Trading and investing is by far one of the best ways to grow your money, many people consider it to be a form of passive income (also referred to as residual, or recurring income), making it extremely beneficial in many aspects.
If you’re involved with the stock market then you’ll want to know about speculation and how it can affect your finances. You’ve probably already heard of speculation and how it can be damaging to a person’s portfolio, let’s take a closer look.
What Is Speculation?
Speculation refers to a trade or investment that has a much higher risk, and will fail more often than not. Although they carry more risk, they compensate by providing investors with a much higher return. Penny stocks are a great example of a speculative investment.
If you’re just getting started with financial markets, you’ll often be advised to restrict yourself to the safest and most reliable stocks; Many people consider these to be index funds, and even Charles Schwab recently said that this is the best investment approach for the vast majority — so when can speculative investments actually be beneficial?
When Can Speculation Be Beneficial?
Investors who are new to financial markets are often anxious about speculative investments, and generally want to keep their money safe. However, speculation can be very beneficial if you know how to manage your portfolio properly.
For the average investor, the majority of your portfolio should consist of safe and reliable investments such as index funds. A smaller but still fairly significant portion should then consist of speculative investments i.e. around 5-10%. There is no definitive number as to what percentage of your portfolio should be speculative though, as it’s mainly decided by how much risk you’re willing to take.
Having a diversified portfolio is going to allow you to take full advantage of what the stock market has to offer.
Even though the majority of your investments should be in index funds or something similar, you shouldn’t overlook speculative investments. Many investors consider these to be extremely dangerous, but they can be highly beneficial when used correctly.