Living In God's Exquisite, Miraculous Sufficiency God bless your 2013! This is the year of ACTION!
One of the ETFs for the S&P 500 ($SPX) is SPY. I’ve been thinking about IRAs and Roth IRAs. Roth IRAs are a great way to grow your account tax free. However, unless other IRA accounts, Roth IRAs offer no immediate tax relief. It’s my understanding that the $5K you can invest towards your retirement can be chosen to go towards any type of IRA, but it will not provide tax benefits initially for the ROTH IRA.
You will still have to pay the taxes on the $5K. However, once it’s in the ROTH, any interest or money made within the IRA, when you withdraw that money, no matter how much it is, will NOT be taxed. How cool is that?
I really love that concept. Roth IRAs were created in the late 90s about 15 yrs ago. LOVE IT! I wish I had started then with a ROTH IRA, but I didn’t as I didn’t understand until the last few years, when I didn’t have any money. However, when I have money again, I will start a Roth IRA.
I do know in any type of IRA account, whether it be a traditional, a Roth, or those formed as a part of a company, you cannot do shorting, as far as I understand. How awful, I think. When the IRS made this rule, they didn’t truly understand, IMHO, that often more money is made when the market is going down than when it’s going up, at least timewise.
But, I can see that when you short something, you have limited profits and unlimited potential for losses. Of course, that would be if you didn’t put your stop losses in. Which, yes, that would probably like 95% of people. So, the rule is basically for the common folk who has no clue about how the market works.
Okay, so with the IRS rule that you can’t short a stock or an investment vehicle in the stock market, how would you take advantage of this? Someone, don’t know who, came up with the idea of INVERSE ETFs. I cannot tell you how ingenius this is.
So, if the S&P500 is going down, which the ETF is SPY, one of the inverse ETFs for the SPY is the SH. If the SPY goes up, the SH goes down. If the SPY goes down, the SH goes up. Problem solved.
Since you can ONLY take long positions in a retirement account, if you trade the SPY, then when the SPY stops going up, as long as it’s not going sideways, and as the SPY starts to go down, you switch to trading the SH, which will be going up. When the SPY stops going down (bottoming out) and begins to go back up, you get out of the SH and switch to the SPY.
So, this way, you are basically still making money whether the $SPX is going up OR down, you just choose the right ETF for the right direction. How super, duper cool.
The past couple days, I decided to backtest and trade these 2 ETFs from around the time I got divorced in the summer of 2008, starting with $5K. At that time, I did have the money to do that. Wish I had. To do it before that time, when my ex left, would not have been a good idea, since that would’ve probably meant that he would’ve taken that account, too.
Anyway, when I’m able to invest in a Roth IRA, I will be using the SH and the SPY to trade in the account, so this is a great way to bypass the no shorting thing without doing anything illegal.
I traded both ETFs since the summer of 2008, backtesting and what I got was really nice. I would start off with a $5K account and each year in January add another $5K to it.
As of yesterday, the account value was about $280K. A total of $25K was added to the account for each tax year (2008 to 2012), the rest is making your money work very hard for you. That’s $255K of interest (not really interest, but that’s what I’m calling it) in 4 years.
I would hope that before the end of the year, provided I get a decent paying job in August, that I would have $5K to put by the end of the year and possibly another $5K in Jan or Feb. No one knows what the market will do, but if it does similar, and I can make that money in the next 4 yrs, I’ll be near the end of my 47th year.
You cannot withdraw from a IRA without a 10% penalty until 59 1/2 yrs old, so that would give me another 12.5 yrs beyond that to grow that account into the millions and upon withdrawal, it would all be tax free because I paid the initial taxes on the $5K each year of deposit.
I LOVE this option and see the long-term gain, rather than a short-sighted benefit.