For many people, the end of one year and the start of another is a good time for a financial health checkup. For some, this includes assessing their progress toward their retirement saving goals.
Over the years, as I've counseled and coached folks getting closer to retirement who realize that they're not as financially prepared as they'd like to be, I often encounter someone looking for a way to make up for lost time.
Remember, tried and true principles of retirement stewardship show that regular saving + wise investing + time + compounding = growth = "enough." Trying to find a shortcut often ends up badly.
That said, I don't want to imply that I think all attempts to accelerate that process are foolish or wrong (I wrote about many of them in Redeeming Retirement), but they can be.
This article provides a real-life example a reader asked about me. As far as I could tell, it's not "wrong" (at least not legally or ethically), but as I suggested to him, it may be unwise.
As a follow-up to my last article about investment fraud, I'll discuss that strategy and similar ones, which, while not fraudulent, may not be best for someone who wants to honor the Lord by making wise decisions about investing their scarce retirement savings dollars.
Dr. R's investing plan
The strategy a reader recently asked me to look at was "Short Window Retirement Planning," an investing program being sold online by Dr. Rouse (Dr. R.). The reader wrote:
. . . I'll soon be 66 and plan to begin collecting my Social Security in October or November this year. I'll keep working a couple more years and feel my wife and I will enjoy a moderately comfortable retirement. Like many folks, I know padding that nest egg couldn't hurt. If you are familiar with (I'll call it Dr. R's investing plan), I would greatly value your opinion of his (investing) plan. I've never been a get-rich-quick kind of guy, but for some reason, I just think his plan is legit.
I don't know the reader's financial situation specifics, but I understand his thinking here. If he's not sure if he has enough savings, "padding that nest egg" a little indeed wouldn't hurt. And the very idea that a brilliant financial guy might indeed have a great plan to make money quickly can be very appealing.
So, I checked out Dr. R.'s investing plan. When I went to his website, this is what I saw first:
Short Window Retirement Planning – Your Road To Secure Retirement Starts Here. . . In Just 3-5 Years Be 100% certain that you'll have all the money you need to retire in the lifestyle you want and deserve at an age young enough to enjoy it. . .A system designed and developed exclusively by Dr. R. for the unique needs of people in their 50's and 60's starting with as little as $10,000 in their retirement accounts.
Then there was this:
ATTENTION! If You're NOT 100% Certain That You'll Have Enough Money To Retire This Is YOUR Plan B. New 12-minute video reveals the risk-free 20-minute per day system for going from $10,000 to retirement in just 3 to 5 years: Short Window Retirement Planning: How to secure your financial future in just 20-minutes a day without risking a dime in the stock market …Isn't It High Time You Cracked the Million-Dollars-in-Cash Barrier? Discover The Secret to Retiring Years Earlier Than You Ever Thought Possible…
Pretty strong stuff, right?!
And as said, I don't know how much money the reader has saved for retirement (I suspect more than $10,000 but perhaps not as much as he'd like). But if I was the person described in Dr. R.'s ad on his website—behind in saving for retirement (in my 50s with only $10,000 saved for retirement)—and someone told me I could "fix" my problem in just a few years using Dr. R.'s proprietary retirement planning strategy, he'd probably get my attention too.
Different strokes for different folks
There are a LOT of different trading and investing programs/strategies/products offered for sale online and by some financial salespeople that purport to address people's concerns about being able to retire with dignity. Some focus on securities trading strategies, while others target investing in or purchasing a specific type of security, commodity, or insurance product. Here's a list of the major ones:
1) Day trading strategies. Buying and selling stocks (or commodities) daily based on small moves in the stock market to capture incremental gains. This strategy is most effective during times of high market volatility and volume.
2) Stock (or commodity) options and futures trading strategies. Similar to day trading but a more complex method that allows investors to make money by buying and selling options contracts to buy or sell a stock at a specific price in the future.
3) Stock picking recommendations. These are usually in the form of weekly or monthly "hot stock picks" based on the author's proprietary screening criteria. The sales proposition is that the author does the research to find under-valued, high-potential stocks and, if you follow their advice and buy them, you will reap big rewards.
4) Guaranteed growth and lifetime income. This is not a trading strategy—it involves the purchase of a variable or indexed annuity product. These are often promoted at the "free steak dinner and retirement planning seminars" mentioned in the last article. (I'm not referring to the more conventional "Single Premium Income Annuities"—SPIAs.)
5) Investing in gold, or silver, or other precious metals. These can be traded as commodities, but they are mainly invested in to mitigate the systemic risks to retirement savings such as stock market volatility, currency devaluation, inflation, and in a worst-case scenario, global economic meltdown.
6) Cryptocurrency, usually in the form of "coins" or investing in funds that hold them. Cryptocurrency is an alternative to traditional currencies (what some call "fiat money.") It's similar to gold in that it has some of the same decentralized concepts (i.e., not centrally managed and controlled by any government, at least not yet). But whereas gold is only marginally useful in our modern economy, crypto is considered more so, especially in forms like Bitcoin. But Crypto is highly speculative—most early investors were seeking capital appreciation. It is increasingly being used transactionally and held as a hedge against currency risk and inflation.
None of the things I listed above are inherently fraudulent like the Ponzi scheme I discussed in my last article, nor are they necessarily scams (although an individual company, salesperson, or product could be). Some, such as a stock recommendation, certain types of annuities, a small position in precious metal such as gold, or purchasing a cryptocurrency like Bitcoin, may be reasonable in some circumstances.
But they could be offered using techniques designed to grab your attention and then sell you something you did not know you needed (and may not need), or can't afford (because it's too expensive), or are just too risky (for people close to retirement and with limited savings).
As you might imagine, I'm naturally put off by any financial professional or salesperson who markets their advice, program, system, or product as something that has a "too good to be true get rich quick scheme" ring to it.
Even if it's not a scheme or a scam in the strictest sense (meaning it's not unethical or illegal, which most of those I listed aren't), some offer the anxious investor a path different from the age-old wisdom of accumulating wealth little by little (Prov. 13:11).
I plan to address most of these over the next few weeks and months, though not necessarily in order. I'll begin with the first two: day trading and stock options and futures trading. And then I'll get back to Dr. R.'s trading system.
Trading versus investing
I think the best definition of investing is putting your money to work in a constructive business activity with a reasonable expectation of a positive return. That could mean investing in a small business, real estate, or owning a company's stock.
Most stocks of fairly well-run companies generate revenue and cash flow that an investor can value. A new company may operate at a loss for a while, but it can't survive indefinitely without adequate cash flow.
Buying and owning company stocks (either individually or through mutual funds or ETFs), or lending money to them (through bonds or bond funds), are financial contracts that explicitly share risk and return and something that can be generally supported biblically, though without a specific biblical warrant, based on the Bible's support for honest trade and risk-taking (Prov. 31:10-31; Ecc. 11:1-6, and Matt. 25:14–30).
That said, I know that some Christians reject investing in the stock market as a legitimate economic activity, equating it to speculating or gambling. They might argue that stocks are bought in the hope (not guarantee) of appreciation.
I respect their convictions, and that's true to a degree: some companies are more speculative than others. But that doesn't mean you're gambling if you invest in them. There are significant differences between investing in an established company with a proven long-term track record of positive earnings (Prov. 13:11), investing in a start-up company with a promising but unproven product and revenue stream (Ps. 115:3; Prov. 16:33), and playing blackjack or the slots at a casino or buying lottery tickets (1 Tim. 6:9–10).
Investors expect a positive return over time, even if the value goes up and down along the way. Speculators invest in things that they hope will produce a positive return. Yet, at any point in time, there's significant disagreement among individual investors and the broader market on whether that will be the case.
But gamblers risk money knowing the odds are against them (that they will almost certainly lose) but hoping for a big win (such as hitting the jackpot at the casino or by playing the lottery.) Some would say they know they'll lose money and do it for the entertainment value alone.
Editorial comment: Knowingly losing God's money is not my kind of good entertainment.
Wise investors in stocks buy long-term ownership in solid companies that provide a product or service with good growth potential. However, trading stocks and stock options or other securities is highly speculative and can't rightly be considered investing. It's speculative because it takes a chance on unknown future events that may have little or nothing to do with the company or its performance to result in a profitable transaction.
That doesn't mean that trading is a "sin." But it is highly speculative at the very least, so it would be unwise to invest your scarce retirement dollars in that kind of activity.
If you're interested in being a "trader," there are probably better ways to do it than others. Just know that it's pretty risky and may be inappropriate for building wealth for retirement, especially if you have a low savings account balance. It might be better to make a long-term investment in a good stock (or stock or bond fund) than trade them.
If you've gotten to retirement with "enough," but feel the urge to stretch for a little more, it may be wise to heed these words from former physician turned investor and author William J. Bernstein: "If you've won the game, stop playing."
Day trading is high volume trading, which is done to profit quickly from price fluctuations, with most positions being held for a brief time.
Almost any security can be "day traded"—stocks, foreign currency, futures contracts and options (more on them shortly), and even crypto. Trading strategies and algorithms are built around a "buy low and sell high" model, even if the price difference is minimal (which is why volume is essential).
Day trading is not for the inexperienced or faint of heart. Someone near retirement who has little or no experience in the stock market and starts day trading is like "going from training wheels to driving motorcycles." And over the long term, it's like "trying to beat the casino."
In other words, it's perilous to enter the market without understanding market dynamics and online trading fundamentals and technicals. And even experienced traders can "get burned." For, as we all know, the house always wins; otherwise, there'd be no casinos.
The stock market is essentially a "zero sum game." That means that there have to be as many losers as winners. One trader "wins" because they buy a stock that increases in price or because they sell one that then declines in value, while another loses by the same amount.
Because there will always be as many losers as winners, you have to "beat the house" (everyone trading in the market, including institutional investors and automated traders using sophisticated algorithms) to make money over the long haul.
Can it be done? Yes, some people win and some lose day trading, and some win in the short-term but may lose in the long term. The big winners over the long term are the exception, not the rule.
Stock options trading
A more sophisticated variation of stock trading is trading in stock options. For a price, you can purchase the right (but not the obligation) to buy or sell 100 shares of a stock at a predetermined price (called the "strike price") within a set period.
Call options are contracts to buy shares at the strike price sometime in the future. Put options are the opposite to calls in that they give the holder the right, but not the obligation, to sell shares at a predetermined price sometime in the future.
For example, here's how a call option works: Let's say that in January 2022, you buy one call option contract (a single option is 100 shares) on XYZ Company stock with a "strike price" of $25. (The strike price is the price at which an option holder can buy a security.) You pay $1.50 per share for the option, or $150.
On the option's expiration date, you exercise your right to purchase 100 shares of ABC Company at $25 per share (the option's strike price) but immediately sell the shares at the current market price of $35 per share for a profit of $10 per share.
Since you paid $2,500 for the 100 shares ($25 x 100) and sold them for $3,500 ($35 x 100), your profit is $1,000 ($3,500 – $2,500), minus the stock option premium of $150. That results in a net profit of $850, excluding transaction costs.
Of course, if your options contract expired and the strike price was below $25, you can't exercise your option contract and forfeit the $150 premium. Add one to the loss column.
Some options contracts are not extremely risky, but they are speculative. The higher the strike price for a call option, the less the option price (premium), but the more likely the option will expire without you ever exercising it. In other words, you will most likely lose all the money you paid for the option.
Notice that both call and put options involve speculating on future events. Owners of calls bet on the price going up while holders of puts hope the price will go down. For calls, the buyer's worst-case loss is the premium paid for the option. For puts, the potential for loss is the amount the market price is below the option strike price, times the number of options sold.
Day trading in options on volatile stocks can be enticing, but such options can be costly. The value of short-dated options, in particular, can diminish rapidly without a significant move in the stock.
As I mentioned earlier, although almost all forms of investing assume some level of risk, buying and selling options are not investing in the traditional sense. Rather than relying on a company's slow and steady growth through good management, options are based more on pure market dynamics (which are often emotionally driven) and the stock price going up or down in a relatively short time.
So, you may be able to grow wealth "little by little" by trading options, but you could lose as often as you win, so it might take a while. Perhaps you'd be better off taking a long-term position in good companies that offer a reasonable likelihood of growth.
Dr. R.'s commodities futures trading system
This brings us back to Dr. R.'s program. It's a system that, as far as I can tell, targets novice investors and, for a price, offers a proprietary trading system that has the potential to grow wealth quickly. (It would have to be pretty amazing if it enables a 55-year-old with $10,000 saved for retirement to have enough to retire by age 65, which would be in the $400,000 to $800,000 range.)
Dr. R.'s program is based on trading commodities futures (which are similar but riskier than options) using a high degree of leverage, meaning that a trader can use a relatively small percentage of a futures contract to control a large amount of a commodity.
One way to understand a basic form of leverage is purchasing a house with a minimal down payment. You "invest" a small percentage of the house's total value but get the full benefit of any market appreciation of the home. (Of course, you also experience any losses.) As a result, your profits or losses are more on a total percentage basis despite the lack of true equity.
Here's a good definition of commodities futures trading From Investopedia:
A commodity futures contract is an agreement to buy or sell a predetermined amount of a commodity at a specific price on a particular date in the future. Commodity futures can be used to hedge or protect an investment position or to bet on the directional move of the underlying asset.
Investopedia goes on to explain a critical distinction between futures and options contracts:
Many investors confuse futures contracts with options contracts. With futures contracts, the holder has an obligation to act. Unless the holder unwinds the futures contract before expiration, they must buy or sell the underlying asset at the stated price.
There are lots of ways to make or lose money trading commodities futures. First, the market price can go up or down—they're highly speculative. Pretty straightforward. Second, you may get a positive "roll return" if you can sell this month's futures contract for more than it cost you to buy next month's. And third, you can earn interest on the collateral that secures the borrowed money you have riding on your bet (leverage).
Also, unlike stocks and bonds, commodities generate no predictable cash flows. Their value depends totally on what someone is willing to pay for them, which is why the prices can be so volatile; they are more sensitive to the ever-changing winds of the market than stocks, bonds, and real estate.
It's possible to make a lot of money fast trading commodities futures due to the effects of leverage. But it's also very risky so I would caution you to be prepared to lose it all. Even if you use a good strategy, it's highly speculative and comes dangerously close to gambling, so let your conscience (and skill) be your guide.
To trade or not to trade?
Stocks are volatile (just look at the market over the last 24 months). Trading stocks and stock options is an attempt to" play" the market's volatility, which is virtually unpredictable (we can only say with certainty that it will go up and down).
Commodities are the most volatile asset class. Some can halve, double, or even triple or more over a short time (which makes them attractive to futures traders in the first place). Also, because leverage is often used in the commodities futures market, price risk is great.
Leverage may be suitable for home mortgages, but it can be dangerous when used by an unknowledgeable or undisciplined trader. It's the main reason so many novice traders lose money and lose it quickly. Dr. R. (thankfully) says this on his site in a Risk Disclosure and Disclaimer Statement:
The risk of loss in trading commodity futures contracts (commodities and futures) can be substantial. You should, therefore, carefully consider whether such trading is suitable for you in light of your circumstances and financial resources.
For those reasons and others, I suggest being wary of speculative activities like futures and options trading that require specific future events to occur to generate a positive return.
Furthermore, I would never recommend that any near-retiree or someone in retirement put their savings at risk in this way. For someone who needs more income in retirement, I would point them to one or more of the strategies I describe in the Redeeming Retirement book.
On the other hand, if someone doesn't share my convictions in this area (and that's what they are—convictions—and nowhere does the Bible say "Thou Shalt not Trade Stock Options or Futures"), and is knowledgeable and skilled at options and futures trading (or working with someone who is) and wanted to take a small percentage of their savings (say, 5% or less) and try to grow it in that way, that would be up to them.
While commodities are hazardous for the small trader, some trader professionals have achieved consistent returns with large pools of money. They can control the risk through diversification and sophisticated (meaning "don't try this at home") trading strategies. In the end, commodities can be treacherous or just another investment that often offers above-average returns.
There's a better way for wise investors to gain from the market: Take a long-term view (instead of that of a short-term trader) and gain from the stock market by systematically investing regularly (known as "dollar-cost averaging") using mutual funds or EFTs.
A greedy one is in a hurry for wealth; he doesn't know that poverty will come to him (Prov. 28:22, CSB).