Topic: How To Invest

What your broker won’t tell you about forex investments

With the Canadian dollar trading near $0.97 U.S., and outperforming many of the world’s major currencies, interest in forex (or foreign exchange) investments has picked up lately.

Forex investments involve dealing in foreign currency futures or options. This can make sense for a business that is forced to take on unacceptable currency risk. Futures or options let the business pass that risk on to speculators who wish to accept it.

Investors are typically the biggest losers in forex investments

Textbooks often fail to emphasize that most speculators who succumb to the lure of forex investments wind up losing money. It doesn’t matter if they trade foreign currency or a traditional commodity, such as wheat. In the end, they almost always wind up losing.

Here’s how things typically work out: Suppose an investor starts out with the intention of losing no more than, say, $15,000. After a few months of trading on futures in foreign -exchange investments, the investor will typically have broken even on his futures trading — if you ignore commissions. But if you count commissions, which obviously have to be paid, the investor will have lost about $15,000.

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In other words, the futures trades on forex investments work out like bets on a series of random events, such as coin tosses. You’ll win a few and you’ll lose a few, but you won’t win enough to pay your commissions, let alone leave yourself with a profit.

If you were to invest the same amount in a portfolio of stocks, you would spend only a few hundred dollars on commissions. This disparity gives futures and options brokers a huge incentive to recruit clients and try to pump up their enthusiasm and confidence.

Futures and options on forex investments or anything else offer a great deal of leverage. If you could get that leverage to consistently work for you, you would earn 50% to 100% or more a year on your initial stake. These days, we see lots of ads for books, seminars and software that purport to show how you can make that kind of return on a consistent basis. Some even go as far as to say you can do it in a few minutes a day.

This raises an obvious question: if it were possible to make that kind of return, why would anybody work?

Our long-standing advice is a more reliable approach than forex investments

Our long-standing advice, and the key guiding principle in managing the portfolios of clients of our Successful Investor Wealth Management service, is to invest in well-established companies and spread your funds out across the five main economic sectors: Manufacturing & Industry; Resources & Commodities; Consumer; Finance; and Utilities.

You should avoid currency trading, penny stocks, new issues, options, futures or any high-risk investments. Although you may experience modest losses when markets drop, you should show positive results over time.

If you’d like me to personally apply my value-investing approach to your investments, you should consider becoming a client of my Successful Investor Wealth Management service. Click here to learn more.