Investment Vs Speculation - 2
By Saghir Aslam
Irvine , CA
(The following information is provided solely to educate the Muslim community about investing and financial planning. It is hoped that the ummah will benefit from this effort through greater financial empowerment, enabling the community to live in security and dignity and fulfill their religious and moral obligations towards charitable activities)
(Continued from last week)
Obviously, Boeing's decline would have been disastrous to a speculator looking for a quick buck. An investor, though, with the patience and discipline to stick with this blue chip industry leader would have been rewarded handsomely. Going back to 1987, the stock had increased 7 fold. Had a shareholder abandoned Boeing early in its slide, in the fall of 1990, they would have reaped a solid gain of about 200%. And for the following four years, the stock traded sideways. But the investor who stuck with the stock has been even more handsomely rewarded with another 400% gain on their original investment.
You might be tempted to say "but, one could have done even better if they sold Boeing in 1990 and then bought it back at the end of 1994." In hindsight, that is correct. In practice, though, determining when to get out it difficult, and deciding when to buy back in is even tougher. Trying to make these guesses is the frustrating essence of speculation. Holding on to quality companies is the rewarding life of an investor.
The world of the investor is full of identifiable and quantifiable factors. In contrast, the world of the speculator is at the mercy of the haphazard day to day wanderings of the market. Though investors must venture through the sometime treacherous terrain of short term ups and downs, they eventually depart for the smoother sailing of the long term. Speculators continue on forever, dealing with the ups and downs of today, tomorrow and next week.
Investing requires a minimum 1 – 2 year time frame. Shorter ventures into stocks is nothing more than speculation. It just does not allow enough time. This is not to say that speculation has no place. For people seeking excitement and the thrill of hitting "home runs," speculation is appropriate for a portion of their portfolio – usually somewhere between 10% and 30%, depending on the individual.
For most people, the majority, if not all of their portfolio should be conservatively invested with a long term horizon. Here again investing provides a better vantage point from which to maintain the discipline needed to manage a portfolio. The emotional volatility of day to day market activity tends to undermine level headed decision making. Fear, greed and even panic can grip the individual who takes their cues from short term market moves. By focusing on the long term an investor can see through these smoke screens.
This entire issue boils down to focus – investors focus on the long term; speculators focus on the short term. Chances are you are best to manage the majority of your portfolio with a keen eye on the long term.
(Saghir A. Aslam only explains strategies and formulas that he has been using. He is merely providing information, and NO ADVICE is given. Mr. Aslam does not endorse or recommend any broker, brokerage firm, or any investment at all, or does he suggest that anyone will earn a profit when or if they purchase stocks, bonds or any other investments. All stocks or investment vehicles mentioned are for illustrative purposes only. Mr. Aslam is not an attorney, accountant, real estate broker, stockbroker, investment advisor, or certified financial planner. Mr. Aslam does not have anything for sale.)