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Key points

  • Recent news stories about aggressive stock investing underscore the importance of distinguishing between speculating and investing.
  • Investing is the execution of a long-term strategy to seek a specific goal, not the act of making short-term bets on individual securities.
  • ETFs are a powerful tool for building a long-term, diversified portfolio that can help investors meet their goals.

Back in 1994, I listened to a speaker at an advisor conference in Phoenix discuss the difference between investing and speculating. I recall that many of us in the room felt that speculating was the essence of investing, that the great game was about trying to select the stocks that would have the greatest upside.

How could we believe investing and speculating weren’t entwined? Over the years, however, I’ve come to strongly believe that there is in fact a vast difference between the two, something that has been highlighted by recent events.

Speculation goes mainstream

It’s rare that obscure individual stocks and sophisticated trading strategies dominate mainstream headlines as they have in recent weeks. The episodes in January and February were straight out of Hollywood, with a storyline pitting non-professional online day traders against professional investors. And while the media spotlight may have been short-lived, it nonetheless offered a fascinating glimpse into lesser-known parts of what is often confused with the investing world.

But what concerns me isn’t what the incident revealed, but rather what it didn’t reveal — which was a lesson about what investing is. When intelligent people ask me questions about what the next “short squeeze” may be, it saddens me that they believe the recent episodes had anything to do with investing.

Whatever one thinks about what supposedly drove some of the Reddit users to invest in GameStop and other companies, or what the consequences should be for the resulting market volatility might make for interesting conversation. However, the events weren’t about investing — they were about speculating. And the two are very different.

Speculating and investing aren’t to be confused

Investing involves setting a goal, deciding how much risk to take on and the best path to reach that goal, and then building a well-diversified portfolio to try to attain that goal. Speculating is putting cash into a handful of stocks, commodities or a new technology with the hope of quick returns, or even worse, betting big on a single opportunity. The advisors I work with understand this and convey it to their clients — investing is the execution of a long-term strategy to seek a specific goal, not the act of making very short-term bets.

Now, there’s nothing wrong with holding individual stocks in a portfolio, but investors need to understand the associated risks. All investing involves risk, but it’s elevated when focusing on just a few stocks. Consider the chart below, which shows individual stock performance over the last five years, a period that saw strong growth in the U.S. equity market, compared to broad U.S. stock mutual funds and ETFs, and how investors could have mitigated single stock risk while benefiting from market returns with the broader, diversified vehicles.

Chase individual stocks at your own risk

Not all stocks are created equal, but there's strength in numbers. U.S. stocks broadly gained 15.2% over the last 5 years.

Chart: Chase individual stocks at your own risk

Source: Morningstar as of 12/31/20. Mutual Funds and ETFs are the Morningstar U.S. Equity Category, oldest share class only, representing access to the broad U.S. equity market. International, sector and sub-sector funds are not included. U.S. Individual Stocks are the Morningstar U.S. Stock Universe, all securities on the NYSE and NASDAQ. Analysis does not include obsolete mutual funds, ETFs or stocks as defined by Morningstar. Past performance does not guarantee or indicate future results.

History is replete with examples of once solid companies that floundered, or high-flying, sure-bet stocks that ultimately crashed. Pooling companies into an investment vehicle such as an ETF can help mitigate that single security risk. Diversifying across asset classes, regions and sectors can further help to smooth the bumps of investing, especially over the longer term.

Speculating isn’t easy — but investing can be

I worry that stories of people getting rich from a single stock can actually make investing seem even more daunting to those just getting started, who may wonder if they have the skill to find that next hot stock. It shouldn’t be intimidating. In many respects, it’s never been easier to be an investor.

Investors now have access to a range of tools and many excellent financial advisors to help. They don’t have to try to find the next hot stock, and they don’t have to build a financial strategy on their own. Highly diversified exchange traded funds (ETFs) offer precise, cost-efficient exposures to range of asset classes. And at iShares, we offer a suite of tools to help with tasks such as building a core portfolio, or helping advisors and their clients better understand risks.

If press reports are accurate, a few of the Reddit forum investors have done very well for themselves. If so, I’m happy for them. But an online forum is not a strategy that’s easy to replicate, nor is it one that’s advisable for achieving long-term goals. For the rest of us, it’s never too late to become an investor and start building — and implementing — a goals-based investment plan.

Michael Lane

Michael Lane

Head of iShares U.S. Wealth Advisory at BlackRock