Many times, we do not know what we do with our money. We assume that we are investing, while the reality may be that we are only saving. Sometimes, we feel we are merely taking calculated risks, while we may in reality be speculating or gambling. It is time to remove such confusions.
Saving: Now, savings are just the money left behind after expenses. For many people, savings is all they have – money lies in the bank and probably gets converted to an FD (fixed deposit). Savers resort to FDs as that is what they know and are familiar with.
Savers are uninterested or averse to personal finance and probably have anxiety even thinking about it. Hence, they choose to ignore it completely!
Such people have probably not thought through their goals and their requirements for the future. They just put aside whatever is left after spending and hope for the best.
This unthinking, mechanical way of deploying money into a scheme such as an FD by default is no way to create wealth. In fact, one may be destroying wealth if one considers post-tax return, as that may not even beat inflation.
Investing: Investments are to be done, ideally, based on goals and objectives that one may have. One needs to look at various parameters such as risk, returns, liquidity, tenure and taxation before investing in a product. Hence, investment is done after understanding the objectives and an asset bouquet that is well-suited for them. Now, that does not sound very interesting, does it?
There are those who like a bit of thrill and excitement with their money. Such people play for high returns, by taking high risks. These investments are more in the realm of speculation and gambling. But are these investments at all in the first place?
Understanding the risks and investor psyche: Generally, savings tend to be in low-risk products such as FDs and small-savings investments. However, sometimes, even savers unwittingly enter high-risk territories such as chit-funds and ponzi schemes. It is mostly due to the lack of insight on the inherent risk, as also the greed for higher returns.
In the case of investing, a good, diversified asset portfolio is sought to be put together based on the investor needs and goals. Done well, the available funds will go into products with appropriate risk-reward and other desired characteristics. Hence, this is the ideal way to build wealth sensibly.
However, investors can easily slide into speculation or gambling territory while assuming that they are actually investing.
Speculation: Speculation is a conjecture without firm evidence. The risks involved are much higher than in a normal investment. However, the probability of a very high payoff for the risk taken is very low. This combination of very high risk with a very low probability of a great payoff makes speculation a dangerous way to deploy money.
Speculators get carried away in a frenzy of a fad, greed, anecdotal evidence and sometimes due to their own previous positive experiences.
Deploying money in venture capital firms, cryptos and penny stocks can all be called speculative investments.
Gambling: Now, gambling is different from speculation. While gambling, the outcome is determined by chance events over which one has no control, and the possibility of a favourable outcome is infinitesimally low. The only people who may want to gamble are the desperate, illogical and extreme thrill seekers, as also people who do not understand that they are gambling in the first place!
Gambling is not just placing bets in casinos or on horses. A person deploying his rather small retirement corpus in dubious schemes is certainly gambling. So is a person borrowing money and buying certain stocks for multi-bagger returns in a very short period of time.
An interesting aside: An investment can become speculative for another person. The difference can be knowledge, experience, and expertise that a seasoned financial professional may have. The other difference could be the time given for an investment.
A seasoned investor taking exposure to a high-credit-quality bond offering high-yields at a turbulent time such as during COVID-19 is an example of investment done by taking calculated risks. This would not be speculation, but a calibrated call.
However, a person having a near-term goal, but investing in equity is certainly speculating.
Savings and investments are talked about as though they are similar terms. Speculation and gambling are interchangeably used.