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Differences of Investing vs. Speculating


Traditional investing takes a strategic approach to building wealth by focusing on long-term growth, risk management and diversification. Speculative investments, on the other hand, are often considered more alternative types of investing, such as collecting artwork. Let’s take a look at how you could incorporate both into a diversified portfolio. For personalized help with your own investment portfolio, consider working with a financial advisor.

What Is Traditional Investing?

Traditional investing typically involves buying and holding assets such as stocks, bonds, or mutual funds with the goal of generating long-term returns. This strategy does this through capital appreciation, dividends, or interest income.

The core principles of traditional investing involve diversification and asset allocation. Diversification aims to spread investments across different asset classes, industries and geographical regions to reduce risk and enhance potential returns. Asset allocation optimizes the mix of assets based on your individual goals, risk tolerance and time horizon.

Traditional investing strategies are often relatively straightforward to implement and accessible to a wide range of investors. These investments are often associated with historical performance that offers a degree of predictability and are usually less volatile than speculative assets.

Examples of Traditional Investments

Here are six common examples of traditional investments:

  • Bonds: Issued by governments or corporations, bonds are loans investors make to these entities in exchange for periodic interest payments and repayment of the principal at maturity.
  • Mutual funds: Pools of money from multiple investors used to invest in a diversified portfolio of stocks, bonds or other assets. They are managed by professional fund managers.
  • Exchange-traded funds (ETFs): Similar to mutual funds but traded on stock exchanges like individual stocks. ETFs often track an index, sector, commodity or another asset.
  • Real estate: Investing in physical properties such as residential homes, commercial buildings, or real estate investment trusts (REITs), which are companies that own and manage income-producing real estate.
  • Certificates of deposit (CDs): Time deposits offered by banks with fixed interest rates and maturity dates. They are generally considered low-risk but offer lower returns when compared with other investments.

What Is Speculative Investing?

A couple diversifying their investment portfolio with traditional and speculative investments.

Speculative investing is an investment strategy that involves taking on a high level of risk with the prospect of achieving substantial returns. This approach is marked by significant volatility and the potential for both considerable gains and losses. Speculative investments are typically less predictable and more susceptible to market fluctuations than traditional investments.

Unlike traditional investing, speculative investing appeals to those with a higher risk profile, aiming for bigger returns over a shorter time frame. This makes speculative investing less suitable for individuals who prioritize stability and consistent growth over time. Therefore, speculative investing requires careful consideration, research and risk management strategies.

Examples of Speculative Investments

Here are seven common examples of speculative investments:

  • Penny stocks: Stocks of small companies with low market capitalization and trading at a low price per share. They are highly speculative because of their volatility and the potential for rapid price movements.
  • Options and futures contracts: Derivative securities that allow investors to speculate on the price movements of underlying assets without owning them outright. Options and futures trading can involve significant leverage and risk.
  • Venture capital investments: Investing in startups and early-stage companies with high growth potential but also a high risk of failure. Venture capital investors provide funding in exchange for equity stakes in these companies.
  • Initial coin offerings (ICOs): Similar to IPOs (Initial Public Offerings) for traditional companies, ICOs involve raising funds for new cryptocurrency projects by selling digital tokens to investors. ICOs are highly speculative due to regulatory uncertainty and the risk of project failure.
  • Forex trading: Trading currencies in the foreign exchange market involves speculating on the fluctuations in exchange rates. It can be highly leveraged and carries significant risk, especially for inexperienced traders.
  • Collectibles and art: Investing in rare collectibles, art pieces, vintage cars or other valuable items can be speculative, as their value depends on factors like market demand, authenticity and cultural trends.
  • High-yield (junk) bonds: Bonds issued by companies with lower credit ratings, offer higher interest rates to compensate for the increased risk of default.

How to Incorporate Both Types of Investments

In pursuit of a balanced investment portfolio, you may consider strategies that incorporate both speculative and traditional investments. This could involve designating a specific portion of your portfolio to speculative endeavors, with the remainder invested in more stable, long-term assets such as index funds, bonds and blue-chip stocks.

The precise allocation should align with your risk tolerance, investment objectives and time horizon. Your goal could focus on the growth potential of speculative investments, while maintaining a foundation of stability provided by traditional investments.

Bottom Line

A couple meeting with an advisor to diversify their investment portfolio with traditional and speculative investments.

Traditional investments offer a foundation of stability and predictable returns, while speculative investments bring the potential for higher rewards albeit with higher risks. As an investor, you will need to assess your risk tolerance, financial goals and time horizon when determining the right mix of assets. Understanding how both traditional and speculative investments work, and integrating each strategically can help you create a balanced and diversified portfolio.

Tips for Investing

  • A financial advisor has the expertise and experience to help you manage your investments to your chosen long-term goals. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • If you need help looking at how your investments could grow over time then you may want to utilize a free investment calculator.

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