Short term vs. Long term investing

[cctv]

Regarding Roth vs Traditional IRA for this contest. I would personally recommend a Roth IRA if you have confidence in your trading/investing abilities to grow the account successfully. Since with a Roth IRA, not only are you not taxed on withdrawals after 59 1/2, but also you aren't subject to the mandatory distribution requirements starting 70 1/2 for traditional IRAs. For Traditional IRAs, you are taxed at your income tax rate for all withdrawals vs Roth IRA withdrawals are tax-free (generally speaking, of course this is assuming it's not an early withdrawal accruing a penalty).

However, if you think you'll probably blow it all and end up with zero in the account going after big/elusive trades, then it might make sense to do a Traditional IRA since your contribution would be tax-deductible (generally speaking). For a Roth IRA, you would need to contribute post-tax dollars.

That said, $1 million in a Roth IRA is a traders dream. Or maybe just my dream.

It is good to have a dream, and it will be really fun to have teammates working toward the same dream. It is like marathon, I may not extend to the last miles, but I will try my best.

I think the most dangerous period is growing from 5.5k to somewhere say 50k.
One failed aggressive trade can easily weep you out from the game; on the other hand conservative strategy is way to slow. This will force us to find another TSLA.

- - - Updated - - -

DaveT: Am I mistaken? Thought that you could not open a Roth IRA in certain tax brackets. Guess you are assuming for thos that can't you will ask them to roll traditional IRA into ROTH?

For guys with large income, you can use backdoor roth IRA
http://www.bogleheads.org/wiki/Backdoor_Roth_IRA

 

[kenliles]

There really is no other option than to do it with retirement accounts.

there's one other option.
you could lose $1M in another investment to write against the gain.
AXPW comes to mind

 

[cctv]

DaveT: Am I mistaken? Thought that you could not open a Roth IRA in certain tax brackets. Guess you are assuming for thos that can't you will ask them to roll traditional IRA into ROTH?

Here is a solution - backdoor Roth IRA
Backdoor Roth IRA - Bogleheads

 

[InTheShadows]

We ought to have a contest. Let's say on June 1st, 2014 each if us opens a new IRA (Roth or conventional) and seeds it with $5500. That is the max amount that ever goes into the account. We log trades and status updates (ie, screenshots) on a separate thread. The goal is to see who reaches $1 million. The rules are you can only contribute $5500 total to the account ever. If you want to start over, you can create another IRA account the next year and seed it with $5500. But you can never add to the original account. Reaching $1 million from $5500 is basically a 200 bagger. I wonder if any of us can do it and how long it would take. Or if we'd all end up failing and losing the full account value due to overly risky plays. There ought to be a nice reward for the person who grows their account from $5500 to $1 million. It doesn't have to be monetary. Maybe this whole thing is a silly idea.

I am not in. I lost more poker games by setting dollar goals like this. The reason I do not have a dollar value goal on my portfolio (especially with a time goal) is because if you make a few bad plays human nature tends to take on riskier and riskier plays to try to make up for the huge losses because going back to the small plays feels like a waste of time. I'm so glad I learned this lesson playing small poker games.

I am personally glad that 2008 happened. Because of this I am in the process of making a plan to survive a similar type crash. Since I am almost completely in options if that type of crash would occur I could not have survived the 3 year come back, which I suspect most of us with straight options portfolio are in the same boat.

To counter this I am working on the safety plan of pulling some of my gains out and moving them into an emergency fund. It's kinda like the emergency fund for your household living expenses only this one is for investing. My plan is to get it to about 25% of our portfolio and in a dooms day scenario (if or when it happens) that wipes out all of my options I would take 50% of that to start over with. As I get older the emergency investing account will be a larger percentage. My hopes with this plan is that I won't have to start out with $2000 again.

This Russian - Ukrainian conflict made me realize this risk and yesterday I sold almost all of my near term options so I am sitting on 30% cash right now. I will be moving 25% of that to my new emergency investment savings account. I'll admit today was tough with the huge gains from yesterday when I sold everything. However if I get wiped out because of some dump macro issue I "should" be able to rebuild much faster. My hopes are that that savings account will end up in the millions and I will never have to use it, but that is not a goal.

My only investing goal is to keep trending upwards. And for my family and me I feel options are a way better way to grow our investments than buy and hold common stock.

 

[sleepyhead]

I agree now that IRA is the way to go. And we shouldn't be afraid of a recession since we legendary traders would make money on the way down too, right?

Exactly!

 

[InTheShadows]

Exactly!

I agree too, however I have not made much money in that direction yet. Once I am able to test that and succeed I will reevaluate.

 

[sleepyhead]

I agree too, however I have not made much money in that direction yet. Once I am able to test that and succeed I will reevaluate.

I haven't tried it yet, but it is extremely difficult to know when to get out and when we are at a peak. Truth is we will never know, and that is why I pretend that I only have 25% of the money that I actually have. I can lose 50% very quickly and the gov't will take half of what I don't lose anyway.a

That said, I know a trader who says that it is a lot easier to make money on the way down, but you have to be able to spot the downturn and that is tricky.

 

[austinEV]

I haven't tried it yet, but it is extremely difficult to know when to get out and when we are at a peak. Truth is we will never know, and that is why I pretend that I only have 25% of the money that I actually have. I can lose 50% very quickly and the gov't will take half of what I don't lose anyway.a

That said, I know a trader who says that it is a lot easier to make money on the way down, but you have to be able to spot the downturn and that is tricky.

There is logic to that since it goes down so fast... if you got the conviction that "a 2008" was happening you would know to go super short with puts and just ride it down.

I was almost completely in real estate in 2008 so I slept through the whole thing (and didn't lose in the real estate either, luckily) so that is easy for me to say.

 

[ongba]

Since we are discussing doomsday scenarios similar to 2008, what would you consider as a trade if we were to have a 2008 like crash? Buying puts on high beta stocks such as tsla, solar, plug, twtr, amzn? Buying calls on vix? Puts on spx? Leveraged inverse etfs? Calls on gld/slv? Seems like there are a lot of choices, but which underying is thd best to maximize profits?

 

[pz1975]

Calls on UVXY or equivalent would probably give a big bang for the buck.

 

[Norbert]

I think it's too late to convert my traditional IRA to a Roth IRA. My TSLA shares are in it, and it's a significant amount.. I'd have to pay tax on it now... I am also significantly older than most of you, I'm 54, I'm considering retiring early next year, probably using the Substantially Equal Payment Plan, so too late for a ROTH conversion at this point. Thanks to my real estate assets and my TSLA investment, I can essentially retire early.
I'll probably play along with the "make a million out of $5500" anyway, why not

You might consider a partial conversion then, depending on the amount of taxes you might be willing to pay now, and depending on the gain you still expect to make on that amount which you don't plan on taking out soon. Since you pay the taxes with money outside the account, you effectively increase the amount of money you have in the account, which can be used for tax-free trades. And also the rules (for taking money out of the account later-on) are more flexible. I'd think it would be worth talking to a tax advisor about this (one who understands all the options, as well as your specific situation.)

 

[KYCurry]

It is only a matter of time. I am sure someone will pull it off.

You guys stipulated five years! That's not a lot of time. Also, I doubt more than ten people will follow through with actually doing the competition so it's not like it will be a meter of numbers either.

 

[DaveT]

DaveT: Am I mistaken? Thought that you could not open a Roth IRA in certain tax brackets. Guess you are assuming for thos that can't you will ask them to roll traditional IRA into ROTH?

High income earners can do a Backdoor Roth IRA, see The Serial Backdoor Roth, A Tax-Free Retirement Kitty - Forbes (google "Backdoor Roth IRA" for more articles).

Here are some other more advanced moves if you have 401k. I would highly recommend talking to a tax advisor before pursing any of these ideas.
The In-Plan 401(k) Roth Conversion Strategy - Forbes
The Backdoor Roth IRA, Advanced Version - Forbes .

 

[AlMc]

High income earners can do a Backdoor Roth IRA, see The Serial Backdoor Roth, A Tax-Free Retirement Kitty - Forbes (google "Backdoor Roth IRA" for more articles).

Here are some other more advanced moves if you have 401k. I would highly recommend talking to a tax advisor before pursing any of these ideas.
The In-Plan 401(k) Roth Conversion Strategy - Forbes
The Backdoor Roth IRA, Advanced Version - Forbes .

Just as I understood it. Certain high earners with a bundle of gains on investments (like exploding TSLA) will not do well with the conversion. Might want to open it to traditional and Roth IRAs. I do not think there is a difference in how you can invest so it should be a level playing field for traditional and Roth players.

 

[tlo]

For us non-Americans, what is the significance of $5,500? I would like to participate but as a Canadian, we don't have IRAs, but have RSPs (retirement savings plan), which I think is the same. We also have TFSA (tax-free savings account) where you have paid tax on the money going in, but all capital gains made are tax-free. There is a limit per year of course.

Canadian here also. I would like to participate in this. Would anyone object to me using a regular margin account? I have already made my annual TFSA contribution, so can't use that.

If I pay tax outside of the account, then from the account perspective it is the same as if it were tax free. We don't pay higher taxes for short term gains, and we only get taxed for half of our capital gains, so I don't quite mind it.

 

[DaveT]

Canadian here also. I would like to participate in this. Would anyone object to me using a regular margin account? I have already made my annual TFSA contribution, so can't use that.

If I pay tax outside of the account, then from the account perspective it is the same as if it were tax free. We don't pay higher taxes for short term gains, and we only get taxed for half of our capital gains, so I don't quite mind it.

I believe you can have multiple TFSA accounts, so what you could do is take $5500 from your existing TFSA account and transfer it to a newly created TFSA account to use in this contest/challenge. No need to do it now as we're still figuring out the rules/details.

 

[Norbert]

Just as I understood it. Certain high earners with a bundle of gains on investments (like exploding TSLA) will not do well with the conversion. Might want to open it to traditional and Roth IRAs. I do not think there is a difference in how you can invest so it should be a level playing field for traditional and Roth players.

Is there some reason they wouldn't "do well" other than having to pay the conversion tax at this point in time? It seems to me that if you have any hopes of trading $5,500 into $1M, you'd really want that to be a Roth IRA, but I'd be interested to understand the case where you perhaps would not want that. Unless you are proud of paying lots of taxes in the end (like me this year ).

 

[Norbert]

High income earners can do a Backdoor Roth IRA, see The Serial Backdoor Roth, A Tax-Free Retirement Kitty - Forbes (google "Backdoor Roth IRA" for more articles).

Here are some other more advanced moves if you have 401k. I would highly recommend talking to a tax advisor before pursing any of these ideas.
The In-Plan 401(k) Roth Conversion Strategy - Forbes
The Backdoor Roth IRA, Advanced Version - Forbes .

Question: The articles that you have linked above, mention that "Backdoor Roth" contributions get complicated by the "pro rata" rule, for those who have pre-existing traditional IRAs. However, in these cases, isn't it better to first convert the traditional IRAs to Roth IRAs, before trying to make additional contributions into separate accounts? And to use the money to pay for the conversion tax, instead of making non-deductible contributions? If so, they could also "contribute" more that $5,500 or $6,500, since the conversion amount and the resulting tax payments are not limited. It can still be done step-by-step, with partial conversions. Once all traditional IRAs are converted, they could then use any "backdoor" tricks without running into the pro rata rule. But maybe I'm missing something.

 

[Mario Kadastik]

I might consider joining too, but would need to know if I could just open a second investment account. The account is tax deferred so I only need to pay tax for withdrawals that exceed initial pay in. The access would be to options and short selling, but the maintenance margin cannot exceed the available portfolio value (i.e. it's not really a margin account as I cannot buy more than the total worth of the account). I'd have to investigate if I could have a separate account under the same trader platform (anyone using IB got ideas for it?) as that would be easier without having to log in and out of multiple accounts.

 

[Norbert]

I might consider joining too, but would need to know if I could just open a second investment account. The account is tax deferred so I only need to pay tax for withdrawals that exceed initial pay in. The access would be to options and short selling, but the maintenance margin cannot exceed the available portfolio value (i.e. it's not really a margin account as I cannot buy more than the total worth of the account). I'd have to investigate if I could have a separate account under the same trader platform (anyone using IB got ideas for it?) as that would be easier without having to log in and out of multiple accounts.

In the US, IB allows multiple accounts (for example individual + IRA). You'd have to ask customer service for your country. (EDIT: In my case, I can access 2 accounts with the same user login, but I think that depends on the specifics of the situation.)

However I believe IRA accounts do not allow short selling of stocks (this might actually be indirectly imposed by the IRS, as it involves a form of loan).