Monday, July 09, 2012

You Want to Run Into the Room Shouting "No-o-o-o!"

Here's Walter Hamilton with the most unsettling domestic news of the day:
Americans worried about running out of money in their golden years are trying a new investment strategy: day trading their retirement funds.
Let's all agree on how crashingly, suicidally dumb this is, even as we feel a pang of compassion for the poor guy who is sufficiently desperate that he'll attempt such a misbegotten strategy.

But then let's take a moment for the very smart Felix Salmon who thinks it isn't really happening:

suspect that day-trading retirement funds is extremely unlikely to actually become a Thing. People just don’t have the time or the self-discipline to do something like that — especially once you find out what’s involved. Because most 401(k) plans deliberately make it very difficult to do this kind of thing, these plans can only really be put into effect if you have two or even three accounts to trade. And if this kind of activity catches on, chances are the fund administrators will put an end to even the existing loopholes. These accounts are designed for buy-and-hold retirement funds, not for trading.
Maybe, particularly if he is right about the practical difficulties. But "self-discipline" is precisely the quality you will not find in the compulsive devoted day-trader: rather, self-discipline is precisely what keeps you away from this beguiling but lethal chimera.

Felix does give the gratifying example of a young man on the customer complaints desk at Wells Fargo who trades in and out on Wells stock. "The chances of this working out for him are pretty much exactly zero," declares Felix, emphatically and I think correctly. But the guy's 29; if he gets burned a few times now, he may get chastened before he really needs the money.

Although it'a not precisely on point, Felix does also mention the most import single rule of employer plans do not buy your employer's stock. Nothing personal; he may be a fine fellow with a lot of prospects. But you've already got your wetware, your human capital, tied up in the job; buying the stock also just makes you the classic underdiversified investor. If they need to pump and dump sell the stuff, they'll give you all that blather about how you want to "show loyalty" and need "skin in the game" Don't believe a word of it. Indeed, one reason the boss wants to go into the mergers and acquisitions game is precisely that his portfolio is by nature undiversified, and for exactly the same reason. He may be stuck with the company stock; if so his only hope may be to diversify at wholesale by buying somebody else. His problem; don't let it be yours. If you still doubt me (and why would you take investment advice from me), go read a guy who really knows what he is talking about.

1 comment:

Ken Houghton said...

When I was working Disaster Recovery in late 2001--started a project on 10 September of that year--I was astonished to discover many Midwesterners and Texans whose 401(k) was almost entirely their company's stock. And some of that, they said, was required by the plan.

ERISA has a lot to answer for.