The riskiest type of investment is something that is completely based on speculation.
An example is buying and selling assets that don’t go up in value.
For example, currency trading. The Euro can’t go up against the USD at the same time as the USD goes up against the Euro:
You don’t even make any money in the bank holding them.
Therefore, it is all about timing, and 99.9% of the people engaging in this activity are speculating.
Stock trading is also risky compared to buying and holding stocks:
It is less risky than currency trading because the base asset (stocks) do go up in value over time.
Not every stock, but the entire stock market. They also pay dividends so if you sell out and make a loss, you still get the dividends.
Yet if you buy and sell them on a daily or monthly basis, you are still speculating.
Amazon can’t beat the market at the same time as Amazon loses to the S&P500.
That means that one person is on the losing side of the trade and the other is on the winning side of the trade.
In comparison, if two people both hold the S&P500 or MSCI World index for decades, both people will win.
In fact, both people will get the same percentage return, if they bought at the same time.
Indeed buying stock indexes for long periods of time isn’t speculative as shown by the below results:
We can also see the same thing in real estate. Flipping real estate (buying and selling quickly) can be profitable as can stock trading, but it is more of a speculation.
Buying and holding real estate in the hope that somebody else will buy the same asset later on for more (capital appreciation) is a form of speculation as well.
In comparison, focusing on what the asset actually yields (the yield) is less speculative.
The biggest signs of a speculative vs an investor is:
They are focusing on hot ideas
Short-term orientated rather than focusing on the long-term
Trying to buy and sell, and market time, as opposed to buying and holding
Not focusing on diversification at all
More obsessed with capital appreciation if they are buying property rather than the yield
An obsession with stories and personalities, like who the CEO is
Needing to feel like investing is exciting. Good investing can be very boring.
So, often it isn’t the asset itself that is risky. People get this wrong.
It is how you use the asset. Buying one stock for a year is super risky, as is trading stocks.
Buying and holding an entire market like the S&P500 for decades isn’t risky.
The same is true in private business. People say starting a business is risky.
That is usually true, but starting one without experience and focusing on debt/leverage is very risky.
Only starting a business after having years of experience in a domain isn’t nearly as risky.
There are some assets that are risky for all non-professional investors, like options, but few people use them.
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