…and how not to lose more than you’ve invested
On my way home last night I saw something on a Piccadilly Line train that caused me to double take. No, it was not one of my fellow passengers – there was an advert by an online commodities broker, which carried this statement:
“65% of retail CFD accounts lose money when trading CFDs with this provider”.
Now, we’re all used to risk warnings – the value of your investments can fall as well as rise etc. – but this is a corker. More importantly to my mind, why are CFDs being marketed to retail investors? CFDs are Contracts for Difference. They are highly complex instruments, which should only be used by the most sophisticated investors and professionals. They can carry the potential to lose more than has been invested. So why would anyone invest where you pretty much have a 65% chance of losing money, and the possibility of losing more than 100% of your money?
It brings home in stark black and white (or in this case, green and white), why diversification and taking the long-term view is so important. This is a story we go over time and again, it is the most basic and fundamental tenet of investing and I make no apology for returning to it today, especially when I’ve just seen CFDs marketed to the man on the Tube.
We diversify our investments and invest over long time periods because markets move up and down with events, and we don’t want to have to cash out at the bottom of an event. The current Brexit situation is causing huge consternation across the nation and the world – although, as I write, it seems much of the uncertainty has already been priced into the markets. The morning after the Government lost the Withdrawal Agreement vote by an unprecedentedly high margin, the FTSE 100 was down only 0.5%, the Pound was actually up against the Euro and flat against the Dollar. But none of us can know what might come next, or how markets will react when it does. What we must do is stay diversified and stick with that long term view, which history shows us is the best way.
We provided a detailed analysis of ‘Long Term Investing vs. Short Term Noise’ back in October 2017, which you can read here, and everything we said then is still true today. Every asset class goes up and down, some more than others, and some go up as others are going down, and it is only by diversifying across them all and investing over the long term that we can expect to achieve stable growth.
Just before the 2016 referendum I wrote an article that looked at historical market returns, going back to 1950. It showed how £100 invested in equities in 1950 had turned into £156,840 by 2015 having absorbed any number of dramatic events along the way: The Suez crisis, The Kennedy assassination, England winning the World Cup (truly momentous in hindsight), the Black Wednesday stockmarket crisis, the Iraq War, to name but a few, and you can re-read it here. And that is the fundamental message; events occur, markets react, and markets correct the reaction.
As my colleague says, every market fall is V shaped, and provided you stay invested you’ll come back up the other side of the V. Just avoid CFDs please.
Philip Chandler FPFS, CFPTM, Chartered MCSI
Chair of Aspinalls Technical and Investment Committee