As a financial planner, I work hard to educate our clients on sound principles of investing. For instance, we teach that markets are generally quite efficient in the long term. This means that it’s very difficult to find an edge — whether through superior information, getting ahead of the news, or some advanced strategy — that consistently produces returns above the market over long periods. Statistics bear this out: 90% of active fund managers “underperformed the market over the last 15 years.” The solution, for us, is simply to hold a diversified portfolio that essentially “owns” the market, as our Chief Investment Officer, Andy Christopher, CFA, CFP® suggests. Let the market do what the market does, and, with enough discipline and time, you’ll likely be rewarded.
Having said all that, I have a confession to make. Even though I believe and teach those principles, I sometimes still find myself looking for ways to gain an edge and achieve better returns than just good, old-fashioned, “boring” investing. Perhaps it’s hubris — maybe I’m just more intelligent than the 90% of professionals who fail to outperform the market. My wife would strongly disagree. Perhaps it’s stubbornness — I’ve never been particularly quick to learn from my mistakes. My wife would strongly agree!
Whatever the case, I suspect I’m not alone when it comes to building wealth. There seems to be something in human nature that constantly searches for a quicker way, some strategy or solution that will super charge our investing results and get us to that “number” — whatever it is — more quickly than a diversified, disciplined, long-term approach.
Below, I’d like to share a couple of increasingly popular investment strategies that people often pursue in search of a faster path to wealth, drawing on both personal experience and lessons learned from others. While these approaches can sound appealing — and are often marketed as shortcuts to financial success — they rarely deliver the results people expect. More often, they expose investors to significant risks that can derail, rather than accelerate, their long-term financial goals.
Day Trading: Exciting, but Rarely Rewarding
If you spend any time on X, TikTok, or YouTube, you’ve likely run into a post or video of some guy posing in front of his Lamborghini or mansion. The title might read, “How I turned $100 into $1 million in 1 year.” If you continue to watch or read, they are likely selling a course on trading, where for a few thousand dollars, you too can learn their strategies so you can own your Lamborghini in a matter of time.
While I was never drawn in by one of these videos; admittedly, I did find the concept of day trading alluring in my early investing journey. The idea is that if you can learn a successful strategy (usually based on technical analysis), you can make money in the market on any trading day. The opportunity appears endless.
My perspective on this may differ from that of other planners because I believe it is theoretically possible to succeed as a trader. While markets tend to be efficient over the long term, inefficiencies can and do exist in the short term. Further, there is ample evidence that some traders have achieved sustained success. For example, in Jack Schwager’s Market Wizards series, he interviews traders with exceptional track records, and participation in the books requires verification of their trading performance.
I include day trading on the “avoid list” because social media has convinced many people that trading is easy money. As a result, they're often completely unprepared for how difficult it actually is. The idea that you can pay some dude with a Lamborghini video a few thousand dollars and become a successful trader in a matter of weeks or months is completely out of touch with reality.
First, let’s talk about whom you’re up against. As a trader, you’ll be facing off daily with the best traders in the world. Legions of traders from Goldman Sachs, Merrill Lynch, Morgan Stanley and other institutional players that spend billions on research, technology, and talent are part of your competition. With the rise of algorithmic and high-frequency trading, you’ll also be facing machines that react to news and trends with a speed no human can match. Trading has often been compared to competing at the highest level of performance sports. I believe that is an apt comparison. Thinking you can learn a few trading setups and immediately start printing money is like thinking you can play in the major leagues after a weekend in the batting cages.
Believe it or not, though, the competition is not the hardest part. The biggest enemy you’ll face if you decide to trade is you. To be successful as a trader, you’ll have to have the emotional discipline of a robot, something very few have. First, you must be able to take losses and take them regularly. Some of the best traders in the world have win rates of 30% or 40%. That means they are taking losses 60-70% of the time. Imagine the psychological toll. After all, this is real money. In my view, it is the emotional component more than anything else that leads to the dismal numbers of successful traders: 95-99% of day traders fail. Make no mistake, this is the big leagues.
It’s for these reasons that I put day trading in the “avoid” category. Those YouTube videos and X posts can be incredibly persuasive, but the reality is that most aspiring traders will lose money, expend enormous emotional energy, and ultimately discover that what looked like a shortcut was actually a detour.
Leveraged ETFs: More than Double the Risk
Perhaps you agree with me that day trading is not worth the effort in your journey to supercharge your investment returns. Well, there is a growing class of investment products that appears to offer exactly that. Leveraged ETFs have become increasingly popular, as they have the potential to double or triple the daily returns of an underlying index (I’ll come back to this shortly; it’s very important).
To understand how these work, we need to first understand what an ETF is. ETF stands for “Exchange Traded Fund.” In other words, they are simply funds (i.e., a basket of individual stock holdings) that trade on a stock exchange. Functionally, they serve the same purpose as mutual funds — diversification. However, unlike mutual funds, they are actively traded throughout the trading day. So, for instance, if you wanted to own the S&P 500, you could simply buy an S&P 500 ETF. If you wanted to own the Nasdaq 100, you could buy a NASDAQ 100 ETF. Buying ETFs in a diversified way is a wonderful way of investing for the long term.
But remember—we're trying to supercharge our returns. So now, there are ETFs that use leverage (e.g. options) to double or triple the daily returns of an index. Thus, you could buy 3x S&P 500 ETF and if the S&P 500 index moves up 1% on a given day, your 3x ETF will be up 3% that day! At least, that’s how it appears on the surface.
Now, it should be obvious that this is inherently riskier. An axiom of investment theory is that risk is directly correlated to return. But, perhaps you’re young, you know that you have time on your side, and you, therefore, can take the additional risk. Shouldn’t you put your foot on the accelerator and embrace the additional risk in pursuit of greater returns?
I want to suggest two reasons why you should not do so; one is mathematical, and the other is technical.
The Asymmetry of Losses
The mathematics of investing are unforgiving: a percentage loss requires an even larger percentage gain simply to get back to where you started. And this grows exponentially based on the size of the loss. Let’s take a large-loss example to show the math. Let’s say you buy a stock at $10 and it drops to $5. You’re down 50% on your investment. To get back to even — $5 growing to $10 — you need a 100% gain. The deeper the loss, the steeper the climb back to breakeven. Here is a handy reference guide:
- A 5% loss requires a 5.3% gain to break even.
- A 10% loss requires an 11.1% gain.
- A 20% loss requires a 25% gain.
- A 30% loss requires a 42.9% gain.
- A 50% loss requires a 100% gain.
- A 60% loss requires a 150% gain!
- A 90% loss requires a 900% gain!
Okay, let’s apply this to leveraged ETFs. Let’s say you bought a 3x S&P 500 ETF, but you bought it in our last extended bear market of 2022. The S&P 500 was down about 20% that year — certainly a bad year, but if you stayed the course, you needed a 25% gain to get back to even. However, with the 3x ETF, you may have been down ~60% and would need a 150% gain to get back to even! That’s the asymmetry of losses. If you decided 60% was too much to handle (it would be for most), you may have been tempted to abandon leverage and just get back to regular investing. But that leverage will have had a massive compounding effect. In fact, if you abandoned the leveraged approach and just bought an S&P 500 ETF, you’d still be underwater today, even though the S&P 500 is up more than 70% since the 2022 bear market. The lesson is simple: leverage can magnify gains, but it can also create holes so deep that investors spend years trying to climb out of them.
The Daily Reset of Leveraged ETFs
Worse, though, is that this is not exactly how leveraged ETFs work. If you purchase any leveraged ETFs at your brokerage firm, you’ll get a disclaimer that says something like “Leveraged ETFs are designed as short-term trading tools, not long-term investments.” This is because leveraged ETFs reset daily. The math gets a bit complicated here, but the practical takeaway is simple: because it resets daily, in a volatile market, you could actually be negative after a period of time when the underlying index was flat. This is called volatility decay.
The point is this: while it might be tempting to try to supercharge your returns by using something like a leveraged ETF, the risks are extraordinarily high and you could spend years recovering from a painful, leveraged downturn. Sometimes the potential reward simply isn't worth the risk.
“Boring” Investing Isn’t So Bad
In the world of investing, there will always be promises of a quicker and more exciting way to build wealth. But in my experience, the promise almost never lives up to the hype. If you’re interested, Leading Edge Financial Planning CEO, Charlie Mattingly, and I discuss a few more strategies in Episode #133 of The Pilot Money Guys Podcast. The reality — and perhaps the great irony of investing — is that the most effective wealth-building strategy is also the least exciting. Sure, you won’t see a YouTube video with screenshots of overnight gains and Lamborghinis parked in the driveway. That’s because building wealth isn’t flashy; it consists of patiently saving, investing consistently, owning a diversified portfolio of quality assets, and watching the power of compounding work over many years.
One of our outstanding interns, Erin Rosenthal, wrote an article recently for Aero Crew News that shows the power — and hence the importance of investing often and early — of compounding gains over time. I won’t summarize it here, but it’s certainly worth a look. Instead, I’ll leave you the timeless wisdom of Warren Buffet: “The stock market is a device for transferring money from the impatient to the patient.” Buffett's observation has endured for a reason: successful investing is rarely about brilliance. It's about discipline. It's about resisting the temptation to chase shortcuts, staying invested during difficult markets, and allowing time and compounding to do their work. In my experience, patient investors don't just win occasionally — they win most of the time.
All the best – Fly safe!
Jonathan Groover, CFP® | Financial Planner
Leading Edge Financial Planning
865-240-2292 Office
865-312-7295 Cell/Text
Please let us know if we can help you on your journey to financial peace and prosperity! Hopefully, you found this article interesting and helpful. If you have any questions, contact us at 865-240-2292 or [email protected].
Check out our Pilot Money Guys podcast where we regularly discuss these types of financial topics along with some fun airline news updates and interesting guest interviews. Even the publisher and founder of Aero Crew News – Craig Pieper!
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Leading Edge Financial Planning LLC (“LEFP”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where LEFP and its representatives are properly licensed or exempt from licensure. For additional information, please visit our website at www.leadingedgeplanning.com. The information provided is for educational and informational purposes only and does not constitute investment advice, and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status, or investment horizon. You should consult your attorney or tax advisor. The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance, and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur. All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information, and it should not be relied on as such.
