How Much Leveraged Risk is Too Much?

On January 15th, 2015, the Swiss National Bank eliminated it’s cap on the Swiss Franc in regards to the Euro.  What does that mean?  Well, up until that day, the SNB had said that the value of a Franc would be tied to the value of a Euro.  Under that policy, they had maintained the Franc at a value of 1.20 Francs to 1 Euro.

Disclaimer: This post is being sponsored by ETX Capital.  The content is mine, however, and isn’t influenced by their sponsorship.

Artificial Currency Valuation

In other words, they were artificially changing the value of their currency.  And when they stopped artificially changing the value of their currency?  The market corrected, and the Franc rose to a more reasonable exchange rate. At the same time, the Euro dropped.  The big problem with all of that?  There was no warning that it was going to happen.  And as we all know from the housing crash in 2008, when there’s no warning, bad things can happen.  Banks across Europe immediately felt the pressure.  Within a day, it wasn’t just banks.  It reached all the way down to many small investors around the globe.  Most of those investors were FOREX investors. You see, FOREX investors invest in foreign currency with the expectation that the currency will increase in value.  For years, the Franc was artificially stuck in one place.  And then it wasn’t.

Leveraged RiskSNB Change Cost Many FOREX Traders

Many FOREX traders trade on margin, or leveraged investments.  They’re required to keep a certain percentage of their overall investment in a cash account.  Say $200 on a $10,000 investment.  And when that $10,000 investment tanks and is suddenly worth only say, $1000?  It’s not like they just get to walk away from that.  They still owe the $9,000 they lost to the brokerage.  But, just like in the housing crash, where many of the investing houses were over-leveraged on sub-prime mortgages, many of the investors simply didn’t have the cash to make up the difference.  And many of the FOREX brokerages were left holding the bag, which left many of them in the same situation as the banks in the housing crash.  Suddenly without much in the way of liquid funds and headed for bankruptcy.

Much like the housing crash, there were a few brokerages that had been cautious with their leveraging, and actually managed to escape relatively well from the SNB issue.  One such brokerage was ETX Capital in London. Not only did they come through the fray,  but, according to LeapRate, they’re buying up some of the brokerages that didn’t make it through so cleanly.

Limited Leverage and Risk Aversion Saves the Day

So, how did ETX Capital make it through the SNB fiasco?  According to a LeapRate interview with the CEO of ETX, it’s because they’re a more risk-averse brokerage.  In other words, they put additional limits on the leveraged investing of their users.  That risk-averse, limited leveraging, allowed them to take far smaller hits in the markets and recover much more quickly.

What can we learn from ETX?  Some risk might be good for us, but we have to be really careful about how much risk and leverage we have.

Limiting Leveraged Risk is Good for Personal Finance Too

Let me put it this way.  How many of you reading this have less than $1000 in the bank right now, and over $100,000 in mortgage, student loan, and credit card debt?  That’s leveraging.  Your credit score is a numerical indicator of the likely hood that you will repay a debt.  The higher the credit score, the higher the likely hood that you’ll repay the debt.  When you take on a mortgage, or use a credit card, you are leveraging your credit score (and future income) for that “investment” debt.  (*note: Debt is never really an investment.  Don’t treat it as such, please.)

Why do we leverage our credit and income for debt?  Because very few of us will ever have the patience or will power to save up for years so that we can pay for a house with cash.  Most of us can’t make it a year to save up for a good used car.  So, we leverage ourselves out to buy the things we can’t buy with cash.  The more debt we accumulate, the more leverage, and thus risk, we have.

What happened to people who bought houses with those sub-prime mortgages before the crash?  We all know the answer.  We saw it streaming across our televisions and the headlines of our newspapers for over a year.  They were foreclosed on.  The economy dipped so hard that there was serious discussion about it becoming another “Great Depression”.  And those people lost their homes.

What if we were more like ETX Capital and other brokerages and banks that self-limit their leveraged risk?

Confessions of a Professional Blogger – Book Review

Confessions of a Professional Blogger

By: Miranda Marquit

Confessions of a Professional BloggerDisclaimer: I received a copy of this book from Miranda.  My policy on books I receive free copies of is that I don’t review them unless I like them.

How many of us, myself included, don’t jump at the chance to get a little insight into how someone who does something that we want to do for a living, for a living?  I know that when Miranda asked me back at the end of 2013 if I would read her book that I immediately said yes.  It’s been a little while since she first sent over a copy, but that’s totally on me.  I read a lot of books, and somehow hers got lost in the shuffle and ended up at the bottom of the to-read pile.  I wish it hadn’t, but it did.

On to the book.  It’s a short read at just over 100 pages, but it’s chock full of excellent information on becoming a professional blogger.  Miranda leads the reader through the steps of starting out and gaining fans for your blog, or for gaining customers for your freelance writing.  Throughout the book, Miranda focuses quite a bit on the details on how she manages her freelance clients, the way she’s created the “package” of services that she provides, and how she structures it all to the benefit of all involved.

If you’re looking to test the freelance writer waters, Confessions is a quick read that’s loaded up with information on where to start, what you need to do, and how to keep it rolling.  You’ll find the book to read like a lot of Miranda’s articles, smooth and concise.  And who better to learn from than someone who used her freelance writing to become the primary breadwinner for her household?

You can pick up a copy of Confessions of a Professional Blogger at her site, MirandaMarquit.com.