Con men and cheaters selling investment courses

Many errant businessmen are selling trading courses. No one with a working formula will reveal their “magic formula” for a few thousand dollars. The efficient market hypothesis states that any formula that takes if released into public hands and if adopted by the public, will result in the nullification of the effects of the formula.

But the case is different if the formula is one based on simple probability. 50% of the time it works, 50% of the time it does not work. You sell the formula for thousands, show the cases when it works, find a reason when it does not. Offer advice on hindsight, give many caveats for future looking tips. This is an old business. People have sold gambling tips over centuries. Today, the same con men are legitimizing this trade by dealing with regulated instruments like stocks.

Let me unveil the business model. They get you in to attend a free course, hype you up, sell a 3 to 4 – day course for thousands. At the end of the course, they sell you more courses and formulas and unique programs. You get sucked into the program. Just when you think this is it, there’s more. You signed up with one of the brokers they brought. Every trade you make, they make a fee, or at least, they earned an introductory fee.

If you want to learn how to trade FX or stocks, read a proper textbook. There is no shortcut. Keep a few honest financial blogs. There’s not many.

Timeless advice on Investing

One should commit at least 20% of your income to savings. Such reserves are badly needed in urgent situations. The accumulation of your savings should be committed in liquid financial instruments. Liquidity is the primary consideration because you want the option to retrieve the money quickly at a low cost.

Some of my friends invest in land-related structured products that lock up their money over a long time. Some others invest their money in alternative schemes. Always put your money in traditional instruments such as stocks, bonds, exchange-traded funds, mutual funds and money market funds.

Investing in a long-term affair. Anyone that tells you otherwise isn’t a real adviser. Your returns are a function of cost and risk. The riskier your instrument, the lower your returns. The costlier your investments, the lower your returns. This is pretty straightforward.

There is no magic formula in investing. Diversification allows you to reap benefits of lower risk with the same expected return over time. The cheapest way to diversify is to put 2/3 of your money in stocks and 1/3 in bonds. Some recommend a 60/40 split. This is fine too, as long as you rebalance your portfolio annually. The proof of the benefits of diversification is mathematical. Giants in the financial industry have also urged individual investors to adopt such a simple investing rule. I recommend two books that you need to read; Common Sense on Mutual Funds and The Intelligent Investor.

My opinion is that you do not need a financial adviser. They increase your investing cost. The rules of investing are relatively simple. You do not need to outsource this responsibility. First, select low-cost funds. On average, managed funds charge at least 2% over passion exchange-traded funds. This reduces your overall returns in the long run by a gigantic amount. Beware of unique fee structures. Some fees can be hidden in sale charges, some in wrap accounts.

William F. Sharpe, a Nobel Laureate in Economics said: “The first thing to look at is the expense ratio”. You will definitely earn the highest returns in a low-cost index fund. An index fund that mirrors the market will also likely outperform any funds in the long term. In fact, more than 90% of funds fail to outperform the benchmark index. Funds with high expenses will underperform their benchmark. Funds performance typically exhibit mean reversion. In other words, the worst fund of the year will more likely outperform the best fund of the year in future. To me, past performance means nothing. I will always only look out for index funds with the lowest costs.

Within the equity portion of your portfolio, simply invest in low-cost index funds in the U.S and the U.K and in Asia. Avoid synthetic exchange-traded funds because there is an additional layer of counter-party risk. Actually, you only need to hold a couple of funds in your entire lifetime. If you hold too many funds, it can be difficult to manage the exposure. Many of your funds will overlap significantly.