Sometimes I hate to be right. Today there were some ugly examples of why you don’t invest with borrowed money! Today I want to take some extreme examples of using loaned money to invest, and why it can be so terrible for your financial health.
As you may know I actively trade – with a sizable PORTION – of our assets. I even publish the track record of how I am doing compared to the S&P 500 and other traders every single day. Many of those traders – not the S&P 500 – are beating me in the popularity and total returns contest, but today many got caught with their pants down.
Take for example, the number two highest ranked strategy on the website, with a score of 99.6% out of 100%. As the blurry table below shows, for ever a year the strategy returned well over 150% a year. However, if you know how percentages work no matter how many 150% gains you have, it only takes one 100% loss for the day to put you at zero. Ten of the top 26 most popular strategies on this website dropped so low today that they now have a negative annualized or cumulative return.
Here is one last example from the strategy UGotMail. It was around number seven on the leaderboard. Today it just lost investors 4 times what they put into it with a cumulative return of -433.8%! What was he doing? Trading futures, shorting, and using margin. Stop losses or not these are very risky things to do. In my opinion a stop loss in a situation like this is similar to worrying about wearing a helmet while you ride your bike against traffic on an LA highway.
I tell friends and family to check me out on Collective2 all of the time, but I am always a bit worried to do so because when I do they may see some of the systems that look really good but that are actually bombs waiting to go off. So, I want to give a couple quick tips to show you what to look out for and this will prevent you from falling for these ticking time bombs.
- Don’t use margin! Basically if you are just starting out I would only trade in a cash account or an IRA. By doing so your broker will put limitations on you designed to protect you.
- Don’t short! If you don’t know what this means then you should know not to do it.
- Don’t use futures!
- Use common sense and wait for a strategy to have 6 months to a year of track record.
- When you do get into a system don’t put too much money into it.
- “Never invest in a business you cannot understand,” Warren Buffett
I personally do use limited margin accounts. With them you don’t actually use borrowed money, but it does prevent you from having to wait three days to buy a new stock when you sell and old one. You can get an account like that at my two favorite brokerages for trading, Interactive Brokers and Robinhood.
We all make mistakes investing. I once bought a new car with a loan that way I could keep investing rather than paying cash for the car. In retrospect it was a very dumb move, and I won’t use borrowed money again. Have you ever used borrowed money to trade then regretted it? If you are doing that right now you may just come to regret it.