A Path to Ruin

• Posted by Robert Sinn
• on July 9th, 2012

“Joe Hansman, 29, who handles customer complaints at Wells Fargo, shifts money among two conservative mutual funds in his 401(k) and the banking company’s own stock. He trades 10 to 15 times a month, steering money into Wells Fargo’s stock when he expects it to rally for a few days.” Anxious investors day trading with retirement accounts (h/t @reformedbroker)

I have to agree with my boy TRB on this one – although I’ll go one step further and say that novice investors/traders day trading their retirement accounts is not only a really bad idea but it is also likely a path to financial ruin which will set some people back decades in their retirement planning. While $WFC is a fairly tame stock that even Uncle Warren (Buffett) buys on dips, i’m sure that the above mentioned Mr. Hansman is fairly aggressive in terms of position sizing and probably doesn’t have a contingency plan (stop loss) in the event that WFC doesn’t rally as he expects, and in fact declines precipitously.

This story speaks to a much larger issue facing Americans: With the goose that used to lay the golden eggs, the stock market, no longer regularly returning 15%+ per annum American investors have found themselves in search of new ways to juice investment returns. However, the problem is the same one that it has always been – there are no shortcuts to investment success and in order to achieve higher returns one must almost always take greater risk ( above market risk profiles, more concentrated portfolios, etc.).

When my grandparents retired, their retirement portfolios (which were heavily invested in US equities) benefited greatly from the massive equity market bull run which began in the early 80s and culminated in the dot com bubble collapse in 2000:

 

We are unlikely to see the major indices rise 500+% in less than a decade for a while (but my crystal ball is a little cloudy tonight…..); therefore, investors have to get used to the idea of single digit returns (and sometimes even low single digit returns such as those currently offered by US treasury yields). However, for people like the 29-year old Mr. Hansman mentioned above with a long life ahead of them it would be much wiser to actually learn how to invest properly. In fact, a 29- year old can certainly be much more aggressive in his portfolio allocations and can even take positions (10% of total portfolio or less) in relatively speculative equities that would be unsuitable for someone over 50 years old due to the amount of time that the younger person has left to make up for any “mistakes”.

Day trading is tough and most people simply can’t do it successfully over the long run, particularly someone working a day job who is unprepared to put the time in required to learn properly and achieve success. Investing is different because it is slower and done over a much longer time frame – my advice to people who feel the above pressure to juice investment returns for retirement and aren’t in a position to hire a professional financial advisor:

Do it the right way, avoid shortcuts and schemes that are too good to be true. Learn gradually over time and realize that you can achieve your goals if you work at it and stay focused on the longer term big picture. Also, don’t forget that saving and limiting excessive consumption is just as important (if not better) as making good investment decisions. 

 

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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