The potential financial results of investing can feel limitless, and it can be tempting to think that just one stock pick could make you an overnight millionaire. Yes, stock-picking can have a place in your investment strategy, but if you’re focused on the allure of a “get rich quick” mentality, you may want to ask yourself- Are you investing or gambling?

What’s the difference?

One of the key differences between investing and gambling is process and strategy. If you don’t have a process and strategy in place, it is a sign that you need to establish or refine your plan. Further, gambling focuses on emotions such as hope. Investing, on the other hand, is all about strategy. With a clear strategy, you know approximately how much your investments will potentially grow too and over what time horizons. You have an idea of when you will exit and what potential tax consequences will arise when doing this and also know what surplus income you have available to regularly invest.

How do you know if you’re investing effectively?

If you’re unsure whether your current investment approach is working to realise your goals, think about your investment process and how many of the below five elements are included in your approach.

Completing no research

If you’re not completing any research and putting money into assets based on tips from friends or what you see on social media, you’re exposing yourself to increased risk and not doing enough due diligence. Do your own research on a tip and have a look into the company you would like to invest in. How do their financials look? What are their future plans? is there alot of trade activity going on? What are independent research houses saying about this investment?

Investing in micro-cap stocks only

Micro-cap stocks typically have a market capitalisation under $500 million and are ranked from 350 to 600 on the Australian Stock Exchange. With a relatively small market capitalisation, buying stocks in these companies can be cheap and speculative. The downside, however, is that these companies are usually in their infancy and experience volatile price fluctuations. There’s a place for micro-cap stocks in your investing. However, if you’re putting all of your money into these companies, you’re likely exposing yourself to unnecessary risk, market volatility and potential losses. Consider diversification in your portfolio and concentrating the core holdings in long term blue chip shares and taking some risk on micro-cap stocks if you think there is potential for this stock to rise.

Investing with short time horizons

Putting all of your money into short-term investments or activities such as day trading is an indication that you’re too focused on short-term gains without a long-term strategy and may be a sign of gambling. There’s a place for short time horizons in your investing, but only once you’ve mastered the foundations such as establishing a long-term plan and ensuring you have adequate cash buffers.

Short term trading can be beneficial for someone that understands the market, has the time to monitor the markets and knows when to take profit from a strategy and where to set stop loss positions.

Lack of diversification

If all of your money is invested in one asset class, you’ll be over-exposed to volatility in a single market. To ensure your money grows consistently over time, your money needs to be balanced across a range of asset classes and sectors. This will help in minimising the risk of loss and allow your portfolio to grow if one asset class is in a negative period.

Having no investment strategy

If you don’t have an investment strategy, your investing won’t be as effective as it could be. To start putting together an investment strategy, you need to think about things such as:

• building up adequate cash buffers;
• how much money you need invested to live comfortably off your returns; and
• when you anticipate you’ll start drawing an income from your investments.

Moving forward with a long-term wealth strategy

Investing in different asset classes such as equities, commodities, and fixed-income assets is a great way to build long-term wealth. To build this wealth, however, you need a strategy and process to follow.

If you’re unsure how to develop an investment strategy and just gambling, be sure to seek qualified financial advice. Investing in this advice now can reap great rewards in the years to come, ensuring your money is working to help you realise your financial and lifestyle goals sooner. Remember it is not trying to time the market, it is time in the market. So getting started with a small amount now can make a positive impact to you in the future and the rise of micro investing apps make it easier to start your journey.

If you would like to discuss your strategy in more detail and are questioning whether you are investing or gambling, we have office locations in Norwest business Park and Oran Park or are available via online meetings if you require. You can email admin@rpwealthmanagement.com.au or call our office.



Sources:
https://perennial.net.au/small-micro-cap-education/ “What are Small and Microcap Stocks?” (28 September [no year])
https://www.investopedia.com/articles/trading/05/011705.asp “Day Trading: An Introduction” (7 April 2020)
https://www.investopedia.com/terms/s/small-cap.asp “Small Cap” Investopedia (18 May 2020)
https://moneysmart.gov.au/how-to-invest/choose-your-investments “Choose your Investments” Moneysmart (2020)



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