Investing With Dick and Jane
The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.
By Richard Schmitt
NEW YORK (
) -- One morning Dick went into the woods. Dick found a stick. Then he found another and another . . . . In all, he found and gathered 100 sticks and brought them home. These were no ordinary sticks now. When Dick got back home that morning, he learned he could sell his sticks for $4 a piece. So he set them aside for a rainy day and stashed his sticks in a hole. You could say he set-it-and-forget-it.
That same morning, Jane went into the woods and found 100 sticks of her own. Upon Jane's return home, Dick told Jane her sticks were worth $4 a piece. In the afternoon while Dick was napping, Jane went to the market and found the price of a stick had gone up to $5. So she sold 20 sticks for $100, leaving her with 80 sticks and $100 cash at the end of the day. So now both Dick and Jane had portfolios worth $500.
Still holding a bunch of sticks, Dick and Jane checked the stick market the next day. It turns out that by the end of the next day, the price of a stick had come back down to its original $4 price. So Dick's stick stash -- of 100 sticks at $4 per stick -- was still worth the $400 he started with the day before. However, Jane had 80 sticks at $4 a stick worth $320, plus $100 from her stick sale the day before. Her balanced portfolio of sticks and cash was now worth $420. That's $20 more than Dick had.
Soon Jane realized she could build wealth by not only trading sticks for cash when stick prices were up, but also by trading cash for sticks when stick prices were down. Her trades amounted to buying low to set up gains and selling high to capture gains. Better yet, Jane's stick trading cost her nothing now. So she set out to market every day to rebalance her sticks and cash.
Unlike Jane, millions of Americans hold their stash in stocks (not sticks) and cash in retirement savings accounts. But like Jane, they can rebalance their portfolios every day to set up and capture gains from the stock market's ups and downs. Their daytrading just has to follow some rules concerning fund transfers in retirement savings accounts.
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Taking only a few minutes a day, 401(k) daytrading calls for incremental fund exchanges between cash and stock in retirement savings accounts -- where fund exchanges do not trigger immediate taxes or direct trading costs. Done the right way, 401(k) daytrading offers a way to build retirement wealth in a stock market that seems to offer nothing more than uncertainty. Had Jane instead been 401(k) daytrading a retirement portfolio of stocks and cash, she could have beaten Dick's set-it-and-forget-it strategy by more than 25% over the 10 years ended Dec. 31, 2011.*
Moral of the story
: Don't set-it-and-forget-it like Dick. Instead you can day trade like Jane.
* Based on a comparison of 401(k) day trading a retirement portfolio with an initial balance split evenly between an S&P 500 index fund and cash with a retirement portfolio invested entirely in an S&P 500 index fund.
Richard Schmitt is the author of
401(k) Day Trading: The Art of Cashing in on a Shaky Market in Minutes a Day
. Outside of his appearances on
Fox Business News
, KCBS, and
Business News Talk Radio
, he is an Adjunct Professor teaching retirement planning at the Edward S. Ageno School of Business at Golden Gate University.
