The prospect of making easy, quick money will always be tempting. I have fallen for it myself, on several occasions. It never ended well.
A few years ago, I tried spread betting. I enjoyed some early success too, after backing the FTSE 100 to rise in early trading. I made £400 that morning, if memory serves correct. Within days, I had lost it all, on a string of bad bets. Every time I placed a trade, the market instantly moved against me, as if it hated me. Or was laughing at me.
By the end of the week I was several hundred pounds down, and that’s when I stopped chasing my losses. To be fair, I was rubbish and ill-prepared, but I’m not the only one. In 2016, the Financial Conduct Authority found that 82% of customers trading contracts for difference (CFDs) with spread betting providers lost on average £2,200.
I got off lightly.
Foreign exchange fiasco
Forex trading was another temptation. I was writing quite a lot about the currency markets, and thought maybe I could turn my hand to trading currency pairs, only to encounter the same problem. You cannot accurately predict short-term currency movements any more than you can predict where the stock market will go in the next few hours or days. That’s why 96% of forex traders lose money. I do not find those odds attractive.
There are just too many variables – and too many unexpected events that can send markets veering off on an entirely unpredictable course.
The strange thing is that stock markets are easier to predict over the longer run. While in the short term they can go anywhere, in the longer run, the general trajectory is upwards. That is why I believe they are a better way of generating long-term wealth than spread betting and forex trading, or other get-rich-quick investments such as Bitcoin.
In the long run, we’re all richer
Measured over decades, stock markets are known to generate average returns of 7%-10% a year, with dividends reinvested. The key is to invest for the long term.
People who think stock markets are a get-rich-quick ‘game’ have got it all wrong. The way to make big money is to buy a balanced spread of shares and funds, and simply leave them to grow for years and ideally, decades.
You also need a low-cost trading platform to minimise charges, which are a drag on performance, and invest free of tax inside your Stocks and Shares ISA allowance.
Dividends clinch it
Incredibly, stock markets can make you rich even if they do not move. The FTSE 100 returned 94% between 31 January 1999 and 31 December 2018, according to Schroders, despite slipping slightly from 6,930 to 6,845 over the period.
It did this through the power of dividends. The index offered an average yield of 3.54% a year, and if you reinvested those to buy more stock or fund units, you would have benefited from the effects of compound interest.
You don’t get dividends when you spread bet or trade forex. You just spend a lot of time watching your computer screen flash red as your losses mount up. Stick to shares, they’re profitable and a lot less bother, in the longer run.
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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019