Forum Mailbag: 24-Hour Trading, Timing The Next Bear Market, 4% Rule, And Taxes, And More!

There is so much great information on personal finance forums. I regularly participate on several message boards, including Bogleheads, White Coat Investor, and Rockstar Finance. Here are some of the discussions happening around the internet.

1. White Coat Investor: 24-Hour Trading

Question: Djohnflatfeecfp noticed a CNBC article noting that TD Ameritrade now allows 24-hours trading. He (sarcastically) wants to get the opinion from the WCI community regarding whether this is a good idea.

WSP’s Take: Once upon a time you could only trade stocks between the hours of 9:30-4: 00 pm. True bankers hours. After hours trading (4-8PM) allows traders to see the immediate effects of events that occurred after market hours such as earnings reports. Pre-market trading (4-9: 30 AM) can also be interesting to traders as certain things like government data get reported before the market opens.

TD Ameritrade wants to fill the gap between 8:00 PM and 4:00 AM by allowing investors to trade during the overnight hours. Little, if any, market-moving action takes place during these hours. Stocks that have significant Asia exposure could potentially move with the Tokyo, Hong Kong, and China stock markets, but in general, the liquidity in these markets are likely to be very thin.

When I worked on Wall Street, I felt bad for the currency traders, whose markets trade 24 hours a day. Since their currency markets opened at 5 PM on Sunday because it was Monday morning in Sydney, the New York currency traders typically did take a look at the markets on Sunday night (I know, boohoo, doctors see patients 24/7).

2. Bogleheads: Timing The Next Bear Market

Question: Sharkiez is a relatively new investor who wants to learn about market “history” from 2008. Essentially, he wants to study the events that lead up to the 2008-2009 crash so that when the market “starts” to fall this time around, he’ll be able to get off the train early and avoid the majority of the losses.

WSP’s Take: By the middle to end of 2007, the mortgage-backed securities industry was already falling significantly. However, the stock market made a new high in November 2007 in spite of this. Traders lose many millions of dollars all the time, and it doesn’t cause the banks they work for to go insolvent. However, the mortgage crisis deepened, and Bear Stearns went bankrupt in March 2008. Again, things were dicey, but it was possible that they and a few other lesser-known financial companies would be the only casualties of the financial crisis. Unfortunately, things got worse in the fall of 2008 when Lehman Brothers went bankrupt and was bought by Barclays, Merrill Lynch was bought by Bank of America and GM and AIG required government bailouts. At that point, there was widespread fear that multiple other banks could follow Lehman’s lead and go bankrupt. However, this did not materialize, and the market bottomed in March 2009.

In hindsight, it seems obvious to have sold in late 2007, since the mortgage market was already showing serious signs of trouble at that time. However, the extent to which the collapse in the mortgage-backed security market would cripple the entire global financial system was not known at that time and certainly was not predicted by most investors.

The problem with trying to time market crashes by “getting out early when the music stops” is that there are many “false alarms” where it sounds like we could be headed toward a crisis, only for the crisis to be averted. Since 2009, there were many years when people predicted a European sovereign debt crisis, and global markets would rise and fall based on whether people thought Spain or Greece or Italy would default and trigger a domino effect of defaults across Europe. It never happened, and the market marched higher.

You simply cannot predict with certainty when to jump off the train. You might just jump off and it turns around and goes in the opposite direction.

3. White Coat Investor: 4% Rule Question

Question: Darkroominvestor (must be a radiologist, don’t you love these screen names?) has a question about the 4% rule from the Trinity University study. He is asking whether the 4% rule is affected by taxes. Specifically, he was wondering whether investments in Roth IRAs or other tax-free instruments such as municipal bonds lowers the 4% rule.

WSP’s Take: The Trinity University study does not specifically take into account taxes when they popularized the 4% rule. Therefore, you need to lower your retirement number by the amount you expect to pay in taxes. For example, if you have $1 million in a 401(k) and you expect to pay approximately 20% in taxes when you withdraw that money during retirement, then you should consider it to be worth $800,000 when calculating whether you have enough money to retire.

4. Bogleheads: Fidelity Taxable Account

Question: Eli79 has $80,000 in a savings account that he wants to move into a taxable account and invest in an asset allocation of 80% stocks / 20% bonds. He would like suggestions for the stock and bond components of this portfolio. Specifically, he would like to know whether he should be using municipal bonds (either his Minnesota state municipal bond fund or a more general municipal bond fund).

WSP’s Take: For the stock component, just use IVV (S&P 500) or ITOT (Total Stock Market). The mutual fund (FSTVX) is inferior to an ETF in a Fidelity taxable account because of its relative tax inefficiency.

For the bond component, I would use a total bond market ETF such as AGG, as opposed to a municipal bond fund. I’ve made my opinions about municipal bonds known, and I don’t think it makes sense for anyone except for those in the highest tax bracket to invest in municipal bond funds.

Wall Street Shares: 9 Articles To Read This Week

1. Physician on FIRE: I Volunteered for the Hospital Board and was Sued for Millions. — PoF shares his years-long experience of being sued by a trustee when the hospital he worked for went bankrupt.
2. Dads, Dollars, and Debts: Funding A Fidelity Backdoor Roth IRA: Step-by-Step — DDD shows you how to fund your backdoor Roth IRA if you have a Fidelity account.
3. The Physician Philosopher: The Third Philosophy: The 30% Rule — TPP describes the wealth accumulation rate, which is different from savings rate.
4. White Coat Investor: Updates in the Disability Insurance Marketplace – Part 11 — Insurance agent (and WSP site sponsor) Larry Keller gives his periodic update of the disability insurance market in a guest post for WCI.
5. The Financial Journeyman: Bitcoin: Just Say No — Even if you think that Bitcoin is a good investment/trading vehicle, its use on the underground parts of the internet and real world may discourage you from buying.
6. Wealth Rehab: If You Don’t Understand it, Don’t Invest in It — Even if you understand blockchain technology, don’t invest in it.
7. Rogue Dad, M.D.: A Doctor’s Guide to the Doctor Loan & Other Home Loans — RDMD describes his experiences with the physician mortgage.
8. PF Geeks: 150 Proven Ways to Save Money — You might find a few pearls to save money you hadn’t thought of in this mega-post.
9. ESI Money: Millionaire Interview #1 — ESI has been doing a long series (37 and counting) of profiles of millionaires. His first-ever millionaire interview was with a pharmaceutical scientist married to an internist.

What do you think? Do you agree or disagree with any of my responses? What’s your take on the topics in this week’s forum mailbag?