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Harry Browne / Fail-Safe Investing

Fail-Safe Investing is built around the 17 Golden Rules of Financial Safety. Here is one of those rules.

Rule #3: Understand the Difference between Investing and Speculating

Investors often get into trouble by speculating when they think they're investing. If you don't understand the difference between the two, you can put yourself in a dangerous situation.

When you invest, you accept whatever return the markets are paying investors in general.

When you speculate, you attempt to beat that return - to do better than other investors are doing - through clever timing, forecasting, or selection. The implicit assumption is that you have knowledge or talents other investors lack.

You're investing when:
  • You hold a long-term position in the stock market with no attempt to time your investments or to determine which industry or individual stocks will perform best.
  • You keep your savings in a money market fund or a bank account.
  • You hold a balanced portfolio, with a variety of investments, so that at least one will do well - and keep your portfolio afloat - in any economic climate.
You're speculating when:
  • You select individual stocks, mutual funds, or stock market sectors you believe will do better than the market as a whole.
  • You move your capital in and out of markets according to how well you think they'll perform in the near future.
  • You base your investments on current prospects for the nation's economy.
  • You use fundamental analysis, technical analysis, cyclical analysis, or any other form of analysis or system to tell you when and what to buy and sell.
  • You allow an investment advisor, mutual fund, or money manager to move your money into and out of markets.

Investment advisors and writers often refer to "safe investments" when they're really talking about speculations. And no matter how they assure you that a given speculation involves little risk, it is still a speculation.

The distinction between investing and speculating is important. Any attempt to beat the return available to others must, by definition, also involve the risk that your return will be smaller than what the market is offering effortlessly, or that there will be no return at all, or even that you might lose all the capital you've risked.

As we proceed, I hope you'll see why I want you to understand the difference between investing and speculating. Both are honorable endeavors, but only one of them is suitable for the funds you're basing your future on.

There's nothing wrong with speculating - provided you do it only with money you can afford to lose. But the wealth that's precious to you - the money you're counting on for retirement - should never be risked on a bet that you can outperform other investors.

Thus your first concern should be to set aside the money that's precious to you - using it to set up a bulletproof portfolio that will weather whatever might come, while providing steady and stable growth. I call that the Permanent Portfolio because, once arranged, it requires no further analysis or alteration. It is built to protect you in all circumstances without trying to divine the future.

That might seem like an impossible task, but it really isn't. In Rule #11, we'll see how to do it.

Once having invested in a safe portfolio, you can set up a second portfolio with which to speculate - funded with money you can afford to lose. I call that portfolio the Variable Portfolio, because you can make changes to it to your heart's content, on any basis you choose. You can afford to take risks with that portfolio because you know that, even if you lose it all, you won't damage your future. You don't have to have a Variable Portfolio, but if you want to speculate, having one will provide a safe way to do so. We'll look at the Variable Portfolio in Rule #12.

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