Boring? It’s often better when investing! - August 07, 2019

Boring? It’s often better when investing!

Currency trading is popular among professional and amateur investors alike.  We can understand its appeal: advertisements and success stories always say how easy it is to earn great profits with it. FX trading is indeed an exciting craft, but in investing boring is often better than thrilling.

FX always comes up among people who want to manage their own investments and earn profits fast. Why? Because many amateur investors see it as an easy way to get rich quickly. Sadly, people usually lose their money on FX because there are many things that success stories don’t tell you.

It’s a stressful market

Forex trading is a stressful business. This means that it’s harder to participate in it mentally because it puts a lot of strain on people’s mind. The reason is simple: currency market is super volatile  in the short-term and in the medium-term.

It is true that in the long run FX moves together with the rest of the market, but FX trading is for day-traders, not for people who plan for longer periods. Simply because the dream profit that ads tell you about are made on fast-paced trading. The type that puts a lot of stress on the trader.

Looks good in movies, not in real life

We get it, FX trading is still hot: it’s mostly what people see in movies. Trading is quick thinking, decisions are made in a heartbeat, and profits can be enormous. Looks like the perfect thing to do. Reality begs to differ. As we already wrote about it, several sources say that 90-95% of traders lose money on forex. (See: Why most people lose money on FX trading.)

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In contrast, stocks and bonds might seem boring. Successful investment portfolios are not like action movies: they do their jobs for 5-10 years and they “only” make a decent return. As it can be seen in the chart above, S&P 500 made a profit in two-thirds of the last 100 years. That is stellar performance. Stocks become especially attractive if we look at the success stories of the tech companies of the 21st century. (See: What are the FAANGs and why are they important?)

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Other instruments and mixed investment portfolios also made great returns in the last 20 years as it can be seen above. What’s more, S&P 500 made an annual 5.6% return, while mixed portfolios were close to that. Average investors (who made their own decisions on the market) only reached a 1.9% return per year, which is far below the market itself.

Trading luck for stability

We know FX trading can lead to tremendous profits, but the real success stories are rare: only 3.5-4.5% of traders make any profit at all. Long-term success is even harder. That needs constant work and a bit of luck, too. Short-term success on the other hand is almost always only about a lucky decision, often followed by bad ones.

We think it’s better to go for stability with investment portfolios. No wonder, the wealthier someone is, the less liquid asset, like currency, they have (see: The difference between the wealth of the 1% and the middle class). It is indeed true that even a well-crafted investment portfolio needs discipline (see: The importance of discipline explained), but that’s still easier than being lucky every single day.

Disclaimer: This analysis is for general information and is not a recommendation to sell or buy any instrument. Since every investment holds some risk, our main business policy is based on diversification to minimize threats and maximize profits. Innovative Securities’ Profit Max has a diversified portfolio, which contains liquid instruments. This way, our clients can maintain liquidity, while achieving their personal investment goals on the long term.