Author Topic: A cautionary tale of non-diversification from another forum  (Read 7683 times)

electriceagle

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A cautionary tale of non-diversification from another forum
« on: September 05, 2014, 09:56:49 AM »
I came across this in another forum and felt the need to share it. Despite posting in the "Antimustachian wall of shame and comedy" category, I don't want to make fun of the guy. I see it as a cautionary tale and a trap that is easy for investors to fall into.

http://www.fatwallet.com/forums/finance/1388318/

"I'm left with about $150 in my Roth IRA, though I had over $100,000 in there back in June.  I also had about $45k in taxable accounts that mirrored my Roth IRA, and 100% of that is gone as well.  Thankfully, we still have about $7k in an emergency fund, and the kids have "future funds" that were not invested in options, so did not incur losses.  Anyway, as far as retirement accounts and free cash, we are about wiped out.  I am left with 2 questions:"





Helvegen

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Re: A cautionary tale of non-diversification from another forum
« Reply #1 on: September 05, 2014, 10:47:50 AM »
Wow...

Rezdent

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Re: A cautionary tale of non-diversification from another forum
« Reply #2 on: September 05, 2014, 10:53:36 AM »
I totally understand why an average person would be terrified of investing if they read a story like this...

Albert

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Re: A cautionary tale of non-diversification from another forum
« Reply #3 on: September 05, 2014, 11:15:46 AM »
The guy has a gambling problem...

Metta

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Re: A cautionary tale of non-diversification from another forum
« Reply #4 on: September 05, 2014, 11:16:01 AM »
I'm kind of lost reading the guy's tale of woe. As far as I can tell he invested his entire Roth IRA in a single American Airlines stock and was doing some sort of options hanky panky with it. Can you even do that with an IRA? I thought IRAs had to be invested in mutual funds or similar broadly diversified investments. I don't think this has much bearing to those who are investing their retirement funds somewhat normally. What am I missing here?

J'onn J'onzz

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Re: A cautionary tale of non-diversification from another forum
« Reply #5 on: September 05, 2014, 11:21:56 AM »
I'm kind of lost reading the guy's tale of woe. As far as I can tell he invested his entire Roth IRA in a single American Airlines stock and was doing some sort of options hanky panky with it. Can you even do that with an IRA? I thought IRAs had to be invested in mutual funds or similar broadly diversified investments. I don't think this has much bearing to those who are investing their retirement funds somewhat normally. What am I missing here?

You can trade options in an IRA but they have to be cash secured so if you want to sell a put in a @20 stock you have to have $2000 cash in your IRA to cover it. If you did that same trade in a margin account it would only take about $400 or so of buying power, depending on the stock, brokerage, etc.  I am almost certain this is how it works but if anyone else knows any better i would like to hear it.

As far as only mutual funds that is not right. You can hold individual stocks and as stated above options but you must have approval for options first. I have even heard there is a way you can hold real estate and other investments in an IRA but I am not really sure how to do it.


MgoSam

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Re: A cautionary tale of non-diversification from another forum
« Reply #6 on: September 05, 2014, 12:04:54 PM »
Wow, I can't imagine what he likely is feeling.

UnleashHell

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Re: A cautionary tale of non-diversification from another forum
« Reply #7 on: September 05, 2014, 12:20:37 PM »
so he lost 145k?

last year  - according to the post he had a treble - then a quadruple of his funds.  or a straight quadruple - the post doesn't make it clear. then he lost it all.

so if you look at the starting amount last year he had between 10 and 36k in funds - had a winning streak and then lost it all.

he's a SAHD. goes get s a job and puts away 40k - he's then back to where he was last year.

its not as bad as it sounds.. not good, but could be a lot worse...

remember to diversify kids - oh and nobody ever went broke taking a profit....


GuitarStv

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Re: A cautionary tale of non-diversification from another forum
« Reply #8 on: September 05, 2014, 12:29:13 PM »
The guy has a gambling problem...

Yep.  What he is/was doing isn't investing.

AH013

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Re: A cautionary tale of non-diversification from another forum
« Reply #9 on: September 05, 2014, 12:40:14 PM »
Not that I don't feel bad for the guy's financial situation now, but he straight up gambled.  He bought a boatload of call options on a single stock with 100% of his IRA money.  Essentially a short term bet that 1 stock goes up a set amount of money within the next month or so, or else you get zilch.  That's even worse than buying penny stocks.  As others noted he basically did the stock market equivalent of betting it all on 1 spin at a roulette table.  The fact that he thought spreading your money across 5 whole stocks is the type of diversification that brings "peace of mind" sums it up adequately.

As much as I feel for the guy's family, kids, etc. it's asshats like this who straight up gamble their IRA funds, cry about it when they eventually lose it all, and then get Congress and lobbyists to point to them as an "average American" example when they lobby for turning everyone's 401ks, IRAs and retirement funds into a public retirement fund for Uncle Sam to manage for us, give us all mediocre returns, and then dole it back out us on an as-needed & to-whom-they-see-fit basis.

All I see is a textbook example of why there should be a financial literacy quiz you have to pass before you're allowed to roll a 401k to an IRA, or invest in something other than a lifecycle fund.

MgoSam

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Re: A cautionary tale of non-diversification from another forum
« Reply #10 on: September 05, 2014, 01:52:42 PM »
Yeah, it was gambling. I remember thinking to myself that had I bought ____ shares of ____ at ____, it would be worth ____ now. But this thinking excludes so many other factors. For me, one of the biggest things is that I know that I wouldn't likely buy it the stock at that low price, nor would I sell it at the high price.

Or in this guy's particular case, when would be the ideal time to cash in your chips? He gambled a few times and that paid off, but then it seems that he got eager for more.

I am in Vegas for a few weeks each year and it has been many, many years since I've laid down a single bet. For me, this isn't about will-power, it is a pure rational decision. The last times I gambled I was miserable, because if I won a $100 then I wanted more, if I lost $100 I wanted to win it back. At the end of the day I was never satisfied, and odds are I was a lot poorer as a result.

My company's owner used to be a huge speculator in the stock market and lost a boatload on it. He would be investing in companies that he didn't know anything about, or day-trade. What's sad is that if he had simply just put his money into an index fund, he would have an absolute fortunate put aside. What's worse is that he would spend some days at the office glued to his computer, watching the market, rather than focusing and investing on new products and trying to garner more business.

Elderwood17

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Re: A cautionary tale of non-diversification from another forum
« Reply #11 on: September 05, 2014, 03:14:17 PM »
Not that I don't feel bad for the guy's financial situation now, but he straight up gambled.  He bought a boatload of call options on a single stock with 100% of his IRA money.  Essentially a short term bet that 1 stock goes up a set amount of money within the next month or so, or else you get zilch.  That's even worse than buying penny stocks.  As others noted he basically did the stock market equivalent of betting it all on 1 spin at a roulette table.  The fact that he thought spreading your money across 5 whole stocks is the type of diversification that brings "peace of mind" sums it up adequately.

As much as I feel for the guy's family, kids, etc. it's asshats like this who straight up gamble their IRA funds, cry about it when they eventually lose it all, and then get Congress and lobbyists to point to them as an "average American" example when they lobby for turning everyone's 401ks, IRAs and retirement funds into a public retirement fund for Uncle Sam to manage for us, give us all mediocre returns, and then dole it back out us on an as-needed & to-whom-they-see-fit basis.

All I see is a textbook example of why there should be a financial literacy quiz you have to pass before you're allowed to roll a 401k to an IRA, or invest in something other than a lifecycle fund.

+1

Davids

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Re: A cautionary tale of non-diversification from another forum
« Reply #12 on: September 05, 2014, 09:02:46 PM »
The quick summary is awesome

I had 25K, bet on black and won!
I doubled down and won again!
Realizing that I gotlucky I went and played blackjack for a while, made a little bit of money but nowhere near what Roulette was making.
I made one last bet on black and didn't see where it landed.  When I came back I had lost all of my money!


vegasdude

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Re: A cautionary tale of non-diversification from another forum
« Reply #13 on: September 06, 2014, 02:57:47 AM »
It sounds like his investment in American Airlines stock may have been really smart and not just lucky. But instead of just holding onto the stock which performed well, he gambled EVERYTHING and lost. Also something about going on vacation after he placed the bet? It's hard to follow his math exactly but it sounds like he lost $145k which was 4x the amount he had saved up in the 15 years prior. So he had saved 36k in 15 years? He probably wasn't on the fast track to retirement anyway. But the reason for the post is he's ASKING can I get a job and save 100% of the money and not be limited to 5k a year? Is spending the rest a rule in his book? Maybe he means can I put 100% into an IRA tax free because I lost so much in one year? No mention from him how he would invest it if that were possible.
« Last Edit: September 06, 2014, 03:00:53 AM by vegasdude »

AH013

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Re: A cautionary tale of non-diversification from another forum
« Reply #14 on: September 07, 2014, 08:32:41 AM »
No mention from him how he would invest it if that were possible.

Well he's learned his lesson. Going forward he'll diversify his IRA across 5 call options.  And since he learned that stocks can also go down instead of just up, he'll branch out into some put options too!

Edit:  I was being sarcastic, but clearly the guy learned little. Around page 8 in the comments the guy says he's changing his investment strategy to diversify across 10 stocks and will switch from short term call options back to "safer" long term call options. Dude is completely disregarding the advise from others in his thread suggesting he invest in broad market funds, claiming he is an excellent stock picker by highlighting his wins over the years that have led to an average 10% return until now.

Best comment by far was someone who went through the Op's other posts and called the guy out on being a penny pinching idiot (with an aptly named handle "IStillPickUpPennies") who denies his wife (who is the sole breadwinner) a means of communicating with her parents (on her birthday no less) because the Op thinks a phone card costs too much and drives his kids around in a van without seatbelts since that way it is technically "legal" to not have to buy then child safety seats, yet can rationalize losing their entire retirement savings as prudent investing with only slight modifications.
« Last Edit: September 08, 2014, 05:34:08 AM by AH013 »

NoraLenderbee

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Re: A cautionary tale of non-diversification from another forum
« Reply #15 on: September 07, 2014, 09:56:59 AM »
The quick summary is awesome

I had 25K, bet on black and won!
I doubled down and won again!
Realizing that I gotlucky I went and played blackjack for a while, made a little bit of money but nowhere near what Roulette was making.
I made one last bet on black and didn't see where it landed.  When I came back I had lost all of my money!

Like!

arebelspy

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Re: A cautionary tale of non-diversification from another forum
« Reply #16 on: September 08, 2014, 03:05:41 PM »
I'll admit it: I have been as stupid as this guy.

Hopefully he learns from the mistake and moves on.

I feel for him.
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Metta

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Re: A cautionary tale of non-diversification from another forum
« Reply #17 on: September 08, 2014, 03:49:08 PM »
I'm kind of lost reading the guy's tale of woe. As far as I can tell he invested his entire Roth IRA in a single American Airlines stock and was doing some sort of options hanky panky with it. Can you even do that with an IRA? I thought IRAs had to be invested in mutual funds or similar broadly diversified investments. I don't think this has much bearing to those who are investing their retirement funds somewhat normally. What am I missing here?

You can trade options in an IRA but they have to be cash secured so if you want to sell a put in a @20 stock you have to have $2000 cash in your IRA to cover it. If you did that same trade in a margin account it would only take about $400 or so of buying power, depending on the stock, brokerage, etc.  I am almost certain this is how it works but if anyone else knows any better i would like to hear it.

As far as only mutual funds that is not right. You can hold individual stocks and as stated above options but you must have approval for options first. I have even heard there is a way you can hold real estate and other investments in an IRA but I am not really sure how to do it.

Thanks for the info! My father was an accountant and, for a time, a certified financial planner. He was the one who told me something like "You don't buy and trade individual stocks in your IRA. Your IRA is for  your mutual funds." I think I interpreted that as "It's illegal to use it for anything like individual stocks." Clearly he must have been giving advice instead of laying down the law. Sometimes it was hard to see the difference when he gave financial advice to me and my sister. :)

nyxst

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Re: A cautionary tale of non-diversification from another forum
« Reply #18 on: September 09, 2014, 08:25:56 AM »
I'm kind of lost reading the guy's tale of woe. As far as I can tell he invested his entire Roth IRA in a single American Airlines stock and was doing some sort of options hanky panky with it. Can you even do that with an IRA? I thought IRAs had to be invested in mutual funds or similar broadly diversified investments. I don't think this has much bearing to those who are investing their retirement funds somewhat normally. What am I missing here?

You can trade options in an IRA but they have to be cash secured so if you want to sell a put in a @20 stock you have to have $2000 cash in your IRA to cover it. If you did that same trade in a margin account it would only take about $400 or so of buying power, depending on the stock, brokerage, etc.  I am almost certain this is how it works but if anyone else knows any better i would like to hear it.

As far as only mutual funds that is not right. You can hold individual stocks and as stated above options but you must have approval for options first. I have even heard there is a way you can hold real estate and other investments in an IRA but I am not really sure how to do it.

Thanks for the info! My father was an accountant and, for a time, a certified financial planner. He was the one who told me something like "You don't buy and trade individual stocks in your IRA. Your IRA is for  your mutual funds." I think I interpreted that as "It's illegal to use it for anything like individual stocks." Clearly he must have been giving advice instead of laying down the law. Sometimes it was hard to see the difference when he gave financial advice to me and my sister. :)

I like your dad :) I try to do the same with my kids... Making them think that saving 50% of their income is normal, and if they want to step it up, save more.. Hopefully they are in their late 30's before they realize that not everyone does this... haha!

frugalnacho

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Re: A cautionary tale of non-diversification from another forum
« Reply #19 on: September 09, 2014, 08:54:17 AM »
I like your dad :) I try to do the same with my kids... Making them think that saving 50% of their income is normal, and if they want to step it up, save more.. Hopefully they are in their late 30's before they realize that not everyone does this... haha!

By late 30's hopefully they will be retired.