Thursday, September 18, 2008

The Frugal Trader

Protecting your assets doesn’t seem a foregone conclusion as it did even a year ago. Iceberg risk isn’t just a theory anymore. Unfortunately your money isn’t safe.

Several frugal blogs have described some ideas to conserve money for the upcoming Great Depression Part II. I have several ideas on how we as traders can reduce (but never eliminate) our personal portfolio risk.

1) Set aside at least 2 years (better if you can do 5) of your total free capital. Put this capital in government backed savings accounts. In at least 3 banks worldwide. I recommend 1 U.S. bank, 1 European bank (Swiss Bank is good), and 1 Asian bank (Singapore or Hong Kong). Want to be even more secure? Put at least half of it in gold – jewelry, coins, etc.

2) If you are Forex trader, split your account between Spot FX and Currency Futures. Remember that the 6E and the EUR/USD trade in a very similar fashion and Futures are regulated and often insured (check with your broker).

3) Have at least 3 or 4 brokerages (as reputable as you can find) as possible. Make sure they don’t all clear from the same clearing firm.

4) Get your family on a budget. Tell me you already have one. Monitor that budget at least monthly.

5) Reduce all debts to zero – that includes your house. Can’t afford to pay all cash for your house? Get a condo.

6) De-leverage your trading as much as possible. Are you currently risking 3% per trade? Get it down to 1% - or less if possible.

7) No lattes! Reduce your latte and eating out habits. Eat at home. You will lose weight, save money, and help the environment. See if you can cut your total food costs in half. It isn’t that hard.

8) Grow your own food. There are several urban homesteaders who feed their family entirely from 1/10 of an acre. You might have to become vegetarian to make it happen (yep I hate veggies too – get over it). Get into gardening. Re-invent the Victory Garden for your home. WWII rationing may seem quite pleasant compared to the upcoming storm.

9) Kill your T.V. If you subscribe to cable cancel your subscription. T.V. rots your brain anyway.

10) Kill your cell phone. Do you remember when you were a kid? There were no cell phones. It’s a waste of money; nobody really cares about your 100 texts per day anyway. It will relieve stress and help you disconnect from unnecessary distractions. Still can’t live without it? Any disconnected cell phone is still able to dial 911 (the only number you really need in an emergency).

Some of this might seem a little over the top. Didn't we all get into trading so that we could live the Lifestyles of the Rich and Famous? That may be true for some, but for me it's about personal and financial freedom. How can we be free when an iceberg could put us underwater at any time? Remember, just because you're paranoid doesn't mean the market isn't out to get you.



Anonymous said...

Ted... this is an old friend who knew you when you were in So Cal. I found your blog quite by accident and have found it an interesting read. I've been learning a lot!

Drop me a line some time. Would love to get in touch with you and your better half again. synna*at*pacbell*dot*net


Anonymous said...

Another good one LT. My family had an email love fest sometime back in which we all decided to do a lot of what you describe. My mother recently fired our advisor and accountant and has just hired a new advisor. Don't think we'll be replacing the accountant. The first thing we did was divide up the cash into five accounts in four different banks. We also have our individual bank accounts, of course, and we have all agreed to move them to banks that are solvent. Quite striking, really, because as an extended family we were never that close. We have all agreed to share our living wills and trusts. I am no longer depositing into WAMU and have opted for a very secure and transparent credit union -- my Grandfather sat on the board before he passed away and they are all "old school" types. It's very secure. Local banks and credit unions will fare better in this crisis because they have much less bad debt, they know their local communities, and they are somewhat insulated from current credit/confidence shocks. Not saying they won't be affected, but most are safe. Fortunately, the family decided to pull the shared investments out of the equities markets back in 2007 -- to the chagrin of our last advisor. Most of us were already on the sidelines with our long term investments. So we are all just waiting for things to get better. I continue to make deposits into a thrift savings, because it lowers my taxes and the income is tax deferred -- and to tell you the truth, I am comfortable "averaging" in over the long term with 10% of my gross income each month. My mother is considering buying some land. My uncle is currently in the downsizing process.

Wish I could get rid of my cell phone. And cable. And cappuccino. I'll have to engage the wife in a delicate discussion and see what happens from there.


Lord Tedders said...


Wow I can't believe you found my blog. Unless you've gotten into trading...

I'll send you an email this weekend.


That's a great point about using local banks. As you say many of them tend to be more "old school" and conservative with their asset base.

I love that story about your old advisor. Sounds like you guys exited the market at a good time and fired him for a good reason. Buy and hold works o.k.(80-90% max DD ahem, ahem) if you have a long time horizon but if you are planning to retire in the next 5-10 years it's a terrible place to be. Especially with today's market volatility.

Fortunately my wife was the one who suggested some of these things. And once I explained the logic of getting rid of the other things she was happily on board. Currently her big project is trying to get our garden up to maximum output. Should be pretty fun and tasty at the same time.


Anonymous said...

You live in a great part of the world for gardens. Dunno if I told you this, but I was born and raised for half my childhood in Lake Oswego -- a town just south of P-town. I get up there just about every year for the holidays. Great city. One of the best on the planet.

Anonymous said...

Oh...and GREAT comment about the folks who are almost at retirement age. I bet most have lost 25% (...or more...much more...) of their investments in equities in the last two years. If they are properly proportioned, however, one could allow onself to hope they would be okay. But what a huge stress that must be!

Lord Tedders said...


That's great I didn't know you were familiar with the Portland area. It is a great place for gardens. Although we're actually back in California (Sacramento area now) since my wife got a new job.

Yes it is folks who are near retiring that will be hurt the most by all of this.


Anonymous said...

LT, if you have the time, I have a project you might be interested in. A trader, actually, who is in need of desperate help -- beyond my skills to save. Email me if you're interested:

jay AT lonelytrader DOT com

I know this person would be very grateful...