Investing isn’t always easy and 2016 has certainly proven that volatility in the stock market can lead to significant shifts in investor sentiment and philosophy. A correction of this nature should be viewed as an opportunity to analyze your current strategy to ensure its measuring up to your expectations. What it should not do is cause you to deviate from a sound philosophy of investing to a gamblers streak of speculation.

Let me explain what I mean by that….

Investing

Investing is when you create a rational plan to grow your earned capital through a systemic process of investment in multiple securities or asset classes. It may include converting your cash to stocks, bonds, commodities, mutual funds, or ETFs in a manner that conveys a disciplined approach to risk management alongside a defined process and time horizon.

For most investors this simply means building a balanced portfolio that takes into account their specific risk tolerance, experience, and goals. That plan will then be subtly adjusted over time as your life changes, you accumulate or redeem capital, or your philosophy takes on a different form. The themes change, yet overall, the basic building blocks of investment in the stock and bond markets have been similar for generations.

Speculating

Speculation on the other hand is when you take out a lottery ticket. It’s a completely different mindset that is more akin to gambling rather than true investing. You don’t wake up one day and put $5,000 in the Direxion Daily Gold Miners Bull 3x ETF (NUGT) as a long-term investment opportunity. You do it because you think you can make a killing in a very short period of time.

This chart should illustrate that point distinctly:

Sometimes that opportunity pays off through timing and maybe even a bit of skill in reading the fundamental or technical tea leaves. Other times you get scorched and end up selling at a loss with a big helping of regret and earnest promises to never to do it again.

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