Of the hundreds of investment books that we are asked to review, a recent one stood out for its utter audacity: 401(k) Day Trading: The Art of Cashing in on a Shaky Market in Minutes a Day, by Richard Schmitt. The premise of this book is as preposterous as its title. But it raised two important questions, meriting this review.
Schmitt, who is an adjunct professor at Golden Gate University, where he teaches retirement planning, argues that equity investors should not be content with the mediocre returns the US equity markets offered over the last decade. Investors should instead engage in day-trading, or what he calls “hyperactive rebalancing.”
Following Schmitt’s advice, a 401(k) investor should rebalance his or her portfolio daily. The portfolio should consist of an investment, such as an equity index fund, and a cash account. When the market goes up, you sell a little bit, moving more into cash, and when it goes down you buy a little bit, moving back a bit toward full investment. Schmitt provides a “calibration factor” for the investor to determine how much to buy and sell.
Such activity would quickly expose the investor to the penalties imposed (for good reason) by fund companies on short-term trading. Schmitt has a solution, though. The investor should establish two 401(k) accounts, each with a cash account. One would be used for buy transactions and the other for sell transactions.
To execute these trades, the investor would need access to a real-time feed of market prices. At 3:55pm ET, he or she would observe the price of the index, use the calibration factor to determine how much to buy or sell, and execute the trade at 3:59pm in the appropriate account.
According to Schmitt’s book, this strategy would have returned 1.84% annually for the 10 years ending December 31, 2010, versus -0.48% for the S&P 500. He must not have included dividend reinvestment, since the correct return on the S&P 500 over that period was 1.31%. I’d also like to know whether Schmitt obtained his result using pricing at 3:55pm ET, as he advocated in his book, or whether he simply used closing 4pm prices, but I’ll leave that question for someone else to answer.
I’ve now summarized Schmitt’s entire thesis, which occupies about five of the book’s 298 pages. Apparently his publisher, John Wiley & Sons, could not justify the $49.95 price stated on the book jacket if the book looked more like a $10-per-page pamphlet. So on the other 293 pages you will find a primer on how the global economy functions, how our capital markets operate and the ways in which one can save for retirement.
The notion that an investor should employ such a strategy is absurd. Even if it provided the 53 basis point advantage for which Schmitt claims there is anecdotal evidence – and I don’t trust his numbers – it is guaranteed to lose over the long run, which is relevant time horizon for retirement planning. Equity markets will appreciate over time, and this strategy will decrease exposure to the market and erode returns.
