Pretty much sums up what I have been trying to accomplish all along. I feel that it is important to read and then read again in order to cement certain processes and procedures into the mind. I find one of the most compelling points of order is that there is no record keeping. Along with the tax adavantages, this is by far the best part of the whole system.
The part that I differ in opinion comes with the diversification area. I find that it is a bit easier for me to have multiple IRA accounts and have concentrations of certain stocks in each account. This allows me to trade larger blocks for each trade.
For instance, I know people who hold just a few shares of same companies in many accounts. Having the shares of T in an open account and shares of T in an IRA or multiple IRA accounts will reduce the effectiveness of trading in those accounts. First off, it is great if you are acquiring shares only, but if those shares are meant to be traded or liquidated, multiple trades would be required to divest the same number of shares that could be held in one account- Way too much hassle and way too much expense towards commissions for me to feel comfortable. Next, in order for a trade to be really effective, the trade needs to be profitable. Less expense=more profit! If only a few shares are available to trade, the total profit has to be reduced by the cost of a round trip trade. Of course, there is nothing wrong (actually advantageous for the person who is not looking to trade) with accumulating a small number of shares through repurchases and commission free additions, however, in a trading scenario, it quickly becomes apparent that trading fees and the 3 day rule quickly kill most of the advantages of trading in an IRA.
For example, if the trade costs $14 plus SEC fees and only 100 shares are traded, it effectively costs you $0.14 plus cents before a profit is ever realized. If the stock happens to be T for instance, I look for only a 1%+/- .25% move as my target for a winning trade. In this example, if T is trading at $34, a $34.34/share exit would result in only a $0.20/share profit. Not bad, but that 1% trade actually results in only a .588% or less actual profit after SEC fees are tallied. Now, in order to actually see a profit of 1% after fees, it would require a move of $0.54 cents or greater. The odds of a favorable outcome are effectively lowered as the spread between the purchase price and the sale price increase.
In the above scenario, it now takes almost 2 trades to get to that magical number of 1% profit. Another little caveat that is often overlooked in this scenario is that stocks tend to trade in ranges. The smaller the profit that is required to become profitable, the easier it becomes to actually purchase a stock such as T on the lower end of the range towards support and turn around and sell it at a profit towards the higher end of the range. If the range is only .54 cents or so, I have to ask myself, “Am I that good at buying the bottom and selling the top? My answer is always, “No!” So, it becomes advantageous to narrow the spread so that it potentially becomes easier to take advantage of the oscillations in the market.
Looking at the above scenario, it now becomes evident that the person who is trading in small numbers of shares in an IRA is effectively lining the pocket of the broker and the SEC. If the trade was in an open cash account, the numbers would be even more disadvantageous after taxes are factored into the equation. So, the point I am trying to make becomes evident very quickly. If an investor is looking to trade small amounts and also have a nice diversification of stocks, it might be more advantageous to purchase shares of a company in one account whether open or IRA in order and not spread those same shares out over multiple accounts. That way, many companies can be owned, but the shares of each are able to be traded under one trade and not through multiple round trip trades over multiple accounts. Each trader has to start somewhere, right? That is absolutely and emphatically true, but when diversification is emphasized and trading is also required, those shares held might be better off being held and accumulated in one account.
I have been asked many times about how I hold so many shares of one company in my trading account. I always answer with the same response. “There are only so many trades that I can make in my account each week, regardless of the dollar amount of each trade. So to be effective and truly show a profit on each and every trade, I have to reduce costs and the spread for a profitable round trip.” It truly is as simple as that. The government has given us a very effective vehicle to utilize in order to accumulate wealth (IRA -Roth in particular), but that same governing body has put restrictions on the ability to trade in and out of stocks in those IRA accounts.
In a more concentrated scenario, the round trip trade becomes easier to execute because everything required to produce a profitable scenario is scaled down. With my strategy, I parlay every winning trade into a new trade as the price oscilates to an area at least 1% or more below where I previously sold my stock. In that way, my next purchase results in more shares purchased which, in turn, results in an increase in the dividend payment that I will ultimately receive.
I am always asked about how can I take on so much risk. To that, I say, “I made a conscious decision to trade this money in a particular company and I know that there are risks associated with this particular strategy.” However, let’s say that I took that $10,000 (Roughly 294 shares of T) trading account in an IRA and traded it to the point where it becomes $20,000 (Roughly 588 shares of T). What am I losing by selling those shares at a profit, then taking all of the money from the sale and buying back more shares than I had before if the stock falls? The answer I always hear is that I am not diversifying my money or trying to protect it in case of a market crash. To that I say that I only had the $10,000 to begin with and now I have double that that could potentially pay me double the dividends.
I also say that even if the market lost half of its value and T went with it, I would still be even and be collecting twice as much in dividends along the way.
I am basically a dividend investor, and enjoy collecting dividends and reinvesting them. In that same breath, I say that I have the desire to trade certain dividend yielding stocks that I would gladly hold and do hold currently.
I feel that the most effective way for me to trade those shares is in an IRA because of the tax advantages and lack of paperwork. Since I made a conscious decision to make the trades from the beginning and I truly know the potential consequences, it has become easier to just push the button. With every profitable trade, my overall cost per share is reduced on the next potential trade because the expense is stretched over more and more shares. Plus, as the $ value increases with each trade, the magnitude of the increase in share price is reduced to prduce a profitable trade even if it does not result in 1% profit. This, in the end, is how I justify my desire to keep trading in the account.
I have plotted out each and every trade needed to get to my ultimate goal. It is a feasible strategy, but can it truly be accomplished? The only way to find out is to give it a try. Currently, I am giving it my best. I know it works at the levels that I am using it, but it might not function as such if and when, the number of shares being bought and sold reach the higher tiers of the strategy. In addition, there may come a point where I am actually nervous about pushing the buttons. I believe that will be the point where I need to rethink the strategy. However, it is currently being utilized in full force. With my strategy, it takes roughly 54 trades to double the money. Also, early contributions drastically reduce the number of trades needed to reach the ultimate goal.
Wow! This post has been long winded. I currently have 8 kids sleeping over from last night and they have been all over the place all morning. I am amazed I was able to put together the thoughts that I did. Anyhow, I plan on continuing with my trading strategy as long as I can effectively implement it.
I cannot say that I stock to the strategy without fault. I do adjust my purchase price a bit and I will accept a little less than 1% on the round trip.
However, I do not plan to waver more than a few cents either way. In order to achieve the long term goal I need a plan and I need to follow it. I made that plan, and now, I am following that plan.
I am very thankful to all those who have been reading my blog. Hopefully, it has been entertaining and possibly helpful. Please feel free to ask any and all questions. Good luck to all of my fellow bloggers and investors.
Happy New Year!
Robert the DividendDreamer
AKA — Seeking Dividends
Follow me on Twitter– Seeking Dividends@DividendDreamer
AKA — DividendDreamer