The Spread-Betting Attrition Rate

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By

Tony Loton

Published in Investing on 16 May 2012

Why spread bettors deserve the nickname 'The Six Monthers'.

Have you ever watched the Blackadder Goes Forth episode titled "Private Plane"? It's the one in which our heroes join the Royal Flying Corps, unaware that the nickname for that squad -- "The Twenty Minuters" -- refers to the average life expectancy for new pilots.

For me, this is a perfect analogy for spread betting. Many people -- even some Fools, including me -- sign up for a spread-betting account thinking that it will be the road to big money with little effort, unaware that the nickname for new spread bettors should perhaps be "The Six Monthers". A source at one of the spread-betting companies once told me that six months is the average time that a spread-betting account remains operational before the punter gives up... or at least switches to a different provider. To be fair, she also pointed out that her company held onto spread-betting clients (on average) for 12 months or more.

So why such a high attrition rate?

Another one bites the dust

I know that the prevailing sentiment among many Fools is that "spread betting is dangerous", what with the leverage and all that, so it may be true that many newbie spread bettors simply get wiped out and scuttle off with their tails between their legs. It may also be true that some become disillusioned when the anticipated "several hundred pounds per day" day trading profits fail to materialise.

Either way, I think it's because new spread bettors are looking at it all wrong, and I think it is possible to practice "better spread betting". More about this later, but first...

Where are all the losers?

With such a high attrition rate and with very high percentage (much higher than 50%) of spread bettors losing money, you'd think we'd hear more about the losers -- and not just from the spread-betting-bashers. But it's hardly surprising that we don't hear too much from the losers themselves because...

While many of us who write articles and maintain blogs are happy to sing when we're winning, with the occasional lapse into cathartic self-deprecating humour, the habitual losers are rarely ever heard from again.

The fact that we only ever hear from the survivors is prevalent in the investment funds industry too, of course. The fund managers shout about their latest greatest best performing funds while quietly concealing the sub-par performances of their dog funds.

I don't know what the comparative attrition rate or longevity (in investment terms, not mortality) is for traditional investors who operate share-dealing accounts, so if anyone else knows -- do tell via the comments section below. In any case, I think that spread bettors would last longer and the spread betting attrition rate would improve if more first-timers practised...

Better spread betting

I don't think there is such a movement as "The Campaign for Better Spread Betting", but I'd like to start it. The campaign manifesto would serve to:

  • Alert would-be spread bettors to the dangers of being bullied by the spread betting companies into "day trading" currencies, commodities and foreign exchange currency pairs as a result of their boasts about fast execution and tight spreads.
  • Encourage a more considered -- dare I say more "Foolish"? -- approach to spread betting plain old equities and possibly stock indices over a longer "position trading" timescale more akin to traditional investing, and with the possibility of capturing dividends along the way.

Above all, this hypothetical campaign would educate new spread bettors about the vital importance of managing the leveraged risk using stop orders and prudent position sizing.

Stopping the rot

By better educating potential spread bettors about the possibilities and pitfalls of this alternative investment (yes, I did say "investment") vehicle, it may be possible to slow down the spread-betting attrition rate. This would surely be a good thing for the spread-betting companies themselves, and for the Fools and non-Fools who are tempted to dip their toes into the shark-infested spread-betting waters but who don't want to get those toes (along with the rest of the leg) bitten off.

Foolish bottom line

From the information I have, it is perfectly plausible to label new spread bettors with the nickname "The Six-Monthers" on the basis of their typical non-longevity. But it doesn't have to be that way. I believe that spread bettors can live longer (in the financial sense) and more prosperous lives, or at least not die trying, by adopting a more Foolish approach.

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Comments

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SevenPillars 16 May 2012 , 10:07am

Where are all the losers? One of the problems with getting information off the internet, especially forums and blogs, is that people don't like admitting to losses, but will comment quite happily about their winners. The internet is full of people like this, yet statistics show that most people lose at spread betting and may well be losers at traditional long term buy and hold investing as well.

And you are right, most fund managers are losers or at least under-perform the market, that's why these financial companies are always coming up with a fancy new unit trust product to sell. What is the difference between a UK smaller companies fund and a UK special opportunities fund? Nothing except the name. Once both fail to produce the goods the next fund offered will probably be the UK smaller companies special opportunities alpha fund.

People probably lose at spread betting because they are looking for short term profits. Day trading is very difficult because the spread alone works against you in many markets. Add in volatility and your trade could be right, but the market swings against you for a moment and you get out for a loss only to see it turn around. The chart up and downs always looks nice and easy with hindsight. The shorter the timeframe for a trade the more difficult it is to make profit given the spread.

Position trading or swing trading may be more profitable if approached in the same way as you would if investing in shares directly, but you still need to be on the right side of the market in terms of momentum. This means that the longer term charts, weekly and daily at a minimum should be your friend before making any trade.

UrbanDreamer 16 May 2012 , 12:07pm

My 12 month update was recently posted over on YTST admitting my losses. (less than £200)

To be honest I already approach SB as if I was directly buying shares, though I won't use the word investing when what I am doing is actually speculating. Spread betting is a outlet for my speculative urges rather than speculating using funds in my ISA, which has now become a investment vehicle.

Tony is totally right about the importance of managing risk by stop losses and position sizes, but I would further suggest a weather eye upon reporting dates when bad news or less than fantastic news may rock a share. I would also recommend trying to match long and short positions if possible so that a general market collapse has little effect upon your account.

I question however his more liberal use of the word investing. To me making money is not, in and of itself, investing. It doesn't matter if all your bets pay off, your bet was never a investment. Pedantic perhaps, but then I don't feel the need to justify risking money gambling or accept that investing does not carry similar risks.

Indeed I bet that most of us know someone who has lost money investing and regards it as a mugs game akin to roullete. I certainly have family who do and other Foolish authors have commented about family comments along those lines.
http://www.fool.co.uk/news/investing/2012/05/09/my-family-and-other-investophobes.aspx

HousingBear999 16 May 2012 , 2:23pm

Hi Tony - I've adopted a "Foolish" approach to spread-betting for about 5 years now, and I would say it's worked out for me and can be done on a longterm basis (in addition to my ISAs and SIPP). Although I'm only approximately "evens" (after deduction of all costs etc) across those 5 years I've learnt a lot, am still in the game, and feel well positioned for the future. Using all the normal "Foolish" principles has definitely helped and I hope will help into the future. On the flipside, on a "risk-return" basis one could argue I've actually done poorly over the 5 yrs (with zero return and significant risk!) I freely concede, but still!...

5HT 16 May 2012 , 3:57pm

It is always easy to find reasons why the market did this or that after the event. However there are too many variables including multiple unknowns to make sensible predictions over the short term. The smaller the timescale, the greater the noise. I would suggest that, short of using inside information, wins and losses are random. Even with an optimised strategy, statistically the platform providers will win and you will lose, just like a casino.

Of course in the real world some will win for a time. It is a zero sum game. If the losers drop out then there will be a preponderance of winners remaining in the game. But their chances of winning (assuming an optimised strategy) will still be no better than before and it will still be a zero sum game.

longpod 16 May 2012 , 6:42pm

More articles to help us try to improve please Tony.

plaste 16 May 2012 , 6:45pm

I've been trading with spread betting firms over 13 years and in that period I've compounded my capital at 22% per year with one losing year. I use a variety of mechanical systems, predominantly trend following. I also have a day trading system in the mix and that is also profitable. The reasons people lose have been well documented and I would suggest it has little to do with the nature of spread betting firms in themselves.

HousingBear999 16 May 2012 , 8:50pm

Plaste - out of interest, what would you say are the key reasons that people lose (just in a nutshell)?

5HT 16 May 2012 , 10:49pm

@plaste - extraordinary claims require extraordinary evidence.

SevenPillars 17 May 2012 , 9:06am

One other point to consider is that with spread betting you can also go short. To some this is a totally alien concept and one that is difficult to accept let alone actually do, especially if you come as most investors do from a buy and hold world. Most investors only know how to go long, for example IG Index offer to their clients current information about the positions that clients are holding. Currently, despite the market falling, the following number of clients hold long positions in the following companies.

Vodafone 97%
BP 98%
Lloyds 91%
Tesco 100%

etc, etc....

Could go on, but the market is clearly falling yet the majority hold long positions. It is rare to find a majority of clients with short positions in FTSE stocks. The question is, for those snowed under by paper losses how long will they hold for? Their longs might be right in 20 years time, but as most of us know, you can be waiting a long time for a share price to come back, even in a bull market.

snikmij 17 May 2012 , 11:50am

I suspect it could be the scheme that they joined that puts some people off.

I started with Richard Hill scheme which was useful for learning about currency/index movements but the fx plan he sold was useless for the most part, more losses then profits.

Then joined affx, that went very well until this wretched currency volatility started and that was that, still works occasionally though.

I think that a 'laissez faire' attitude needs to be cultivated also to gamble with what one can afford to lose!

lotontech 17 May 2012 , 12:04pm

Funny you should say that, snikmij, because in a "better spread betting" book that I just found myself compelled to start work on I wanted to make a point about "only gambling with what you can afford to lose".

The only problem with that statement, sensible though it is, is what I wrote in a previous Motley Fool article at http://www.fool.co.uk/news/investing/2011/02/09/are-you-investing-what-you-can-afford-to-lose.aspx

Quoting myself from the article:

"..as a former highly successful IT consultant with an expense account, a flash car, and everything else, I could once afford to lose a lot of money... so I did! "

Thanks for your comment, and thanks to the others for their comments too.

Tony Loton (article author)

globally 17 May 2012 , 7:59pm

Can some kind "Fool" kindly explain what the principal difference is between Spread Betting and CFDs. I imagine that in both cases there's an optimum time for keeping ones position open taking into account all expenses including daily interest. Someone once told me that for CFDs the figure was 6 or 7 weeks but I haven't a clue why. My objective would be to protect decent profits on a couple of shares I've held for some years with a view to selling in the autumn if there's still a Stock Market then!

lotontech 17 May 2012 , 8:42pm

globally:

On CFDs you pay dealing fees when you buy and sell, and you pay Capital Gains Tax on profits, so it's rather like share trading... but leveraged.

Spread betting has no dealing fees and no CGT.

I hope this helps,

Tony Loton (article author)

globally 18 May 2012 , 9:41am

Tony Loton - Many thanks for the information and presumably you can keep a spread bet open for as long as you can keep providing additional margin if that becomes necessary? But what about CFDs. I imagine interest on ones position is mounting up on a daily basis and there are other expenses to pay, so would I be correct to assume that keeping a trade open for, say, six or seven weeks is the maximum without taking the question of additional margin into account? Presumably, with CFDs, any loss suffered is allowable for Capital Gains Tax relief but that would not apply to Spread Betting.

lotontech 18 May 2012 , 9:53am

globally:

Sorry, but I can't really say much more without straying into "advice" territory, and I'm not a big user or fan of CFDs.

On your wider question about relative costs of holding shares (and potentially CFDs) vs. spread bets you might be interested in this article:

http://www.fool.co.uk/news/investing/2011/01/26/share-dealing-vs-spread-betting.aspx

globally 18 May 2012 , 3:30pm

lotontech - Very helpful article and food for further thought. Many thanks.

luckystrike23 20 May 2012 , 6:43pm

some additional interesting bits on why so many traders lose money:

http://www.financial-spread-betting.com/Lose-money.html
http://www.spread-betting.com/losing-money-spread-betting

lotontech 01 Jun 2012 , 7:09pm

In the course of writing this article I got the bit between my teeth on the "better spread betting" concept, and embarked on an ambitious project to start writing a "Better Spread Betting" book that would initially be entirely free to read on-line. You can find the result (so far) at http://goo.gl/p5JJY

Tony Loton (article author)

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