February 2, 2012 / 6:19 PM / in 6 years

Stern Advice: 5 reasons to start day trading now

WASHINGTON (Reuters) - We all know what we are supposed to say about day trading: It’s horrible, a scam, a vestige of the 1990s tech boom, and just for naive chumps.

But still, there are days when it would be nice to lock in a big win, or pile into a favorite stock when it seems to be beaten up.

In an era of flash crashes, computerized trading, whipsawing volatility and sell orders that cost less to execute than it takes to buy a gallon of milk, why should you stick with the old buy-and-hold strategy? It seems a bit out of date. You don’t have to party like it’s 1999, but you can be a little more active around the edges.

That’s the view of Richard Schmitt, an adjunct professor of retirement planning at Golden Gate University in San Francisco, a long-time retirement consultant, and author of “401(k) Day Trading: The Art of Cashing in on a Shaky Market in Minutes a Day” (Wiley, 2011). Schmitt has been moving his own retirement account money in and out of the market on a daily basis since 2008.

“The beauty of doing it in a retirement plan is that trades don’t trigger immediate taxes,” he said. Trades within 401(k) plans, individual retirement accounts and Roth IRAs don’t trigger capital gains taxes, though many 401(k)plans do limit the frequency with which you can trade.

Here’s Schmitt’s system: “Near the end of each day, if the market is lower, I‘m buying. If it’s moving higher, I‘m selling.” He suggests investors take 1/1000th of the value of their portfolios, and link that amount to the daily percentage change in the Standard & Poor’s 500 stock index.

So, if you have $150,000 in your retirement account, you would trade $150 for every percentage point move in the SP500. You’d do that near the end of the day, by moving that much money out of a stock fund or exchange-traded fund and into a money market mutual fund.

“It’s a lot like rebalancing, in that when you become overweighted in an asset class like stock, you will sell some,” he said. “It takes the rebalancing concept to an extreme.”

Schmitt concedes that his plan could hurt investors in the event of a long raging bull. But he expects stocks to be volatile, yet in a narrow trading range, for years to come. That would be one reason to adopt some day trading habits.

Here are others:

-- It’s cheap and easy. In the old days, buy-and-hold strategies made the most sense because it could cost hundreds of dollars every time you bought or sold a stock. Now you can make $8 trades in an online brokerage account in moments.

Mutual funds used to come with big sales loads and exit fees. Now you can buy and sell the entire market, in the form of a total market exchange traded fund, for pennies. Many 401(k) plans offer brokerage windows in their plans, through which you can do this.

-- The big boys do it. Hedge funds and institutional investors are using computer programs that swoop in whenever the market crests and pull their profits off the table. That’s why you can be watching your profits grow slowly and steadily and then whoosh!... they are wiped away.

-- You have more information than you used to. You can watch the market in real time. You can see if shares have moved up or down for days in a row, or if there’s a big move starting at 3 p.m. on any given day. Using your knowledge of history, you know the market doesn’t move unrelentingly in any direction for days and days in a row.

You can see if the index or stock you’ve been buying and selling moves into a different valuation territory.

-- You can do it gradually. Day trading doesn’t have to mean sitting at a computer all day and buying and selling large lots of shares on minute moves. It can mean being a little bit more aggressive around the edges, about buying more on bad days and selling more on good days. One tried-and-true technique called ‘value cost averaging’ does that in a moderate way.

In value cost averaging, you invest in a mutual fund or ETF on a regular schedule; say biweekly. Instead of investing the same amount of money per period, as you would with dollar cost averaging, you increase the amount of money you put in when the share price is down, and decrease the amount you put in when the share price is up. Say, for example, you were putting in $100 on average every two weeks. If the share price fell 3 percent in those two weeks, you’d add 3 percent to your contribution, and invest $103. If the price rose 5 percent, you’d put in $95 instead of $100.

Over time, you’d commit more money during lows and less money during highs. That won’t protect you from a meltdown like we had in 2008-2009, but it will help you manage your costs and risks with a long-term investment.

-- You can manage your risks. If you’ve made a killing, you can take some money off the table. But one of the biggest risks to long-term investors who day trade is this: They’ll be out of the market when it takes off. To protect yourself from missing out on the all-important rallies, remember to buy back in when things look bleak. And to do your “day trading” with a portion of your funds and not all of them.

(The Personal Finance column appears weekly, and at additional times as warranted. Linda Stern can be reached at linda.stern@thomsonreuters.com; Linda Stern tweets at www.twitter.com/lindastern.;

Read more of her work at blogs.reuters.com/linda-stern;

Editing by Gunna Dickson)

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