How to Speculate when Investing

What exactly is speculation when it comes to investing? Speculation is best defined as the process of choosing investments that come with a higher degree of risk in hopes of profiting from a large price movement. Speculative investments are usually those who seem to have a great deal of potential, but they also have many more question marks.

Speculative investments are not the same as a pure gamble made without any research. A true speculator makes a well-informed decision to purchase a particular investment in spite of the increased risk. In baseball terms, it really is the equivalent to swinging for a home run and realizing that it lowers your chances of getting a base hit.

Is speculation a negative or a positive when you are investing? As is the case with most questions like this in investing, there is no clear cut answer. Speculation is typically seen as a negative thing by most prospective investors, but that is not necessarily the case. Often those in the financial media use the word speculation when they are talking about something that was done improperly, but I don't believe that is entirely fair. Does that mean that speculation is always a good thing? The answer is clearly no. Too much speculation in an investment portfolio can lead to a sudden fall that will be difficult to withstand.

The trick is to find a happy medium where speculative investments are part of a much bigger portfolio of assets. Too much speculation will likely ultimately lead to the demise of your investment portfolio, but at the same time too little speculation will hold you back from higher potential gains.

What is the Right Level of Speculation for You?

Depending on your personal financial situation, you must gauge what level of speculation is healthy for you. If you are a young person who is looking to invest for the long-term, you might want to put 15-20% of your investment portfolio in speculative investments. If you are nearing retirement, you likely should keep no more than 5-10% of your portfolio in speculative investments. Once you are retired I believe it is time to stop speculating and simply protect your hard-earned capital.

It is important to remember that even when you are speculating you should make sure you keep your investment portfolio diversified. Speculation should never be focused on one particular asset class, but rather spread across different non-correlated investments.