Bankrupt Overnight in Bonds, FOREX and Options.

A month ago on its quarterly earnings’ call, one of the fastest growing brokerages in the U.S. admitted that 46% of new accounts closed, on average, largely because “people run out of money.” Can you imagine how hard it would be for you to stay in business if 46% of your customers were going bankrupt on your platform? In fact, many of those former clients are facing debt collectors now because they leveraged more than they had deposited in their FOREX trading accounts. The brokerage is seeking to recoup at least $121 million from former, bankrupted clients through aggressive debt collection practices.

So, how does this brokerage continue to gain new accounts, more assets and higher revenue? Because unsophisticated investors are sold into high-risk investments on the promise of easy, astonishing returns. When losses occur, pride and embarrassment keep people from sharing this valuable information. So the next victim races through the door dazzled by the sales pitch, completely unaware that almost half of new accounts are going belly-up. With trading commissions so low at online discount brokerages, the emphasis on higher and more frequent trades on the options platform has become a major driver of revenue and growth.

Options and FOREX are not the only areas of high-risk trading today. Bonds, which are traditionally considered safe, have now become some of the riskiest places for your money, due to credit risk and potential illiquidity.

I outline three examples of bankrupt bonds, FOREX and options below, followed by 3 easy ways that you can stay on the right side of the trade.

One important factor is that these devastating drops happen overnight, while you’re sleeping. Once they occur, your investment goes illiquid, and upside down, overnight — before you can act. If you wait for the headlines, you’ll always be late. So, NOW is the time to take a serious look at your nest egg, budget and retirement strategy — before it’s too late to protect yourself.

Bonds. 
 MF Global was helmed by Jon Corzine, a former US Senator, governor and chairman of Goldman Sachs when it went bankrupt, largely on big bets in European PIIGS bonds (Portugal, Italy, Ireland, Greece and Spain). Greek bonds became illiquid during the crisis of 2011, and existing bondholders were shafted in the bailout deal. Liquidity and credit risk have become huge drivers in the risk of bonds today.

According to a press release issued by the Federal Reserve Bank of St. Louis, “There has been a growing concern as of late that liquidity conditions in even relatively liquid bond markets have deteriorated in recent years. If this is so, then even modest events may trigger an unexpected and undesirable disruption in financial markets.” We’ve seen bonds become devalued and illiquid overnight in automakers, airlines and other legacy corporations that have used Chapter 11 to restructure their debt and pension obligations. If you are holding long-term bonds, it’s time to evaluate the amount of risk you are taking on and craft a new strategy now — while you still can.

See the chart below for the amount of leverage in U.S. corporations. The debt in nonfinancial U.S. corporations has soared to over $5.6 trillion, which is double what it was in 2002.

FOREX.

On Thursday, January 15, 2015, the Swiss National Bank discontinued their “minimum exchange rate” with the euro. Within days of the Swiss National Bank announcement, a number of FOREX trading firms imploded, including Alpari, a UK-based currency trading firm that sponsors the West Ham football club and New Zealand’s Excel Markets. FXCM had to borrow $300 million overnight to continue operations, after reporting that client losses were more than $225 million. Bloomberg reported that the combined losses at Citigroup, Deutsche Bank and Barclays Plc totaled over $400 million. Those firms will employ aggressive debt collection practices to recoup their losses from the people who caused them, meaning not only did the investor lose their principal. They will also be ponying up other assets to cover the losses.

Options.

AIG had a net loss of $183 million in the first quarter, largely impacted by hedge fund losses of over half a billion. Professor Myron Scholes, who received a Nobel Prize for writing the Black Book on options trading, had one of the largest hedge fund failures in history with his Long-Term Capital Management hedge fund. Hedge funds have access to far more sophisticated tools than retail investors, including more efficacious trend charts, more money to leverage, a team of trained professionals, and after-hours and preferred trading status. Even with all of that, the highly educated pros are having difficulty staying afloat. This is why almost half of new accounts at one of the fastest growing brokerages in the U.S. are running out of money, at a time when the stock market itself is still trading near its high.

So, how do you protect yourself from the risk, illiquidity and losses from bonds, FOREX and options? 
 
 Bonds:

Keep the terms short and the credit worthiness high. Don’t reach for yield. Look for safer, income-producing hard assets that you purchase for a good price for a better Return On Investment. Hard assets hold their value better than paper assets when you are living in a Debt World. (Think of those pictures you saw pre-World War II, when Germans were hauling wheelbarrows of money to purchase eggs.)

FOREX:
 As you can see with the Swiss currency event, currencies are highly manipulated by Central Governments. You never get advance warning before a major event. If you are tempted to trade FOREX, then you must be aware of your total liability, and limit that total to the same amount that you’d be willing to bet in Las Vegas. 
 
 Options:

When you are as good at picking winners and losers as Warren Buffett, then you might try your hand at options, with money that you are willing to lose. Be sure that you are aware of your total liability, and that you can set aside hours each day to babysit your positions.

Your future is in your hands. You cannot afford to trust your life savings to someone who is earning commissions to sell you into investments that are not appropriate for you. 
 
 That is why I have spent the last 16 years educating Main Street on The ABCs of Money that we all should have received in high school. If you want to be sure that you are safe from all of the risks in stocks, bonds, FOREX and options before the Presidential Election, then call 310–430–2397 and register now to attend my June 11–13, 2016 Money Makeover Retreat. There you will discover:

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