This is the fifth in a series of posts focusing on the Recession in America and the impacts it is having on things other than your 401k and personal finances. Check out the first four posts in this series titled -
Recession in America – What about our pets?
Recession in America – Home Foreclosures
Recession in America – Unexpected Landlords
Recession in America – Abandoned Subdivisions
How has your 401k held up in these difficult economic times? I know that mine has lost a lot of its value in the past 12-months and chances are it will get worse. I am not the only one who has seen a drastic decrease in the value of their 401k and retirement accounts during this period. Many Americans have recently lost a lot of their retirement savings because of the economic crisis.
How is your job security these days? Are you one of the millions of people who have lost their jobs in the past year? If you have a job – how secure do you think it is? Fortunately, I still have my job – but who knows, it could get eliminated any day because of budget cuts from my employer.
If you answered yes to any of the questions above or know somebody who is in one of those situations, then you are not alone. Most people across America are experiencing these same hardships. As as result of 401k and job losses, it looks like there is a troubling pattern forming that somewhat resembles gambling. I have been reading a lot of stories recently about the rise in day trading in the stock market. Some discount online brokers are reporting sharp increases in new accounts opening in the past several months. From most reports – these new accounts are for people getting into the day trading business.
There are two big reasons it appears why people are picking up day trading during this recession.
- Income – People are picking up day trading as a form of income. Many people who have lost their jobs or are looking for supplemental income have decided to day trade stocks to make money.
- Retirement – There is another group of people who have decided to pick up day trading as a way to build back up there retirement portfolio. People have decided to use flipping stocks as a way to hopefully build back the value of their long term investments.
Both reasons I listed above are a little troubling to me. Investors and ordinary people have seen their jobs and retirement nest eggs vanish in the matter of a few months time. Most long term investors, who thought they were doing things the right way, feel like they have been punished for no good reason. Now they have decided to get back in the game by trading stocks short term. I worry because many of these people don’t understand the ins and outs of day trading. While day trading can be extremely profitable for a few who actually know what they are doing, the majority of uneducated investors will get swallowed up. Most of the new day traders are probably not aware of what it actually takes to day trade stocks. In fact, most of the knowledge long term investors have been taught is not relevant when day trading.
Is this another case of our culture wanting to get rich quick? Or is it just a desperate attempt by people to get back what they once had? I hope it is the latter and that we have learned something from this economic crisis – like living within your means and not risking your future for short term gains.
Have you changed your investing behaviors during this recession?
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My husband and I started mutual funds shortly after graduating college. We chose aggressive growth mutual funds to build wealth for the long term. Our stocks did very well, riding the wave up to the peak. Shortly after the index fell off its 14,000 high in late 2007, we sold everything and put our savings into precious metal funds. We saw the handwriting on the wall — or rather, the economists we were reading saw the stock market decline coming. I am glad we paid attention.
As an aside, you may need to re-title your series “Depression in America” as this economic downturn worsens.
Maria @ Residual Income Web’s last blog post..How to Make Money with a Website: Niche Topics
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passivefamilyincome Reply:
March 8th, 2009 at 11:10 pm
Maria – That is great you were able to understand what was happening in the market in 2007. It definitely is worth paying attention to things. I remember reading articles from Warren Buffett around that same time telling people he was getting out of the market and things were going to get bad.
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Hmm daytrading.. Active trading could also be swing trading with a holding period of 2-5 days.
Studies have shown that over 90% of aspiring day traders lose it ALL in the first 1-3 years of trading. Most strategies for active trading also have losses, the thing is to stick to a strategy that works for you!
I have friens who actively trade stocks, futures, forex, options and they make good money. But some of them also have steep drawdowns which could get up to 40-50% from the peak of their portfolio values. I see active trading as no different a strategy than buy and hold investing. If you have been a buy and holder and you decide to switch now to active trading you are more likely than not NOT DOING yourself a favor.
Dividend Growth Investor’s last blog post..Dividends and The Great Depression
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passivefamilyincome Reply:
March 8th, 2009 at 11:10 pm
DGI – I think you have the right approach and discipline for stock investing. I appreciate your insight.
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The only thing I got into was real estate investing, and that was not governed by the recession at all: it was the culmination of a long time dream which started after I read Rich Dad Poor Dad. In terms of my stock portfolio, I have just stuck with an annual and quarterly rebalancing and updating. The one thing I have done, which is great, is not look at the balances at all. Unfortunately, when the market was on the uprise, I liked to look at the balances a lot, but it led to a couple ‘day trading’ type moves that I’m still not proud of.
Steve’s last blog post..Links for 2009-01-11 [del.icio.us]
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passivefamilyincome Reply:
March 8th, 2009 at 11:12 pm
Steve – I also read Rich Dad Poor Dad which motivated me to start this site and go create passive income. I know some people knock the book but I found it very motivating. It taught me how to think about things differently.
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“While day trading can be extremely profitable for a few who actually know what they are doing, the majority of uneducated investors will get swallowed up.”
Certainly. I’d guess that well under 1% of people who begin actively trading are successful at it long-term. If you start with a disciplined, patient plan and don’t expect tangible results for a long time, you increase your chances many times over. If you start daytrading in a desperate attempt to supplement your income, you’re are digging your own grave.
Blake’s last blog post..Should Parents Pay for College?
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passivefamilyincome Reply:
March 8th, 2009 at 11:13 pm
Blake – Unfortunately I think people are desperate and are also use to instant gratification. Hopefully they understand what they are getting into.
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Day trading sounds like a great way to win back your retirement savings. Until you have to be right more than the experts who have infinitely more information and tools than you do. Also, day traders have a significantly larger portfolio turnover, which results in higher costs and short-term tax rates. Not a good idea. Just keep pumping money into the stock market and accept the fact that you’re buying at a discount.
Steve’s last blog post..How to Calculate your Self-Employment Tax and Solo 401k Contribution
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passivefamilyincome Reply:
March 8th, 2009 at 11:14 pm
Steve – Nice point. Now is not the time to be trading and instead pick up beaten down high quality dividend producing stocks.
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That is down right scary info. I’m shocked that regular folks are picking up day trading in the middle of this mess. Rarely can professionals make money doing that. I did it in the late 90’s and thought I was some sort of genius or something…then 2000 hit, and I was just a regular Joe again. Be careful, DT is a risky road.
Brandon’s last blog post..How Low Can Stocks Go???
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passivefamilyincome Reply:
March 8th, 2009 at 11:15 pm
Brandon – I have done similar things with Options trading but have stuck with a plan. I think the 90’s produce a lot of people who thought this way then woke up broke the next.
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