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In a world where you can trade anywhere with just a click of the mouse there is simply no room for excuses when it comes to choosing a number of trading and investment accounts tailored to your individual trading needs.
The recent events of “Black Thursday” which caused the downfall of several on-line FX brokers, including the well known UK FX broker Alpari, looking for a buyer at present, brought home the issue of security to traders and investors.
Fact is, risk cannot be avoided, yet it can be managed
Risk not only pertains to your trading style, but the level of risk you take on your investing and trading is also co-related to the kind of broker you choose for your transactions.
If you are an investor who is holding positions over night the risk to your capital is potentially compounded, particularly when you are using a margin account. Alas, that is another issue. I will discuss managing risk in detail in my next article.
Diversification of your trading and investing techniques is an obvious strategy, however, hardly anyone ever mentions that you should not have all your eggs in one trading account.
While brokers are regulated and investors’ deposits in segregated accounts are guaranteed by the regulators, when a broker goes bust the reality often looks very different: You may have to wait for a long time to see your money back, often years, if indeed you are going to see a return of your funds at all.
Relying on the promise that your money is guaranteed is dangerous complacency, naive and downright foolish in today’s world if increased volatility and risk. We are in a chaos phase of a large degree cycle where big changes must happen.
No one can predict exactly what is going to happen and when, as we have seen with the Swiss announcement to unpeg the Swiss Franc from the Euro.
Hindsight is always great and used by the ego heads who think that they “know”.
The reality is simply this: When the world is in a cycle of transition into a new cycle making predictions is a gamblers’ game. There are times when we can predict with more certainty than at others. Right now, all we know for certain is this:
The changes will impact the financial markets, just like the Swiss decision came unexpected causing swift moves nobody was prepared for. There are ways to trade and invest during such times, most traders and investors lack that knowledge though. Old comfort zones do not permit the mind to adjust to making changes easily. Yet right now your ability to survive the coming years depends on your ability to adjust in the face of increasing uncertainty.
Spreading your capital across different trading accounts is one insurance policy to lower risk exposure to your capital which is easily implemented.
There aren’t any guarantees, but to have just one trading account increases risk exposure to your capital.
The security of your capital depends not only on the type of bank your broker clears funds through, but also to a great extend on the strategies the broker has in place to ensure against “Black Swan events”. This means adequate reserve capital for starters.
Given the strict regulations in place, one can be forgiven to believe that most of the better known brokers will be safe.
Alas, who would have thought that FXCM would need a rescue package? They are one of the biggest brokers out there. So, size definitely is no guarantee for security, or professionalism.
Knowing how to diversify is a vital part of understanding risk
Diversification is all encompassing: It pertains to your choice of brokers, spreading capital around, and to your trading and investment strategies:
Don’t have all your money in, or two sectors employing the same investment, or trading strategy across the board. Short term trading, swing trading and investing in different sectors is sound strategy.
Use different types of accounts for the different strategies:
Spread betting is a UK specific tax exempt form of trading. Everyone who trades or invests should have a spread betting account in my opinion in addition to other accounts.
The rich spread their capital across the globe. The idea to think that keeping your money safely close to home is utterly misplaced. Lack of understanding of capital flows and poor psychology make investors cling to the belief that their money is best off in the country they live in.
Consider having accounts in different countries.
One of my favorite places is Australia. The country is relatively safe in these times of upheaval and re-structuring. Australians are delightful to deal with, being straight forward and relaxed. Many a European and American broker could learn from their attitude.
You would want to look for a broker who uses the Commonwealth Bank of Australia, deemed to be one of the safest banks in the world. The broker I have a relationship with in Australia clears all clients’ deposits are through CBA, so in effect your money is with CBA in your trading account.
The Australian government is putting regulations in place to safeguard the individuals’ deposits.
By contrast we can observe increased risk to private individuals’ bank deposits in Europe:
With the Euro potentially being on its last legs some governments in Europe have already levied taxes on the funds of private individuals, as we all know. Stealth taxes, a form of confiscation of the money of individuals’ deposits, are also increasing here in the UK.
To my mind an obvious way to protect your capital is by having several smaller trading accounts rather than leaving all your money on deposit in one bank. In this way you will not be challenged too much when making transfers from one account to another.
UK banks are engaging in a rather worrying practice asking business owners who are withdrawing cash over a certain amount what the money is for. The answer is carefully noted down in a file. Of course the bank employees are acting on orders from their superiors.
The money in your bank account is not yours, make no mistake.
You have a better chance of being served well by a good broker who works on your behalf than by any bank. Okay, I stop my rant about the banking system. This article is about your brokers!
Brokers, just like banks can and do go bust.
There is no guarantee that you will see a fast re-reinstatement of your funds in case the broker goes belly up. You could lose all your trading or investment money in seconds.
The same, incidentally, is true for the funds in your bank account. When Germany exchanged the Deutsch Mark for the Euro this effectively lead to an immediate loss of funds of around 15% – 20%. Disguised of course, but felt in immediate loss of purchasing power.
Do the smart and sensible thing. Have several trading accounts spread across three countries.
Choosing a broker for your Forex trading, and another broker or two for share trading, while having your ISAs in yet another separate account, or two is common sense and not scaremongering in the face of the large cycle of major transition we are finding ourselves in. You have been advised. The storms are brewing and as the old proverb goes: “It ain’t over until the fat lady sings…”
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Mercedes Oestermann van Essen is a trader, trading psychology coach and author of “The Buddhist Trader” and other books on trading psychology. Sign up for her free course: 7 Little Known Secrets To Trading Success & Happiness HERE.
