Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 373

To speculate or not to speculate

“Tips! How people want tips! There is greed involved, and vanity.”

-Edwin Lefevre, Reminiscences of a Stock Operator, published in 1923

The launch of electronic brokerages spawned day-trading for regular people back in the 1990s, and the advent of low-cost and free brokerage took things to a whole new level this year.

But speculating on markets goes way back. It was almost a century ago that journalist Edwin Lefevre wrote the investing classic Reminiscences of a Stock Operator, documenting the perils of stock market speculation.

And it has been more than 80 years since Ben Graham, the father of investing and Warren Buffett’s teacher at Columbia Business School, first split the world of markets into two classes: investors and speculators.

Graham said an investor is someone who wants preservation of capital and an adequate return. Everyone else is speculating. It’s a distinction that is more important than ever today.

The Australian Securities and Investments Commission (ASIC) recently conducted a review into 2020’s sudden surge in stock market speculation as ASIC grew increasingly concerned about the risks being borne by small investors.

The findings of the review were extraordinary

Not only are small investors trading more amid the COVID-driven volatility in markets, but many are setting up brokerage accounts for the first time. More people getting involved in markets is normally something for the industry to celebrate but there are some concerning features about the new generation’s taste for risk.

For starters, the average daily securities market turnover by retail brokers has doubled this year. ASIC studied a period of six weeks at the start of the COVID-19 crisis in Australia when the Australian Securities Exchange indices fell by more than a third from their record high.

During the period, turnover from retail brokers hit a daily average of $3.3 billion, up from $1.6 billion in the previous six months.

More surprising was the finding that as the markets fell, retail clients were buying. Over the period, retail broker clients bought $53.4 billion worth of shares and sold $48.4 billion.

The net buying behaviour coincided with another interesting statistic: many of the buyers were in the market for the first time. ASIC tracks ‘unique client identifiers’ in the market. During the early part of the crisis, an average of 4,675 new identifiers appeared in the market every day. The rate of creation of new accounts was more than three times higher than before the crisis.

The results were clear: a heady combination of working from home, access to cheap broking accounts and volatile markets tempted many to try their luck.

But for most, it didn’t work out. ASIC concluded that if all retail investors held all their positions for only one day, total losses for the six weeks would have hit $230 million.

It’s a salient lesson and one Vanguard has been prosecuting for decades. Market speculation – whether through day trading or mere market timing – poses clear risks to financial health.

The first risk is that people are notoriously bad at timing itself. Timing the market is always tempting. If we could only pick the highs and lows, we could dramatically improve returns. But hindsight makes timing an illusion. The future remains uncertain and repeated studies have shown that even professional investors struggle to time the market.

The ASIC study bears this out. Two thirds of the days on which retail investors were net buyers were followed up by a day of falling share prices. Half of the days when they were net sellers were followed by an up day.

Here’s another problem faced by many direct investors: concentration. People who take a trading approach to their investments can end up with a collection of assets that have been accumulated over time without regard to how they fit together as a portfolio.

This can lead to a portfolio that is overweighted to a particular asset type or industry, increasing the risk of permanent loss of capital should things go wrong.

ASIC also notes that many investors are being tempted into high risk products that use leverage to supercharge returns.

Geared products increase the profits from favourable market movements but magnify the losses when things go the wrong way.

ASIC says some 75% of trading in one geared exchange traded product earlier this year was by retail investors, who pushed it to become one of the most traded products on the market.

This appetite for risk also tempted some into volatile, speculative investments based on commodity prices. Some oil futures products lost 80% of their value in a few weeks, potentially wiping out investors who never intended to actually take delivery of the oil.

Have you been tempted by the wild west mentality of 2020? Have you found yourself straying from your investment principles and taking a punt?

Five simple rules for investors

Here are five ways to get things back on track.

First, remember the difference between investing and speculating. Investing means holding assets that will provide you with an adequate return over a long period of time in a mixture of income and capital growth. It doesn’t mean chasing short term profits.

Second, revisit your original investment plan – or create one – and bring discipline back to your investing. Having clear, appropriate investment goals and a considered roadmap to achieve them is the core to successful investing. Portfolios need to be built from the top down – considering risk, return and diversification – and not built up as a collection of individual assets.

Third, be diversified. Diversification protects you against permanent loss from something going wrong in a single investment. Diversification means owning different investments in different industries, different countries and different asset classes.

Fourth, keep an eye on how much is leaking out of your portfolio in fees. Fees include brokerage, advice fees and fund manager fees. These all eat at your capital. Fees are the single best predictor of outperformance of a managed fund. The lower the fee, the better the outperformance.

Fifth, remember that earnings usually grow over time and that compounding works.

Sticking to the core principles of successful investing can get your investments back on track to deliver your goals.

 

Robin Bowerman is Principal and Head of Corporate Affairs at Vanguard Australia, a sponsor of Firstlinks. This article is for general information and does not consider the circumstances of any individual.

For more articles and papers from Vanguard Investments Australia, please click here.

 

  •   2 September 2020
  • 3
  •      
  •   

RELATED ARTICLES

Can you value a share just using dividends?

Australia: Most listed stocks per capita and biggest gamblers in the world

Why buying speculative stocks often proves irresistible

banner

Most viewed in recent weeks

Are you making these SMSF mistakes?

After four decades advising investors, there are a few common mistakes I've seen SMSF investors make. From holding too much cash and chasing yield to overtrading and trusting tips. Are these errors costing you?

Why have Australian living standards 'fallen' and how do we fix it?

For the last few years there has been much talk of a 'cost-of-living' crisis in Australia and of 'falling living standards'. Lately this has flared up again with the pickup in inflation resulting in a renewed fall in real wages.

Will you run out of money in retirement?

Fear of running out has become a defining retirement anxiety. Why do some retirees die with substantial wealth while others deplete their nest egg? Evidence suggests the answer is more complicated than we think. 

Retirement spending is not one-size-fits-all

New data challenges the idea that Australians are underspending their super. The bigger issue may be helping retirees navigate complexity, make confident decisions and use their savings to support security, wellbeing and choice.

Four options for an income investor’s next dollar

What if Australia’s golden age of dividends is ending? Rather than overhaul your portfolio, it may be worth considering where new capital can work harder. I discuss four income strategies and the trade-offs behind each.

The missing link in the CGT debate

A little-noticed consequence of Labor’s tax changes could have implications well beyond investors’ tax bills. The issue raises bigger questions about incentives, capital allocation and the drivers of long-term economic growth.

Latest Updates

SMSF strategies

Meg on SMSFs: What do we think about reversionary pensions these days?

Reversionary pensions have long been a staple of SMSF estate planning, but are they still the best option? Meg Heffron revisits a once-clear favourite and asks whether changing super rules have shifted the balance.

The ageing ‘crisis’ has not and will not happen

Rising age dependency is frequently treated as a warning sign for economies. But when actual workforce participation is examined, a strikingly different picture emerges about ageing, productivity and economic sustainability.

Retirement

How does the 4% rule stack up?

The 4% rule has long been retirement's gold standard. But after a difficult period for investors, fresh analysis suggests a more conservative approach may significantly improve the chances of making savings last.

Shares

Four charts that expose market concentration risk

Investors have recently been rewarded for backing market leaders, but history suggests this eventually comes at a cost. Now may be the time to review whether your portfolio is carrying unintended risks beneath the surface.

Investment strategies

The case for gearing beyond property

Most Australians gear into property but ignore shares. That may be a mistake. Used carefully, geared equity strategies can enhance long-term returns, reduce cash tied up in growth assets and support retirement income goals.

Economy

Australia's $1 trillion debt pile

The headlines exclaiming that Australian government debt has hit A$1 trillion and US government debt has hit $40 trillion has turned heads, but how serious are they really? Will Australia's mix of debt create challenges?

Economy

Has 100 years of growth made us any happier?

For decades, GDP has been the benchmark for economic success, but has it made us materially happier? If happiness does not rise in lockstep with prosperity, are we overlooking what constitutes a successful society?

Sponsors

Alliances

  • ASA-Logo-RGB-ActiveGreen-web.png

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.