5 TRADING MISTAKES YOU SHOULD AVOID

Avoid the Five Fatal Trading Mistakes and Start Winning in the Market Place

Avoid the Five Fatal Trading Mistakes and Start Winning in the Market Place

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Avoid the Five Fatal Trading Mistakes and Start Winning in the Market Place

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How you make a loss on your cash at the bank!

How you make a loss on your cash at the bank!

Australian Investment Education

Loss on cash at the bank australia 2013You probably remember growing up and hearing your parents say “save your money for a rainy day!” I certainly do – and growing up in the UK, there are plenty of them.

Australians, as you can see from the chart below, are saving an increasing part of their income – currently more than 10%. This is a very high level – the highest for thirty years in fact.

Australian Households Savings

Australian Households Savings

So why so high

Part of the reason for this level to be so high has been attributable to media coverage of financial markets and the impact that has had on investor psyche. In short, your average investor is paralysed by fear – too scared to make a move, in case they lose money.

Headlines such as billions wiped out overnight are less than supportive, particularly when there is no subsequent headline the next day, saying that billions were added back to the market. My how we love a sensational headline!

Sure the stock market has been volatile – it always is, but with a US equity market back at record highs and the Australian market not that far behind, many have missed the recovery, instead, sitting on a pile of cash that is losing its value.

Commonwealth Bank has posted a 40% Plus gain in its stock price over the past 12 months, yet most investors have been content, earning maybe 4% on their money.

I heard a comment a little while back that many investors now consider “break even” to be the new profit, having lost money during the GFC! Sadly for many, their cashing out could not come at a worse time, with markets fully recovering and providing opportunity for all to make back any losses and some.

Yet cash still seemed more appealing, despite the paltry return, because after all, you cant lose money when holding cash, right?

Then there is job security

Other less subjective issues include job security. Unemployment is sitting at around 5.5%, again driving people to prepare for the swing axe and have cash in the bank, when needed.

Also, we have all heard – albeit possibly inaccurately – that the mining boom is over and that other mainstream areas of the economy are also going to feel this cooling too.

So has holding cash been effective?

We think the answer to this question is no!

But how can holding cash not work?

How can holding cash be costing you money?

Surely that is not possible?

Hang on – are you telling me I am effectively losing money on my cash savings?

Well actually, yes. It is hard to swallow, as we are all taught that holding cash at the bank is the safest form of investing but on a real basis, you are quite possibly losing money.

Please allow us to explain

Interest is earned on cash at the bank, right. This may be a money market account, which is getting a better than RBA Base rate, or a term deposit.

A quick look at one of the major banks’ sites and they are offering between 3.0% and 4.2% depending on the account balance.

According to the Treasury and I quote “Australia’s net personal average tax rate for an average worker is 24.0 per cent. The net personal marginal tax rate in Australia for an average worker with no children is 31.5 per cent.” As such – on average, 24% of all your income – interest and salary is paid in tax.

Earning 3% at the bank, after tax, effectively becomes 2.28% after tax, assuming you are only paying the average tax rate.

Ok well that is 2.28% return, right – so how am I losing money?

Ok so having established your net return, lets now take into account inflation – the silent lifestyle assassin. Inflation in Australia, according to the Reserve Bank’s site is currently 2.4% and that also needs to be deducted from your return in order to get your real return.

So 3.0% becomes 2.28% net of tax, less 2.4% for inflation leaves you with a grand total of minus 0.12% real return.

This is not quite the safe haven for cash that perhaps you may have thought and certainly is not going to do anything for your long-term wealth creation as you are actually going backwards.

So what is the answer?

Assuming that you don’t wish to be going backward on a real basis, it is going to require utilising your cash. Holding real assets – those that go up, during times of inflation, not backward, has to be part of the financial model you run.

Equally, taking on a strategy that is less speculative, providing a more regular kind of return, without those big and costly swings in value that can happen with speculation would have to be something worthwhile looking.

That really leaves two options on the table – investing in property – capital intensive and while may provide a capital gain over time (don’t forget the stamp duty) doesn’t necessarily provide cash flow when you take into account loan serving. The other, is covered calls, a proven share market cash flow strategy.

Buying a share (in blocks of 100) and then selling a call option over it, provides immediate cash flow – paid to your account the very next day. It is also a relatively low risk strategy, as we are simply looking to be paid for time, not the overall direction of the stock.

Add the two together, and the fact that your monthly income from covered calls, is likely to be close to what you earn annually at the bank, and you should be getting interested.

What’s more, earning in a month, what the bank pays over 12, is not 12 times as risky, is it?

This is our number one strategy for cash flow and this month alone have seen us lock in several great profits again this month RIO – Gross profit of 3.04% in 2 weeks, ORG, 5.19% over 3 weeks, FMG 3.07% in 3 Days.

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about Andrew Baxter

Originally from the UK, Andrew has been a market professional for almost 19 years, trading a wide range of global markets and instruments. As a highly regarded industry speaker, he has spoken alongside Sir Richard Branson, Robert Kiyosaki, Anthony Robbins and Tony Blair, empowering many thousands of people, from all over the world, with the skills, techniques and ...

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