If you had missed the best 90 days of the S&P 500 over a 15 year period (1993-2007) your average annual return would have been a negative 7%.  If instead you bought the market and held onto it, that same return would have been greater than 10%. 

That’s not my rule; it’s THE rule!

As an investor, you understand that the market is like a yo-yo climbing a flight of stairs. With that, you accept the likelihood that you will lose money about 3 out of every 10 years.

Speculators think that they are so clever that they can time the market and know when to get in and out of it.

So let’s define the difference.

Investing is:

• Putting money to work that you don’t need to spend in the short term and leaving it alone without moving it around or chasing recent winners.
• Keeping your arms crossed and staying disciplined while the crowd is urging you to sell.
• Taking your profits when everybody else is eager to buy.
• Owning a diversified portfolio with exposure to assets offering real world financial safety — in other words, a place where your money is safe in any economic environment.

Speculating is:

• Betting you can outsmart and outperform the market over a long period of time.
• Basing investment decisions on forecasts, computer trading systems, or technical analysis.
• Following the alluring advice of hucksters and charlatans offering you the golden promise of prosperity . . . for a hefty fee, of course.

There is an old Wall Street adage that says, “Bulls make money, bears make money, but pigs get slaughtered.” Amazing how simple the truth can be, isn’t it? Then how come so many so-called investors (hopefully not you) continue gambling with their serious money?

Because it seems so easy. Just look at all the material you receive in your inbox about how you can get rich trading stocks in your spare time. Or last year’s winning mutual funds touted on TV and on the radio. It’s all nonsense.

For over three decades I’ve witnessed thousands of people successfully build wealth but I have to see any of it maintained when achieved through speculation. Sure, a few luckly souls manage to make it big in a short period of time but just as quickly as their wealth was created, in no time at all it is often lost.

Here’s the reality check: Nobody I know and nobody you know has built (and more importantly) maintained wealth through speculation.

I don’t have anything against speculation so long as you are doing it with your “play money” - which is the money you can afford to lose. But most of time here we are dealing with your serious money . . . the money you need for retirement . . . and that is money you CANNOT afford to lose through speculation.

Understanding the difference between investing and speculating is key to the long term outcome of your financial future. If you are an investor, I commend you for your discipline and hope you stick with the program.

If you are a speculator . . . well, good luck.