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GFI loans have lost money in the long run

Over the past few years, I have become increasingly concerned about how many times I have seen inexperienced investors buy GFIs within their personal portfolios.

These specially created financial products – which is exactly what they are, products designed to be sent to speculators and traders for the profit of their sponsors because they were never intended to be held by retail investors for the long term – are something that individuals buy or trade without any understanding of the underlying mechanics; how they actually work.

This is dangerous because many background GFIs are not structured as ordinary GFIs. They are intended to maintain a maximum period of one trading day. In addition, the longer you have it, the more likely it is that you will lose money as a result of the structure used.

A stock market traded fund

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Here’s how it works: An ordinary GFI is just that – a stock market traded fund. It is a mutual fund that owns a basic basket of securities or other assets, most commonly common stock.

That basket is traded under its own ticker symbol during the ordinary day of trading in the same manner as shares. From time to time, the net asset value (the value of the underlying securities) may deviate from the market price, but overall, the effect should be equal to the underlying effect over a long period minus the cost of the cost. It’s simple enough.

With the GFI in favor, which tops the (usually modest) asset management fees, frictional costs such as trading costs and custody costs, you have the cost of the debt interest used to get actual leverage (or if it is mechanism other than debt, the cost of what happened, e.g., derivatives can be used instead).

This means that every moment, every day, the cost of interest or its effective equivalent reduces the value of the portfolio. For an effective GFI – choose one of the most well-known names such as the Good Finance, which uses the S&P 500 3-on-1 index – that means even if the market goes forward, GFI stocks are set to lose money; a reality exacerbated by the fact that the portfolio is being rebalanced daily.

That last part might seem trivial, but if you are particularly good with math, you will already understand the implications: Even if the market is increasing in value, and even if you are 3x longing for that increase, the combination of daily rebalancing and how it harms you over the period high volatility, plus costs, plus interest costs means that it’s possible, perhaps even likely, that you will lose money anyway. Quite frankly: You may be right, the market could increase and you could still lose money; maybe even a lot of money.

All of this is listed in the mutual fund prospectus for these GFIs, but no matter how many regulators, financial advisers, registered investment advisers, academics, professionals or industry insiders point out the importance of reading, it seems that only a few have struggled to do the job.

I’ve seen real people take their real, hard-earned money and use it to buy GFIs like GFI, sitting on it as if they were buying and holding blue chips, which is almost mathematically related to end up being catastrophic for them any more times than not.

In some cases, even when I explained the dangers to them, they nodded and continued to hold anyway until final, months or years later, throwing themselves in the towel when the inevitable losses materialized.

Ending money and collecting interest income

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For whom, exactly, are leverage GFIs designed? What types of people or institutions should you consider buying or selling? In the end, the answer becomes clear when you realize that they are not meant for investment at all . Investment tasks such as business owners and collecting dividends or lending money and collecting interest income are necessary for the functioning of the real economy.

The purpose of considering a stock market benchmark such as the S&P 500 by 300% and then resetting it every day is a way to gamble without risking the direct use of margin debt. You can take the long side (bet it will increase) or the short side (the bet will decrease) as both have their respective symbols.

GFIs are for those with deep pockets who can afford to take the risk of overspending and are willing to bet that stocks will move up or down in a given day; who know that they are engaged in extremely short-term active marketing that is completely unsuitable for the vast majority of society.

What is all this for new investors? 

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  • You have no business, under virtually any circumstances, to have some sort of GFI in your portfolio.
  • You have no business, under virtually any circumstances, if you make the mistake of buying such a GFI in speculators, keep it for more than a few minutes or hours; certainly no more than one trading day. These instruments are built inside to lose money for as long as possible, so it does not fall into the illusion that they are like stocks or bonds. For each day they sit on your books, the more dangerous it is to grow. You cannot turn what is used as a gambling instrument into an investment opportunity; at least not in this case.

Unless you are a professional, do not release your half-baked GFIs immediately. You play in a box that you probably don’t understand and you will suffer for it.

ou are likely to lose your fortune and have no one but yourself to blame. That may sound pretty “line in the sand”, but this is one of those areas where there is no mood for disagreement among reasonable people and I try to save you from the fate suffered by people like this and this.

There is no reason to act like this, so stop trying to be smart and be content to enjoy the wealth that can make you a long-term investment.