Are you a speculator or an investor?

Robin writes:

There has been so much said and written in recent years about active and passive investing. Rightly so — it's an important subject that investors need to understand. But active and passive isn't necessarily the most helpful distinction. For me, you're either a speculator or an investor, and, sadly, there are still far more speculators than investors.

Do you trade stocks several times a year?

Do you regularly check your trading or retirement account to see how your investments are performing?

Do you look to the financial media for ideas on which stocks or funds to invest in?

Do you feel the urge to trade again if the last trade you made was either a big success or a real flop?

If you answered Yes, to any of these questions, the chances are that you’ve lost control of your investment decisions.

Of course, investors like to think that their decision-making process is thorough and rational. But the evidence tells us it can be anything but.

Behavioural finance is a relatively new academic discipline, devoted to explaining why we make the financial choices we do. Studies have highlighted a whole range of behavioral biases that lead to sub-optimal investment decisions.

These include confirmation bias, or the tendency to seek, interpret, and remember information that confirms pre-existing beliefs while ignoring contradictory data. Then there’s herd behaviour, which refers to the way we follow and copy what other investors are doing. Also common is loss aversion, the preference for avoiding losses over acquiring equivalent gains.

But there is another reason why investors make such poor choices: addiction. In short, you're more likely to be a speculator than an investor.

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This article is based on the book Index Funds: The 12-Step Program for Active Investors . The issues it raises are addressed in Step 1:

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