Most of the people who come to us for advice consider themselves investors, not speculators. The difference is of course open to interpretation and worth exploring.

The dictionary defines speculation as “the forming of a theory or conjecture without firm evidence”. Sound familiar? This is indeed how many investors commonly make decisions. That is, by hunch, tip, instinct or forecast – all of which have no firm evidence.

When making important decisions, most people seek firm evidence to support their choice. For instance, in the field of medicine, we ask our Doctors to provide firm grounds for justifying a recommended drug or procedure. We want to know that it has been done before and that it is most likely to work. We may ask the practitioner to outline the outcomes achieved previously from a similar course. Through this line of enquiry we satisfy ourselves that we are making sensible, well thought out decisions, based on the best evidence we can find.

Why then are investors so often inclined to bet substantial portions of their life savings on tips, hunches and forecasts?

If you need any convincing of the unreliability of financial forecasts, a good exercise is to pick up a 12 month old newspaper and read the financial prognostications and opinions. The worth of these is quickly laid bare.

Many investors believe that they are paying their adviser for forecasts and that the value of the adviser’s work lies in the reliability of these forecasts. I would argue that these forecasts are not worth paying for. The truth is none of us, no matter how well read, have a crystal ball that works and the financial markets never cease to surprise us all from year to year.

This week’s edition of the Financial Review ‘Smart Investor’ will make interesting reading in a year’s time. The magazine’s cover is littered with mouth-watering enticements such as “Your springtime shopping list of the best suburbs for houses and apartments”.

A shortcoming of human nature is that we all seem to want to believe that these forecasts are on a firm footing and that ‘superhero returns’ are possible (not just happenchance). And so from time to time impulsive part of our brains gets the upper hand and prompts us to act on these enticements, usually to our own detriment.

So if acting on impulse with little firm basis is speculation, what then is investing?

The bad news is the core tenants of investing don’t make for sexy magazine headlines. They are mundane and are unlikely to make you rich quickly. But they are the surest ticket you have to investment success over the long term. They include:

• Make your decisions slowly and in a considered way. Never act impulsively.
• Have a plan, and a documented approach to how you will manage through the inevitable market cycle of boom and bust.
• Genuinely invest for the long term.
• Admit that you aren’t going to successfully time the tops and bottoms of markets and forget trying.
• Embrace diversification.
• Be humble. The market is not perfectly efficient, and not always right. But most of the time it is efficient enough to make it close to impossible to beat.
• Worry about costs. All else equal, the greater the fee you pay, the lower your potential return.
• Understand that portfolio rebalancing is the gift that just keeps on giving. If that doesn’t make sense, then explore this concept and understand it because it is key (see our article of 26 Sept 2013).