For people learning about investing, Forex may sound appealing. However, there are many reasons why we should be careful about it. We discuss why you should not invest in Forex.
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What is Forex?
Forex, or FX, is an abbreviation for Foreign Exchange. Therefore, whenever we hear someone talking about Forex, what they really mean is the trading of currencies.
In other words, if we sell Euros to buy US Dollars, we are participating in the world of Forex. If we want to buy British Pounds, Swiss Francs or Japanese Yen, we will also do it in the Forex market.
There are many reasons to participate in the Forex market, such as traveling, buying products in other countries, saving, or even as part of our investment process. However, as we will see below, Forex itself is not an investment.
Why Forex is not Investing
An investment is made with the expectation that it will generate future positive returns. For example, if we buy shares in a company, we do so in the hope that it will make a profit, distribute dividends, and see the valuation of the company increase.
However, buying, accumulating and trading foreign currencies cannot be considered investing. At most we can call it saving.
But, apart from earning a little bit of interest income, currencies can only generate profits if the price of one currency goes up against another. And that, apart from not being an investment, will not generate us any significant returns.
The only reason for accumulating Forex or cash in the bank, as part of our investment process, is when we believe there may be a crash in the financial markets. In such a scenario, we may want to keep our cash in certain currencies and not other.
The way in which it is possible to make money in the Forex market is through trading. That is the continuous purchase and sale of currencies. But that carries a significant amount of risk. At the end of the day, it is not about investing but trading.
There is not anything reason with trading Forex, as long as you are of how that works, and you have a proper risk management in process. Otherwise, you are likely to get wiped out.
Why Losses are Guaranteed
The main reason why losses are pretty much guaranteed if we embrace the concept of investing in Forex is inflation.
Inflation is the constant loss of value experienced by currencies over time. As a result, prices tend to rise and we need more money to buy the same products.
While it is true that not all currencies go down in value equally quickly, they all end up losing value. This can happen slowly and gradually, like with the Swiss Franc or the Japanese Yen, or quickly, like the Argentine Peso or the Turkish Lira.
For this reason, simply accumulating foreign currency as a form of long-term investing is guaranteed to generate us losses in real purchasing power in the long term.
Alternatives to Investing in Forex
If you want to invest for the long term and see how the value of your capital grow, there are multiple alternatives that are likely to turn out better than putting your money in the Forex market.
Therefore, you can look at stocks, bonds, precious metals, real estate, commodities or even cryptocurrencies. Obviously, all these investments have risk and can lead to losses. But, in the long term, it is very likely that we will achieve positive returns.
Forex should be limited for those who want to actively trade the markets and, most importantly, know what they are doing.
If you fancy learning more about investing in various types of markets, I suggest you start in this section:
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