What’s the real difference between investing and gambling your money? How can you build wealth while keeping your investments secure?
In Set for Life, Scott Trench shares practical strategies for building long-term wealth through smart investment choices. His approach challenges common misconceptions about investment risk while offering clear guidance for both novice and experienced investors.
Keep reading to learn how to manage investment risk and make informed decisions that can help grow your wealth steadily over time.
Managing Investment Risk
Trench explains how to manage investment risk with advice regarding diversification, stocks vs. bonds, and speculation.
When you start investing, Trench advises you not to worry too much about diversification (spreading your money across different assets). If you have less than a few hundred thousand dollars to invest, focusing on one high-performing asset class, such as stocks or real estate, can help you accumulate wealth more quickly. Diversification becomes more important only as your wealth grows and preserving it becomes a higher priority.
(Shortform note: In I Will Teach You to Be Rich, Sethi differentiates between asset allocation and diversification. Asset allocation is how you spread your money across different types of investments, like stocks and bonds. Your asset allocation should match your risk tolerance—for instance, when you’re young, you can afford to invest more heavily in riskier assets like stocks that have the potential for higher returns. Diversification, on the other hand, means having a mix of investments within each asset class. So even if most of your money is in stocks, you’ll want to invest in different types and sizes of companies.)
Additionally, Trench argues that, contrary to popular belief, stocks aren’t riskier than bonds. While the prices of stocks may change more compared to bonds in the short term, stocks are actually less risky than bonds for long-term investors because they’ve historically provided higher returns over extended periods than bonds.
(Shortform note: In Beating the Street, Peter Lynch explains two major risks that bonds face: inflation and interest rate changes. First, inflation can reduce the real value of fixed bond payments over time, so your $50 interest payment buys less and less as prices rise. Second, if interest rates go up, the value of your existing bonds goes down since newer bonds offer better rates. Unlike bonds, stocks let you own a piece of actual companies, giving you the chance to earn both regular dividend payments and increases in the stock price itself.)
However, Trench warns that you should avoid speculation, which means buying assets solely in the hopes that their price will go up. He explains that speculative activities like buying gold or cryptocurrency aren’t true investments because they don’t create real value or sustainable long-term wealth in the same way that investing in productive assets like businesses or real estate can.
(Shortform note: In The Intelligent Investor, Benjamin Graham more specifically explains the difference between investing and speculating. True investing is when you carefully analyze an asset to ensure both safety and adequate returns. Speculation is everything else. Speculators often trade based on short-term stock price movements, popular opinion, and emotional swings rather than a company’s fundamental value. Graham warns against common speculative traps disguised as investment strategies, like trading based on short-term earnings reports or chasing trendy formulas, as these approaches consistently fail to outperform the market over time.)
