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.
David Kuo challenged his Motley Fool analysts to pinpoint the attractive sectors of 2012 -- and they delivered! Discover the industries they selected in this new Motley Fool guide -- "Top Sectors Of 2012" -- while it's still free!
Further investment opportunities: