Lots of Diversification Under My Tin Foil Hat

Hello traders! On the first day of every Online Trading Academy class that I teach, everyone in the class introduces themselves: what is their name, what have they been trading, what are they looking to learn from the class, etc. Very often someone with trading experience will quickly delve deeply into a problem that they have with trading. “Whenever I buy, the market immediately turns down,” or “My stop gets hit too often and then the market goes my direction.” Both of those problems are easy to fix. In fact, every trading “problem” has probably been experienced by thousands of traders before you, if not by the very instructors you are now learning from! Believe it or not, you are not a delicate unique snowflake of a trader. The problems you face are rather mundane, and probably simple to fix, if you have the discipline to do as instructed.

However, in a specific forex class that I am referring to there was a student – actually, a husband and wife team – who expressed a very specific problem. The problem that they have is trust in the marketplace, banks, and other financial institutions. Years ago, many would have scoffed at what could have been considered “tin foil hat” wearing paranoia, but after the most recent events in the Eurozone with Cyprus, I think most people should be out getting sized for a tin foil hat! (Tin foil hat refers to the belief that wearing such headgear can protect you from electromagnetic fields, mind control, telepathy, and is commonly a sarcastic remark directed to people who believe in conspiracy theory notions.)

Not long ago, many people around the world believed their deposits in banks to be safe, even guaranteed up to certain limits. While this has been true in most countries so far, we are currently at a very important point in history. If you have been vacationing with no access to news for the past couple of weeks, apparently there are certain group of banking bosses in the Eurozone who waited until a Friday evening, and then told the people of Cyprus that their deposits were going to be stolen – oops, I meant taxed – anywhere from ~7% to ~10% of their money. This stolen money – darn, did it again, I meant tax – would go to bail out banks who had basically made bad investment choices. Why did those banks make bad investment decisions? Well, the banks were lied to by other banks and bank regulators. Which of course means it is no one’s fault. Except the depositors, of course, because they will end up losing money over these bad investments. Strange, isn’t it? Actually, it is becoming frightening, as some officials in the Eurozone have commented that this confiscation of deposits may become the norm for bailing out banks who have made bad decisions.

Back to the students in that forex class. They wanted to learn not only how to trade forex, but to protect their assets through diversification, and even diversify through different financial institutions. Everyone should know that if you buy the stocks of IBM, Intel, Dell, and Microsoft, you are hardly diversified. Usually people want to buy stocks in different sectors and industries, often with ETF’s, to be more properly diversified. In our forex class, I like to take things just a bit further. Why not diversify into different countries through forex? You don’t necessarily have to actively trade the currency pair, but you could hold on to it as a longer term play in case of a weakening home currency. For example, if you make 10% in the stock market in a year, but your inflation rate is 6%, your actual return is only 4%. Oh yes, don’t forget taxes on the 10% return. With a properly done trade in the forex market, you can offset the weakness in your home currency by selling it and buying a currency which is getting stronger.

Another bit of diversification is perhaps through precious metals. Many people are aware of the possibility of using gold (for example) as a store of value and a hedge against inflation. (What? A gold bug? Put on that tin foil hat!) Obviously, timing is still very important, as the price of gold has moved from about $300 to $1800 and back to $1600 in the course of just a few years. Now, should you invest in the physical metal, the ETF, the futures contract, or something else? I will tell you that several country’s central banks around the world are buying the physical gold and “requesting” the delivery of their gold that is being held in secure vaults in New York and London. If central banks are wanting the physical and not the ETF, that should tell you something.

What about diversification of your financial institutions? I believe that having money in different banks, brokerage firms, credit unions, etc. is a very wise move. Just ask the people who had all of their trading accounts at Refco, MF Global, or PFG Best (Peregrine Financial.) There are many accountholders who are still waiting to get all of their money back from these institutions; most never will get all of their funds back. While we haven’t had any depositors in United States banks not get their money back after a bank failure, what would a 10% tax be like to bail out your bank? Ask the people of Cyprus in a few weeks.

This week’s newsletter was not to instill a feeling of gloom and doom, causing you to put all of your money in gold bars underneath a huge rock in your back yard. The purpose, much like our classes, is to help you make more and protect what you have. While not being able to offer specific advice on percentages and distribution of your money and accounts, I hope you take it upon yourself to find out more about wealth and asset protection through diversification.

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