Speaking of volatility, one of the so-called joys of day trading is finding stocks to short. For better or worse, the Internal Revenue Service (IRS) does not allow you to short from a self-directed individual retirement account (IRA) for tax reasons. If you really want to short the market, it’s probably a better idea to use your non-401(k) designated investing money and consider an exchange-traded fund (ETF) that shorts the entire S&P 500. For example, the ProShares UltraPro Short S&P 500 (NYSEARCA:SPXU) seeks a return that corresponds to three times the inverse (-3x) of the daily performance of the S&P 500. (Source: “Internal Revenue Bulletin: 2004-8,” U.S. Internal Revenue Service web site, February 23, 2004.)
Part of a long-term strategy with a 401(k) is about reinvesting dividends. You don’t get this when you day trade with your retirement; that’s because you haven’t left your money in the stock long enough to collect on those quarterly dividends.
While socking away money into your 401(k) for 20, 30, or 40 years doesn’t sound very exciting, the end result should be. Over the ensuing decades, capital appreciation and dividend growth in your 401(k) should reward patient investors with more than the volatile results that day trading would.
This article is brought to you courtesy of John Whitefoot from the Daily Gains Letter.