401(k) Day Trading E-Book

Richard Schmitt

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Trading Series
• Sprache: Englisch

Seitenzahl: 583

Veröffentlichungsjahr: 2011

Beschreibung

For many, retirement has become increasingly difficult to both attain and afford. But there is a way today's 401(k) participant, as well as those contributing to similar retirement savings plans, can turn their retirement dreams into reality. With over twenty-five years of experience consulting on retirement plans, author Richard Schmitt knows what it takes to make the most of them, and now, in 401(k) Day Trading: The Art of Cashing in on a Shaky Market in Minutes a Day, he shows you how. Divided into four comprehensive parts, this reliable resource takes you step-by-step through the environment, rationale, and process of day trading your retirement portfolio in minutes a day. It skillfully outlines an approach to buying low and selling high through daily fund exchanges--that draws on many of the fundamental principles of investment management--to exploit daily market volatility.

Leseprobe

Contents

Cover

Series

Title Page

Copyright

Dedication

Preface

Acknowledgments

Part I: Introduction

Chapter 1: Game On

TRADING AND INVESTING

ENVIRONMENT

RATIONALE

PROCESS

JUICING RETURNS

Part II: Environment

Chapter 2: The Shift

HOW MUCH RETIREMENT INCOME IS ENOUGH?

SOURCES OF RETIREMENT INCOME

TRANSITION FROM PENSIONS TO 401(K) PLANS

WHAT THIS TRANSITION TO 401(K)S MEANS TO YOU

Chapter 3: Rules of the Game

401(k) PLAN BASICS

401(k) PLAN DETAILS

RULES ARE IMPORTANT

Chapter 4: Tools of the Trade

INVESTMENT CHARACTERISTICS

ASSET CLASSES

RETIREMENT SAVINGS ACCOUNT MANAGEMENT

FUND OPTIONS

PLAN EXPENSES

FUND VALUATION AND EXCHANGE

COVER YOUR ASSETS

Chapter 5: Uneven Playing Field

MARKET VOLATILITY

SIDEWAYS STOCK MARKET OVER NEAR TERM

FORECAST: CLOUDY WITH A CHANCE OF SUN AND RAIN

Part III: Rationale

Chapter 6: Playbook

WEALTH

WEALTH MANAGEMENT PROCESS

MARKET ECONOMICS

CONVENTIONAL WISDOM

RULES OF THUMB

ALTERNATIVE INVESTMENT STRATEGIES

WHAT STRATEGY?

Chapter 7: Getting an Edge

DAY TRADING PURE AND SIMPLE

THE SCIENCE BEHIND IT ALL

SHOW ME THE MONEY

DAY TRADING TAKES DISCIPLINE

Part IV: Process

Chapter 8: Game Plan

FREQUENT TRADING POLICIES

DAY TRADING THE RIGHT WAY

TWEAKING DAY TRADING TO FIT YOU

VARIATIONS ON THE DAY TRADING THEME

THERE YOU HAVE IT

Chapter 9: Postgame Press Conference

MARKET REACTION

FROM THE PERCH OF ACCOUNT SERVICE PROVIDERS

WHAT THE BOSS SAYS

THE GOVERNMENT'S TAKE ON IT ALL

FACT OR FICTION

GET OUT THE CRYSTAL BALL

Appendix A: Decision Tree Controlling Transition of Day Trading Accounts

Appendix B: Outside Assistance in 401(k) Day Trading through Systems, Services, or Funds

Notes

CHAPTER 1 GAME ON: MAKING SOMETHING OUT OF NOTHING

CHAPTER 2 THE SHIFT: PENSIONS TO 401(k) PLANS

CHAPTER 3 RULES OF THE GAME: 401(k) UNDER THE HOOD

CHAPTER 4 TOOLS OF THE TRADE: A LOOK AT YOUR ASSETS

CHAPTER 5 UNEVEN PLAYING FIELD: VOLATILITY IN A SIDEWAYS MARKET

CHAPTER 6 PLAYBOOK: RETIREMENT SAVINGS INVESTMENT STRATEGIES

CHAPTER 7 GETTING AN EDGE: BUY LOW AND SELL HIGH

CHAPTER 8 GAME PLAN: THE ART OF DAY TRADING

CHAPTER 9 POSTGAME PRESS CONFERENCE: MOVING FORWARD

Glossary

About the Author

Index

Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States. With offices in North America, Europe, Australia, and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers' professional and personal knowledge and understanding.

The Wiley Trading series features books by traders who have survived the market's ever changing temperament and have prospered–some by reinventing systems, others by getting back to basics. Whether a novice trader, professional, or somewhere in-between, these books will provide the advice and strategies needed to prosper today and well into the future.

For a list of available titles, visit our Web site at www.WileyFinance.com.

Copyright © 2011 by Richard Schmitt. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, [phone], fax [phone], or on the Web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, [phone], fax [phone], or online at http://www.wiley.com/go/permissions.

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Library of Congress Cataloging-in-Publication Data:

Schmitt, Richard, 1956– 401(k) day trading : the art of cashing in on a shaky market in minutes a day / Richard Schmitt. p.cm.–(Wiley trading series) Includes index. ISBN 978-1-118-08541-7 (cloth); ISBN 978-1-118-12821-3 (ebk); ISBN 978-1-118-12822-0 (ebk); ISBN 978-1-118-12823-7 (ebk) 1. 401(k) plans–Management. 2. Retirement income–United States–Planning. 3. Day trading (Securities)–United States. 4. Portfolio management–United States.I. Title.II. Title: 401(k) day trading. HD7105.45.U6S359 2011 332.024′0145–dc22 2011015867

To Mom, who told me that I could. To Dad, whose fantastic spirit is my compass. To Wendy, who made it so that I did.

Preface

Have you ever felt like an outsider hoping to get a glimpse of what actually is going on behind the scenes in your 401(k) plan? Wading through all of the financial and legal jargon involved in participating in a 401(k) plan can be an overwhelming and not all that exciting task. Who knows–maybe it could be like a sausage factory, and you would not want to know what goes into it. This is not really the case. Instead, you should appreciate that government policy makers, plan sponsors and their staff, and other experts put much thought, time, and energy into developing, implementing, and administering savings vehicles to help you save for a secure future. This book is your backstage tour through retirement savings vehicles, such as 401(k) plans, showing you how to profit in these current uncertain times through day trading your retirement savings portfolio.

Like sausage, these plans are made up of a myriad of ingredients, such as layers of savings and investment options, interwoven with structure, like tax law and other rules. It is all in how the ingredients are used that makes the difference between producing a mediocre or an exceptional result. Over time, sausage makers have modernized their operations to make more sausage with the same amount of ingredients. That is good news for its primary ingredient–the pigs–whose numbers are not being depleted as rapidly.

Likewise, financial institutions have adopted technology to efficiently administer more 401(k) accounts. Yet, for all the technology devoted to administering 401(k) plans, it is the individual 401(k) account holders who are still leaving money on the table–they are not making the most of their investments in their 401(k) accounts. To take a lesson from the sausage makers, it is time for 401(k) account holders to adopt a new approach in using the same old ingredients to yield more product.

The goal of most investors is to accumulate wealth through the investment of savings. To do this requires some planning and strategy. First and foremost, 401(k) investors need to save; for without savings, there are no investment opportunities. Then they need to invest their savings so as to get the best return on investment. Ideally they accomplish this through careful selection of securities and impeccable timing of their purchases and sales. This is easier said than done. In reality, the investment selection and timing processes can be pretty subjective and challenging even to investment professionals.

Yet there are certain elements of the investment process within your control, and every 401(k) investor’s control, that can better your chances of generating higher returns on your hard-earned savings. It is always wise to follow conventional investment theory emphasizing portfolio diversification and a long-term perspective toward investing. At the same time, you need to take care to lessen your exposure to risk as you age and your investment time horizon shortens. Security becomes paramount as you get older and have less time to turn around any poor investments that do not pan out.

The 401(k) plan offers you a special environment with additional opportunities to build retirement wealth. Not only can you enjoy the convenience of automatic savings through payroll withholding, but you also consequently enjoy the benefits of dollar-cost averaging for stock purchases made on a regular periodic basis from payroll savings. Then you generally get to invest in professionally managed investment options carefully selected by your employer. In addition, 401(k) plans as well as other retirement savings plans offer you special tax treatment and cost savings not available through regular savings and brokerage accounts.

Another area of opportunity within the investment process garnering more attention, as well it should, is the control of investment expenses. Year after year, expenses reduce investment performance and eat away at account balances on which investors may eventually rely for support in their retirement. Given the right information in a transparent way, you and every other investor can improve your investment returns by managing your investment expenses. This means you need to select investment options that charge expense levels worthy of the returns they generate–not necessarily the lowest-cost funds, but funds whose performance justifies the expense charged.

Enter the concept of day trading your retirement accounts. Day trading offers you yet another way to get more out of your retirement savings portfolio in these uncertain times. This is not the type of day trading a full-time trader does to turn a quick profit from intraday price movements on sometimes exotic securities bought and sold on a rapid-fire basis. Instead, with day trading retirement savings accounts, you take only minutes a day to make a single daily fund exchange.

The day trading strategy is a really old concept wrapped in a new package built for the cost- and tax-friendly environment offered by 401(k) and other retirement savings plans. Its underlying premise relies simply on the old adage of buying low and selling high. The new package is the part relating to the proper timing, amount, and direction of each trade that produces gains in these current uncertain times.

The day trading strategy addresses the questions necessary to execute a trade within a retirement savings plan: what fund options to exchange, which direction the fund exchange is to take, how much to exchange, and when to submit the exchange instructions. Its ability to build retirement wealth in an uncertain market is fueled by the day-to-day changes in the stock market. As will be demonstrated, it is the elegance of simple arithmetic that enables day trading to generate gains in the type of unsettled, sideways market that this author predicts for the near term through at least 2020.

Most investment strategies depend on stock picking. The day trading strategy focuses on the bottom line. Day trading is more of a quantitative strategy that bases trading decisions on daily stock market fluctuations rather than on technical or fundamental analyses of individual securities or market sectors. In a way, it could be considered a form of swing trading on market trends that sets up or captures gains with only one daily fund exchange. The whys and the wherefores of the market twists and turns are not nearly as important as the disciplined execution of the process over time.

As with any profession, the investment community has developed its own jargon that could take years to learn. Fortunately, day trading deals primarily with basic trading concepts, like exchanging funds between stock and cash. Each day you either buy stock with cash or sell stock for cash. In short, you need to buy and sell stock at the right time (which will be defined herein). Beyond the basics, investing, like driving a car, can become more about the experience.

Nonetheless, this book explores the rationale behind day trading and the retirement savings vehicles that make it all possible. In the course of its discussion, some financial terms and 401(k) and other retirement savings plan terms will be introduced along the way and be displayed in italics, as well as defined in the Glossary at the back of the book.

A global positioning system (GPS) can be useful in driving a car (or golf ball) from where you are to where you want to be. The GPS continually monitors your location and adjusts its instructions to tell you which direction to go and how far. You can think of the day trading strategy as your own personal GPS for directing your retirement portfolio trades. You already know your destination is wealth accumulation. Under the day trading strategy, your reading of the daily change in the stock market will guide you in the direction (i.e., buy or sell) and amount of each daily trade. Market volatility will cause your trades to go back and forth in incremental amounts based on your readings of the daily market changes.

Until now, day trading 401(k) accounts has been sort of a dirty little secret that plan administrators would rather you not know about. For many years, some 401(k) investors have engaged in a type of frequent trading that plan administrators see as putting other account holders and themselves at a disadvantage. Trading costs passed along to all shareholders may increase if a particular fund’s inflows do not equal its outflows. In turn, fund prospectuses note that uneven cash flows into and out of funds brought about by frequent trading make it harder for fund managers to invest fund assets.

Most important, though, is that frequent fund exchanges by participants in retirement savings plans necessitate more record-keeping and systems capacity on the part of fund companies. Although your 401(k) plan may offer daily fund exchanges, the plan administrator surely does not expect everyone to do just that. Establishing enough systems capacity sufficient to handle all potential trades would be like building roads to smoothly accommodate all rush hour traffic–a novelty in most major cities.

Just as a bank does not keep all of its depositors’ savings in the vault reserves ready for withdrawal on a moment’s notice, plan administrators do not maintain enough systems capacity to handle all of its account holders making fund exchanges every day. Consequently, 401(k) plan administrators have already stepped in to establish some pretty effective policies and rules designed to thwart day trading in the name of facilitating orderly investment management. If you sit passively by, these rules could keep you from realizing your retirement dreams.

You understand that rules generally act to discourage you from hurting yourself or others. Mom always said not to hit your brother. The posted speed limit is 65 miles per hour. However, independent-minded Americans do not always follow rules very well, especially when a worthwhile cause like wealth accumulation is at stake. The bold ones have always said that rules are made to be broken. Perhaps to the disappointment of the rebel in you, no rules will be broken here. By following the day trading strategy described in this book, you will be strictly abiding by the rules as they stand. You will not even be attempting to bend the rules, although you may dance around them on a fairly regular basis. So, really, stop hitting your brother, and slow down!

To work, day trading must accommodate the structure of the rules established by plan sponsors, plan administrators, fund companies, and the government. In most retirement savings plans, you can effectively trade only once per day, because all fund exchange orders, regardless of when they are submitted before the close of the market, are executed each business day at the market close. As a result, the retirement savings day trading strategy calls for only one trade just before the end of each day.

Of course, there are some plans that facilitate more frequent trading with real-time trades of individual securities like stocks, bonds, and exchange-traded funds (ETFs) through self-directed brokerage accounts. However, unlike the mutual fund options offered in a 401(k) plan, you would generally pay any trading costs you incur, and your resulting investment returns would be reduced accordingly. Then it becomes up to you as to whether undertaking a more frequent trading strategy is worth the risk, time, and trouble.

The essence of day trading retirement savings accounts lies in the methodical execution of daily fund exchanges to remove the emotion from each trading decision (and frankly save you a bunch of time). 401(k) and other retirement savings plans offer the type of favorable conditions that make it possible to derive value from each daily trade over the long term. The reward of higher investment returns in these uncertain times goes to those patient investors who stick with day trading.

Day trading retirement savings in an uncertain market is just one way to get the most out of your participation in 401(k) and other retirement savings plans. It is intended only to serve as a supplement to a sound underlying investment strategy encompassing prudent asset selection, risk management, and expense control applied to all household assets.

This book presents the environment, rationale, and process on which day trading relies to juice retirement portfolio returns. It offers practical information everyone can use in building a retirement portfolio. In addition to introducing some basic tenets of investment management that also apply to day trading, it covers topics ranging from saving for retirement to expense management before describing the process and nuances of day trading retirement savings.

It starts with a discussion of the unique features of retirement savings plans that make day trading possible. From there, it turns to why these plans have taken such a prominent role in retirement planning. Some background on 401(k) plans and investment options found in such plans is next, followed by a discussion of investment strategies. Then the case for the value of day trading in uncertain times is presented. With this as a backdrop, the basic premise for day trading and its execution strategy are laid out. Finally, it concludes with some crystal-ball gazing as to what could become of all this.

Along the way, the book will lay out clues (in bold type) as in the genre of a murder mystery. Only these clues will not lead you to a conclusion of who-done-it. You already know that you will be doing it. Rather, the clues will lead you to how day trading is actually done.

Any views and opinions expressed in this book are those of the author. This book is not intended to provide any tax or financial advice. As such, any reliance on the views and opinions presented herein is at your own risk. Any financial plan should consider your own personal circumstances. Before undertaking any action, you should consult with your tax and financial advisers to determine whether that action would be suitable for managing your retirement portfolio.

Acknowledgments

Any work requires the perseverance and understanding of those around you. Luckily, I have been blessed on a daily basis with the most awesome support of family and friends in the completion of this project. I cannot thank enough my wonderful wife and four brilliant children for their thoughtfulness and contributions to this project and the rest of my life.

Many thanks also go to Bill Falloon and his most capable team at John Wiley & Sons, notably Jennifer MacDonald, Vincent Nordhaus, and Tiffany Charbonier, for recognizing and nurturing the expression of a new way to approach the investment of retirement savings.

Last, thank you for providing an audience for an idea whose time has come.

PART I

Introduction

CHAPTER 1

Game On

Making Something Out of Nothing

Remember, you don't have to buy at the very bottom or sell at the very top to be a successful investor [but it sure helps].

–Charles Osgood, KCBS commentary, April 13, 2009

The boy plays video games. When Dad first hooked up the video game console, the little shaver experimented to learn how to play his games. With experience, the boy picked up some strategies and techniques on his own. He was not about to read any instruction manuals beforehand. After playing over a period of time, he eventually developed some proficiency. However, he wanted to do better. He wanted to become the next professional gamer, like his “manny” (a male nanny). So, like most people these days, he consulted the Internet. There he found the latest “cheats” on many of the games he plays. It seems that gamers are a somewhat friendly bunch who like to share cheat codes to help others in the community do better in their games.

Video games are basically a bunch of rules embedded in computer code acted out on a video screen. Each gamer's action (toggle turn, button push, etc.) has a consequence that may be good or bad. A cheat code represents a series of special commands that can enhance the skill level or appearance of characters within the game to gain an advantage. For example, a gamer playing a certain basketball video game could use a cheat to outfit his entire team with new shoes. As we like to believe in real life, it is the shoes that make the video basketball star the best he can be.

Now Dad became concerned when he first heard of his son's use of so-called cheats. After all, the boy was not brought up to gain an unfair advantage through nefarious measures. Rules are rules and must be followed by both sides in a fair contest. They dictate the way the game must be played. So the boy sat Dad down to explain (in his own way) that cheat codes were used to take advantage of not-so-apparent rules already built into the game. They were meant to be used to increase the skill level of the players. He compared their use to coaching, saying they were more like a coaching strategy than a ploy to gain an unfair advantage.

So Dad accepted the coaching argument. Everyone acknowledges that good coaching is a key component to achieving success. Even John Wooden, the Wizard of Westwood, used to coach his legendary UCLA basketball teams on every last detail, down to the proper way of putting socks (not shoes) on. To my knowledge, nobody ever called that cheating. It was more like getting the best out of what you had within the rules of the game.

There is also a way to gain an edge in managing retirement savings. It involves day trading tax-deferred retirement savings accounts, such as 401(k) plan accounts. It is just that the term “cheat” usually does not lend itself to a positive connotation in most environments, perhaps other than gaming. It may sound exciting to school kids playing video games, but conjures up visions of Internal Revenue Service (IRS) audits to the rest of the population. So hereafter, “cheats” will not be the preferred term used to describe a way of taking full advantage of existing rules in managing assets in tax-deferred retirement savings accounts. Rather, the clever use of a way to maximize the tax and cost benefits afforded retirement savings accounts to enhance a retirement portfolio's investment returns is deserving of a more favorable term.