Andrew Hallam
06.08.21
Where Are The Odds Better, Trading Currencies or Trading Stocks?
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Trena saved money for several years, but she didn’t know what to do with it. Instead of investing it, she dumped it into her savings account. “Eventually, I had about $300,000,” she said, “So I walked into a Singapore bank and asked for suggestions.” She sat with a wealth manager who outlined a plan. He said a team at the bank could trade currencies on her behalf.
Trena hadn’t thought about this before. She knew plenty of people traded stocks. But currency trading sounded far more exotic.
If you scour the Internet in search of wealth building strategies, you’ll see several people hawking currency or stock trading systems. They make it look easy. Many include eye-watering testimonials from people who bought their trading software and soon became rich. But before delving further, let’s go back to the gold rush.
It took off in the United States in 1848, when James W. Marshall discovered gold at Sutter’s Mill, in Coloma, California. Hopeful speculators came west, panning for gold in streams and opening local mines. Gold, they figured, was fortune’s key. But few people made much money panning for gold. The real winners, instead, were selling picks and shovels. Levi Strauss was one of them. The now iconic blue jeans man moved to San Francisco so he could sell goods to miners.
This isn’t just a story from the past. It’s a timeless whisper. As with gold panners, most of the people trading currencies or stocks won’t make much (if any) money. The real moneymakers will sell services instead. They’ll profit from selling courses and trading software programs. Banks will profit from currency spreads and fees.
This might make you wonder about Trena’s money. For a couple of years, a team at one of the biggest banks in Singapore traded her $300,000. But instead of performing well, Trena lost money. The only winner was her bank. It charged her currency spreads and commissions for every trade they made.
I’m not saying you should never trade currencies. But treat it like a trip to Vegas. If you must, keep a small amount aside and have a bit of fun. Don’t, however, make it part of your retirement plan.
After all, currency trading is a zero sum game. Here’s what that means: Imagine if I gave you $1000. You split that money evenly into every currency in the world. Then you held those currencies for 20 years. After two decades, if you converted the proceeds back to US dollars, you would have less than you started with (after paying currency spreads). This is because currencies, as a group, don’t rise in value. Any money that’s made must be done through trading.
But when trading currencies (or stocks) always remember the other end of that trade. For example, if you believe you see an opportunity to make money by trading GBP for USD, consider the unknown person (or algorithm) who’s on the other side of that trade. It might be your tipsy cousin Harry, cocktail in hand. Or, it’s a trading algorithm (which is much more likely) at one of the world’s biggest banks. Even in the case of professional currency traders, there’s an opponent at the end of every trade. In other words, the winner will win in direct proportion to what the other side loses. That, and the fact that currencies don’t rise as a group, is why we call currency trading a zero sum game.
That means, over long time periods, it’s almost impossible to get ahead…unless, of course, you’re also selling picks and shovels. Trading individual stocks is difficult as well, but there’s one major difference. Stocks don’t represent a zero sum game. For example, if I gave you $1000 and you split that money equally into every global stock, you would almost certainly have more than $1000 after 20 years (even after paying commissions on every purchase). This is because stocks, overall, move up. They don’t rise every year. And not every stock will rise. But on aggregate, stock markets compound dramatically for investors.
This might tempt you to become a stock market trader. But as with currency trading, always consider who (or what algorithm) might be on the other side of that trade. Once again, it could be your tipsy cousin Harry, a professional mutual fund manager or Warren Buffett himself.
This is why if you’re serious about making money, don’t trade currencies or stocks. Instead, build a diversified portfolio of low-cost index funds or ETFs. Research suggests that, by doing so, you will beat the vast majority of professional traders without any effort. That’s because professional traders typically cancel each other out. A winner, during one trade, is often a loser the next. By owning the entire stock market, at the lowest possible cost, you will earn the return of the overall market, thumping most professional traders after fees.
That’s worth considering… if you want to make money and not just fool around.
Andrew Hallam is a Digital Nomad. He’s the author of the bestseller, Millionaire Teacher and Millionaire Expat: How To Build Wealth Living Overseas
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