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Investing during volatility

ARE YOU AN INVESTOR OR A SPECULATOR?

Most people would probably say they are investors. However volatility in the markets over the past year or so is testing investors' resolve and revealing many closet speculators.

So what’s the difference between the two?

Investors generally use a consistent long-term strategy in line with their individual goals. They seek to build a more secure financial future through steady purchases of well-diversified investments. Super fund members are generally considered investors because a super fund is about the long term accumulation of wealth.

Speculators are less concerned about consistency. They are prepared to take a risk in the hope of making quick or large gains. For example a speculator is more likely to switch investments in reaction to a piece of news or a “hot tip” they receive.

The risk of trying to time the market

Speculators must accurately predict the future, not once, but twice. First, they must correctly determine when to sell. Second, they must accurately determine when to buy back in. Their timing must be nearly perfect which is particularly difficult in a volatile market.

Of course, changing your investments during a volatile market is not always speculating. It can be the mark of an astute investor if the reasons for your changes are consistent with your individual long-term goals. Nor does it mean super investors should necessarily‘ set and forget’. It can be a very healthy thing to review your super investment strategy from time to time to make sure it still feels right for you.  

The benefits of a consistent strategy

One example of a good long-term investment strategy is investing a set amount at regular intervals. If you maintain this schedule during a market dip you will buy more units when prices are lower and fewer units when prices are higher. So you are more likely to get a satisfactory average price overall instead of buying all the units at the high levels of the market. This is called Dollar Cost Averaging which most super fund members benefit from as their contributions are generally made at set regular intervals throughout the year.

Mapping out an investment plan can be the easy part. Sticking with that plan is what separates investors from speculators.

The following quiz offers possible "speculator" versus "investor" reasoning for changing investments. Which answer best represents your decision-making process?