Episode Details

All investing is associated with some level of risk.

But if you're taking on too much risk, you may be speculating, when you think you're investing.

In today's episode, I'm going to talk about the difference between investing and speculating as well as a number of myths about risk that most investors don't understand.

Then I'll have a chat with Bessie Hassan, of Finder.com.au about the risk of getting scammed.

You may be surprised to learn that Australians lose more than a million dollars a week in scams. We'll talk about who gets scammed, what to watch out for, and how to protect yourself.

What most investors don't understand about risk

What's the difference between investing and speculating?

Investing is purchasing an asset to earn a return. You make the decision based on evidence, based on fundamentals, based on long-term horizons so that timing isn't an important part of it, and you aim to profit from it.

Speculation is riskier. It's based on the hope of a profit. It's based on hearsay or the next hotspot or chasing the next big thing. It's usually based on short-term time frames, so timing the market is important. And you're hoping to make money out of a rising market, and therefore it's less reliable than investing.

So why do some investors think they're investing when they're really speculating?

They're looking for the next growth area or the next hotspot. They're looking for something that will work now.

On the other hand, strategic investors don't look for investments that will work "now", they look for investments or locations that have always worked - they invest in properties and locations that have worked in the long term. That's the big difference between investing and speculating.

The myth of risk

What most of us have been taught about risk is wrong, and it's probably holding you back from achieving real wealth. If you are like most investors somewhere along the line you've probably heard that there is associated with different investment vehicles,

Most believe that any investment can be placed somewhere along a continuum of risk with low risk investments at one end and highly speculative ventures at the other. They believe that generally, the higher the risk the greater the reward.

However, this theory misses an important component that helps determine whether or not a specific investment is risky. That component is you. The investor.

Each investor has their own personal risk spectrum.

How can you tell if an investment is risky?

This question can't be answered without knowing more about you.

Have you ever invested in property?

Have you completed a development?

If you have zero knowledge about residential developments, or you've never owned an investment property, no matter how good the deal seems a development is a risky proposition.

Some ways to determine risk:

• Know your area of expertise -- If you're investing in something that's your specialty, you start with a built-in advantage.
• Control – the more control you have, the lower your risk
• Transparency – the more you know, the lower the risk
• Liquidity -- Liquidity means the ease with which you can recover your money by selling the investment and converting it (or part of it) to cash. The greater the degree of liquidity, the lower your risk.
• Returns -- Investors gain returns from their investment property via cash flow, capital growth, forced appreciation and tax benefits. The more secure the returns, the less risky the investment will be
• Is your equity safe? -- Is your financial outlay secure if the investment fails?
• Are you personally liable? -- When you make an