Tempted to Speculate? Don’t Risk More Than You Can Afford
| Paul Fain, CFP®
It’s madness, March Madness! It is always fun to fill in a NCAA basketball tournament bracket, whether for family bragging rights or for the office bracket pool.
As the tournament unfolds, most of the basketball powerhouses smash lesser rivals while a few Cinderella stories emerge. For example, my undergraduate alma mater, Tennessee, got upset by #13 seed Oregon State. My graduate school alma mater, Ohio University (also a #13 seed), stunned defending national champion Virginia. I’m not a big gambler but I imagine that the Las Vegas odds-makers always get a few March Madness surprises that cost them real money (vs. the $10 entry fee to the office bracket pool).
Closer to home, this past November, mobile and online sports betting became legal in Tennessee. Now you can’t watch an evening television show without seeing at least one sports betting commercial. Why financially speculate on sports? People are drawn to the lure of a quick wealth possibility, but it can be a dangerous intersection between entertainment, fandom, and your hard-earned money.
The risk of losing money is inherent but “speculation” is not a dirty word. It’s a strategy. Investors do it all the time in efforts to make more money. The problems occur when investors cannot afford to speculate and/or when they speculate unknowingly. In recent months we’ve seen a lot of speculative investing in questionable stocks like GameStop and Blackberry. Meanwhile, speculation continues in cryptocurrencies and precious metals such as silver. Investors are flipping houses again. Maybe the increased interest in speculation is a result of pent-up feelings about economic lost ground, a pressure to make-up for losses, or an urgency to right the financial ship by extra-ordinary means.
More subtly, we see investors speculating in more naïve ways – having too much invested in one stock or mutual fund, buying and selling investments at inopportune times, or trying to time the entry or exit to entire markets. Even ultra-conservative investors take speculative risks. If you park most or all of your portfolio in money markets, CDs, and savings bonds, your purchasing power may be eroded by inflation. Without some long-term growth potential, your retirement security may be at significant risk.
Bottom line? Sometimes boring is beautiful. I’ll stick to the office bracket pool and my diversified investment portfolio. While continuing to keep costs low, tax friction minimal, and trading infrequently based on simple buy low/sell high discipline. To anyone keen on speculating to build wealth, remember that keeping wealth is equally important. Don’t risk more than you can afford to lose and be intimately familiar with your speculative risks.
Let’s get back to the hoops!
This article was originally published in the Knoxville News Sentinel on March 26, 2021