Mortgages and other debt have carried stigma for millennia.  We were warned of the evils of borrowing money in the bible, by Shakespeare and by countless pundits and philosophers over time.  But our society encourages us to pursue the American dream through home ownership and the only way to secure the American dream is to take on a mortgage.

The home purchase push went into overdrive after our veterans returned home from World War II.  Home ownership became the mantra, GI loans became the norm and suburbia flourished.  The children of these veterans also bought into home ownership as both a place to live and a prudent investment.  One key difference between the veterans and their brood is the veterans paid off their mortgage before they retired with deeds of trust burning parties.

The World War II veterans were highly influenced by the debacles of debt during the depression of the 1930s.  People lost their farms and homes because they could no longer make the monthly payments.  This learned behavior lasted their lifetime as they regularly shunned debt of any type.

Times changed.  Debt became the new American mantra.  We leverage our investments, spend future pay raises today and live the lifestyle we all deserve became the new learned behavior.  Governments and financial markets made it all so easy.  In fact, current economic growth is highly dependent on maintaining this excessive consumer materialism.

But, as we approach retirement we realize this party cannot go on.  The bills have come due and we know we should probably pay them before we quit work.  We now face a conflict of whether to save more for retirement or pay off our debts.  Both require we forego some level of current consumption.  Paying down credit card and other debt seems obvious, but mortgage debt weaves its way through our lives in complex ways.

In our quest for lower monthly payments and possibly take out some home equity, many of us refinanced with abandon in the latest low interest environment.  Paying a lower interest rate generally makes sense but one of the side effects of refinancing is it extends the duration of the mortgage.  We may have traded a mortgage with ten years left to refinance one with thirty years left.

Although our level of debt may be the same, the lower monthly payments are merely an illusion that we are saving money.  Our debt has been extended and we are just paying it off at a slower rate.  If we pay the new amount over the new time period the total interest we pay by staying in debt longer can be more than the amount we saved through lower monthly payments.

Our parents’ generation paid off their mortgages prior to retirement.  We now must consider whether we should do the same. There is no right or wrong answer mostly it depends on the tradeoffs you are comfortable living with.  There are five basic strategies to consider:

The key test of the viability of this strategy is to be able to maintain servicing the debt. We can determine our ability by figuring out how much the monthly payment is relative to our total income.  First determine your monthly income by adding your Social Security, Pensions and the expected income taken from savings.  Next take the monthly payment and divide it by your total expected monthly income.  For example, if your mortgage payment is $1,000 per month and your total expected income is $3,000 per month your expense ratio is 1/3 or 33%.  Generally we enter the danger zone when our monthly ratio exceeds 33%.  If your ratio is higher than consider one of the other alternatives.

Credit card and other consumer debt should be eliminated prior to retirement.  Consumer debt is a tough trap to get out of once retired.  Although this strategy does not reduce total debt, the ongoing carrying cost should be lower.  Refinancing is also cheaper than paying off consumer debt with taxable IRA distributions.  Variable rate consumer debt and variable rate mortgages shift interest rate risk to the retiree.  Retirees generally have a fixed income, having a variable debt with the potential to increase can squeeze the retiree and force unpleasant lifestyle tradeoffs as more fixed income shifts to pay the monthly mortgage.  This is not the time to increase financial risk with a variable rate mortgage.

Straddling our mortgage with our investments can only be done effectively if we take on more investment risk.  Mortgage rates our deductible, but comparable low risk investments pay less on an after tax basis than we pay on our mortgages because most of them are of shorter duration.  CDs, Treasury Bills and such pay considerably less than long term mortgages.  These investments are taxable and their after tax return generally will be no better than the after tax payment on your mortgage.  For this strategy to work, you must take on more investment risk.  Money would have to be invested in lower quality, long term bonds, stocks, or other risk assets to make this work.  This strategy always carries the possibility of losing money on your investments.

If we have a substantial balance to pay off at retirement, then we need to look at the impact of using up a portion of our savings to accomplish this.  First, it will be quite expensive if we use IRA or 401(k) money to pay the mortgage as these funds are subject to ordinary income taxes.  Second, if we must sell appreciated assets we may have capital gains taxes to pay.  Each requires more than one dollar sold to pay off one dollar of debt.  There is also an impact on our access to cash; we now have less cash.  We need a portion of cash to meet emergencies and we need a portion dedicated to grow in value to meet future inflation.  We may have paid off our mortgage and can sleep better at night at the expense of being less prepared for emergencies if we draw down too much of our savings.

But, we have to be ready to move and the move down strategy is subject to market risks.  We may not be able to sell our home for what we think it is worth.  There is purchase risk in buying the next place and if we are to finance the deal, there is interest rate risk.  The key uncertainty to this strategy is adapting to the new living arrangements.  Family disruptions can occur.  New social networks may be harder to build and the new location may be more appealing in our fantasy than in reality.

Deciding what to do with our mortgage can be the most important financial decision we make in retirement.  New retirees have lived with debt most of their lives and are more comfortable with it than their parents.  There is always risk in debt as can be seen with the current mortgage meltdown and banking crises.  But, knowing the risks of debt, if handled responsibly can help us meet our retirement lifestyle objectives.

We each need to find our balance between debt and security.

chapters include: financial empowerment; option fundamentals; advanced option strategies; alternative investments.
this book explains how to make profits during both bear and bull markets; build a diversified investment portfolio; acquire assets at a large discount; achieve investment goals.

(more…)

Being the largest market, retail traders are pitted against the largest business and financial entities and some of the smartest brains. Coupled with the use of large levels of leverage (50 times in Singapore and up to as much as 800 times offered by brokers elsewhere), trading in FX can be a highly risky business. Therefore, early mistakes for the novice or aspiring trader can be expensive and can put one out of business right away.

In this article, I would like to bring up 10 essentials for new trader to take note. Consider them the survival guide while you navigate unfamiliar territory. The rule is to stay in the game while you strengthen your wings and feathers. This guide will help new FX traders eliminate mistakes that arise from lack of experience as well as personal complacency.

There are plenty of literature both in print as well as the Internet. While many titles that you pick up will actually carry a lot of information that overlaps, I always consider it worthwhile if it contains one paragraph that has insight not mentioned elsewhere.

Discussion with such persons provides structure to all the information that we have gathered through our reading. We ask for their help with the questions we have and as a two-way process, they jog our memories and test our understanding by asking us critical questions.

An experienced and caring professional can also interview you to understand your needs. By pointing to a suitable path based on their experience, they can help to save us a lot of trial and error.

No one trades FX without knowing technical analysis because it is really a game of managing support and resistance and knowing what the trend is. Now some readers may not like that sentence but let me make some observations.

Visit popular FX-related websites like DailyFX (http://www.dailyfx.com) and CNBC (http://www.cnbc.com) and you will realize that there are always price charts and mention of support and resistance of currency pairs. Now you need technical analysis knowledge to be able to analyze those and that means if you ignore technical analysis, you miss out half of the input.

We can really get good ones provided by trading brokerages if we use their trading platform. Not all brokerages provide price charts however and some provide charts that are inadequate.

What kind of charting software?

Get acquainted with economic news and understand their implications to FX. That said even readers who have good clear understanding of economics may not be able to fully comprehend their effects on currency movement. That is because as retail traders, many of us do not receive enough information. In addition, the markets are forward looking, that is they anticipate and move ahead of events so that markets may not react anymore when news actually comes out.

I know of two types of traders who make use of news announcements: one to speculate and the other to avoid them.

The former speculates on the outcome of news announcements hoping that price will react decisively in a profitable direction. While it sounds like betting, some technique is involved. To be profitable in the long run, the speculator must follow some rules including limiting the downside risk of getting it wrong.

The other type of trader uses some strategy or another but wants news out of the way. Sudden movements are not welcome so no news is good news.

Whether you like to trade news or avoid them, a trading calendar is indispensable.

A good calendar has the following:

This is the place where we try out FX trading in a hands-on manner. After all we need to put our knowledge to application. At this stage, two things cross your mind: what is a good demo platform and what do you do with it?

Some important features:

What do you then?

Your strategies should make use of technical analysis or fundamental analysis or both. You should never be trading on someone else’s opinion because FX is fluid and situations change rapidly.

A crucial aspect of FX trading is risk management and cutting loss. Due to the high levels of leverage at work, traders should never hang on to a losing position. Averaging is NO-NO.

Improve and refine your strategy until you win money consistently. You must fully understand the mechanics of success so that they can be duplicated. Reasons for failure must be avoided. Sometimes, you have to drop a strategy entirely and start all over.

The more we trade, the more we learn. Situations continue to arise that challenge our knowledge. Gaps will appear and ‘truth’ suddenly becomes myth. Learn to recognize price setups and the events they associate with. Drill your trade execution based on the chosen strategy until you can carry them out reflexively.

Cash accounts should fit some criteria:

New traders should take note of an important fact. Brokerages offering FX trading in Singapore provide differentiation of services. The terms and conditions they offer can be varied and no one should take for granted that one broker is the same as the other. Make sure that you talk to a trading representative to discuss the finer points.

That’s because at this point emotions are involved. Make sure that you trade with disposable funds and follow a plan. After all, currency speculation is a really thoughtful activity.

The reality of the trading business is that a large percentage of one’s trades will be losers. Every business has overhead expenses, or costs of simply opening the doors for business. Trading is no different and trading losses are a large part of those overhead expenses. Once one accepts that aspect of trading, it becomes much easier to close losing trades early with minimal emotional attachment.

It is also crucial to post audit your trading every month. I evaluate each trade that lost money and categorize it as a “losing trade” or a “bad trade”. The bad trade is the one where I did not follow my own trading system rules, whereas the losing trade was executed and managed correctly, but simply did not turn out positively – it was part of my overhead.

The precise percentages of losing trades will depend upon the markets being traded and also the particular trading strategy. For example, many successful commodity traders will only have 30-40% winning trades. At first blush, that doesn’t appear to be a viable proposition, but the key is the ratio of gains on the winning trades versus the losses on the losing trades.

For example, let’s assume my trading system’s average winning trade returns $250 but my losing trades average about $500. That doesn’t look like a winning system, but the crucial missing piece of information is the ratio of wins to losses. If I win 10 of the next 12 trades, I will gain $2,500 and lose $1,000 on the two losing trades for a net gain of $1,500. Another trading system might have a different pattern, e.g., winning trades average a $750 gain, but losing trades average losses of $100. This pattern of wins and losses is fine if the probability of success is high enough to make up for the losses. For example, if my probability of success is only 20%, this system will be profitable. Out of the next ten trades, two winners would account for $1,500 while the eight losers would total $800 in losses, for a net gain of $700.

Always understand the risk/reward ratio of your trading strategy. Couple that with the probabilities of success and loss to know the expected value of a series of trades using this system. Depending on the parameters, one system will be profitable with infrequent, but large, winning trades, while another profitable system may be characterized by highly probable, but small, winning trades.

This explains why you often hear a trading guru adamantly insist that you must always trade where the maximum gain is at least three times the maximum loss (a low risk/reward ratio). But then you hear another well known trading coach tell you that the best trading strategies are the ones with probabilities of success greater than 85%, with a high risk/reward ratio. Nether system is superior. But each system has its own pattern of wins and losses and optimal trade management. Which system is most compatible with your trading style and risk tolerance?

One of the items on your checklist before making a trade should be a glance at the calendar to see if any exchange holidays are upcoming. When time decay is on your side, exchange holidays are also your friend. If the market isn’t open, it can’t move against your positions, but time decay is still occurring and improving the profitability of your position. I will often establish my OTM credit spread positions before long holiday weekends to add to my edge.Another important factor to keep in mind is the historical seasonality of volatility. Trading activity slows during several of the holidays every year, as traders take time off to be with their families and exchange business tends to slow. March and October have historically displayed the highest volatility for the year, whereas the summer months and the week between Christmas and New Year’s Day are historically slow periods of market activity. An old wall street maxim is “sell in May and go away.” It refers to the tendencies for many market participants to take vacations and long weekends over the summer, resulting in lower trading volumes and lower volatility. This tends to favor strategies like iron condors that benefit from slower moving, sideways markets.Another factor tracked by many traders is which monthly options cycles have 5 weeks and which only have 4 weeks. Option prices will be skewed because of the number of days in an option cycle.  If your trading style involves consistently selling premium each option cycle, you should be aware of the five week option months, since the amount of premium income may be affected.Options trading strategies that benefit from the time decay of options prices are attractive for monthly income generation. Pay attention to the calendar and put time on your side.