The reason you invest is to accomplish something well off in the future - perhaps a down payment on a house; money for retirement; or to build up a safety net for unexpected events. Investing differs from speculating because investments have expected returns based on economic reasons. That is, stocks have earnings and bonds have interest payments. Speculating is betting...hoping that whatever you are buying today will be worth more next week or next month...just because.

In his excellent new book titled The Clash of the Cultures - Investment vs. Speculation, John Bogle outlines just how problematic the speculation mindset can become when it is confused for investment. Even institutional retirement and endowment funds (including many state retirement funds), with very long time horizons have resorted to speculating and in many instances with terrible consequences.

The capital markets serve a desirable function as a conduit for turning capital into long-term value. The markets engender innovation, provide needed liquidity and create jobs. Investors part with their dollars in anticipation of some future reward. The timing of "future" is uncertain but there is some economic basis for the expectation.

Many have followed the happenings of two highly hyped public offerings - Facebook and Groupon. In only a few months, both stocks have rendered instant examples of the dangers of confusing investment and speculation. While the future of these companies is yet unknown, what is known is the substantial decline in share price since the initial public offering. Many "investors" were hoping that the stocks would move higher despite questionable economic fundamentals.

Part of avoiding the "speculation virus" is to stop trying to predict the future (which, of course, is exactly what speculation entails). The current prediction narrative describes the apocalypse waiting if desired political results don't happen in November. This ignores the sharp growth in company earnings (the economic underpinnings for investing). Regardless of election results, people will still be buying Pampers, iPads and Cokes afterwards.

 - James E. Wilson, CFP®