wars, many regional conflicts, two global pandemics, revolutions, major industrial shifts, demographic shifts, inflationary cycles, ozone depletion, nuclear threats, energy crises, bankrupt banks, and countries. It was different every time. Yes, it could take a market decades to recover from a peak. However, you don’t just buy once. An investor is continually buying into the market over their accumulation years. At a progressive discount that they come to appreciate on the ride back up. Further, by investing around the world, you mitigate against the more regional issues that commonly occur.


Do not check your investment portfolio frequently.

speculative investing

This is a behavioral advantage for real estate. Your house price isn’t updated daily and then plastered on your front lawn. You also can’t buy or sell it for under $10 by clicking a button on your smartphone.

You might get away with insulting your Bruce Banner Investor a few times a year, but mocking him with daily volatility by watching your portfolio frequently is a bad idea. Combining leverage with this is like giving him a noogie. You wouldn’t like him when he’s angry.

What should be a long-term investment takes on a too-short timeframe if you provoke the beast. Investing becomes short-term trading. Gambling. Don’t do it.

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