Franc-ly, My Dear... some investors still haven't learned the lesson about leverage

By Mike Jones, posted January 22nd, 2015

This week shock waves hit certain areas of the investment world as the central bank of Switzerland abandoned its 3 1/2 year policy of pegging the Swiss Franc to the Euro.

Due to worries about a global slowdown and possible deflation in Europe, investors poured more than 10 times the amount of money into Swiss Francs in December than usual. Calculating the cost for a continued peg to the Euro made this decision easy. As a result, the currency of Switzerland moved as much as 30% up against the Euro in one day. You can imagine how this affected certain investors and brokers if they were on the wrong side of this trade. In fact the Wall Street Journal reports:

The losses were caused when big wholesale banks stopped quoting franc rates, liquidity dried up and volatility spiked in the foreign-exchange market Thursday, making it impossible for brokers to execute trades while losses spiraled. Many of these brokers offer 100 to 1 leverage, allowing clients to stake large sums with relatively little cash, meaning a 1% loss can wipe out a client.

Once again individuals and selected investment firms are wiped out due to leverage and lack of diversification. 

With this fresh on my mind and fresh in the news I thought I would reinforce and reiterate my investment approach. I hope the following is why you have hired me (or will!) to manage your money. 

Diversify within a selection of investments that seem to make sense given the current economic environment. Have an expected rate of return that is reasonable. Do NOT use excessive leverage (EVER). Understand what history teaches about expected and tolerable levels of volatility relative to the return that you seek. Monitor investment selection and risk and have a predetermined plan as to how you will respond to significant changes in either. 

Mike Jones is Managing Director / Investing Group of Argent Advisors, Inc. Email him at mjones@argentmoney.com. Write to him at 500 East Reynolds Drive, Ruston, LA 71270 or call him at (318) 251-5844. The opinions of any single advisor do not necessarily reflect the opinions of Argent Advisors, Inc.  No forecasts can be guaranteed.  Argent Advisors, Inc. does not offer tax, insurance or legal advice.  The information contained in this column should not be construed as a substitute for personalized investment, tax, insurance or legal advice.