Market volatility is a concept about which investors have had to learn a lot over the last few years. Ever since the financial crisis, stocks have been prone to massive drops and sudden rallies - enough to whipsaw even the savviest money managers.
Conditions have made many want to give up on stocks and seek safer places to keep their money - like a mattress. But at least one expert sees the market swings as an opportunity to build for retirement.
In his new book, "401k Day Trading," Golden Gate University professor Rick Schmitt tells investors how to take control of their own future through easy-to-implement retirement strategies.
"The overlying philosophy relates to how you can use market volatility to your advantage," Schmitt explains in an interview with RTTNews. "In the past 10 years, you've been able to do 25 percent better than the market," through this process.
Put simply, "401k day trading comes down to buying low and selling high every day," Schmitt says.
Here are excerpts from the interview:
What is 401(k) day trading?
A: Basically 401(k) day trading comes down to buying on every dip and selling on every rise - all in a retirement savings portfolio. Your listeners know that most 401(k) fund options are mutual funds or similar type funds that are valued once a day at the market close. 401(k) day trading involves making an exchange each day near the market close between cash and stock. If the market is about to close higher, transfer funds from stock to cash. If the market is about to close lower, transfer funds from cash to stock.
It sounds like 401k day trading is a lot like rebalancing…
A: Yes, it is a lot like rebalancing, in that when you become over weighted in an asset class like stock, you will sell some. However, it takes the rebalancing concept to an extreme by calling for daily transfers.
Aren't there frequent trading restrictions that would prevent you from day trading in your 401(k)?
A: Yes, there are. And that's the secret. At the risk of sounding like a commercial, you'll have to check out my book, which happens to be called "401(k) Day Trading." It tells you how to day trade your retirement savings accounts the right way.
Does 401(k) day trading apply to other types of retirement savings plans?
A: Yes, you can: 401(k) day trade all types of retirement savings accounts, like 403(b) accounts that teachers have, 457 accounts that governmental employees have, and IRA's that many individuals have. These accounts just need to offer mutual-fund-type options in two flavors: stocks and cash.
What kind of returns can you get from 401(k) day trading?
A: Over the last 10 years ended December 31, 2011, day trading outperformed the market (as measured by the S&P 500 index) by more than 25 percent. During that period, a buy-and-hold investor in the S&P 500 index earned less than a 10 percent return on investment, while a 401(k) day trader boasted a return of almost 35 percent. As the kids say, that's some "major bank."
Why now for 401(k) day trading? What makes this the right time?
A: The U.S. has been stuck with a volatile stock market that has been moving essentially sideways for over a decade now. Due to demographic patterns, I expect that sideways market trend to continue for some time. Due to advances in technology that facilitate communication and trading, I expect market volatility to continue. Just in 2011, market volatility more than doubled in the 3rd quarter over what it was in the first half of 2011, as measured by the number of days on which the S&P increased by more than 1 percent. Day trading uses that volatility to produce gains in a market that appears to be headed nowhere.
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