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Lessons Learned From Losing a Quarter Million Dollars

This article was written by in Investing. 3 comments.

About the author: This guest article is presented by Debtkid, who recently begun working part-time for LendingClub. He regularly writes at Debtkid about his journey to become debt free.

A few years back, I was playing poker at a bachelor party. There were about 12 guys there, and the pot was around $100. During the course of the game, I had a few large open positions in the foreign exchange market. I kept a laptop next to me during the poker game so I could watch my open trades. While I lost at poker that day, I made over $15,000 in a few hours with my laptop. I was 22 years old.

Too bad I was already down over $100,000 at that point. It would make for a much better story, huh?

I’m a recovering day trading addict. I day traded my first stock when I was 18, and continued to trade through college first with stocks, then options, then currencies. I gained access to capital from credit cards, personal loans and even family members as my trades got larger, and my risks more out of control.

I ended up with over a quarter million dollars in debt because of my losses.

I’m 25 now and have not traded for almost 2 years. I lost my home, my credit, a girlfriend, and nearly my sanity because of my addiction. I lived on the floor of my small office for two months, spending some nights in my car because it was more comfortable.

Things are going much better now. I still have a long way to go to pay off the debts I have from my addiction, but I’m making progress. I have a place to sleep, food to eat, and family and friends who care about me. I feel truly blessed.

Here are just a few of the lessons I’ve learned over the past few tumultuous years.

Invest for the right reasons
I first started day trading to make lots of money so I could impress a girl. Yes, I know. Worst reason ever. Once I started day trading, and I saw a little talent (aka beginner’s luck) in myself, I got greedy.

My trading soon became all about the money. How much could I make in a day? $1000? $5,000? $20,000? Yes. Yes. and Yes. The bigger gains I made the more confident I felt in taking out loans to cover my losses.

I was in big time denial. And yet I kept dreaming of a big house, a million dollar bank account, and impressing all my friends.

Invest for your child’s education. Invest so that you can retire in comfort. Invest so you can sleep well at night.

Don’t invest to make a quick buck. Or impress a girl.

Don’t trade what you don’t understand
I thought I knew how to trade FOREX (foreign exchange) from a technical perspective, because I had some limited success trading stocks as a technician. I was way off base.

Bottom line: If you don’t understand the investment completely, stay away from it.

Take risks based on your strengths, not blind luck
Take risks where you are in control and that involve your passions or talent.

Buying a random stock because some talking head recommended it is not taking a risk. That’s just gambling. Can you control the price of that stock? No.

Let’s look at current example of good vs. bad risk. You’re a programmer named Sam in silicon valley. You’re sitting on a nice bit of cash and you think it’s time to get into the real estate market. You read a few articles online and start looking at foreclosures to buy in Vegas and Miami.

Now let’s say there is a successful real estate agent named John in Vegas who’s made a killing the last few years and wisely stocked away a ton of cash. John knows the market well, so well in fact, he’s had a list of 5 properties on office wall the last few months he’s been just waiting for price drops on.

Who should be buying homes? The answer of course, is John, the real estate agent. Sam the programmer is much more likely to have success starting his own web startup. Risk is really a relative term. You can minimize risk and maximize your returns when you invest in where your talents lie.

You’ll never find a more motivated and trustworthy investment than you.

Don’t hide your mistakes. We’re all human.
For nearly 3 years I hid all my losses from my family, friends, everyone. I kept my secret because I thought I could still correct my errors all on my own. And that was my biggest mistake of all. Sometimes we all need a little help.

Had I shared some of my early trading mistakes with my Dad, I might have avoided the huge losses I accumulated. I could have learned my lesson after losing just 10,000, instead of after 300,000 when I hit absolute rock bottom.

Photo credits: chrischappelear, groud.zero

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Guest Post: The Weak Dollar is Killing Americans’ Wealth

This article was written by in Investing. 24 comments.

dollar bill close-up

This is a guest post from Pinyo, author of Moolanomy, a personal finance blog about money, wealth, investing, and more. Subscribe to Moolanomy’s RSS feed here. In this article, Pinyo’s excitement about his net worth increase is tempered by the declining value of the dollar.

I just completed my September net worth review and noticed that I am actually less wealthy. While my net worth went up 1.24%, the value of U.S. dollar went down by 2.26%. You may think that this doesn’t concern you, but it does because we are an integral part of the global economy. For my family, this is even more important because we have direct financial dealings outside of the United States.

The realization that my wealth went down got me interested enough to trace this back to 2000. This period is particularly interesting for me because I have been beating the S&P 500 since then. From the chart below, you can see that market returns weren’t great, but they did manage to yield a 3.31% CAGR (i.e., compounded annual growth rate).

S&P500 Performance through October 1, 2007

If you’d invested $10,000 at the end of 2000 in an S&P500 index fund, you would have about $13,000 on October 1, 2007.

Now, let’s look at the U.S. dollar against 3 major currencies: the British pound, the Japanese yen, and the euro.

Currencies and adjusted S&P500 performance

Historical currency data from FXHistory: historical currency exchange rates

From the chart, you can see the value of the U.S. dollar against these currencies. In column G, I took the arithmetic mean of the percentages in column B, D, and F, clearly showing the declining value of the U.S. dollar. Column H is the result of actual S&P 500 performance adjusted for currency performance. Now our CAGR is only 0.51%!

From the perspective of the global economy, $10,000 invested at the end of 2000 in an S&P500 index fund, was only worth about $10,400 on October 1, 2007.

According to the Inflation Calculator from InflationData.com, the inflation rate from January 2000 to January 2007 was 19.91%. This means that most American investors are less wealthy now than they were in 2000!

What does this mean?

* This doesn’t mean I am going to make any immediate change. For instance, I wouldn’t start gambling in the foreign exchange market (Forex). To me, currencies are not investments. They are speculative, and not suitable for lay investors like me.
* I am glad to have 30% of my portfolio in international funds. But, this doesn’t mean I should increase it to 50% either. I think the key to success is diversification, including having both domestic and international investments.
* This means that our wealth is affected by the global economy. As such, we should be aware of what’s going on outside of the U.S. and looks for way to grow our wealth more at a global level.

Please let me know what you think about this different perspective on wealth by leaving a comment. Thank you.

Read more from Pinyo at Moolanomy. Image credit: SqueakyMarmot.

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Foreign Exchange Trading

This article was written by in Uncategorized. 10 comments.

An article in the Wall Street Journal, Currency Markets Draw Speculation, Fraud [free], talks about day trading in the foreign exchange market. The story focuses on Marc Coppola, one of my favorite Q104.3 DJs, who apparently also dabbles in trading foreign currency.

To summarize, this type of trading has grown in popularity despite its risk. However, at least one person interviewed in the article believes it is less risky than trading in stocks since larger currency cycles tend to be easily apparent.

The two currency exchanges mentioned are Gain Capital, the broker used by Marc Coppola, and FXCM (ForEx Capital Markets). I signed up for a free visitor account at FXCM a while ago, but didn’t look into it much. That company offers a mini-account that will let you get started with as small an initial investment as $300.

It might be worth it to experiment a little.