Yeah, I think your allocation makes sense. Those kinds of historical sell-offs are a humbling experience, and right after that are once in a lifetime opportunities. The key for everyone is surviving those first I guess. For myself, one of my best winning trades have been the ones I took a huge beating on first. I agree, I think having financial independence should be the first goal before considering anything higher. This forces me to retain a very conservative portfolio myself for the most parts. I often take only retained profits from winning trades to bet on riskier high beta names, and it is these positions that often generate the better or a significant portion of the overall returns. Even though I also know I can put 100% capital on these high beta trades within a portfolio, it just doesn't make sense given my aversion to risk, to put it all in one basket -- to refer back to your point about splitting assets to cash and retirement account (probably buy and hold market ETFs).
I think most do realize though. And plus, as mentioned before, there are too much variables here to make a sweeping generalization. First of all, you could be a resident of a zero capital gains country, like Hong Kong, and you'd pay zero taxes. So already that argument about taxes doesn't apply already for those guys. Or you could be in a huge liberal country and pay 50% taxes. Or you could earn very little income and so your tax bracket is 20%. Or maybe as a trader you make 'minimum wage or less' and may even be a candidate for financial assistance. Or a trader might be trading under a corporation and thus only pay lower corporate taxes, and only drawdown dividends to themselves (the final leg of taxes) to meet living expenses (in this case they retain most of their realized gain capital to work for them). But I think clearly everyone understands there are taxes, maybe just most traders rather focus more on the technical aspects rather than discuss other stuff like taxes or how much you're saving on groceries by clipping coupons etc. With that mentioned, in spite of taxes, there are people who still prefer to take profits. There is something to be said about taking profits and making sure you walk away from the market with a gain than to sit there on your hands and leave the rest to fate. It comes down to how risk averse you are about market conditions. Just saying "don't sell and let your gains work for you is the way to go" actually hinges entirely on your own market sentiment (which is just your opinion and everyones got one) and thus your level of risk tolerance, more so than any fundamental benefit to buy and hold making sense over the long term. I can tell you buy and hold "to avoid realized gains and paying taxes" didn't do any Citigroup shareholder any good since 2006. Like I said, some people rather they pay the taxman the 5% gain they had, than to say they avoided realizing gains to pay taxes and sit on paper losses. I think 9/10 you'd find people say they'd rather take the profit and pay the tax. "Buy and hold" requires one to have a long term bullish view, have lots of faith in the future working out for you (something you have no control over and pure gamble), and also requires one to have additional capital to buy in and average down (such as having a salaried job) in order to really take advantage of this style of investing. As it refers to this discussion about purely career traders, they don't have this opportunity since trading is their career and they don't expect additional inflow of capital from other sources like a job. Sitting on paper losses or be exposed to sitting on paper losses or be flat after having paper gains on a position following a sell-off in the future is clearly not the way to go for the career trader. Plus, if you're so tax averse about your investments, maybe you'd even venture on to discuss how you're not into dividend paying stocks. Afterall, you'd rather not be taxed and rather that corporate earnings be retained by the corporation to grow, and the idea is hopefully the share price follows earnings. In other words, you might as well bet the nest egg with something like BRK.A/B. Buy and hold has its purpose, but again, there is a reason why you don't find high performance hedge funds piling assets onto something like Berkshire and rather choose to trade and make realized gains elsewhere. Yet, even with that said, most 'long term shareholders' actually prefer dividend paying stocks on the whole, on the basis they'd like the idea they get realized money back to them in the form of dividends, rather than to put blind trust in a third party (e.g. trust Warren's instincts with Berkshire). I'd also be interested in a thread that discusses the cost of living and lifestyle of a true @home retail trader who trades their own capital. That will be very interesting to me, in terms of the whole story. E.g. how they got their first seed capital (is it from their savings from an old job, borrowed from parents, etc). Then discuss how frugal or not they are. How they allocate capital. What their fall back or plan will be is in case they get wiped out. However, I think the majority of 'traders' here and elsewhere either trade someone else's capital in concert with their own (such as family and friends) so they have a bigger account and probably take fees (so they are basically salary earners, not pure traders), or they have a job as well as trade on the side, or they have a family member who earns a salary too while they trade. The mindset must be completely different for those @home traders who knows they will never get a top up of their account from a salary, and knows they MUST rely on what they already have to try to make more and that losing what they have right now is like a death spiral because it means you have less buying power. The positive feedback death spiral of losses (less money, less gain but living costs continue to rise due to inflation).
I was a Buy and Hold investor until the 2000 crash. I had an account at that time in the mid 6 figures and spent many sleepless nights not knowing what to do, so I did nothing. By mid 2004 I had recovered most of my capital but decided not to go thru that experience again. I also decided that I would retire early and depend entirely on my investments for an income. The first thing I did was develop a written plan outlining where I was, where I wanted to go and how I was going to get there. Easier said than done!! It took me about 6 weeks to come up with the final plan. Itâs basically an operating manual for an investment account. I tried to write it so that anyone could understand how to implement the plan. Itâs a series of If/Then scenarios. If this happens then I will do this. First priority was risk control and preservation of capital. (Risk = less than 1% of account) Risk is defined as the amount I will lose if I follow the plan. Second was to pull cash from the account. ( sweep ½ the amount over initial account value each month into cash account for living expenses and savings) I use the initial account value to calculate the amount Iâm willing to risk. I have 3 different accounts at 3 different brokerages to keep them separate. ( Long term dividend paying trades; swing trades; and day trades) Canadian taxes are treated differently that the US, There is a dividend tax credit for Canadian companies and 50% of the Capital gains are tax free and the other 50% taxed as income. Swing and day trades are the majority of my day to day income. My risk reward ratio is planned at 1 to 3 but in reality works out to 2.7. Win rate is 37% Annual return in the 35% range. Long term trades are used for major expenditures like a new car etc.
I think this is an important point that a lot of buy-and-hold investors don't consider. There is a difference between a good outcome in the past and a good strategy going forward. I think the 2008 financial crisis was worse than the 2000 crash. Sure we recovered within 3 years, but there was no certainty at the time that we would. I think there is a very good chance that we will have another big crisis at some point. Who can guarantee that we will recover again within three years? Rules of thumb are not very reassuring in a crisis. I read a commentary by Mark Hulbert in which he said there are 3 types of investors: 1) cut & run at the first adversity, 2) hold no matter what (i.e. still holding their Confederate money, and 3) plan to wait it out but eventually panic and bail. The first two don't do too bad, but the third gets killed every time. Most long-term investors lost 40-50% in 2008. I broke even, and that's worth something. And that becomes even more important as I get older. I have to consider the wear and tear on my mind and body of a lot of stress.
First, just to be a devil's advocate, I think there's actual research that shows that "active retail traders" are the worst performing group. http://www.dummies.com/how-to/content/day-trading-success-rates.html http://www.travismorien.com/FAQ/trading/futradersuccess.htm And these don't consider the tax advantages of long-term vs short-term trading. That being said, making the argument that you should be a buy-and-hold trader because of the tax advantages doesn't make sense either. It's assumed that if you are trading as a career that you have some sort of strategy that is working well enough for you to earn a living. I don't think most strategies that work in a short time frame would work on a long one. I've been trading as a career for many years now and making my returns requires far too much churn/turnover for me to hold on to any positions for very long. I've attempted to minimize my tax exposure in other ways, but holding positions for a year is not one of them. Anyway, my point is that a working strategy is FAR FAR FAR FAR more difficult to come up with than a tax strategy, so it's obtuse to suggest a trader should simply switch to a long-term strategy for tax reasons.
You're not playing devil's advocate at all. You're saying something completely irrelevant to what I was challenging, and also something I agree with. I agree with the notion that studies show most retail traders lose money over the long term. As I have explained earlier. It is owed to lack of knowledge, lack of capital, emotions, etc. But, the argument here was specifically about taxes. Taxes are not the reason retail traders fail. When traders fail, the study means they lose money by going negative change in equity. You don't go negative equity because of taxes. The taxman only takes what you profit. So you must profit to be taxed. You can over trade and may underperform a market return for a given year or even compared to a risk free rate, but theres something to be said about the safety of locking down a profit than to continue risking capital marked-to-market in a changing global market place with black swans and risks around every corner. Its all hogwash anyway. Last year buy and holders of the S&P look good. This YTD not so much. Next year might be another can of beans. Exactly. It doesn't make sense to say someone should be buy and hold for tax advantage. Buy and hold requires an optimistic long term outlook on a security. Short of a crystal ball, you don't know what happens tomorrow let alone the longer term. Avoiding realizing capital gains so as to avoid taxes, but later sit in a massive paper loss due to a black swan or random sell off by money flow, can be a losing proposition. Most traders choose to take profits because they lock in a winner. There is always another trade elsewhere. People trade because they seek alpha, and this includes benchmarks such as inflation and the taxman's cut. There is nothing novel about saying tax hurts the bottom line. Everyone knows this. You don't even need to be a trader to know tax hurts the bottom line of a business, or reduces your disposable income as a salary earner. Anyone who pays taxes knows this. People lock in profits because of risk aversion to the future unknown. Most are willing to bet short to medium term because outlook is easier to foresee. For long term investing on the order of years (the argument for avoiding taxes), while it works for some securities having a long term upward bias, most of the time (and all the time), its nothing but wishful thinking and a toss of the coin hoping something works out. Remember each stock is ownership of a company. A company is run by a group of people, in a changing market place. There is no guarentee of anything. Look at Lehman Brothers or Enron, or Citigroup, etc etc. Over roughly the last 10 years we've seen two major market sell offs. I can guarantee you between choosing to buy and hold Citigroup since 2006 and continue to be a bagholder to this date (but hey it is not taxed yet! No tax FTW), or be some other trader who flipped the shares back in 2006-2007 for 5-10% profit and had to pay the taxman their cut, most logical thinkers would choose to be the trader who got taxed and who moved on to other stuff long long ago. Further, as it pertains to the career retail trader with no other source of income, sitting on paper losses is just not going to work for making a living, unless their account is massive and they can collect on dividends alone to live off of. Short of that, you simply can't do the buy and hold method. Buy and hold investing works because of the belief (hope and glass half full wishful thinking) that a market has an upward bias and the outlook is good long term. It also requires someone to be able to 'buy the dip' when the market sells off so you get in a better average cost base on the position (continuous injection of new money to the account). It also requires one to have the financial capacity to live off savings or salary while waiting out an eventual recovery (that you hope is coming but you can't know unless you have a crystal ball). Buy and hold works for most retail traders with a job. It likely won't work well for a career trader who trades their own capital (fixed at the time) and has no source of income (no new injection of capital to account).
Good point. And there is survivorship bias too. Well I am fairly well studied on the concept of long term investing, and also the general hedge fund or private equity mentality of being quick money in and out of positions. My own opinion is more in line with the latter. For me, it makes less sense to continuously risk capital over the long term when I am unable to foresee the long term global market condition of anything over the period of years or decades. I can make educated guesses like everyone else about a company or an industry's outlook, but I don't think its prudent to bet the farm on it. I'm thinking like private equity where you go in, invest in short term opportunities and you liquidate your position. Capital preservation is key and that outweighs any strong opinions you may have about the bullishness of an industry and try to squeeze every last capital appreciation. So I will always choose to take profits over riding something out long term and be hit with black swans. Can a position continue to have upsides? Of course. But I won't lose sleep over it because of a conscious decision to lock in profits and eliminate the risk in the position and move to something else. Private equity firms sell off assets with lots more upside left. Otherwise there will be no buyers. But their job is to look for new opportunities, invest in the short term for a good R:R and get out once the profit target is reached.
Thats a good plan and your returns are pretty decent. Do you rebalance between the trading, swing trading, and investing accounts?
I do think about the salaried job vs trading issue quite a bit. I left behind a very decent paying career (easy six-figure income) - I was let go from my last company, but it would've been easy to get another job with my knowledge/contacts/experience. At the time, I was pretty burned out from year's of work and trading was something new and interesting, so I threw myself into it. My initial bankroll was about $150K which was most of my savings from many years of work. I did have a couple of notable drawdowns - lost 30% of bankroll over a few days early on (never took me below my initial bankroll though), lost $120K on a single trade earlier this year, but overall I was lucky and never made less in a year than I did in my previous career - going on 8 years now. On a yearly basis my capital gains have ranged from 2x - 4x my prior salary. Although I've done well, I don't think my spending habits have gone up at all. There's a sense of security I had from getting a paycheck every 2 weeks and having an established career and knowing I would always be worth a certain amount in the job market. It's difficult to find that same sense of security as a trader since you just never know if you'll continue to perform. I have a very modest mortgage from my career days, my wife works full-time and I'm on her health plan, I live fairly modestly and have never bought anything significant that I wouldn't have even if I were working in my previous career. I was making enough even before I started trading that I wouldn't have thought twice about spending on things that expand my life experiences and knowledge, time/vacation with family, etc. I have not gone out and splurged on an expensive car or anything like that. I also have the mentality that since I have the ability right now to grow my bankroll, I should reinvest in myself as much as possible. This might not be the most disciplined approach but my strategies are fairly market neutral and I believe I'm inherently hedged against macro events. The longer I trade, the harder I believe it will be to go back to my previous career. I'm always anticipating the day when my trading strategies will stop working and my intention would be to go back to my previous career. This also leaves me feeling somewhat insecure. Although I'm a trader, I don't particularly think I'm making a contribution to society. I really think for most traders, the priorities in life are money, and maybe love of competition. One of the side-benefits for me is that I've been able to help my parents grow their retirement funds and hopefully give them a better retirement. There are other things I miss about the career besides the regular paycheck. Lunch with coworkers, having new and interesting conversations every day with intelligent people, etc. Trading is a pretty lonely and insular activity and I think it's somewhat unnatural to have no social interaction at all. Thinking about money all the time is also pretty unnatural and doesn't bring out the best in me. My wife thinks I have a more mean-spirited mentality than I had before I started trading. Although I have no regrets thus far, I definitely continue to think about the lost opportunity costs and whether this is what I want to do with my life.
Interesting account, thanks. I think I can relate to a lot of that, particularly the insecurity of future performance. Having a job security is really a different feeling than someone who relies on their own money to make money, because salary cheques can keep coming in and its like a safety net. People who try to make money for themselves either as a trader or entrepreneur seems to be constantly scrambling for opportunities all the time. But I guess job security itself is also an illusion most of the time, because people do get laid off from a variety of circumstances beyond one's control (e.g. performance). The same situation bestows entrepreneurs who are often constantly insecure about their own standing, at least some of the most successful ones in history, e.g. Sam Walton of Warlmart. I think it comes from having tonnes of battle scars and been through the ups and downs, and any success you have seems surreal and 'temporary' and that any careless step and you can lose it all. But it is probably also this insecurity that keeps you grounded and at bay, because you never take anything for granted and thus can actually avoid a lot of the risks that someone who is complacent will fall victim to (e.g. over spending etc).