Blog Archives - Learn to Trade Stocks & Options

Day trading blog

a lesson in patience

3/29/2018

Author

Daniel Bustamante | Instructor

One of the things that happens all too often in the retail trading world is the need to constantly be doing something. Have you ever been in a chat room, or Twitter (even worse) where there always seem to be a 'play' or something to trade? How many times have you been able to make $5,000 trading to see it just given away a week later? I know I've done it, a few times in my career, and it's annoying.

It's a lack of patience.

The market sets up situations where large portfolio shifts tend to occur, and in my experience, it's during those times where you want to structure a trade and then allow the market to do the heavy lifting for you.

It's one of the reasons we don't offer a stand alone 'day trading' room anymore because there are simply days, even weeks where there is nothing to do. I remember a time a few years back when we first started Landshark and I led a E-Mini futures trading room. There was about a week where we didn't do much, not a single trade. I later received an email from a client saying that he wanted more trading ideas.

My answer? Why? Do you want something to do or do you want to actually make money? He didn't like that.

This is also why I take issue with the financial education community and the day traders who tell their followers that you need a daily stock watch list.

It's also why I like to swing trade. I made $1,700 on a 30 day hold this month on Square.

I don't really watch TV, but this scene above from the HBO show Boardwalk Empire and Arnold Rothstein has always stuck with me. For those of you that watched the show Arnold was shrewd, direct and really liked to win without mistakes, at least that was my interpretation. The scene above resonated with me.

It's all about patience. The market (real estate and stock) should never force you to depart with your money if you're patient.

And sure, people like to call the markets gambling, I'll take that then if risking $600 to make $4,500 makes me a gambler like I did this week on NFLX. The thing to remember as some of you are going through the Core Foundations of Trading program this week is that learning to run a trading business takes time, as do certain market situations.

So if you find yourself anxious to make a trade or put money to work, it's likely that this industry won't be a great fit for you. But if you can be patient, calm and cool as a cucumber waiting for your hand then you'll surely have no issue being consistent and turning a profit no matter the amount.

I hope this blog piece helped.

Daniel Bustamante
Instructor

TRADING MADE EASY: 3 SIMPLE STEPS TO DIY INVESTING

3/27/2018

Trading is seen as a high-risk high reward business. Everybody reads in the financial press of hedge funds and traders making millions of dollars predicting where a stock or economy will go in a short amount of time. If they're right they make handsome returns, if their wrong, they close up shop. But what about the everyday blue collar investor who is looking to get into this world where they may have only 10K...20K..or 100K set towards retirement?

Trading is accessible and easy to learn once people really decide they want to learn this business. We will layout 3 simple approaches to getting started to managing your own money as you approach or enter retirement.

1. Leverage your tax-advantaged retirement accounts and company 401Ks.

Investors every month automatically tuck away money into their retirement accounts and their company plans, but what if you can trade inside of them to generate returns in up and down markets? Now most people will say predicting the market on a long-term basis is almost impossible and to that, we would agree. But what if you're trying to predict a stock or market movement in a span of a day or two? This becomes much easier to understand when you focus your attention away from global macro trends and solely look at price actions and levels where the market is in a breakout zone in short time spans.

The great thing people fail to realize with company-sponsored plans and self-directed retirement accounts is they can make countless trades speculating in up and down markets and won't be subjected to annual taxes (depending on the investment and strategy). This allows them to take advantage of markets that are very volatile in both directions instead of a buy and hold mentality where returns will usually mimic the overall broader market returns for that year.

2. Using options as downside protection in ugly markets and making short-term trades when a stock really moves.

Now many individuals and even financial advisors don't utilize options trading because of the perceived complexity that comes with this market. But options have been around to serve two main purposes:

A. hedge portfolios that have core diversified stock holdingso where the investor is not looking to sell for tax or cost basis reasons.

B. Making higher returns in an underlying stock move without having to buy the physical shares and pay the increased margin. They then can exercise those options and be in on a stock lower than the current market price, or, cash out and collect the proceeds and move onto another short-term trading idea.

Options at first can be confusing especially because unlike holding shares in stocks where you're patiently waiting for long-term growth, options investor have to be correct in stocks move in a short amount of time before those option contracts expire worthless.

But if you stick to 10-15 stocks that have the high daily traded volume where the patterns and trading opportunities present themselves the options markets can be an ATM in growing your retirement assets faster than a buy and hold mentality.

3. Allocate a part of your savings and investments into self-directed trading.

Everyone who reaches a certain threshold in net worth should absolutely surround themselves with the brightest minds like a CPA, financial advisor, and even a portfolio manager. But a small portion of your nest egg should be actively traded where you're on the controls making all the decisions. Why? Well, if you have a properly allocated investment portfolio with a financial adviser the goal is to not panic and sell everything when markets get ugly. This could lead to a lot of frustration in determining if markets are just experiencing a slight pullback or a full-on bear market. So having a portion of your money set up to deploy in markets that are going down where you can capture those short-term opportunities in down and up markets is crucial to a successful investment plan.

The second reason its good to have a portion of your money set aside that you personally invest is because it forces you to be active in knowing what is going on in the financial markets and keeps you accountable to achieving your retirement goals. Most people who have a financial adviser will speak to them a few times a year where they check all the boxes in making sure you're on track for retirement, but you being accountable to yourself and holding your financial adviser accountable is important through understanding what is going on in the financial markets.

By actively trading a portion of your money yourself you can gauge better than the everyday investor where the markets are likely to go and to compare your returns to those that are helping you manage your wealth.

What if I am new to trading in a retirement account?

We get this question a lot especially over the last few weeks due to the market's selloff. The best way to learn to trade is to surround yourself with those that do it for a living and to apply yourself understanding what essential methods you need to be successful and forcing out the non-essentials such as the news or various indicators in learning.

No one complains when markets are going up and everyone is doing well. It's only when things go south and the markets fall do investors become reactionary and start looking at their retirement goals. But by then it could be too late where you would have to work longer than you want. So taking the step now in learning to trade for yourself will ensure you become wiser to how financial markets and the economy works, but will also set you up to be proactive and execute trading opportunities regardless if markets are going up or down in short time spans.

If you want to learn more about retirement account trading I encourage you to join us tomorrow and Thursday at 1 pm EST. Where our full-time traders will show you how its possible to trade inside your retirement accounts and learn it in a way that will be seamless once you cut through all the red tape about tax-advantaged account trading. The free webinar registration link is below and we encourage you to attend if you're ready to manage your own money.

REGISTER FOR FREE HERE

HOW TO GET OPTIONS APPROVAL IN YOUR RETIREMENT ACCOUNTS

3/27/2018

HOW TO GET OPTIONS APPROVAL IN RETIREMENT ACCOUNTS

Many investors when opening up retirement accounts or view their company 401K plan's don't know they can utilize options investing to add a powerful tool in protecting their retirement assets in down markets and generate excess returns. We will explore the different options levels you can obtain in your retirement account and discuss how to use options in generating above-average returns and hedge your retirement assets as well.

Due to the inherent leverage in options and the counter-party risk involved in writing options, brokers have developed a tiered system of option approval levels for traders that limits their access to options trading.

There are 4 option approval levels, each of which allows additional access to various forms of options trading based on the experience and resources of the trader.

Level 1 – Covered Calls & Cash-Secured Puts
The first option approval level is for covered calls and cash-secured puts.

Covered calls occur where the options writer actually holds the shares for the options being written, and can thereby provide a physical delivery of the shares if the share price exceeds the strike price.

For example, the trader sells a call option for one share of company A with a strike price of $10. When the price of the shares reach $11, the owner of the call exercises the option and one share is delivered in exchange for $10 from the call owner.

There is in effect no risk to the broker in a covered call, as they can simply take the share from the trader’s account in exchange for the exercise price.

A cash-secured put simply means that the trader has the cash on hand to buy the shares at the given strike to satisfy the exercise of the put. As the price of the purchase is fixed at the strike price, there is no risk that the change in the security’s price will exceed the ability of the trader to pay.

Level 2 – Long Options
Level 2 opens up access to options buying.

While there is no counterparty risk to the broker involved in buying options, there is the risk that the option could expire worthless, which would mean a complete loss for the owner of the option.

Brokers limit access to option buying to level 2 to ensure that the trader fully understands the concepts involved in options trading, such as the decay of value and the actual mechanics of exercising an option. Traders who are used to trading simple securities may fail to grasp the impact that options can have on a portfolio due to their inherent leverage when compared to traditional securities.

Level 3 – Option Spreads
Option approval level 3 opens access to trading spreads and the necessary margin trading involved. Access to margin trading means that traders can create positions whose value exceeds that of their total account, which would leave the broker to cover any difference in the case of any excess loss.

Spreads require a deep understanding and familiarity with options trading, as they use multiple different options, often with a variety of different potential sales and purchases at different points in time depending on how the price of a security progresses over the duration of the spread.

Therefore, access to the margin required for spread trading is reserved for a level of the trader with proven competence in options trading.

Level 4 – Naked Calls & Puts
Option approval level 4 involves the sale of short calls and short puts, which are options sold on the margin where the potential settlement cost is unlimited.

Since the final settlement cost of a written option can be many times the initial premium earned, only the most knowledgeable and seasoned options traders have access to the 4th option approval level. The ability to sell naked calls and puts provides access to the riskiest options trading strategies, such as naked straddles, strangles or naked calls and puts.

This is the hardest level to obtain as brokers like to see a few years of options trading experience along with a healthy account balance, usually in the six figures range.

Accessing Option Approval Levels
Brokerages will provide new traders with a form where they can detail their options trading knowledge and experience. The broker will then use that information along with the specifics of the account to assign an option approval level to that account.

Brokers have developed a sophisticated vetting system, and it is recommended that traders are truthful when detailing their knowledge and experience of options trading so that they are assigned the proper option approval level. Option approval levels are as much for the trader’s benefit as the broker’s, and it is important to gather the requisite knowledge and experience of options trading before attempting more complicated and risky strategies.

IN SUMMATION:

If you have a basket of stocks that you hold for the long term but you feel markets are starting to come down where it's not in your advantage to sell all your holdings for tax or growth purposes, purchasing puts on index-based ETFs is the way to go. Yes, you will have declines in your holdings, but provided you purchase the right options chain in the SPY, for example, you can see those profits build up to limit how much you lose in an all long equity portfolio.

Options strategies for hedging or growth purposes are not as esoteric as they might seem. Learning to trade options inside retirement accounts is possible provided the investor know what to look for and follow set criteria for those opportunities.

If you want to learn how to get options approval and trade in your retirement accounts be sure to register to our upcoming webinar below on the 28th & 29th at 1pm EST. We will show you the steps to make returns in your IRA and 401K regardless if markets are going up, down or sideways.

YES, I WANT TO LEARN TO TRADE IN MY RETIREMENT ACCOUNT: REGISTER HERE

what is swing trading?

3/20/2018

Author

Daniel Bustamante
Instructor | Wealth Management

For beginner traders it's easy to get caught up in the lingo of trading. What's better, what's not etc., and one of those items is swing trading. It's a term that is thrown around a lot with no real definition per se. What I mean is that different traders quantify swing trading based on different ideas so I will just give you what we here at Landshark Education consider swing trading.

Swing trading for us is defined as a 5-day or longer hold on any trade/investment you put on.

Now on to the next question. Which is better, swing trading or day trading? Well there is no 'right' answer to this at all. This is personal preference for many traders but I can tell you this as someone who has done this at a professional level for 12 + years that I prefer swing trading.

Why? In short-summary, I don't like to jump in and out of trades or sit at the computer all day long. Swing trading for me is less stressful because I can look at a larger time frame and price target and allow the trade to get to that point. Now, I do trade a lot of futures (E-Mini and Crude Oil) so that is more day trading but I do use swing trades there from time to time when appropriate.

In addition, I find that swing trading allows me to 'mess with' my trade less. What I mean by that is I don't have to watch it every minute of the day which means I am less prone to deviating from my trade plan and price targets. For some of you saving yourself from yourself may be a key in your personal trading development. What I have found is that swing trading for many alleviates many of the issues like over-trading and selling too early that many beginner traders have.

To the right is an example of a swing trade that I recently made.

The Trade:

Trade Duration: 30 Days
Trade Cost: $1,500
Trade Profit: $1,704 or 113.91%

February 20th I purchased 2 Square September call contracts at $7.45 a piece.

Total trade cost: $1,500 (2 X 7.50)

I sold that position today for $15.00 (or so) a contract for a total gain of $1,704 or 113.91%.

Why did I decide to make this a swing trade you might ask?

Well that was determined based on the stocks price chart. Based on my analysis (technical not fundamentals) I made the assessment that the stock could trade higher but would take time. Therefore, a swing trade.

So whether you want to learn about day trading or swing trade just remember that there is no one that is 'better' than the other, it comes down to personal preference. I can tell you, however, that we see a better student success rate with those who swing trade v. attempting to day trade.

I hope this article helps.

Dan Bustmaante
Instructor

WHY WE GET PARALYZED BY LOSING TRADES

3/20/2018

When it comes to trading, losses come with the business. But what if losses are always apart of the business where it seems nothing is going right no matter how much determination you put into improving?

We will explore what the main reasons are that traders hold onto losing positions and how they can help remedy these "root" causes in becoming consistent again.

PERSONAL LIFE OUT OF SYNCH

This is a common reason why trader's start to lose money and they fail to associate it with a personal disruption taking place and more on their own trading strategy. They think the market has changed dramatically from what has made them successful up to a certain point while not realizing something materially has changed at home.

I remember when I worked for a fund we had a particularly bad quarter with a lot of deals being funded that were dubious and the fund manager making the excuse that there was nothing good out there but the money needed to be deployed. Over time through after work happy hours he would tell me that things at home were deteriorating because of pressure he was feeling in having to maintain a lifestyle for his partner which she expected. This, in turn, motivated him to take on riskier deals where if they paid off would generate higher returns and thus fees for himself. That didn't happen! After a few redemptions, he told his wife about the fund's troubles and expressed to her that there may be a chance they would have to put off certain planned luxuries. And guess how she reacted? She loved him and expressed she didn't understand what he was going through and would pair back on spending in order to help him alleviate his stressors at work.

The fund as you could imagine started going back to its root strategy in finding quality deals and returns normalized again.

In telling this story when it comes to being a trader either part-time or full time, having an open communication channel with your family and important relationships will help you immensely because at the end of the day if they're your support system they will do whatever they can in order for you to succeed. Hiding losses, being aggravated, and not communicating to those that you love will see you start to take out your frustrations in the markets by trading larger or more reckless when all of it can be solved by a simple conversation.

HAVING AN EMOTIONAL CONNECTION TO A COMPANY.

There are many publicly traded companies right now where the investor (cult)ure is high. So much that you will find traders who will have the majority of their net worth in one stock because they believe in the vision that company has laid out. They tend to disregard bad quarters as a one-off blip or brush off media hit pieces as fake news trying to stop a revolution.

If anyone has followed Theranos and their fraud this is a perfect example of investors failing to see the writing on the wall and ended up losing billions after the company's valuation deteriorated over time. But what if it's your favorite stock you see going down and you cant find the power to sell?

Well, think about why you invest in a stock. Because you want to make money! If you believe in the company's mission then you can do that. But at the end of the day, if you see a stock is in a massive downtrend, the bad news keeps piling up then its time to cut and run. People always hold on to losers because they feel if they don't turn that paper loss into a realized loss it hasn't happen yet. This will see your account dwindle or see that once beloved stock trade for pennies for years where you could have taken that money and redeployed into a better investment.

IN SUMMATION:

If you tend to see your losses rack up in trading and you don't know why you should take a step back from the trading screens and really ask yourself in the last 30 days what was significant in my life that has changed where I feel this might be affecting my trading. You will be surprised what you come up with and be able to piece together how to fix it pretty quick.

What I suggest you do if you're experiencing these issues are :

Clear your mind daily through running and meditation as your body will react to this and your mind will be clear. Studies show that doing these two things for 30-minutes a day at least will improve your quality of life immensely.

Talk to someone about your issues and let a third party perspective tell you if they noticed a change as well so you can get a deeper insight of your root causes.

Stop trading and start paper trading until you get your groove back.

Surround yourself with those that are profitable and take baby steps in getting back into the game.

learning to trade stocks | lesson 3

3/19/2018

Learning to trade in the markets is an exciting journey filled with ups & downs and for the persistent ones usually a journey that ends in freedom.

We continue today with part 3 of a lesson on trading in the markets. As the markets sold off today sharply we covered what could be done and not done. The large take away here is to keep the process the same each time and to be patient for support targets to reach before getting long the market.

We hope this helps!

WHAT IS TRADING EDUCATION REALLY?

3/15/2018

In this article, we will layout exactly what "real" trading mentorship is and what you should avoid. For those who are looking to learn to trade they usually go three routes in this process:

Starting off with trading paper accounts and testing strategies to see what fits them before trading real money.

Joining an online community or forum in learning from those they perceive to be good traders and taking bits and pieces in applying it to their own trading method.

Understanding they need outside professional help and then they turn to professional mentorship in learning how to trade.

We're going to talk about the third choice as this is the industry we know and can speak to what real mentorship is.

WHAT ARE THE MAIN CATEGORIES IN ONLINE TRADING MENTORSHIP:

When looking at the competitive field of who teaches what, and what you get exactly when you pay for trading education it boils down to a few categories.

Paid chat rooms/copying trades:

This is probably the most prolific in the online trading community and the business model is pretty straightforward. In this subscription model, you pay a monthly fee to piggyback off of a head traders setups. Now they usually will say before the market opens what they're going to get long and short and you basically just copy their trades in entry/exit. Pricing on this model depending on the market the head trader speculates in can range from $50-$300 a month. Sometimes more, but the online average is about this pricing. I talk about the pros and cons of this model below and if this is the right approach for you or not.

Paid courses/mentorship:
This model relies on the student to really put in effort in learning how price action works, how to find correct levels to enter into positions, and working with a group of full-time traders in going over curriculum and giving students feedback. This is obviously more time intensive vs. just copying a trade from someone else but it too has its benefits and cons which will be discussed below. Now pricing on this approach in learning to trade can cost several thousand and there is a reason for that which is mainly due to the attention level someone receives in learning this business.

WHAT ARE THE PROS AND CONS OF EACH MODEL:

We get emails every day where potential students come to us and ask can I just copy your trades and not pay for the mentorship? And this question really speaks to how you see trading and what time you really want to put in learning.

Trade Copying Model Pros:

All you do is copy the head trader and log in every morning to see what trades he/she is taking and you do likewise.

Cost is much less than professional mentorship due to the fact you're just copying trades and you're not really interested in how the trade setups work.

Potential to make good money if you just find the right trader and they continue to perform.

Not much time needed to dedicate to the market or find setups because it's outsourced for you.

Trade Copying Model Cons:

You get what you pay for. If you're paying for a $ 50-month service then chances are that trader may not be as good as advertised.

The trader can (and will have bad weeks, like everyone) and that means you will have bad weeks.

You're reliant on someone else's ideas to feed you trading setups. And usually, you're trading one or two markets like penny stocks or futures and nothing else.

Your account balance does not match his/hers so they may be able to take larger losses and still be in the game vs. your account size.

They usually won't give away their "method" which is an add-on service. They give you trades you execute. Plain and simple.

Paid Courses/Mentorship Pros:

Cost is more because you're actually working alongside a trader in a one-on-one fashion either online or in person to show you how markets and trading works. Similar if you took a job at a hedge fund as a trainee.

You eventually learn how to trade markets outside of just a few asset classes and eventually generate your own ideas in trading real money.

You're not reliant on someone else after a certain time and you don't usually have to pay an ongoing monthly subscription fee.

Feedback and help from professionals for those who learn similar to university relying on a set curriculum and course overview.

Paid Courses/Mentorship Cons:

Time! If you have no interest in learning the curriculum or spending on average 5-10 hours a week applying what you're taught with your mentor, then this model won't work for you.

Costs are higher usually

It can be frustrating getting into a set routine like the university in staying on top of curriculum and attending online mentorship classes.

WHO ARE THE BAD ACTORS AND WHAT TO AVOID:

Now that you have an idea on which course of action you plan on taking in outside help in learning to trade, its time to know what/who to avoid.

Those who stated they worked at a hedge fund when they really have not:

This is most common in the online community, you will have a YT banner ad of some random person saying they worked at a hedge fund and will teach you their method on how to trade the markets. The fact is there are two roles in a hedge fund. One is called a "controlled function", the other is called a "supportive function". They're very two distinct functions in that the former actually place trades and manages the fund book, while the other is in the back office spectrum or gets the coffee for the desks.

This is very easy to find out if they have worked at a fund because it's all public information. If they say they have worked at a fund ask them a simple question: Do you have a reference at the fund or can I see you Reg D offering where you're listed as a PM or officer of the fund. Chances are they won't deliver.

Those who have little to no track record but turned an arbitrary number into a larger number and touts that as their main advertisement in getting people signed up. Now, this we see all over the internet, some person will say I turned $1,000 into $100,000 so let me show you how YOU TOO can do this. Most of the time those traders either have a terrible risk-adjusted return in that equity curve, they bought a cheap penny stock or asset and it shot to the moon making that trade their bedrock for advertisement, or simply they had two accounts and went long in one and short in the other showcasing the best performer.

The lifestyle trader: These guys are the funniest of all. They will create a false narrative about how successful they're by surrounding themselves with rented cars, Air Bnb's mansions and even movie prop money and blasting it online on social media. The truth is this class feeds off of subscription models and affiliate marketing in order to fund their life. They do very little trading in the markets and usually are short-lived when it comes to generating profits.

All the types listed above can be discovered if people who want to learn to trade do a little research. If they say they have professional fund or finance experience ITS ALL PUBLIC INFORMATION!

IN SUMMATION:

If you're still looking to trade either part-time or for extra income then first you need to decide what time and dedication you want to put into this. For some, learning trading like you're in school again is not for everyone as they have a busy life. There is no problem with this. But at the end of the day education varies just like college and if you go to a community college it will be cheaper than say going to an ivy league university. When it comes to trading, you get what you pay for and more importantly what you're willing to put in on the effort.

When You Should Have Taken Profits & Losses

3/13/2018

When it comes to trading, usually traders lose money in two key ways:

Not cutting losses in losing positions
Watching profits evaporate into losses and not acting!

Most new traders when they have a view on a stock, option, futures or FOREX position will usually have an idea where they feel the major support/resistance areas are to cut losses and take profits. However, just like gambling in casinos, they tend to reevaluate and change their minds and push their luck at the last minute.

This usually happens because when it comes to trading, if you don't stick to the "original plan" when entering a position and that market reaches that level, you don't know how to react.

The problem lies in being conflicted on what type of trader one is. If someone is a swing trader where they look to buy/sell on breakouts until the market reaches a certain support/resistance level than stick to that model. But, a lot of traders then turn into macro traders which are defined as someone who holds positions for more than several weeks or months and this leads to a deviation in short-term trading vs. long-term trading.

A perfect example would be if you believe for example AMZN with its parabolic state will come down slightly to say support at $1550 because you see overall stock indexes are starting to show weakness, then you need to make sure to get out of a cheap OTM put when it starts going your way to that level. Usually what happens though in options trading is the price starts going your way and you see the premiums explode 5x...10x..15x and then your greedy side comes in and say's "hmm, maybe now it can come down even more" This flawed thinking tends to see your premiums evaporate or slowly come down as volatility starts to dry up because that stock is sitting on major support now.

Now you don't have to close everything out at once if you have multiple options contracts on if you feel the stock will run lower, but it's generally a good idea to take significant profits off the table to lock in profits. Most don't do this. They will watch the price level hit that they predicted and think it will run more. What tends to happen is the stock stays bouncing back and forth at that major support and premiums start to come down, which makes them panic and flatten their position making less money than they should have.

IN SUMMATION:

When putting in a trade, have a DEFINED entry and exit point established to take profits and losses and don't change your mind once the market moves at either level. You're not a hedge fund making these big macro decisions on how the world will shape. The goals in trading small accounts are to take profits and redeploy as quickly as possible in growing the account.

MUTUAL FUNDS: A LOOK AT WHAT IS SOLD VS. WHAT YOU GET.

3/9/2018

MUTUAL FUNDS: A LOOK AT WHAT IS SOLD VS WHAT YOU GET.
An Inside take on my former years in the financial advisory biz.

What Are Mutual Funds?

Most working Americans have mutual funds but don’t really understand how they work or what their true benefits are. If you look at your 401k most likely you will see obscure words such as “moderate allocation”, “Conservative US fixed Income” and the list goes on. Problem is that everyone asks “what do these actually invest in, and what am I being charged?”

Mutual funds are made out to be complicated because of lack of regulation, and obscurity on holdings within funds. This is the reason why most investors feel daunted to invest and rebalance them while in their working years.

Let’s look at the two fund types most investors invest in;

ACTIVE FUNDS:

During the bull market craze in the 80’s-90’s hot shot managers such as Peter Lynch came to the scene with the Magellan fund. Investors wanted to not only participate in the stock market, they wanted to beat it. So many financial institutions came up with the notion of having ”in-house” mutual funds vs. sending that extra money off to a third party company. This they said would provide a one-stop solution to financial planning and collect additional fees for managing the assets of clients.

BlackRock Global Allocation Mutual Fund (allocation link)

Now looking at the link individuals know somewhat how this fund allocates capital but still doesn't know exactly what stocks or bonds it actually invest in, how does the manager determine when to get in and out of a stock, and if the manager can go short or not to benefit on market corrections. This is a major problem for several reasons in which I will lay out a few examples at the end of this essay.

The appeal to Active funds was that you could beat the stock markets without having to lift a finger. All you had to do was hand your money off to a hot shot money manager and he/she would find the opportunities in markets to get you better returns. It worked for many years until a combination of new products, bear cycles, and fee scrutiny came into the picture. I go over the main issues with mutual funds from a fee and conflict of interest standpoint in The True Cost of Mutual Funds Section.

PASSIVE FUNDS (INDEXING)

Pioneers such as John Bogle who founded Vanguard always believed that over time if one just follows the market through indexing they will do better than those who actively time the markets. Index funds are similar to active funds but they don’t employ a fund manager, they don’t have excessive marketing and payroll overhead, and lastly, their sole job is to just track whatever index the company sets out for it. Fees are usually 1/100th less than a standard active fund for the reasons stated above as well.

Here is a standard Index fund and its holdings:

Vanguard Total Stock Market Fund (allocation link)

Example: Someone who has $10,000 to invest but doesn’t want to perform extensive research performing the stock selection, they could just buy a fund that tracks the Dow 30 stocks. If the DOW is up 10% in a year, the index investor should be up close to that return (see: tracking error).

Index funds do well for the long-term investor who accepts they don’t want to outperform the markets, they just want to mimic them. This strategy can perform as long as investors perform periodic rebalancing (see: tactical rebalancing) and they do risk adjustments to more conservative allocation when they get older. This based on my experience is where investors falter with index funds which I speak about later in this essay.

THE TRUE COST OF MUTUAL FUNDS

Now that we have a better idea what mutual funds are, how they work, let’s look at why most investors (active funds) tend to give away significant returns in fees.

Recently there was an insightful documentary that frontline put out which they aptly titled “ The retirement gamble” which I included below. The point it was trying to drive home is how fees and wall street end up keeping most of your returns while you take all the risk with the portfolios they manage. Of course many didn’t watch this or it didn’t get a lot of press after coming out (maybe something to do with the financial lobby), but I wanted to expand on this documentary from the financial advisor's perspective/broker on how the main street continues to get the short end of the stick.

(watch it below)

401Ks AND OTHER QUALIFIED ACCOUNTS
The biggest MLM scheme in history

Now when we look at a standard 401k packet when employees start their new job, they usually see large investment firms and insurance company mutual funds. But how do they get placed in the plans over the countless other investments? and, what’s the relationship these companies have with the brokerage firm?

These investment and insurance companies employ thousands of salesman to go out and pitch financial advisors, brokerage houses, third party plan administrators, even small business owners to place employee assets with that fund. So without getting lost in the nuances of how these relationships work (over client’s interest) I will compare a mutual fund gathering assets to a standard MLM scheme which is below.

STANDARD MLM SCHEME:

The person at the top has a product or service which can be marketed by hiring two salesman who go out and bring in additional “reps”. The reps sign-up a certain amount of individuals in their “downline” and whatever those reps sell/bring in, their upline gets a piece. This continues multiples of times in the standard MLM program.

Now let’s look at the Mutual Fund MLM Scheme but flip the chart upside down where they guy at the bottom represents you and your after fee returns after everyone gets their cut.

At the top: Here we have the salesforce for the mutual fund companies who go out and buy lunches, host seminars, pay for certain amenities to the ones who make the decisions on what mutual funds will be the brokerage houses go to fund family. How do these sales reps get paid? the same way big pharma reps get paid...Bonuses. If a rep is able to secure a contract with a decision maker at a brokerage firm that at minimum the brokerage will shift say $100M to the fund family, the brokerage firm will receive “finders fee” or what is better known as a kickback for meeting this metric.

Second to the Top: Now that the mutual fund family is the go to fund for the big brokerage houses it’s up to the managers and decision makers of the firm to “motivate” their sales force (brokers) to push these funds at the expense of the clients goals. They know their metric is to at least have $100M transfer from the client’s money market funds or some other investments (that may be suitable), to this “better” or more “suitable” fund which the brokerage has a financial conflict with.

What incentive does this manager or decision maker have in making sure his/her salesforce of brokers meets this quota? Promotion maybe, or how about year end bonuses that wall street loves pumping out for just transferring cash from one side of the world to the other. And if they don’t meet this metric they usually are reassigned or resign to a lesser firm. But how do these managers motivate their salesforce (brokers) to push this exclusive fund family?

Third to The Top: We come to the face of the brokerage, the financial advisor. He/She is out for your best interest in making sure you meet your financial goals, plan for your retirement and all the other lovely adjectives in describing your financial freedom. Like everyone that works on wall street no one comes for the base salary, they come for the bonuses. The financial advisor knows that each year they need to bring in a certain amount of assets, they need to generate a certain amount of revenues quarterly through trading and mutual fund purchases, and they need to play nice with managers when it comes to promotion time.

They do this by placing one buy order for the mutual fund family which was pre-selected for the client before they even had a conversation regarding what their financial goals were.

At The Bottom: YOU! Now you have been asked a few questions regarding your risk tolerance, liquidity needs, and possibly what other assets you have to not over concentrate risk and poof! you’re now presented with a mutual fund out of thousands available to you that are strapped with appealing words such as diversification, long term track record, management stewardship and a host of other words that a consulting company tested and told the brokerage houses to say that would appeal to the mass affluent.

Now, you have a spanking new moderate allocation mutual fund which has an upfront sales charge of say 5.25%, and you have to wait several years in order to get your breakeven costs back. You’re left thinking your broker did all this research to screen various funds, performed due diligence on the management company, and aligned your goals with this fund. When all he/she did was read the morning memo on which fund will generate the most revenue to meet quarterly targets.

UNDERSTANDING A SHARES AND C SHARES

Now we come to the part where you pay your fees for the privilege of active management. There are two main ways to go to get your first 10k invested.

“A” Shares: This share type is suitable for the longer term investor. When I say long term I mean at least 10 years. The reason for this is when you put $10,000 into a fund right away a portion of that is paid out to the fund company as a “front load fee”. They will say this is better for you because over time it comes back to you, and, you pay less in fees longer term. This is all well and good but we are forgetting about the annual management fee which is usually 1% minimum. Now this fee represents the portfolio managers fee for rebalancing and actively managing your money. If they should happen to have a negative year in the stock market, they still get paid that fixed fee.

Usually investors will see that up front fee come back to their accounts after the 6th-7th year which you will see a comparison example below.

“C” Shares: This type of share class is suitable for shorter term investors who may need emergency liquidity in case they have a financial hardship. When you invest $10,000 all of that goes into the market vs. an A share which after the front end load fee is subtracted gets invested. Now instantly you may think why not just go into C shares if they don’t take a front end fee? Here is why there is no free lunch with C shares also.

You have to hold the C share mutual fund for at minimum 1 year or you pay a back end fee of usually 1%. Also, the annual management fee similar to the A shares is always going to be higher. Why? Simply because the fund family knows your money won’t be with them forever as a short term mutual fund holding, so they have to squeeze as much of their fees out of you before you decide to move to A shares or cash out.

Below I have included a link lining up the same mutual fund, time horizon, and rate of return and you will notice how A/C shares affects what you keep after 20 years of investing and fees. Be sure to scroll down to "over time" to see the disparity.

A COMPARISON OF TWO FUND SHAR CLASSES IN THE SAME FUND

Here are a few takeaways from this comparison:

The cost for holding this mutual fund in A shares and C shares is the same usually in the 7th year.
After the 7th year the C share will increasingly become more expensive to hold relative to the A share
The A shares cost 5.25% up front which is $525 you’re down before your first full day in the markets. This obviously comes back to you but it takes a few years.
This example assumes you will generate at least 10% every year. We all know this is not reality as 2000/2008 recently proved
We’re not even considering the financial advisors 1% fee which he/she collected from you for just outsourcing your money to a third party manager over managing your assets themselves. What a sweet job they have!

What should you do now?

First understand that financial advisors under a brokerage firm or (wirehouse) by law just have to prove what they recommended was suitable for you. They DON’T by law have to align their interest with yours when it comes to investments. Only fee only RIA’s are held to higher standards and have to align their views with yours.

Ask more questions. People hate to interrupt financial advisors or financial ‘experts’ for the fear of looking stupid or ignorant on the subject. When it comes to your money be as much of a pest when you ask how does this product help me get to a certain point in my financial goals.

Learn to trade and invest for yourself. With technology such as mint.com, online planning platforms, and trading programs like ours, the standard way individuals get advice and invest are changing. This is no longer the 80’s where people at cocktail parties boast about how savvy their broker is, they now talk about how they made money themselves or found a more cost effective way to a financial goal.

IN SUMMATION

Understand what you're investing in by asking questions. And if you really want to take control of our own destiny when it comes to investing, be sure to join us tonight at 7:30pm EST for our webinar on how to trade part time while maintaing your career.

REGISTRATION LINK: HOW I MADE 20K IN FEBRUARY TRADING PART-TIME WHILE MAINTAING MY CAREER.

how to trade options - $2,000 profit trade

3/8/2018

This was a 3 day trade using call options on Google.

When you're learning to trade options there are a lot of strategies to consider. I am going to save you time. Focus on spreads and directional strategies. The rest is nonsense.

I've been trading directional options myself since 2007 and heavily since 2010. This strategy works all of the time you just have to spend more than a week testing it. This is not rocket science and no book is going to teach you this: You have to learn this by doing and then being around a community of people that do the same.

Below is the breakdown of the $2,000 trade on Google.

The key notes:

1. Have price targets
2. Be willing to sell on gap ups
3. Plan the trade ahead of time

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