Should you participate in speculative investing

By Randell Tiongson on May 3rd, 2024

As a personal finance advocate, being asked about investments and investing is a daily occurrence to me. I often joke that anything that every question relating money has been asked of me already. Building wealth is a preoccupation by many and investing one’s money is a crucial endeavor to wealth building.

Investing is the act of committing money expecting it to grow in value. However, investing will always entail risks which means there will always be a possibility of loss of money. In investing, one needs to understand and accept the risk-return relationship: high returns entail taking high risks while low risks will result to low returns. In other words, your returns or growth will depend on your willingness to take on higher risks. Risk can be categorized as low, moderate, high or speculative.

Speculative investing has been popular among many nowadays because of the desire to grow their money quickly. Personally, I am not against speculative investing but I want to emphasize the dangers of speculative investing. One of today’s most popular form of speculative investing is cryptocurrency (i.e. Bitcoins) but there are many other speculative investments out there. To simplify, speculative investments are easy to identify by looking at its potential yield or gain. Investments that can give you very high returns like 30% or even 1,000% in a year is definitely a speculative one. In 2011, the value of 1 Bitcoin was only $.0008 and someone paid 10,000 Bitcoins just to purchase 2 pizzas! By December 2017, Bitcoin value was already above $17,000 per coin. The astronomical (and seemingly impossible) growth of Bitcoins continue to fuel the frenzy for speculative investments. True to the nature of speculative investments, Bitcoin value hovered for a long time at $6,000, very far from its peak value just a few months after its high in set that year. Bitcoin is only one of the many cryptocurrencies out there and their success is far from encouraging with half of cryptocurrencies issued in 2017 are now non-existing and most of that are still existing perform poorly. However, Bitcoin and other cryptocurrencies once again soared in 2021 peaking above $60,000 which was a big stir in the investments market. But again, and as expected, Bitcoin went down significantly and stayed at the $16,000 range for a long period of time. But again, in April of this year, Bitcoin soared once more to a high of about $68,000 and stayed for a few days before coming down to about $59,000 as of this writing. Will Bitcoin hold at that value or are we expected another crash soon? We will soon find out.

Another popular form of investing is the stock market. While not all stocks traded in the stock market are considered speculative, many of them are. Investors trade those stocks because their price volatility or movement. Speculative investments can also be found in real estate, business and many other forms of investment.

One of the most important rule to follow in investing is this “never invest in something you do not understand.” While investing is not rocket science, it does require some studying. Because of poor understanding, many are duped into investment scams. Knowing how particular investments work will make you a good judge to determine what is a legitimately speculative investment from an obvious investment scam. Another factor to consider is your risk tolerance. Can you accept a big possibility of loss of money when you invest? If you can’t, stick to more conservative investments.

Investing requires wisdom and speculative investing requires great wisdom. Even if you have a very high tolerance for risks, it is always prudent to limit your exposure to speculative investments. On a personal note, I invest in speculatives particularly cryptocurrencies but I make sure that I am also properly diversified. No one wants to wake up realizing that half the value of his money is gone, or worse, all of it.

The bible offers wisdom in investing, lots of it but let me share two that I often share to others:

“Wealth gained hastily will dwindle, but whoever gathers little by little will increase it.” Proverbs 13:11, ESV

“But divide your investments among many places, for you do not know what risks might lie ahead.” Ecclesiastes 11:2, NLT

Such profound wisdom from the book that is not only timely but also timeless.

Aside from the ‘how’ and ‘what’ of investing, you must also know your ‘why’. Investing, and most decisions we make with money always show the condition of our heart. Ask yourself why you are investing to begin with, what is the purpose? Always remember that money is only a tool and not the end goal. I believe that we are only managers of what we have and we truly do not own anything — the bible says “The silver is mine, and the gold is mine, declares the LORD of hosts.” Haggai 2:8, ESV. As a manager, every action I take with money makes me accountable to the true owner, hence the need for prudence.

Remember “For where your treasure is, there your heart will be also.” Matthew 6:21, ESV

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Should you participate in speculative investing