Why This Speculative Investment Could Ruin Your Savings

In 2007, Americans saved a total of $57.4 billion. That same year, we spent $92.3 billion on legalized gambling.

That data, which comes from Christiansen Capital Advisors via Jason Zweig of The Wall Street Journal, says a lot.

Are you surprised by that imbalance?
We sure were. And while it's worrisome that we spend more on gambling than we save, it's even more troubling for another reason: We have an addiction to trying to get rich quick.

Gambling, after all, is about putting up a small amount of money in the hopes of winning a large amount of money. (We grant you that there's also an entertainment value to it.) It's a high-risk, high-reward game. Sounds a little bit like the ridiculous leverage major banks employed, both in the U.S. with Lehman Brothers, Bear Stearns, etc., and abroad, where banks including UBS (NYSE: UBS  ) , Barclays (NYSE: BCS  ) , and HSBC (NYSE: HBC  ) carried even more leverage than U.S. counterparts.

The intersection of Wall and Main
As the savings stats suggest, Main Street Americans took on too much debt without enough cash in the bank back during those heady housing-boom years. We compounded the problem by taking unhealthy risks. We all know how that's turned out.

Thankfully, it was not all for naught. Groundbreaking new data has revealed that Americans have learned from the recent crisis and are changing their ways. We're getting smarter about saving, more conservative about the risks we take, and all in all setting up our country for a brighter financial future.

OK, that was some serious sarcasm
In reality, there is no groundbreaking new data. While U.S. savings rates are up (prompting some economists to worry about deflation), given the evidence, our guess is that that's a temporary phenomenon. Sketchy "get rich quick!" infomercials are back in full force, data from online brokerages have shown that day traders are back in the market, and there's a new scheme that individual investors are trying out: currency trading.

According to Aite Group, currency trading among retail investors is on the rise. Daily trading by these -- for lack of a better word -- amateurs is expected to rise to $125 billion per day in 2009, up from $100 billion per day last year and $10 billion per day in 2001. That's a lot.

But here's our advice when it comes to retail investors and currency trading: Unless you're a professional driver on a closed course, stay away.

Who listens to us?
Yet currency trading has big-time appeal to small-time investors. As the Journal noted recently: "Investors are typically attracted to currency trading because of the vast leverage available -- as much as 500 to 1. That allows an investor to put up just a few hundred dollars of capital to make a bet of tens or hundreds of thousands of dollars."

While that is some serious upside, consider this: The vast majority of currency trades are made by hedge funds, large corporations, and central banks. In other words, your counterparty in a currency trade is likely to be someone who is -- and this is important -- vastly more qualified to make currency trades than you are. This prompted Gary Tilkin, chief executive of online firm GFT, to tell the Journal that trading currencies "is a business for speculators, not investors. It's more common to come in with $2,000 and lose than it is to turn that $2,000 into $25,000."

Your broker, however, will not tell you this. (Shocker.) The Journal notes that CME Group (NYSE: CME  ) and Deutsche Bank, among others, now have products to entice retail investors.

The right idea, the wrong execution
Glibness aside, individual American investors are right to be worried about the future of the dollar. That's natural, given that the U.S. national debt, stimulus spending, and inflation have made the future of the U.S. greenback a page-one headline these days.

Furthermore, we agree that the outlook for the dollar isn't so rosy. In fact, I (Tim) recently declared that the dollar is doomed, and pointed investors to Philip Morris International -- my No. 1 dollar protection stock.

While one stock is not enough to protect you and your savings from a decline in the dollar, currency trading is not the answer, either. You need a diversified portfolio with exposure to a basket of currencies, as well as to commodities that will hold value even as the dollar declines. That means stocks with 100% foreign exposure, such as the aforementioned Philip Morris or MercadoLibre (Nasdaq : MELI), stocks with vast commodity reserves, like Chevron (NYSE: CVX  ) , and careful, measured use of low-cost currency or commodity ETFs such as SPDR Gold Trust (NYSE: GLD  ) .

That's your huckleberry
A balanced approach like that will yield protection from a declining dollar without subjecting you to the massive risks of currency trading. Even better, it will help you make money slowly over time ... which, as history has shown us time and time (and time) again, is the only way to do so sustainably.

At Motley Fool Global Gains, we specialize in finding and vetting foreign stocks to help you achieve better global balance in what we'll guess is your dollar-denominated portfolio. While Philip Morris is a solid pick, there are many more currencies and countries you need exposure to. But you're in luck: You can see all of our research and recommendations by being our free guest at the service for 30 days. Click here to take us up on the offer.

Already subscribe to Global Gains? Log in at the top of this page.

This article was first published Oct. 12, 2009. It has been updated.

Brian Richards does not own shares of any companies mentioned. Tim Hanson owns shares of Philip Morris International, which is a Global Gains recommendation. MercadoLibre is a Rule Breakers selection. The Fool has a disclosure policy. It does not stockpile bullion.


Read/Post Comments (4) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 13, 2009, at 5:37 PM, jec1ny wrote:

    I fully concur with the dangers facing our currency outlined above. My own investing strategy is closely aligned with the permanent portfolio approach advocated by the late Harry Browne.

    Currently I have 75% of my portfolio in a permanent portfolio (PP) and 25% set aside for speculative investing.

    My PP is invested as follows

    25% VTWSX

    25% HSTRX

    25% Gold (physical coins and bullion)

    25% Cash and short term AAA bonds

    The speculative part of my investments is divided roughly evenly between TGBAX and VEIEX

  • Report this Comment On November 13, 2009, at 9:19 PM, Teacherman1 wrote:

    As my Grandmother was fond of saying, "A fool (not a Fool) and his money are soon parted.

    I guess with so many people growing up in the computer age, there is a tendency to thank that just because you subscribe to some sort of currency trading program, that you have suddenly become an "expert".

    Most tend to forget the other old saying, "Garbage in, garbage out.

    I good article but one I fear will not be heeded by many.

    Patience seems to have become a lost art.

  • Report this Comment On November 16, 2009, at 10:36 PM, vgaymer wrote:

    your moral high horse looks more like a shetland pony if you're recommending a tobacco stock.

  • Report this Comment On November 18, 2009, at 10:11 AM, SnapDave wrote:

    Seriously guys? You're going to completely write off holding some foreign currency because some folks are trading with massive leverage? Isn't the real message here: don't use massive leverage?

    "In 2007, Americans saved a total of $57.4 billion. That same year, we spent $92.3 billion on legalized gambling."

    You have to laugh or cry. Maybe because I've been up almost 24 hours I'm LMAO.

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