There are times in life when you decide that “Hey, if I can’t beat these assholes, I might as well join them”. That is probably a good strategy for picking a beer league softball team, or jumping ship and joining the young upstart firm that is eating your corporate dinosaur lunch.
Howevah, when it comes to investing your hard earned retirement money the editors of this sophisticated financial journal advise you against it, in the strongest possible terms. Banksters are horrible for so many reasons, one of which is that you can’t dilute their power by behaving like they do. You are just a peasant, and financial markets are rigged against the peasantry.
Apparently, some ‘Mericans have decided that it’s a good idea to actively manage their own tax-deferred savings plans, also known as “day-trading”, which is not different in any important respect from taking your retirement nest egg and
slowly quickly pissing it all away at the craps table.
To be fair, participating in any kind of tax-deferred savings vehicle such as a 401(k) plan or something similar is a gamble in and of itself. If you are a young-ish person in the relatively early stages of being a wage slave to W. Mittens Romney’s polo teammates and you choose to save money in a tax-deferred environment, you’re basically taking an enormous bet on what your marginal income tax rate will be when you begin to withdraw money from your account sometime past the age of 65. And that is assuming you live to see 65 in an era when nuclear security will be largely in the hands of drunk, underpaid soldiers (Russia, China) and religious fundamentalists (Iran, Pakistan, India, America).
It’s not possible to know or even estimate without heroic assumptions whether you’d be better off financially by saving pre-tax money or post-tax money. Income tax rates will almost certainly be higher in the future, because running a structural budget deficit of 10% of GDP will eventually bring the chickens home to roost. But you also don’t know exactly when you’ll start drawing down your nest egg, or when Death will tap you mercifully on your shriveled, arthritic shoulder.
So, the best strategy for allocating assets in the face of tax uncertainty is to spread them out. Have a tax-deferred account, contribute as much as you can (especially if it’s matched by an employer, although by now that practice may have gone the way of the Dodo, liberal Republicans, and God) and also build up a portfolio bought with post-tax savings.
In almost all circumstances, diversification is also the right strategy in terms of which kinds of assets you choose to own, regardless of the tax treatment of the money you use to acquire them. If you have more than 10% of your wealth tied up in any one asset, LUL UR DOIN IT RONG. If you bought a house as a financial investment, seek therapy. And if you took out a home equity loan to capitalize a Christian card-counting operation, pray to Baby Zombie Jesus for forgiveness.
Your gambling compulsion might turn out OK, but only if you’re one of the Elect, like His Lord High Hairgel Mitt Romney… and we’re pretty sure none of the Elect read this blog.
In fact, in 1958 the Bank of Sweden Prize-winning œconomist James Tobin proved that, for any person who has an even remotely normal appetite for risk, the optimum portfolio is some combination of the market portfolio (a weighted average of every asset in the market) and a risk-free asset (AAA-rated government bonds are the closest thing in real life to this). Your attitude towards risk only informs how much of the risk-free asset you hold, not the relative makeup of all of the other assets.
Why does nobody do this in real life?
- Some people are optimistic beyond what is reasonable (see traders, day);
- The market portfolio doesn’t actually exist, although you can come close segmentally with index funds; and
- The capital-asset pricing model’s assumptions aren’t strictly true in real life.
Howevah, your correspondent’s meager savings are allocated approximately like this anyway, because your correspondent is a peon who can’t profitably take advantage of the market’s occasional irrationality. Between not having inside information, not having the clout to rig the bond markets, not having the time or skill to hunt through balance sheets and income statements for true value á la Warren Buffett, and not being a tax attorney, I have no illusions at all that I can possibly beat the broader market over a 30-40 year time horizon.
If you, dear reader, happen to think that I’m just a pansy and that you could do better, you’re at least half-right. And you’re in luck, because I have prime oceanfront Florida real estate to sell you.
Day trading is madness, for one inescapable reason: transaction costs. Every time you execute a trade, some market-making middleman will take a cut. Thinking more broadly, the more you trade, the more likely you are to get fleeced by short-term capital gains taxes as well. And the more you trade, the more you will infer (and act on) trends in short term price movements that are ephemeral, random noise in data. It’s like weighing yourself every day. You will become an emotional wreck because (essentially random) fluctuations in meaningless water weight will overwhelm any actual change in body mass, to the point that you start spitting in a cup like a middle school wrestler hustling to make that 148-pound cutoff.
It’s insane, and instead of losing water weight you’ll lose your money, all of it, to institutional investors who’ll then turn around and give it to President Mitt Romney’s re-election campaign. And he’ll turn around and channel it to defense contractors, who will build the next shiny object that kills brown people. And all that money spent on weapons ratchets up the pressure to actually use said weapons, but one day it’ll go wrong and the brown people will retaliate with ICBMs dipped in depleted uranium. So instead of being destitute, you’ll just be dead, and so will everyone else, and it will be your fault. Because you day-traded.
Don’t fucking day trade. Ever.