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Options – A complete and Straightforward Explanation

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Options still have a kind of nimbus:

Very complicated and only to be understood by a few illustrious financial freaks.

Total nonsense.

There are many misunderstandings about options, even among many financially educated people, simply because the common explanations are unnecessarily complicated.

Therefore, I would like to try today to illustrate the matter a little more vividly.

I am convinced that even if you already have options, you will have a little aha moment after this article.

content

  • What is an option?
  • How does the rating of options work?
  • Does that also apply to Covered Calls, Spreads and Iron Condors?
  • How people fall for options with options
  • Are the option models perfect?
  • Is it possible to earn money with options trading?
  • Should I hedge my portfolio with put options?
  • Are options an alternative to ETF and stocks?
  • For the sake of completeness: What an option is not
  • Conclusion
  • You think this post is good? Then support Homemade Finance!

What is an option?

There is so much technical gibberish in this area I want to omit as far as possible. However, we first have to agree on a few terms.

A common definition is as follows:

An option gives the owner the right but not the obligation to buy (call) or sell (Put) a certain commodity within a certain time (American) / at a certain time (European).

American: option may be exercised at any time during the term

European: Option may only be exercised at maturity.

If you represent the above definition strictly graphically, then you can illustrate the two types of options as follows:

Call:
Long-call option

Put:

Long-put option

If the price of the underlying (ie what the option relates to, eg a stock) is below or above the strike at the time of exercise, it may make sense not to exercise the option.

Simply put, if, for example, a stock is currently traded for € 90 on the market, I will not exercise the right and buy it for $ 100, even if a call would allow me to. Would not be advantageous.

How does the rating of options work?

Here’s the sticking point:

Many know a few models by name, such as Black-Scholes or the binomial model.

You enter a few data in front (such as maturity, risk-free interest, etc.) and at the end you get a number spit out. The fair value of an option.

But what does that mean anyway?

Fair means in mathematics that the expected value is zero.

The classic example is a coin toss. Imagine we both throw a coin and the odds of winning or losing is 50% each. If you win I pay you 10 € and if you lose you pay me 10 €.

Our expected value is 0, because: 0,5 * 10 € -0,5 * 10 € = 0 €

Now let’s take a look at the graphic for the definition of a long call from above:

Long-call option

What is the expected value?

In other words, what’s the worst thing that can happen to you here? Right, that you do not make profit or loss.

What is the best that can happen to you? That the Underlying / Underlying goes off like a rocket and you bring back fat booty.

We may not know the exact probabilities, but we can say that the expectation value is definitely positive, because x * (+ y) – (1-x) * 0 = + xy

So what would you do if someone offered you something with a positive expectation? Right, you would bet as much as possible.

Would that be a fair game? Of course not, because your positive expected value corresponds to the negative expected value of your contract partner.

Trivially speaking, nobody will offer you an option for free. Eh clear.

What now makes an option pricing model, it tries to calculate what the expected value of the above game is. You have to make some assumptions about that, especially how the returns on the underlying are distributed.

Let me illustrate this graphically:

Option Probability distribution

Ok, step by step.

The red curve is the assumed probability distribution for the underlying. Now you go and divide the whole thing into intervals.

In the example above, I picked out an interval at random. It can be seen from the probability distribution that the probability that the underlying is somewhere in between when exercised here is 10% .

On average, for example, you will also have made 5 € profit if you finish in this interval. For our expected value is thus 0.1 * 5 € = 0.50 €

This interval thus contributes 50 cents to the expected value. Of course there are more such intervals.

option probability distribution-2

If you start to make the intervals infinitesimally small and add up the expectation values ​​of all these intervals, you get the expectation value for this option.

option probability distribution-3

All these small intervals with their expected values ​​add up.

Let’s just assume that the expected value for the above option is $ 10.

What would you ask for a bonus so that the game is fair for both sides?

Quite simply, 10 € or better said, exactly the expected value!

We remember, at the beginning of our train of thought, the situation looked like this:

A good deal for the buyer of an option (long), a bad thing for the seller of an option (short).

While the buyer has nothing to lose but can win everything, the seller can lose everything but win nothing.

To try the numbers from our example, the buyer has a positive expected value of 10 € and the seller has a negative expectation of 10 €.

To make the whole thing fair, the buyer of an option now has to prepay the seller for the expected value as a premium.

Finished. Now we have a fair game or a fair valued option.

That’s the basic idea when evaluating options. By the way, this also applies to puts.

Does that also apply to Covered Calls, Spreads and Iron Condors?

Yes. No matter how you combine options and stocks, when Black-Scholes applies, you do not change the expectation.

covered call

The point is, you can use options to create really creative payoffs, but at the end of the day they all have the same expectation from the point of view of Black-Scholes or Cox-Ross-Rubinstein (binomial model) .

iron condor

You can turn yourself upside down, in the end it does not matter what you do or how complex your position is. You do not influence your expected value.

bull spread

If you want a nice overview of a variety of option strategies, then I can recommend you the page “The Options Guide” .

Do not forget: the expected value remains the same!

How people fall for options with options

What appeals to many people are strategies that generate regular revenue from premiums by selling options.

A good example is the Iron Condor. This is usually built up in such a way that the current price is somewhere in the middle and you therefore take the premium even if it does not move.

So you act on the short side and take, for example, the premium regularly every month. Let’s just say, 5% a month is sold as a seller (for the time being).

It sounds great too: Plannable revenue! Well the height is limited but they come regularly.

I love that, every human being does that!

Often people dare to hesitate, realize that it seems to be doing well and after a few months in the firm belief that they have found the Holy Grail for financial freedom.

This goes on for about 20 months (100% / 5% = 20) and then comes the big bang. A big market movement, a crisis or something else consumes all premiums previously received.

Absolute mourning on the part of investors.

All that has happened here is that many small premiums earned regularly have been exchanged for a rare big loss.

Of course, the big bang can happen sooner or later. When exactly, you do not know that. From a mathematical point of view, however, in our example it will appear on average every 20 months.

From the perspective of an option valuation model, nothing changes in your expected value!

Do not forget that.

Short Warning: There are also many self-proclaimed stock market gurus who sell this type of options as a trading system to unsuspecting investors. Absolutely foolproof and extremely profitable.

For only € 49.99 a month.

This is bullshit, of course. As always with such surefire boxes one should ask oneself why these scammers (it must be said so) have to sell their stock market letters and not simply their own system to act for themselves.

Quite simply, after a while, they implode and consume all the previous small gains.

Until then, the milked investor has paid but a few months his contributions to a worthless system.

Are the option models perfect?

No.

It has been proven that certain assumptions of the individual models are not entirely true to reality.

This can be proven by two phenomena in reality:

1. The Volatilitymile

The volatility mlile shows that a closer examination of the impact of volatility on the option price is in disagreement with Black-Scholes.

implied volatility

Without going too deep now, this simply means that volatility in reality does not behave as Black-Scholes assumed.

Higher volatility leads to a higher option price. You can imagine that, the more uncertain the world around you, the more grateful you are for a hedge / insurance.

From the point of view of Black Scholes, the Volatility Mile means that options that are far away from the current price are more expensive than provided in the option valuation model.

Important: From the perspective of the option model, the inconsistency exists! But that does not automatically mean that the market is wrong. Rather, it should be worded that Black-Scholes does not behave as it should in reality!

Therefore, seemingly too expensive options in reality may not be too expensive, but priced just right.

2. Volatility premium

Again, without going too deep, this phenomenon implies that from the model viewpoint (!) Options in the past were systematically too expensive. Because the volatility used in valuing options was slightly overestimated on average.

If something seems to be too expensive, then it is obvious to sell this. So, if options were systematically too expensive, it should have been sold systematically.

There is a so-called PUT-Write Index by the CBOE simulating a constant short sale of puts on the S & P 500.

put index

Source: CBOE

In terms of return this was very similar to the S & P 500 but he was less volatile.

So there is evidence that options in the past (like nobody knows in the future) were actually a bit too expensive as the models suggest.

Is it possible to earn money with options trading?

I have to say that because I can hear a few people in front of the screen and maybe believe in their luck in options trading:

Despite all the criticism, the models are not bad in practice and still prevalent today. The prices are certainly not perfect but especially if we take into account transaction costs and taxes, most of the time is extremely adequate.

If there are occasions when an option is obviously priced dramatically wrong, then the big ones (banks, hedge funds) with their gigantic infrastructure are so fast on the spot, because you have as a small individual investor as good as no chance.

I would not spend too much time building up my own trading system.

Even with the anomalies, these are not normal only from the perspective of the option pricing model . In reality, for example, the smile may be the norm and Black-Scholes the extraordinary.

Also, with regard to the volatility premium, the differences have not been so great that one can say that this would have paid off especially for tax implications.

Should I hedge my portfolio with put options?

In my opinion no and here’s why:

A hedge (“I believe the market collapses soon, I buy a put as an insurance”) is nothing but a kind of market timing associated with costs. Of Markettiming even I hold nothing at all.

Another reason is that as we have seen, the expectation value does not change with an option. This would be a secured position.

put protection

Attentive readers recognize that paying out the hedged portfolio is the exact equivalent of paying out a long call. With the corresponding expected value.

In addition, I still have transaction costs and tax bickering. All in all, my expectation value is no longer zero, but very likely even negative.

I have only a few principles in life but this is definitely one of them:

Stay away from negative expectations!

So I do not secure my depot. It does not do anything, so I do not do it.

As simple as that.

Are options an alternative to ETF and stocks?

Options, as we have just seen, are more of a type of insurance and not an investment.

We want to invest and not open insurance, so despite my love of options, I consider a broader ETF portfolio , which I routinely recommend during my life for more meaningful.

In options itself, I only have some play money to try out a few things in practice and to satisfy my curiosity. Everything of a purely academic nature is understood

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Learning to Read Your Personal Record – It’s Exciting!

Today it’s about a topic where I can well imagine that some will roll with the eyes:

Read your personal record.

Granted, this does not sound particularly sexy, but I guarantee you, at the end of this post not only has your perspective on your financial situation changed, but also on yourself.

What you read here is, in my opinion, essential to truly understand your path to financial independence.

content

  • (D) Reading a balance sheet: not just business fuzziness
  • Pictorial explanation of the basics
  • How a stock portfolio behaves in your balance sheet
  • How a self-bought car behaves in your balance sheet
  • You too are worth something!
  • Conclusion and what you can take with you
  • You think this post is good? Then support Homemade Finance!

(D) Reading a balance sheet: not just business fuzziness

When it comes to balance, one inevitably thinks of accounting, boring Excelklopferei and thickly bespectacled paragraph rider.

Snore.

That’s how I felt for a long time, until I realized at some point that you can draw a balance for yourself (Wortwitz intends).

And here it will be interesting in my opinion, because a balance is so clearly the investment of a company but also persons dar.

What could be more useful in building assets than showing it clearly from time to time?

Pictorial explanation of the basics

I do not want to bore you with unnecessary details for reading a review, I limit myself to the bare minimum.

Here is just a simple graphical representation:

Links (one says for this side also assets) stands your fortune.

Right (liabilities) is how this property was paid. Either from your own pocket (called equity) or borrowed money (called debt).

In addition, there is one more but very important rule:

The sums on both sides must always be the same size. Always.

If not, then the maw of hell will open and erase everything that is dear and dear to you.

So be sure to take care of that.

That’s basically it, that’s a balance sheet.

Here is a small example of how a simple balance sheet might look like:

read balance example

 

As we can easily see, a condominium, a custody account as well as bank balances can be found on the side of the property.

On the right side there is now only equity and no debt. The one who owns this balance is currently debt free, so much we can say before.

Last but not least the Hellmouth Rule is also fulfilled, on both sides the sums are the same, so all right.

How a stock portfolio behaves in your balance sheet

What makes a statement so valuable to us is the pretty graphic representation of how consumer debt differs from investment debt. However, one by one.

Let’s take the stock portfolio from the example above:

Imagine, the market value of this portfolio remains unchanged but over the next year, it will give you dividends of € 1000 which your broker will transfer to your bank account.

Then we can observe the following change in the balance:

read the dividend balance sheet

As we can see, the sums do not match. Only at the sight I am already completely afraid and anxious. I can almost feel like it starts to get warm behind me.

So that the balance rises again, there is now a new special sub-item on the right:

The annual surplus. This also belongs to equity.

dividend balance sheet (1)

 

Phew, better.

Because what happened here? Our wealth has grown by € 1000, while on the right side has done nothing, in the sense of there was no debt or the like.

So we are 1000 € better than before. Profit. Hot.

How a self-bought car behaves in your balance sheet

You may hate me for this statement, but most of what we possess is simply becoming worthless stuff.

Day by day, month by month and year by year, it is losing value all the time. That applies to almost all things of consumption.

Take, for example, a privately used car. Make fun, be smart but it loses value.

Let’s go over this in a nutshell:

Step 1: You have before to buy a car, so your financial position looks like for the time being:

car in the balance

2nd step: You bought your car. Price was 10.000 € and in the beginning we assume for the sake of simplicity you could resell it immediately at the price. So it’s worth 10.000 €.

car in the balance sheet (2)

So far so good, but after a year, your car will already be worth less than at the beginning. If it loses 1000 € in value in a year, then the situation looks like this:

car in the balance sheet (3)

So that the hell rule is fulfilled on both sides, it needs a negative net income, also called annual deficit.

You too are worth something!

No, I do not mean your organs, I would not necessarily include in my balance sheet now. Especially since most of us would be hard to estimate a price for it.

Rather, I mean your worker and education. Because these produce similar to ETF or real estate cash for you and improve so ultimately your personal balance sheet.

personal balance

Here are many unknowns, because the exact value of your work or training can not be quantified exactly. But you can try to increase the value by various measures.

Conclusion and what you can take with you

What I do not want with this article is to urge you to meticulously update your balance sheet every day.

That makes no sense, is boring and brings nothing.

Rather, you should at longer intervals (from me once a year) times to check briefly how your financial situation has changed and whether that was good or bad.

Even before larger purchases, it can help to present the effects so briefly.

In addition, I would like to recommend again my article on ” You yourself are your best investment ” to the heart, because in my opinion, your personal balance just does not end with the miserable enumeration of money and material things.

On the contrary, there are also intangible assets, such as education / training, your workforce or simply certain skills.

Consider whether this is an investment and whether it generates cash or money for you in any way.

Consumer or capital goods, that’s the question.

In my opinion, reading a personal balance sheet is even something very exciting.

Because it helps you to better understand yourself and your path to financial independence.

 

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Calculate Your Return: You May Do It Wrong

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Today it’s about something very fundamental when it comes to investing money:

How to calculate the average return of your investment correctly. There is a small stumbling block here that you better jump over.

content

  • Arithmetic vs. geometric mean
  • The arithmetic mean is a blender when it comes to returns
  • Calculate the return using the geometric mean
  • Summary
  • You think this post is good? Then support Homemade Finance!

Arithmetic vs. geometric mean

You certainly know the simple (arithmetic) average. You simply add all the values ​​in a sample and divide by the number of values. That’s pretty trivial:

Sample: 10, 15, 20, 5

Total: 50

Number of values: 4

simple average: 12.5

So far, all right, and you may be thinking, “What is he up to?” Well, let’s look at another example. This time, the annual, percentage gains of the DAX. So simply, what percentage has lost or won the German leading index in a year.

year DAX change % Change
2005 5,408.26
2006 6,596.92 1,188.66 21.98
2007 8,067.32 1,470.40 22.29
2008 4,810.20 -3,257.12 -40.37
2009 5,957.43 1,147.23 23.85
2010 6,914.19 956.76 16,06
2011 5,898.35 -1,015.84 -14.69
2012 7,612.39 1,714.04 29.06
2013 9,552.16 1,939.77 25.48
2014 9,805.55 253.39 2.65
2015 10743.01 937.46 9.56
total 95.87
Number of values 10

So, if we calculate the simple average, we get:

95.87 / 10 = 9.587 or 9.587%

Okay, on average the DAX has risen by 9.587% pa in the last 10 years. If you do that maybe for the last 20 years, then we have an average that allows us to estimate what the stock market is like.

Not correct!

Why is that wrong? Well, calculate it, what does an annual average rate of return with the above average over 10 years mean?

This corresponds to 1.09587 * 1.09587 * 1.09587 * 1.09587 * 1.09587 * 1.09587 * 1.09587 * 1.09587 * 1.09587 * 1.09587 = 1.09587 ^ 10 = 2, 5

Starting from the starting value 2015 (= final value 2014), which is at 5408.26, the DAX would now have to be 2.5 * 5408.26 = 13,520 .

At the time of this article, the DAX has never been at this value, so somewhere must be a mistake in logic.

One of the reasons lies with an old acquaintance: the compound interest. Because of this effect, it is only possible to generate considerable assets in a lifetime. It leads to a non-linear, exponential development. In other words, a euro you deposit is worth more than a euro. Sounds funny, but it is.

However, in most cases this non-linear behavior can not be correctly represented with a simple average.

The arithmetic mean is a blender when it comes to returns

Here is an example to illustrate why the arithmetic mean is not suitable for you as an investor. Look at the following sequences:

Year 1: + 16%

Year 2: -16%

Year 3: 0%

In simple terms, nothing would have happened here, because this is 0 . What would an investor have experienced in these three years? Let’s assume it is the gains of a stock, which at the beginning (year 0 of if you will) would have been worth € 100. So the development would look like:

Year 1: € 116 (+ 16%)

Year 2: € 97.44 (-16%)

Year 3: € 97.44 (0%)

Right here lies the stumbling block at the arithmetic mean. It just does not work when it comes to returns.

Because actually you would have made loss here and not 0%.

Here’s another example with other numbers:

Year 1: 8%

Year 2: 5%

Year 3: 8%

If we calculate the simple average return, then we come to 7%. Let’s compare, for example, how would a stock with an initial value of € 100 hit the arithmetic averaged rate of return and the actual returns achieved.

year actual development arithmetic mean
1 € 108 € 107
2 € 113,40 € 114.49
3 € 121.34 € 122,50

As you can easily see, if you estimate with the simple average how the return would develop, then you systematically overestimate.

So how could you do it better?

Calculate the return using the geometric mean

In simple terms, the geometric mean takes into account compound interest. Take the previous example: From € 100 at the beginning € 121.31 have become after three years. Overall, this equates to a return of (121.31 / 100) = 1.2134 therefore 0.2134 or even 21.34%. We are now distributing this return over three years so that, taking interest on interest rates into account, we will reach € 121.34. This is done with the following formula:

∛ (1.2134) = 1.0666 therefore 6.66%

Believe it or not, the representation of root signs in the web is quite limited and not quite correct at the top, so I’ll formulate the formula briefly in words: The third root of 1.2134.

Short check whether this is true: 1.0666 ^ 3 = 1.2134. So it’s true

Generally speaking, you simply pull the nth root out of your total return . N stands for the number of years that have passed from beginning to end. In our example, as I said, it took three years to get from € 100 to € 121.34.

Earlier we had the small table with the values ​​of the DAX over 10 years where we had found that the arithmetic mean was too optimistic or simply wrong.

The initial value of the series was 5,408.26 at the end of 2005 and the final value was 10,743.01 in 2015. The average geometric return is calculated as follows:

10 root out of 10743.01 / 5408.26 = 10 root out of 1.9864 = 1.071 ⇔ 7.1% pa on average

Short check calculation: 1,071 ^ 10 = 1,9856 fits. Attention, the values ​​are rounded to the fourth decimal place.

Here you will find the whole thing shown again in a graphic:

We note: the arithmetic mean was 9.587% pa , thus mercilessly overestimating the DAX. That was unavoidable, as we have seen, because that is the nature of the arithmetic return. The geometric mean, however, was 7.1% pa and correctly considered the compound interest effect.

On the topic average / geometric return, I have also picked out an interesting video.

Here is another general explanation of the geometric return:

Summary

For us as an investor, it is of course interesting to calculate the average return over several years. We want to know how our investments have developed over the long term, year after year. It is important to use the correct mean and that is the so-called geometric mean . Because this takes into account the non-linear development of returns.

The formula for this is: nth root of end assets / initial assets where n stands for the number of years.

With this tool and a twofold try it is easy for you to easily turn around this cliff of investing.

 

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The Best Investment In The World: You!

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Of course, as an investor, you are always on the lookout for new opportunities to invest the hard-saved as much as possible in the best investment. What many overlook: you or your workforce is your most valuable asset and it pays to continue investing and developing it.

content

  • Your lifetime income: 1 – 2.3 million euros
  • A study pays off with 35%
  • How to make yourself the best investment ever
  • 5 concrete examples of how to increase your value
  • Summary and conclusion
  • You think this post is good? Then support Homemade Finance!

Your lifetime income: 1 – 2.3 million euros

In the course of your life you will make a lot of money. Humans tend to underestimate what regular amounts account for over a very long period of time. That also applies to our income. Even with an average salary, a lot of money goes through our hands over the course of life.

The Institute for Employment Research (IAB) has determined how high life incomes averaged over education:

It is clear that the higher the education, the higher the average income. What you intuitively knew from the outset is confirmed here by bare numbers: education is worthwhile.

A study pays off with 35%

Let’s do a short rough calculation to get a feel for how much:

We assume that the student life costs 1000 € per month . After Adam Riese makes 12,000 € per year and with a standard study period of 5 years so 60,000 € . That’s your investment, so to speak. Furthermore, I assume that you have completed the Abitur and are currently faced with the choice to look for a job or to complete a degree. According to the above statistics, studying at a university will cost you around € 740,000 more .

I discount interest now (as I said, rough estimate) and these € 740,000 will be gradually paid out over the next 35-40 years of your working life. That means on average you get 21,243 € more each year (35 years of work) than if you did not study.

It follows:

21,243 / 60,000 = 0.35 or 35% return

Of course, in this example, I’ve made it a little easier and made many simplifying assumptions and also a lot of the thumb on the bill. And of course, not every study pays off equally. We’re counting on averages here.

But I want to show you with this example, education is always profitable. And so good, there is still plenty of room for heuristics and rules of thumb when estimating.

Interim conclusion: If education is so incredibly profitable, then it makes sense to invest in it. And this is exactly where we will start.

How to make yourself the best investment ever

Maybe you have already studied or you are just out of your age, what can you do then?

books photo

No problem, there are many ways to increase your value. First, however, as with any investment, you must understand how to differentiate a good investment opportunity from a bad one. Because you want as much bang as possible for the buck.

For this you have to approach the business entrepreneurial.

First and foremost, you should take the point of view of your customer . This is simply your employer, to whom you sell your workforce. Because nothing else is the employee’s life. I do not mean that negatively, that’s just how it is. You are not sitting in your chair to be off the street, but because somebody is paying for you.

And as with any business owner, it’s important to know what your customers want. In the ideal case, you already know what your customer is looking for your current and all other potential employers and have an idea to that effect. And if not, you’re practically at the source! Find out what your customer wants. Sometimes this is easier than expected and just asking to get you there already.

Next you should look at competitors , ie your equal or similar qualified colleagues. Are there people with your abilities like sand and sea or are you indispensable because you can do something nobody else can?

The principle here is simply supply and demand: if you are interchangeable, then naturally you will not be able to call high prices.

Third, think about how you can add value to your employer. Because this way you make sure that your educational measures are also of interest to your customers and only then is he willing to pay you for them.

5 concrete examples of how to increase your value

1. Learn another language!

Relatively expensive but with the right language at the right place you can become indispensable. Just imagine you are able to bargain with a foreign-language client of the company or just you have a clue what that means in these papers.

If you can communicate with people, then you are the mediator between the worlds. The chances that this will pay off sooner or later are very good.

By the way, did you know that with only 20% of the vocabulary of a language you can master 80% of the situations? This is the so-called Pareto rule . Use it!

Start with a beginner’s course and work your way up to level A2. This is relatively fast and can also be purely in your application (emphasis is on advertising). If you stay tuned you will reach the level B1 after some time from which you can master familiar situations in everyday life.

If the courses cost you 2000 € and you only earn 25 € more a month, this equates to:

(12 * 25) / 2000 = 0.15 or 15%

A nice return, right?

2. Make further education!

Return Technique probably the best investment ever. Why is that? Quite simply: A training is usually very interesting for your customer / employer, because this is usually very related to its needs. And he’s more likely to pay more for that.

Furthermore, you stand out from your competitors, because each additional qualification makes you a bit special. And something that does not exist on every corner gets higher prices. As simple as that.

For example, if you spend 2000 € on a marketable (see point 4) training and you can negotiate 50 € more salary because of this, this results in a return of:

(12 * 50) / 2000 = 0.3 or 30%

Better than daily money or?

We can go a step further and maybe convince our employer to pay us for the qualification. Then no matter how much more you earn afterwards, your return is infinite!

3. Stay fit and be balanced!

This investment does not pay directly in monetary terms, but indirectly. I think we agree that we see a physically fit constitution as a prerequisite for contentment and balance.

relax photo

My opinion: The more balanced you are, the more efficient you are. And whoever is more efficient will achieve a better price in the long run. That is, if you spend some money on sports or leisure (of course, on a reasonable scale), it can also be a kind of investment. Daring thesis but not completely dismissed.

Treat yourself now and then to something, if it really helps you to go fitter or more relaxed through life.

4. Learn to actively market yourself or your workforce!

An important point that is often underestimated. There is no point in offering the greatest product in the world if nobody knows about it and you do not try to get the best possible price for it. That’s why you also have to communicate regularly which new added value by which new qualification you create for your customer.

If you have trouble speaking, think about investing in a rhetoric course or presentation class. It will pay off in any case, be it in salary negotiations, meetings or otherwise.

5. Collect experiences!

What your customers will always reward is experience. Even if it is not a money investment in the classical sense, sometimes you just make an investment without knowing it.

Everyone has ever dared to do something in the form of time and / or money and was wiser in hindsight, regardless of whether it worked or did not work out.

For example, when creating Homemade Finance, I learned a lot about setting up a website, which will benefit me in other projects and ideas.

Invest or risk something from time to time to gain experience. I’m sure it paid off sooner or later.

Perhaps experience is the most profitable investment ever, but it’s hardest to figure in numbers.

Summary and conclusion

In this post I have shown you 5 concrete examples of how you can increase the value of your workforce. Of course, this does not only apply to employees, but also to self-employed, freelancers or farmers.

With education returns are possible, which I certainly do not find in the long term on the stock market. For me it is only logical to diversify and see my education not only as a personal enrichment but also as a lucrative investment.

The greatest lever is as I have now repeatedly emphasized the education dar. Here, each euro pays you (something considered) there reinsteckst again.

If you’re wondering if the expense of education is worth it, just ask yourself if it’s of interest to your client / employer what you do and if you can get more money for it. In most cases, just a few more euros are enough to make the money invested, for example, in a language course or further education, the best investment in the world.

And what would be the alternative? To leave it on the money account ? Certainly not with quasi-negative interest rates .

So start investing today in the best investment in the world: yourself!

Uncategorized

Create 10,000 Euros: The Ultimate Blueprint For Getting Started

10000-euro-create-homemade-finance

A question that regularly ends up in my mailbox is:

I want to invest 10,000 euros. How can I go about it and what do I have to pay attention to?

For many, this amount seems to be something like the starting signal for an investment above the call money.

Often, people have saved him and now would like to take the first step to the stock market, but are not sure how they could proceed.

If you have found yourself in these lines, then this post is just right for you!

So I’ve come up with step-by-step instructions on how best to do this in my opinion and how I did it.

But beware: Since I do not just want to give you a nude list and then get up from the laptop, I have to go back and forth a little bit to explain some aspects or my point of view.

The result is that this post has over 2,500 words and it takes just under 15 minutes to read it.

If you are fresh on the stock market, these 15 minutes are certainly EXTREMELY well spent time, I guarantee you.

Not only for your question how you can invest your 10,000 euros, but basically for the rest of your life on the stock market.

So let’s go ahead.

content

  • Congratulations!
  • 1. Start
  • 2. The iron nest egg: How many reserves should one make?
  • 3. Define a purpose
  • 4. Set the time frame
  • 5. Determine our risk appetite
  • 6. Choose our investment vehicle
  • 7. Find the right ETF
  • Summary and checklist
  • Conclusion
  • You think this post is good? Then support Homemade Finance!

Congratulations!

You may find it odd to start a post, but I’d like to congratulate you on this.

Yes, that’s right.

You want to invest 10,000 euros and have apparently made the firm decision to take your financial future in self-determined from now on. With this you have made the first and probably most important step:

1. Start

An overwhelmingly large proportion of citizens never become really active when it comes to their own money. Many remain alienated for a lifetime and leave it in terms of investment in what the state pretends to them, so pension, Riester and a little welfare state.

It remains with many then too. This is a shame, because off the beaten track there are many more attractive ways to financially emancipate themselves.

However, this requires dealing with some financial knowledge and since many have no desire for it anymore. This is not only a pity, it is simply sad.

Because it does not take much know-how, but only the right thing to take care of your own money and not just let others decide what you deserve. That’s why Homemade Finance.

There is still a reason to wait for many:

No time, too risky, the stock market is too high, too boring, just Christmas, blablabla. This list can be continued endlessly.

But in my opinion, people are fooling themselves. My belief is:

The secret of winning is beginning.

Because fact is also:

There is never a perfect time to get started!

What may sound negative at first is very positive at second glance. Because if there is never the perfect time to get started, then you can not do much wrong. Point for us then.

2. The iron nest egg: How many reserves should one make?

One aspect that is often forgotten when starting on the stock market is that it creates a cash cushion.

What do I mean by that?

Before we just break loose, put on our 10,000 euros, only to realize after a year then that we would actually need the money to get a new washing machine or the like, we should first talk about the iron nest egg.

Life is full of imponderables. Who knows what your life will look like in the future and what challenges will still be on you.

If you are, you need to be able to overcome these financial bottlenecks without having to prematurely wind up your portfolio. Because that usually happens just when the stock market is just once again on the ground.

Short example: The next financial crisis is here and you have unfortunately lost your job. Until you find a new one, it can easily take a few months to land. If, in this situation, you do not have any reserves that you can access, but only your deposit, then you will need to (partially) resolve this out of necessity.

But guess what? It’s financial crisis. What do you think about the courses? Right, absolutely shitty. But since you have no choice, you have to bite into the bullet and make a heavy loss with your portfolio.

In summary, you are now unemployed, have made losses on the stock market and all because you did not have nest egg. Something like that.

  • It is ESSENTIAL that you build an iron nest egg. This allows you to bridge emerging liquidity shortages suddenly and you do not have to sell your portfolio early, which would be the only way to lose money on the stock market.

 

Here I tell more about the iron nest egg . In short: You should keep between 6-12 of your monthly expenses quickly available on the daily allowance. With it you can also bridge bad times (unemployment, illness, …) and sort them out before you attack again.

Here the principle again graphically represented: 

I know, you came here to learn how to invest 10,000 euros and now I tell you, you should park it again on the caked day money.

But I wanted to go to the stock market and start. Scam!

Room, made. Here is a suggestion:

If you still have not thought of a cushion for you, but you still want to immediately on the stock market, then put regardless of your investment horizon € 7,500 on a money market account, or leave them there.

With the other € 2,500 you go public and make the first step towards financial self-determination. Then promise me and you, but in the next few months regularly pour money into the container with the iron nest egg and that until you could bridge at least 12 months.

Deal?

3. Define a purpose

It is important that you stop for a moment and assign a purpose to your $ 10,000 you want to invest. Here are some suggestions:

 

10 ideas why you want to invest 10,000 euros

 

1. As a foundation for your financial freedom

2. Build a second income from capital

3. Equity (replacement) for a house

4. Hedging the children

5. Go again on Farewell World Tour at 80

6. Be less dependent on the state pension

7. Early retirement

8. Have more time to acquire knowledge

9. Invest in your future

10. For a flight into space

 

The possibilities are as endless and individual as you are.

Even if you have just landed here with the intention to invest your money just kind of neat, then I ask you anyway something to think about.

The reason is simply that going public is psychologically much easier if you have a specific goal in mind. Human nature is inadequate, so we should always trick ourselves a little if it threatens to get in our way.

So we set a non-abstract goal, with which we can continue to motivate ourselves in the next financial crisis . Everything is allowed, as long as it is not just the investment itself.

Investing should never be an end in itself.

4. Set the time frame

Now that you’ve determined the purpose of your investment, the next step is to determine your investment horizon. Depending on how old you are and what your purpose is, you will have more or less time to invest your € 10,000.

This is so important because we decide what time we spend on what time we spend.

Of course, it always depends on your personal situation, but in the following table I show you an overview of how I see it:

10000-euro-asset-comparative

Please note that I am not an investment adviser and this overview, like everything else on Homemade Finance, is simply my personal opinion and my view of things.

Of course, this also means that others may have a different opinion on the division or periods of time than I do. That’s ok, if you want to discuss it. The comments are open to you.

So, from the table we see:

The more time we have to achieve the purpose, the more risky, but also more profitable we can invest our 10,000 euros. Of course always set the case that you have already managed an iron nest egg aside.

5. Our risk appetite firmly sure n

Another aspect that influences the distribution of our small assets is personal risk tolerance.

This is a difficult point, as you can only really see them when you actually stand in the stock market. There are investors who do not even bicker when the markets and their depot rush 50% south.

Others, however, is already at 5% look down the sweat on the forehead. The problem is that you can not simulate this feeling when there is no real money at stake.

Of course, we can not invest 10,000 euros or go public if you need the money a) soon again and b) you have a problem with risk.

To a) we have already taken care of up there, b) helps unfortunately just jump into the cold water. Of course, the stock market also lubricates. So what? Fluctuation is good, fluctuation is risk and diversified risk is fair return. And that’s what it’s all about in the end, right?

Then let’s change our relationship with risk from now on, right here and now. It is not our enemy, it does not want us any harm. Risk does not feel joy when we are in the minus. It’s just there. It’s just there and part of life.

So let’s find out about it and learn to ignore our emotions when our deposit slip shows red numbers. Expected value and time work for us. We should never forget that in heavy trading hours.

In spite of your euphoria, start your stock market career with a smaller amount than you can trust yourself. Imagine the following question: What could I do without the next 20 years if things went stupid?

So, if we want to invest $ 10,000 then it can be a good rule of thumb to get to know our risk appetite a bit better. The final truth about ourselves, however, we will learn only when the stock market burns again and then actually our own potatoes are in the fire.

6. Choose our investment vehicle

This may sound like a stab, but in the end it means nothing other than:

What do we invest in and how do we invest in it?

Regarding the iron nest egg this is relatively easy, a savings account is part of the standard offer of each bank and the offers are not very different from each other. It also makes no sense to operate for 10,000 euros day money hopping .

The Finanzwesir has durchgexcelt this very beautiful: the effort does not pay off. Just look for a relatively tidy account and stick with it.

If we want to invest 10,000 euros, then the interest on the daily money anyway play a minor role. With overnight money it is only about inflation compensation and quick availability. Return is earned on stocks and bonds, not interest on the account.

For this reason, in my opinion, fixed term money, in my opinion, also does not matter, because it usually creates little more than the inflation compensation, but at the same time is illiquid. Almost the worst of both worlds.

Ok, so we already know how to park our iron nest egg. Stocks and bonds are a bit more complicated, but do not worry, it’s not that wild.

Anyone who knows me a bit better knows that I think a lot about ETF, Exchange Traded Funds. These can easily be used to build very broad and well-diversified positions.

Diversifies because ETFs are index-based and, if properly selected with only one fund, you can get the same number of hundreds to thousands of companies in your portfolio.

Many thousands of securities that you can put into your portfolio so efficiently. That’s what I call diversified. And on the stock market, diversification is our religion, because it guarantees us one of the few scientifically proven benefits we can take with us.

On average, diversified portfolios have a better risk-return ratio than portfolios consisting of just a few individual positions.

In addition, ETFs are extremely cost effective. The SPDR S & P 500 is currently available from 0.0945% pa, yes read correctly. Compare that with actively managed funds that your bank adviser wants to turn to.

I assume that the increasing popularity of ETF over the next few years will make the TERs (Total Expense Ratios – the total cost of the fund) tumble even further.

There are ETFs for both stocks and bonds. Therefore, I never buy stocks or bonds individually, but always “in bulk” in the form of an ETF. So I cover in my table from above an area very efficiently and diversified.

If you want to know more about ETF, I recommend my post ” What is an ETF and what happens in case of bankruptcy? “. Beginners and old hands will find something there as well.

So if we want to invest 10,000 euros, then I propose the following vehicles:

Iron nest egg: daily allowance

Shares: ETF

Bonds: ETF

Simple as that. Believe me, it’s a scientific fact that with this seemingly simple trio you’ll get the best result in the long term. More complicated does not automatically mean better on the financial markets.

7. Find the right ETF

Now we come slowly to a more tricky part. In order to invest your 10,000 euros, it is not enough to just decide on a vehicle, but we also have to think about which model and what equipment we want to board the stock market.

And the offer is simply overwhelming, especially with the selection of indices that I would recommend to you.

So, right now, or right after you finish reading, your task with the following small list of indices is to look over to JustETF and to research a bit what ETF is about.

shares
  • STOXX Europe 600
  • S & P 500
  • MSCI World
  • MSCI Emerging Markets
bonds
  • Bloomberg Barclays Euro Aggregate Bond
  • Bloomberg Barclays Euro Corporate Bond
  • Bloomberg Barclays Euro Government Bond 1-3
  • Bloomberg Barclay’s Global Aggregate Corporate (EUR Hedged)

 

This is a selection of, in my opinion, appropriate indexes for ETF. But that does not mean that there would be no more than these. It is, as I said, a selection.

As another rule of thumb, as you can see a good index: It contains more than 500 companies, preferably 1000 and more. Best of all from different regions, sectors and in all possible variations.

I deliberately do not name a concrete ETF by name, because your own research will automatically familiarize you with the topic and help you to gain security.

Hey, no one has argued that investing 10,000 euros does not mean a bit of work either.

Summary and checklist

Checklist: Create 10.000 Euro

    • To begin!
    • Place iron nest egg on overnight money
    • Determine the purpose of the investment
    • Determine investment horizon
    • Assess your own risk appetite
    • Specify investment vehicle or ETF
    • Stay calm even in crises
    • Keep going

Conclusion

Investing 10,000 euros is not rocket science. There are a few simple basics of the stock market to learn and to ask yourself a few deliberate questions.

It is also important to become aware of one’s own emotions, such as greed and fear. Because on the stock market, risk is not your biggest enemy, but you.

The nice thing about being able to invest the knowledge for 10,000 euros is the same as if you want to create 1 million euros. It’s almost perfectly scalable, as it’s called.

This means for you, that you have learned by the way and automatically the basic tools for your further life as a self-determined investor and that in just 15 minutes.

At the beginning of my life as an investor I also faced the same questions and challenges as you. Then I started according to the scheme described above and gained my experience and would like to pass this on to you so that you have it easier than I did then.

 

Uncategorized

The Expectation – Your Holy Grail For Success

expected value-homemade-finance

Anyone who knows me knows that I only dogmatically follow very few rules.

To pay attention to the expected value is definitely necessary.

Because why should I play when the numbers speak against me?

I would like to sharpen the reader’s eye for this really simple ratio, because I believe in success and also for financial freedom , an eye for it is indispensable.

content

  • How can you calculate the expected value? A simple explanation
  • There is also a non-monetary expectation
  • We do not have to know everything very well
  • A disadvantage of the expected value
  • Why am I still dogmatic about the expected value?
  • Conclusion
  • You think this post is good? Then support Homemade Finance!

How can you calculate the expected value? A simple explanation

For those of you who do not know exactly what an expectation value is and how to calculate it, here’s a simple example:

euro coin photo

Imagine we both throw a coin.

With 50% probability head comes and with 50% probability number appears.

But we do not just throw it, we bet for cold hard money. We agree that if you win I pay you 10 €. But if I win, I get 10 € from you.

We know that in 50% of the cases you win and in 50% of the cases I win. Therefore, we can calculate the average profit per game :

0,50 * (+ 10 €) + 0,50 * (- 10 €) = 0 €

That is, if we repeat our game, the coin toss, very often, neither you nor I will go home in the long run with profit but also not with loss.

The expected value is therefore € 0 for both of us.

Of course it can happen in between times that one of us wins a couple of times in a row. It may even be that one wins more often than the other.

But the more often we throw our coin, the sooner we will approach the expected value on average. This follows from the law of large numbers and can be graphically represented as follows:

expected value-law-of-large-numbers

 

Of course, the curve can have virtually any shape, but they all have one thing in common: sooner or later, they will strive against their expected value:

expected value-2

 

Here comes the first two of the four most important insights in the whole article:

  1. That the above curves are against their expectation value is like a law of nature. Nobody can shake it.
  2. Every game is mathematically worth the same. The 1st just as much as the 10,000.

Now let’s change the rules a bit:

Every time you win, I pay you 10 € but every time I win I only get 9 € from you.

Your expected value: 0.50 * (+ 10 €) + 0.50 * (- 9 €) = 0.50 €

My expected value: 0.50 * (+ 9 €) + 0.50 * (- 10 €) = -0.50 €

That means, on average, you win 50 cents every game. Great for you, bad for me. Because I lose on average every time 50 cents.

From your point of view, this can be interpreted graphically like this:

expected value positive

That means you have a systematic advantage here.

You may also be in the loss zone, but in the long run it is inevitable that you will make a profit. It may as well be that I have more money in between than before in this game. But in the long run the numbers work against me.

It is, as I said, like a law of nature.

This is followed by the second two most important findings in this article:

3. If we have a negative expectation, then we should avoid it at all costs.

4. If we have a positive expectation, then we should take it under all circumstances.

There is also a non-monetary expectation

An expected value does not always have to be related to money. There is also an emotional expectancy.

For example, before the first kiss of a newly in love couple. One of the two makes a start and risks something. What if it is too early? What if you are rejected? That would be emotionally a disappointment.

But what if it is the right time? It could be phenomenal. The beginning of something very big!

After more or less reasoning, he dares and lo and behold, it was fully worth it.

Happy end.

Here nothing else happened, as the unconscious attempt to form an expectation value. You look at the possibilities and try to figure out how likely they are.

If the result fits halfway, then we just do it.

The nice thing about emotional expectancy is that when we’re solidified in ourselves, it’s almost always positive.

Imagine, the above first kiss would not have been so good. Would the loss really have been that dramatic?

Sure, at first it’s probably uncomfortable, embarrassing and you think the shame will stay forever. But honestly, the earth keeps spinning, that’s life, and two days later that’s ticked off.

The loss is limited, so we should be more emotionally confident without much thought.

We do not have to know everything very well

Now, of course, one can argue that one does not always know the amount of profit or loss from the outset. Much more likely (attention Wortwitz) it is even that one does not know the probabilities of the individual events exactly.

I ask you:

Do we have to do that anyway?

In my opinion no. Often in life, we encounter situations in which it is crystal clear whether we face a positive or negative expectation.

Prime example study or further education:

We can not gauge exactly how much more salary we will receive from our investment in ourselves and not what the likelihood is.

But we suspect that it is well worth it, because the average salary has been proven to be higher in many studies. This can not be translated into anything other than a positive expectation.

This approach may not be completely clean from a scientific point of view, but it is incredibly efficient.

There are many such situations in life and I even claim that each one translates into a monetary or emotional expectation. Really everyone.

Tip: A help for expectations in everyday life is to ask “What can I lose?”. If the answer is nothing or almost nothing, then the expected value is very likely to be positive. Then just do it and do not hesitate.

A disadvantage of the expected value

Now I’ve been raving about the concept in very high tones all the time. Time so, even a point of criticism a little closer.

Take a look at the two following decision trees. Let’s pretend that it’s two stocks. Both are worth 100 € today and in one year there are two ways they can have developed.

Again, for the sake of simplicity, both options are equally probable, 50/50.

Share A:

Expected value: 0.50 * (110-100) + 0.50 * (110-100) = 10 €

Share B:

Expected value: 0.50 * (150-100) + 0.50 * (70-100) = 10 €

Both stocks have the same expected value and are equivalent in their view.

Nevertheless, every reasonable person would choose the first game. Because what the expected value ignores is the variance or volatility of the possibilities.

With stock A we certainly get the expected value, with stock B it may be that we get a lot more but also that we make a loss.

The expected value does not matter. He just tells you, “That’s okay, just do it. And immediately. “

Why am I still dogmatic about the expected value?

Even if one can practice criticism from an academic point of view, from a practical point of view, the expected value is nevertheless unbeatable.

He is simple, he can often be touched at least over the thumb and he is simply incredibly efficient.

Look at it like this:

The answer of meaningfulness of things of life and money concentrates in a single number.

Wow.

If you succeed in ranking as many games with positive expectation in your life as one after the other, then success is, in any case, a mathematical certainty.

Conclusion

With the concept of Expectation, we have an incredibly powerful tool to rank and evaluate our decisions. Be it financially or emotionally.

It allows us to gauge what we do and, more importantly, what we should do better.

Because no one escapes this law and I do not know how you see it, but I do not want to mess with the power of numbers.

What do you think about the expected value? Do you like the philosophy behind it? Let me know now!

 

Uncategorized

Copy-Trading: When Lemmings Storm the Trading Floor

Today it’s about a topic that is often sold as something like Stock Market 2.0:

Copy-Trading.

Gladly shown in the haze of catchwords such as swarm intelligence, machine learning or robotics.

Cool and really trendy, right?

Quasi the further development of investing for private investors.

If you’ve been following me here on Homemade Finance a bit longer and you already know my philosophy, then you probably already suspect what I think about it:

Not much.

As I come to this conclusion, I want to explain to you here now, because I really want to prevent you burn unnecessary money with this nonsense.

content

  • Brief introduction to copy trading
  • Problem # 1: Survivorship bias
  • Issue # 2: Copy traders are trading actively and underperforming
  • Problem # 3: Hindsight Bias
  • Who profits from the copy-trading trend?
  • How to cheat scammers with copy-trading investors
  • Copy trading and martingales
  • Conclusion: copy trading is expensive, underperformed and is a playground for scammers
  • You think this post is good? Then support Homemade Finance!

Brief introduction to copy trading

The logic behind copy-trading sounds really easy:

You compare a bunch of traders and their strategy, picking out the ones you think are the most successful and following them.

copy_trading_uebersicht

The consequences usually happen automatically. Say, through a copy trading platform, the actions of the traders you follow are translated 1: 1 into your personal account.

I’ve picked out one of the most popular traders in the German-speaking world.

Quite deliberately, I do not mention the name of the platform or the traders that you can follow there.

Because advertising for something that I think is not good enough for you, I certainly do not do here on Homemade Finance. Point.

So, here’s the list of the top 10 traders on the platform:

top10_trader

You might think that you are simply picking out a few successful strategists, following them, and making your own such formidable returns without much effort.

Simple logic or not?

Of course wrong.

Three problems in advance:

Problem # 1: Survivorship bias

There are certain cognitive deficiencies in our brain, and copy trading behaves in this context just as much as comparing actively managed funds.

Looking back, using a list of traders or funds to compare or evaluate is pretty pointless.

Why?

Well, let’s take another look at the top 10 list from just now.

If we calculate the average performance, then we would have made an average of 48.85% pa when investing in all 10 traders, which sounds great. Simply split your own capital into ten equal parts and distribute them evenly.

That should still guarantee reasonable average returns of a similar amount in the future, or not?

Well, not necessarily.

For one, it is crystal clear that nobody knows whether the top people in today’s copy trading will still lead the ranking tomorrow.

Boring, but true:

Past results are no guarantee for the future.

If I follow Trader 1 today and entrust my money to him, that does not mean his strategy will work so well in the next 12 months.

That goes without saying.

The problem is that this applies to the whole squad. All 10 traders can in principle be financially dead in the next 12 months.

But what does a newcomer to copy-trading see when he looks at the Top 10 list for the first time in a year?

10 new, successful and successful traders whose strategy happened to work especially well this year.

But not the Investor Armageddon of the past 12 months, the 10 Trader corpses and your lost money.

Just a freshly polished list of people who had a good run last year.

That means the average return you can count on is not 48.85% pa but less. Because there are often a few “rivets” that you can not see in the list today, but for someone who has already entered in the past, pull the cut down.

In other words, comparing traders to a list puts you at risk of systematically overestimating the average score.

By comparison, the average returns on the stock exchanges, over long periods of time and after deducting inflation and tax, are around 5% per annum .

So you can figure out how much rivet must be there to (risk-adjusted) our 48.85% so far down to pull.

Issue # 2: Copy traders are trading actively and underperforming

As for all market participants, the old adage also applies in copy trading:

Back and forth, pockets empty.

To the performance of copy-traders, there are, to my knowledge, not really detailed, scientific investigations. However, so far secured Findings for the stock market in general of course also apply here.

And there it looks for any active form of action in the long run just bad. In other words, yield less than the market as a whole because transaction costs create a noticeable headwind.

There is nothing to shake it because the laws of the stock market apply to all equally. Whether lonely fund manager high up in the glass tower or sociable lemming down here on the street.

Both will get their expected value in the long term and this is risk-adjusted the already mentioned above about 5% after taxes and inflation per year.

That alone is in my view actually a manslaughter argument against copy-trading, but we still continue.

Problem # 3: Hindsight Bias

Looking back, it is always easy to say:

Oh, I would have.

If the whole world had known 80 years ago what would become of little Warren Buffett somewhere out of nowhere in the US, everyone would have invested in the young man.

But guess what: That just this little boy would enter the long term above-ground returns (about 25% pa), no one could guess.

In retrospect, it would have been wise to invest a few dollars, but this information was not predictive.

On the internet, people regularly read about people who are annoyed at various occasions about not investing in anything, be it Warren Buffett, Apple or Bitcoin .

This mistake is called hindsight bias .

What does this have to do with copy trading?

Well, comparing the different top traders presented on the platforms does exactly the same thing:

One is forced to think “Oh, I should have”.

Of course this is intentional, because the operators know exactly how people are ticking.

As soon as we are confronted with a retrospectively, theoretically very positive situation, we automatically want to react quickly so that we can at least benefit from it in practice.

Such a behavior was certainly beneficial in the hunt in the Stone Age, but such behavior generates losses in the financial markets.

It lets people do irrational things and that’s what the operators want. It suits them well when we chase after the constantly changing top traders.

Should the stupid investor run bankrupt while trying to catch the currently best trader.

The main thing is, he pays his fees and transaction costs.

Who profits from the copy-trading trend?

There are a lot of proverbs that say that if you want to find out the cause of something, then you just have to follow the trail of money.

Let’s do it now:

Basically copy-trading needs a platform where traders and followers can interact.

This is usually provided by a broker or an intermediary.

I will not name any names here, but if I scour the Internet like that, then I find there mostly old Pappenheimer:

Forex brokers and binary options platforms!

A few exceptions, which for example work with certificates, confirm the rule here.

As you may know, I have eaten these betting shops, as their lifework is merely to lure inexperienced retail investors into investments that are on the one hand much too expensive and on the other hand provide no added value for society.

As a long-term investment, this inevitably ends in failure and will make 99.99% of all people who dare to end up worse off than before.

Incidentally, this is not just my personal opinion, but proven by scientific studies.

These brokers (who have almost nothing to do with a reputable broker you buy your ETF for) have only one goal:

Make you move your capital back and forth as much as possible. After all, every move makes good money.

Copy trading is primarily a marketing tool to give you even more “interesting” opportunities to gamble with your money.

It is therefore almost always such rather dubious brokers, who advertise the supposedly limitless financial possibilities (= bag of ash) of copy trading.

On the other hand, there are the traders who provide their strategies on the respective platforms for followers. The platforms, in turn, engage these active traders (not the passive followers, of course) in the commissions and fees they collect to motivate people to fill the platforms with some sort of follower strategy.

It is important to note that both brokers and the forerunner traders earn from the followers and thus have a common interest:

Your money.

And as always, when there is a lot of money in the game, there are always a few cheaters.

How to cheat scammers with copy-trading investors

I will now show you a trick that will allow you to cash in on low-minded followers on copy-trading platforms.

The catch here: It is absolutely immoral and of course punishable.

Therefore, I urge you to stop doing that!

I’ll explain the possibilities to you only because I find it disgusting if any criminal candlesticks exploit other people like that.

And since the underlying “trick” in this context is still unknown to most people, I consider it my duty to explain it to you here openly.

Following background:

There are a variety of strategies in the financial markets and looking back (again keyword Hindsight bias) will always find one that has hit the market seriously.

In return, there are of course strategies that have underperformed.

If you were to follow all the strategies of this world at the same time, then you would receive on average exactly the performance of the market (before transaction costs, mind you!).

strategies-performance

Of course, since many market participants, and especially copy traders, are behaving erratically, for the reasons explained above, the best-performing traders will naturally top the list, and the one who happens to be more recent will be followed successful strategy.

As a result, rain for the lucky guy plenty of commissions and profit sharing.

Nice for him.

Next year maybe another trader with a different strategy is at the top of the list and then gets the blessing.

And so the year turns from year to year. The trader, whose strategy was by chance the superior, gets the most money from the followers.

Interestingly, you can systematically recreate this “success” so that every year you are one of the successful traders in the list:

You simply offer followers every strategy that exists!

On most copy-trading platforms, if at all, one sees only yes-no, whether the one who fights the strategy has invested his own money.

This now allows you to risk completely without your own money or drive a very large number of strategies with very little money, of course, under different user names.

Now if you drive as many strategies AND the exact counter strategies (buying in one strategy and selling in the counter strategy and vice versa), then the chances are that one of the very successful ones.

And completely without risk, because the profits and losses of the two related strategies cancel each other out completely.

It’s all about offering the bar in the bar graph above, which was the largest last year.

This strategy is then followed by the followers and in the automatic replica flushes the image of the commissions as a very real money in the account.

If the strategy is a failure, then our fake ear suffers practically no or only very small losses.

Because offering a strategy costs little or no use and any trading losses are offset by the trading profits of the counterstrategy.

The problem here is that in this situation, losses are limited for the cheater, but potential gains are very large.

This entices you to simply “offer” many strategies with as little effort and automation as possible, and those that do great things will overcompensate for the low losses in other strategies.

A more concrete example:

Trader 1 from our portal list from above has generated a return of 27.41% over the past year through its strategy.

If he has now also the exact counter strategy, ie for each purchase a sale and vice versa, offered under another name, then he has here -27.41% made and to his actual strategies the bottom line deserves nothing, but also lost nothing.

The profit of one strategy is the loss of the other.

So why the whole thing?

Very easily:

He did not gain or lose anything by trading himself, but in the meantime earns real commissions and profit sharing from the followers of the exceptionally successful strategy, whereas the exceptionally bad one in Nirvana’s ranking has vanished and no one cares any more.

That would easily be enough to theoretically finance some other probationary strategies and, among other things, offer user names, even if transaction costs are at stake.

Although I can not prove it, I argue that a significant part of copy trading goes back to this form of fraud.

The attentive Homemade Finance reader will probably realize that the principle that underlies the whole scam is very similar to the perfect crime: the stock market letter .

Copy trading and martingales

If I still have not persuaded you to keep your hands off copy trading, then I’d like to give you at least one last piece of advice on your way here.

If a trader with a performance that looks like an almost straight line with sawtooths crosses your path, then steer clear of the Holy Water like the devil!

What happens here is that after a loss someone increases or doubles their bet. At first glance, this may seem like a genius, because it avoids losses in the short term, but in the long run will definitely ruin mathematically.

Why and why do I explain you in detail in my article on marginal or progression systems .

One of my most important contributions here on Homemade Finance, if you ask me.

Conclusion: copy trading is expensive, underperformed and is a playground for scammers

Copy trading is nothing but a marketing gimmick to the broker.

That may sound like a bit harsh, but it’s fact.

In the worst case copy trading is a quick way to burn money and, at best, just a fancy new package for something well-tried that already exists:

The investment in securities.

And what is ideally to be done, we should all now hopefully be clear:

  • long-term
  • Cheap
  • diversified
  • passive

If you want to pay extra for an interesting packaging, please. But that is directly at the expense of your return.

And of course you should always try to avoid that.

Why pay for certificate fees, profit sharing, or similar for average and long-term market performance when you can get more return for less fees?

In fact, I do not advise you to deviate from your plan (saving a long-term ETF portfolio).

Not a millimeter.

Just stay on course and go your own way instead of chasing the other lemmings into the abyss.

 

Uncategorized

The Path to Financial Freedom Rewards you Today

off-the-financial-freedom-made home-finance

The benefits of financial freedom are very clear:

  • It gives you the opportunity to do what you want . You will agree with me, for your personal happiness that is indispensable.
  • It gives you security , because with solid finances in the back you can handle the crises of life easier. Money does not make you happy, but life is easier.
  • It makes you flexible , you can free up your time and organize your jobs as it suits you. Especially if you have family that is an invaluable advantage.

However, financial freedom is nothing you can achieve overnight. You can definitely work it out with patience and discipline.

This sounds like this kind of freedom is something that you work on for 15-20 years, and in the meantime, you do without the finer things in life. But that is not the case and why this is not so I want to explain to you here.

content

  • Financial freedom is a long-term project
  • Be sure to set subgoals
  • How would you change your behavior if you got € 400 more a month?
  • Conclusion
  • You think this post is good? Then support Homemade Finance!

Financial freedom is a long-term project

As I said, the road to financial freedom is long and you will need a few years to reach your goal. Depending on how ambitious you pursue this goal, this can take as long as 1-2 decades.

The following graphic shows you a small example. We assume a monthly savings rate of € 500 and a term of 20 years. Furthermore, let us assume a net yield of 5% .

That means after 20 years you have earned a fortune of around € 208,000 . All right, what does that mean?

If we assume that you want to pass on the accumulated capital to your children and only live on the continued accrued interest, that means € 10,400 interest each year. That’s € 866 per month for the rest of your life. If need be, for all eternity.

That’s a great extra income. Of course, depending on how old you will be then you can continue to work and continue to increase your income, or if you retire in 20 years, you can upgrade your pension.

By the way, if you are wondering now how high your monthly savings rate must be to come after 20 years and at 5% to 1 million , here is the answer:

This corresponds to around € 2400 per month. This may be sobering at first glance, but if you are still young and have 30 years and may even get 6% return , then the monthly amount will already be reduced to € 994. Still not very short but not impossible. The compound interest sends greetings.

But you definitely do not have to become a millionaire to be financially free, and maybe it’s not such a healthy goal to stiffen up a number. Remember, money does not make you happy, it just makes life easier. Depending on your standard of living, significantly lower sums of money are enough to be money-technically independent.

That may sound very negative now, as if you were doing without something for 20 years, only to be able to enjoy something later in the uncertain future. Even if this is the basic principle of any investment (you are giving up money today to get more money in the future), this does not quite apply to the quest for financial independence.

After only a few years , your depot already supports you with passive income . Even if you do not spend this for the sake of dear interest, but reinvest immediately. But it’s a pleasant thought to know that a certain cash flow keeps your back free.

Be sure to set subgoals

I like to set goals and compare the increases in the depot with everyday things I need. For example, after one year my depot pays me a bulk purchase a month, after 2 years my entire expenses for food, 7 food and half rent, 10 years food, rent and some spare time. And so on.

Financial freedom

A big goal is much easier to achieve by breaking it up into many small subgoals . Reinhold Messner does not even stand in front of the K2 and says to himself, ok I have to go up there now. He looks closely at his route and divides it into individual stages. Today to camp 1, tomorrow to camp 2, the day after tomorrow bivouac under the saddle and then up to the summit.

If he only thought of the altimeters altogether the whole time, that would be an enormous mental burden. But today until camp 1? That’s possible, I can do it. And after a few days he is at the top and has achieved something that seems impossible.

You need stamina, patience and partial goals to motivate and keep you happy. Then virtually nothing can go wrong on your path to financial freedom.

How would you change your behavior if you got € 400 more a month?

In this question, I do not mean your employer, but regardless of your income from capital. And compare it to the situation where your total income depends on your employer.

I believe that the more independent you are from your employer, the freer you will express your opinion. You will also go through life more relaxed and more likely to criticize or represent your positions with more emphasis.

And, as a self-fulfilling prophecy, you’re more likely to become more successful in your job. Constrained and tense, good things rarely happen. In the end, that also benefits your employer, because who wants a gang of yes-Sagern around. Sooner or later, this will get you on your feet and that is certainly not in the interest of the employer.

These “soft” aspects on the road to financial freedom are often overlooked in my opinion. Would you be less tense if you had 30%, 40% or more of your salary, regardless of your job? I am convinced you would be it.

By the way, this is another form of diversification , because what are you doing on your way to financial independence? You invest money and receive income from capital assets. Instead of doing everything on your own, you do not have one but two types of income . You are simply broader.

Conclusion

Financial freedom is not a binary, black and white process . It is something very graduelle. There is no exact deadline from which you can call yourself financially free. You will gradually . An invaluable advantage, because it allows you partial goals set which in turn motivated by keeping you on your way.

Going for financial independence is worthwhile today , not just sometime in the distant future. The steady growth of your depot will make you feel much safer or freer a lot.

If you have enough liquidity on your account then nothing can go wrong on your way.

 

Uncategorized

5 Solutions Against Negative Interest on the Account

Each saver face the hackles on such headlines:

ECB cuts interest rates to zero.

ECB levies penalty for bank deposits.

It’s really hard to look positively forward when big central banks start experimenting with the financial system.

Most of all, we fear all negative interest rates on our credit, that is, you would have to pay interest to the bank in order to park your money with her. You have to let that melt on your tongue. Since you wear his hard savings on the bench to make it work a bit and then you will not only not rewarded but even disadvantaged.

Although the banks are certainly not the winners in the current low interest rate environment, I am well aware of that.

Negative interest rates already exist, so the Skatbank and Commerzbank levy a kind of undefined fee for (very) large deposits. But basically, it’s nothing more than punitive interest.

How likely it is that even private, normally large daily money and current accounts will be affected by it once is in the stars. However, I do not think it is very realistic, because as a saver, we do not have to stand idly by and see how the bank is bugging us away from the savings.

Here are 5 approaches to fight back against it.

content

  • 5 options for negative interest rates
  • Are penalty rates realistic?
  • Who benefits from negative interest?
  • Real you pay a penalty often now
  • Conclusion: Calm blood
  • You think this post is good? Then support Homemade Finance!

5 options for negative interest rates

1. Switch to foreign / non-European banks

Pro: You can continue to participate in the money transfer (transfers etc.)

Contra: possibly no deposit guarantee if outside the euro area then currency risk

The most convenient solution would be to simply use a bank that does not require negative interest rates. Maybe you have to look a bit outside the box, with the danger in the back, that the local deposit insurance is not the best. Currency risks (eg Norwegian Krone to Euro) are also an issue for foreign currency accounts. A big advantage of this method is that you can still conveniently participate in the monetary system.

 

2. Bunk your cash

Pros: you stay liquid

Cons: Theft risk, could be banned

What you have got that one. The mattress full of money (or at least the pillow) can not take the state so easily. That may be but he could simply ban cash. And if not the state takes it away, then maybe a thief. The advantage of this method is that you remain liquid, you do not have to invest in investments that are subject to price risk or are illiquid.

 

3. Use gold as a store of value

Pro: never becomes completely worthless

Cons: quite illiquid, impractical as a means of payment, possession could be banned, fluctuations in value

Gold will fluctuate in value over time, but I would guess that gold will at least never be completely worthless. One could therefore use gold as a store of value and tie up excess liquidity in it. However, it has the disadvantage that it can not be made so quickly to money and the bid-ask spread (the range between selling and buying price) are not to be underestimated, at least for physical gold. There have also been times when the private gold ownership was banned and who knows what else there is waiting for us.

 

4. Buy government bonds

Pro: you stay relatively liquid (if you need money you sell bonds), property is never forbidden

Cons: Price risk (government bonds also fluctuate in value), even states are not without risk

Another alternative would be the purchase of government bonds. This could be done so that you clear your account to a large extent and put your bonds in the deposit with your broker. Every time you need extra liquidity, you sell bonds and transfer the money back to your checking account. Government bonds are almost always liquid and can be sold quickly. However, they also fluctuate in value, so you may have to sell in an awkward moment.

 

5. Invest in a property

Pro: inflation-protected, by borrowing, inflation can work for you

Cons: requires large funds, very illiquid

This option is only suitable if you have a lot of excess liquidity. Then maybe make the investment in a property sense. Another advantage is the “paging”. By that I mean, since you take out a loan, you now benefit from low interest rates and inflation works in your favor. But you should weigh very carefully if that makes sense to you. You should also be clear how much free money you will probably need in the future, because a property can not just sell it once and turn it into money.

Are penalty rates realistic?

How likely negative interest rates are, it can be argued well. Some say that the progressive abolition of cash is solely for the purpose of forcing people to expropriate this form of expropriation. I do not think so, there are many reasons why cash is less and less used, but I can not see any conspiracy in it.

I also do not believe that on a broad front, negative returns on assets will prevail, because if the existing money system punishes the participants on a large scale which use it, then yes, the citizens simply switch to another system without such negative interest. At some point it is just too stupid people and then they look for alternatives.

This can be, for example, an exchange economy or a kind of parallel currency.

Who benefits from negative interest?

As a preliminary I have already mentioned that banks certainly are not among the winners of this interest rate environment. Even if they should raise interest rates from savers, they would prefer to pay us interest. That’s how it worked, the good old 3-6-3 world. Borrow money for 3%, lend 6%, live well from the range and return to the golf course by 3.

Nor do the large (life) insurers benefit. Their business is to collect money from savers and investors on the right-hand side and to invest in securities on the left-hand side. Like also sometimes government bonds.

And here we come a good deal closer to the truth. Because negative returns are good for everyone’s debt. And we know, if someone in this world has debts, then states!

Interest rates on government bonds are currently extremely low, sometimes even negative . So states can lend money very cheaply and keep the shop running.

Here you can see the interest expenditure of the federal government in the individual years. We’re not talking about eradication here! These are only interest that the state spends, of which the mountain of debt has not diminished.

That looks pretty good, the interest burden has steadily declined. Good state or not?

Thus the indebtedness of the Federal Republic (on which of course the interest is paid) developed:

Ok, maybe not so good, the debt has increased well in the time. This means that the current low interest burden comes to the state. Although he has significantly more debt than 10 years ago, he has to pay significantly less interest than 10 years ago.

But what happens when interest rates rise again and new debts can no longer be received as cheaply? The average will rise again and only as a food for thought: 3% of 2,000,000,000,000 (2 trillion) would be 60,000,000,000 (60 billion).

Only for interest.

I think we agree if the states in the current environment are probably the winners. Of course, the ECB and politics are independent of each other (of course), but I would imagine that our politicians are quite grateful to the central bankers.

Real you pay a penalty often now

What many savers are not really aware of:

From time to time, you pay in real terms today, after deducting taxes and inflation. Say the credited interest in your account is not enough to pay for the loss of purchasing power and taxes. Only when the interest goes beyond just these, then you actually generate a real return.

But there have often been occasions where the real saver has paid. A paradoxical situation, because something is being paid to your account, so it looks like more, but in fact you can buy less than before. One is almost happy that the savings are now worth less and does not even notice it.

Incidentally, this also applies to “the good old days” when there was still 5% interest on the current account. Put simply, what good is 5% interest if only inflation is 6%?

The subject of punitive interest is therefore not completely new, which was born only in the current environment.

Conclusion: Calm blood

As you can see there are different approaches to avoid negative interest rates. Sometimes they even throw off some returns, but you have to also some price risk, so that the value can sometimes fluctuate, or take illiquidity into account.

In the case of negative interest rates, I would suggest a diversified approach consisting of several of the above solutions. This should be well equipped against penalty interest.

However, it is not without its challenges, because you have to keep an eye on your liquidity even more intensively than you should anyway.

In addition, one must also pay attention to be able to participate with the respective solution to the payment in any way practicable.

Even if one does not generate a return with a reasonably practicable alternative, the majority of savers will nevertheless resort to it in case of negative interest rates.

Because no return is still better than a negative return.

 

Uncategorized

Forex Trading: If you Trade Forex Again, I’ll Slap You

forex-homemade-finance

Yes, quite rightly read:

If you’re really thinking about dealing with Forex and Forex trading again, I squeeze through your screen and it gets uncomfortable.

I mean it’s just fine!

content

  • Why does the subject of forex bring me to the white heat?
  • Forex trading is a zero-sum game
  • Forex has transaction costs and therefore a negative expected value
  • The amount of trades makes it
  • The leverage effect not only affects profit and loss but also transaction costs!
  • Do not believe me, believe research on the profitability of Forex and Daytradern
  • Bookmakers and the forex business
  • Comparison of forex with a game of chance
  • Conclusion: Currency trading is bullshit.
  • You think this post is good? Then support Homemade Finance!

Why does the subject of forex bring me to the white heat?

Very easily:

At regular intervals in my mailbox land emails in which readers point out that with Forex you could have made a fortune on this and that occasion, if only you had seized the opportunity. The currency trading quasi as our all financial Elysium. Sure, of course.

The most recent example is the collapse of the Mexican peso after the 2016 US election.

What you could have done ashes!

So maybe you should reserve a part (“play money”) of your depot to speculate in the currency markets?

I’m always a bit clueless about such news, trying to explain why I do not think that’s a good idea and also refer to my article on the difference between speculating and investing .

I have also in my transparency promise my opinion on the numerous Forexbuden and consorts out there already look.

Here I would like to go into depth once and for all. Ok, by now I’ve calmed down a bit, of course I will not break through the screen to you.

I’ll stay on my side (for today), so you can put the fork or the pepper spray away and we’ll take a close look at why you’d better concentrate on your investment portfolio rather than on wild currency speculation.

Forex trading is a zero-sum game

What is a zero-sum game, please?

Very easily:

A zero-sum game is a game in which one win is exactly the other loss.

Short classic example:

You and I throw a coin. If you win the number, you win by the head. The winner wins € 10 from the other.

If we throw our coin many times, how much profit / loss will you or I have statistically?

Zero.

That’s right, neither you nor I have made a permanent profit or loss on this game. You win half of the games and you lose the other half of the games, at least in the long run.

Expected value: 0.5 * 10 € – 0.5 * 10 € = 0

Sounds neutral or not? You can not win anything, but you can not lose anything. The same applies to the foreign exchange trade. Here also no value is generated but also not destroyed, but only pushed from A to B.

That’s an important difference to ETF and stocks!

For equities, we hold shares in companies that generate (added) value for people through their economic activities. One is speculation, the other investing.

One of the most important fine differences in the capital markets!

Forex has transaction costs and therefore a negative expected value

Ok, foreign exchange trading is a zero-sum game, unlike stocks.

What sounds so harmless at first has far-reaching consequences for Forextrader. After all, trading foreign exchange costs fees. Since the currency markets are damn liquid these are not particularly high but nevertheless existent.

On much traded currency pairs, the transaction costs are admittedly extremely low, but nevertheless, their expected value shifts into negative territory. If you still have some problems with the concept of the expected value, then please read the contribution to the expected value . It is extremely valuable for your understanding of the capital markets and also here in connection with foreign exchange trading. I guarantee you that the reading will definitely be worthwhile for you.

But back to the topic:

For example, transaction costs from 10 € to 100,000 € volume (also called a lot in the language of foreign exchange trading) per roundturn equal 0.01% . For a much traded currency pair such as EUR / USD, this magnitude is quite realistic. That does not sound like much, but there are two powerful reasons why the bottom line is going to be a hell of a lot more expensive for you.

The amount of trades makes it

Forex trading is a short-term matter. It’s not like opening a position and holding it for 20 years. Rather, it is closed again after a short time. Holding periods from a few hours to days are typical.

The effects of transaction costs (in the forex context, this is usually only referred to as spreads, ie the difference between the broker’s buying and selling price.) Other transaction costs are usually not borne by retail brokers).

    • Let’s assume a sporadic trader making a trade a week . So once buying and selling per week.

 

    • If he starts with a fixed starting amount of € 100,000 and converts it completely every time, then transaction costs cost him 0.01% each time. In other words, each time he receives an average of 99.99% of his money back.

 

  • Since Forex is designed as a zero-sum game, after 52 trades profit and loss, on average, the balance will probably be about the same.

After 52 trades the result is:

100,000 € * 0,9999 ^ 52 = 99,481.32 €

Of our start-up capital, € 100,000 – € 99,481.32 = € 518.68 has been cut in costs.

 

Based on our original € 100,000 seed capital, this equates to 0.51868% of costs incurred for one year of Forexgetrade. That may sound harmless considering the traded volume, but now comes the real trick.

The leverage effect not only affects profit and loss but also transaction costs!

So far, we have assumed that we are trading in equity of € 100,000 , but this is practically never the case with retail traders (fancy term for us small Otto normal traders).

Since the price fluctuations in currencies are usually very low, a decent leverage lever is used, so that a bit more movement in the matter comes.

Let’s assume that our equity is € 5,000 per € 100,000 trading volume.

This is similar to a lever of 1:20 , which is already more conservative in the Forex area. For comparison, some brokers sometimes allow leverage of 1: 400 , which is a similar wise idea as scratching a tiger on the corpse, but only incidentally.

Since the transaction costs always refer to the volume traded and of course not to the equity, after one year and 52 trades also 518.68 € costs incurred. Based on your 5,000 € at the beginning, the cost ratio is therefore 518.68 € / 5,000 € = 10.3736% !

Conclusion: Forex is an incredibly expensive proposition for traders and a very good deal for the broker. That’s also the simple reason why there are 2000 Forexbrokers out there feeling it’s getting bigger every day.

Do not believe me, believe research on the profitability of Forex and Daytradern

Of course you can tell me:

Nice bills Alex, but you can also substantiate your statements scientifically a bit further?

Fortunately, this is not all that difficult, because there are some studies and evidence on this topic, some even by brokers themselves.

An interesting scientific paper on this topic is ” Do Day Traders Rationally Learn About Their Ability? By Barber, Lee and Odean (2010).

Your results:

  • Of all Daytreads, 40% cease after the first month, 80% after one year, 87% after two years and 93% after five years. And no, they do not stop, because they have all become rich.
  • Only 1% of all traders really make a profit on cost.
  • Traders “learn” nothing from their actions, they remain more or less the same rational / irrational about their (usually short) trader career away. The alleged learning by loss is popular in many forex communities, but can not be proven in this investigation.

Another extremely interesting publication, this time on Forex market efficiency, comes from Shmilovici, Kahiri, Ben-Gal and Hauser (2008), entitled Measuring the Efficiency of the Intraday Forex Market with a Universal Data Compression Algorithm . The efficiency of various currency markets was checked by means of huge amounts of data. As a result, no inefficiencies could be demonstrated, which would have allowed a systematic profit after deducting transaction costs.

The statistics published by Broker are also very informative:

One of the largest brokers ever, Interactive Brokers, regularly publishes figures on the profitability of its Forexkunden . In regularity, the number of lossy accounts predominates.

Other zombies like FXCM or Interbank also (forcedly) publish numbers to their customers. Only 25% -30% of all accounts have been profitable there in recent years. The higher the volume of the account, the more the winner / loser ratio approaches 50:50 . Makes sense, too, because the currency trading is yes, as already more extensively quit, a zero-sum game and from a larger volume to reach at least just a neutral expectation.

One man’s meat is another man’s suffering.

Bookmakers and the forex business

Since I’m a big fan of irony, here are two fun facts:

1. There is a gigantic big market for sports betting, yes, quite right. This is called Betfair and is one of the big players in the betting business. That would not be worth mentioning in and of itself. But a few years ago, this company has expanded its product portfolio in an interesting direction. You now know for sure what’s coming: The company has actually targeted the currency trading. To do this, Betfair has launched a forex broker and consequently named Tradefair.

  1. Maybe you already know eToro, a relatively well known Forex- / Social-Tradingboutique from Israel. You probably will not know 888.com. This is simply a gambling site, ie an online casino. Interestingly, one co-founder of eToro is a former director of 888.com. Of course this is not forbidden and in my opinion not morally reprehensible. It would not necessarily generate confidence for me as a trader, if the guy who otherwise offers me gambling wants to make it possible to trade forex with joy.

Do not get me wrong, I have nothing per se against gambling, yes everyone should squander his money as he wants, but the fact that gambling companies also have forex on offer or there are connections between the two areas would me without knowing all the others be aware of the above-mentioned facts.

That simply dictates the reasonably healthy and hopefully critical common sense.

Comparison of forex with a game of chance

Since I am really nasty on it today, I would like to take the comparison with slot machines and foreign exchange trading to the extreme.

forex-comparative

In summary, the problem with Forex is that it can be broadly attributed to the Stock Market chapter, but it has NOTHING to do with equities or with the creation of added value! Unfortunately, some people do not seem to be directly aware of the difference.

Purpose of Shares: The procurement of capital for a company in order to make something meaningful and thus create economic added value. Purpose of Forex: Change currency from currency A to B. Economic value added does not matter here.

Conclusion: Currency trading is bullshit.

This is the most differentiated and most scientific statement that I can overcome on this topic. However you turn it, the whole thing is just a waste of time.

Of course, the internet is full of semi-scientific trading systems as well as detailed contributions and there are whole forums dealing with nothing else.

But please, leave me: It will not make you happy in the long run and cost you at least as much time as money if you get involved. Save yourself this. Better to use your energy and money to build a solid ETF portfolio over the long term rather than speculating in currencies, hoping for the quick buck.

The road to success is never as fast as we would sometimes wish and it is not easy at all. That’s the way the world is.

And do not forget: If you are ever thinking of trying your luck with Forex I might end up breaking through the screen.

It’s your turn: have you been concerned with currency trading? Did I miss one of two worth knowing points? And what do you think about the whole topic?

PS: Forex is poison for you and your financial independence, that’s my belief and my knowledge, based on scientific findings that I’ve collected and want to share with you here.

That’s why you will not find any affiliate links to any brokers in this post and on Homemade Finance, even if these clicks are worth over € 600 .

Yes, quite right.

Why do you think Forexbroker bloggers and website owners can pay so absurdly high commissions? Are you thinking or not? It is really important to me that both of us can trust in Homemade Finance here.

That’s why it goes without saying for me to forego this money and to advertise for nothing that I know that it will not help you with your goals. Promised.