Why do you spreadbet?
1. You’re a gambler.
So how do you outperform?
You treat spread bets in much the same way as you treat a bet on a horse or the throw of a dice or the spin of a roulette wheel. If this is you, stop reading right here.
The chief concerns of investment managers such as those working at investment giants like Fidelity are to conduct fundamental analysis (trying to assess whether a company is undervalued according to a number of accounting and valuation measures); to assess risk; diversification (not having all your eggs in one basket — which we believe is an absolutely necessary first principal) and possibly asset allocation (for multi asset funds) — how much of the portfolio to invest into particular asset classes.
2. You really believe you can beat the market. You may not be doing that consistently right now, but you believe that if you can just get your technique right, the results will come. That’s probably why you’re reading this first-class magazine.
“But it’s a well-known rough and ready rule of thumb that, in any given year, around 75% if not more, of all investment managers cannot even match Here’re some interesting facts — over the past three years a typical successful mainstream unit trust investing in London-listed equities would have returned around 12%. But it’s a well-known rough and ready rule of thumb that in any given year, around 75%, if not more, of all investment managers cannot even match their benchmark index. And you’re unlikely to get rich by putting all your money with that particular fund manager because the chances are that if that manager’s fund was in the top quartile in one year, it will be in one of the bottom two quartiles the next year. Additionally, the typical charges in a unit trust are generally an immediate 5% haircut on your capital just for the privilege of the fund management company taking your cash and where, if an IFA or introducer has been involved, up to half of this is paid to them. Thus a clear incentive on an introducer’s part to push you into high fee-paying funds. Whatever the reasons (or excuses) for such poor mainstream performance, the plain fact is that a skilful spread better can run rings around the professional, and at a much lower cost and additionally being tax free!
When you incept a particular bet, chances are that you have either carried out some degree of either fundamental or technical analysis, no matter how cursory this is (for example, reading bulletin boards or newspaper tips!) — it is still a catalyst that occurs in your mind and prompts you to place the trade. You probably do not consciously pay heed of the diversification element, although those traders looking for a longer involvement in the game should definitely ensure there are some offsetting “shorts” against longs, particularly if higher levels of leverage are embraced. The asset allocation is almost a by-product of the trade idea, i.e. US/dollar FX exposure v sterling if investing in US stocks, for example. Now, without sounding like a broken record, the common theme that we try to embed into our readers month after month is not the usual mantra’s that are wheeled out by so-called trading “experts” that you must “run your winners and cut your losses” — as if adherence to this simple advice will carry you to the hallowed ground of spread betting riches, but that you must control your leverage. It is an open secret that many spread betting and CFD client accounts do not survive beyond 12 months. The reason for this, in my educated opinion, is primarily due to the over indulgence of the leverage offered; Adverts that shout “Control £50,000 with £1000” are all well and good, but if the client then uses the entire available leverage — a 2% move and the game-over sign spins up! Coupled with the inability of most people to take a loss and which in itself is due to educational conditioning in society that you “must persevere and try and try again...”, if you are heavily leveraged in a losing position, then throwing into the mix the typical male pride (female accounts actually last longer, empirical evidence shows) of always wanting to be right, and it’s a recipe for disaster in trading. This, to me, is the collective reason why a typical share trading account will last immeasurably longer than a spreadbet account.
December 2012
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