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Is day trading a good idea?

Dear Dave,

Why do you disapprove of day trading? I am thinking about doing this full time for a living. Can you shed some light on why you think this is a bad idea?

Jeff

Columbia, S.C.

Dear Jeff,

I have a simple answer for you: Because it doesn’t work! The Securities and Exchange Commission did a study back when the economy was booming on this very topic. They said 78 percent of day traders lost money. That is almost eight out of ten people who lose money by day trading. If you told me you wanted to get into any business where eight out of ten people lost money by doing it, I would tell you not to do it. This is not a business that makes money.

Day trading is for the arrogant and the proud who think they can beat the market. The only way you can beat the market is to get in it and stay in it for a long time.
Buy a mutual fund and leave it alone for 20 years. You’ll make money every single time.

On top of that, it can become an addictive game to some people. I’m not saying that would happen to you, but there have been numerous people in and out of our office who have lost tens of thousands of dollars by day trading because they were addicted to day trading. This is not a game. The only people that make money from day trading are the firms that teach people how to do it. Do not day trade. The best advice I can give you on the topic is to stay away from it and find something else to do with your life.

Dave


What happens to ESA if child gets a scholarship?

Dear Dave,

My wife and I just had our first child and we would like to set up an Educational Savings Account for him. What would happen to the money in the ESA if he were to get a scholarship to go to college? What would happen to that money, and how would we get to it in that case?

Eric

Pittsburgh, Pa.

Dear Eric,
Very few scholarships pay 100 percent of all your expenses associated with going to college. They usually don’t pay your housing, books or food most of the time. Your educational savings account can be used for all of those things. Therefore, that isn’t really a valid fear, even though people talk about it quite a bit. If he were to get a 100 percent full-ride scholarship then you’ve got some money stuck in your ESA and you’ve got two options: One is that you can just pull the money out, but you will have to pay a severe penalty in taxes if you do that. By severe I mean a ten percent penalty plus a tax rate. Or you can transfer it to a sibling. If he has a brother or a sister you could transfer it to one of them, for instance, or even to another family member for that matter.

The Education Savings Account that you are talking about is also called the Education IRA. It is limited to $2,000 per year. It is also limited to those people with a household income under $200,000 per year, which includes most people. $2,000 per year will do the trick, too. If you start at birth and go to age 18, you will have about $130,000 in there. And that is tax-free. If you look at it, you put in $36,000 of it, so that is about $94,000 that is tax-free growth. Not bad, huh?

Dave


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