JUST PLAIN TALK: Money to burn

Published: Thursday, April 10, 2014 at 17:37 PM.

Early April was not good for libertarians. Michael Lewis blew up their standard meme that markets magically regulate themselves.   Lewis’ new book Flash Boys shows how high frequency trading distorts markets, increases volatility and allows traders with lightening quick computers the ability to move in nanoseconds.   Their profits come at your expense. I don’t like high frequency trading but don’t let Lewis’ words unduly frighten you. You harm your nest egg or negatively affect your retirement savings all by yourself and far worse than all the high frequency traders combined.  

The retirement blunder big kahuna has nothing to with trading.  Most people don’t optimize Social Security benefits, our clients being an exception. It startles me when I see employed people in high tax brackets taking Social Security before age 70. I guess they enjoy paying taxes and foregoing 8 percent returns.  Taking Social Security benefits prior to Full Retirement Age reduces benefits around 8 percent annually. Social Security subsidizes married couples but maximization requires detailed planning. One size does not fit all in Social Security planning. If you are in poor health, need the money, lose your job or can’t work it’s an entirely different story. With average life expectancy most people blow it. Taking benefits early locks in lower lifetime income.   

Market timing costs investors much more than high frequency trading.  Investors, like generals, fight the last war. People buy what went up last year instead of what’s on sale.  A market timing corollary is emotional investing. Investors, as a rule, take on more risk with frothy markets and become defensive when markets slump. This strategy explains why investors habitually and dramatically underperform the market.

Leaving money on the table by not taking advantage of employer matching contributions costs you much more than high frequency trading. It’s third grade math. A 6 percent elective deferral with a 3 percent employer match gives an immediate 50 percent return.    401K plans with modest fees exact a toll worse than high frequency trading. More expensive ones compound the situation.

People overemphasize taxes. Of course, no one likes paying taxes but don’t shoot yourself in the foot avoiding them. In South Walton millions evaporated in 1031 exchange fiascos. You probably bought too much house, too. The guidelines banks use practically assure you can’t fund retirement and pay the mortgage. Plus a home’s annual upkeep, maintenance et cetera dwarf high frequency trading costs.   Bigger homes equal higher costs. Housing is an expense not an investment. 

Wall Street tells us we should move along, there’s nothing to see.  High frequency traders, after all, only provide market liquidity.  Color me leery. High frequency trading generates huge profits coming from your investments. High frequency traders simply get better prices than the mutual funds inside your 401K. We need increased regulations and oversight over high frequency trading. A financial transaction tax would temper frenetic trading, too. Lastly an Ill-conceived algorithm could crash our financial system. Remember junk bonds, Long Term Capital Management and subprime mortgages. It’s the same bunch, you have been warned. Tony Soprano may be dead but he would look on with envy.

Buz Livingston, CFP has a Blue Mountain Beach based fee-only, hourly financial planning and investment management firm. For more information, visit www.livingstonfinancial.net or come by the office at 2050 Scenic 30A, M1-Unit 230, Redfish Village.



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