Forex trading can seem like an excellent way to make a lot of money very quickly. The internet is full of adverts and stories of people who’ve made a life-changing amount of money trading foreign currency.
However, evidence tells us you’re more likely to lose everything than make a life-changing sum of money trading this way.
With this being the case, I’m going to explain the strategy I plan to use to make a million instead of gambling in the foreign exchange market.
The risks of forex trading
Having started my career on a currency trading floor, I know a thing or two about the market. I realised pretty quickly it’s challenging to make money in this business. You need to be on the ball all the time. And a single mistake can cost tens of thousands of pounds if it’s not rectified immediately.
Don’t just take my word for it. Studies have shown that between 70%-90% of amateur currency traders lose money in the long term.
These figures suggest forex trading is about as lucrative as gambling. As such, if you want to make a million in the market, this approach isn’t worth following.
Instead, I reckon buying a diversified basket of high-quality UK stocks is the better option.
Investing for the long term
As noted above, research shows that most currency traders lose money. On the other hand, over the past 120 years, UK equities have produced an average annual return for investors of around 8%.
Investors didn’t have to take much risk to benefit from this return. All they needed to do was buy a basket of UK stocks and sit on them. Investment funds also provided a way to get in on the action.
Some examples of companies that have been able to produce a similar return include gambling giant Flutter Entertainment, utility provider United Utilities and insurance group Aviva.
Investors who were able to buy these stocks at low levels in the past few decades have seen large total returns.
Granted, this approach won’t make you a million overnight. But it’s a tried and tested way of building wealth, unlike forex trading.
Slow and steady wins the race
According to my calculations, at an average annual return rate of 8%, an investor would need to put away £500 a month for 34 years to make £1m. By comparison, figures show the average investor lost 50% of their money forex trading.
I think these figures clearly illustrate which option is better for investors who want to grow their nesting in the long run. While trading foreign currency might seem like a quick way to make a lot of money, in reality, it’s an easy way to lose a lot of money.
If you are serious about making a million, buying a diversified basket of UK shares could be the better option.
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Rupert Hargreaves does not own any share mentioned. The Motley Fool UK owns shares of Flutter Entertainment. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.