The week trading didn't go my way

An industry professional shares advice on re-evaluating your financial strategy.

It was the beginning of 2018, and the U.S. equity markets were strong in every single segment. It was easy to get complacent. And I should have known better, as I've been engaged with the market for over 25 years; it will act in an unexpected way when you least expect it!

While the market was steady, I added long positions in stocks and ETFs. I also sold put options on stocks and ETFs I wouldn't mind owning at lower prices, and simultaneously, sold some covered calls. This strategy works well in flat to slightly bullish markets. That is, it works great until it doesn't.

Then, one week in February of 2018, the market began to sell off and volatility returned. Not only did my long stock and ETF positions lose value, the short put positions experienced losses as well — at an even greater velocity than the equities. These positions moved more than I had expected, and consequently, the unrealized (paper) losses were larger than I planned for.

Emotionally this was tough to watch. To make matters worse, I was on a business trip which led to a feeling of having less control — real or perceived. I'm sure this has never happened to you, right?

How did I not see the volatility coming? As traders, we have all seen this movie before. We know how it starts, and ends. It's like when I watch my favorite movie Field of Dreams, I know that if Ray "builds it, he will come!" It repeats time and time again.

The unrealized losses led me to ask one key question: "Am I going to be okay financially, based on my long-term goals of paying for college for my three kids and having an active lifestyle in retirement?"

In the spirit of self-evaluation and development, I wrote a short list of what I learned over that week. If you can learn anything from the pain I experienced, great.

What went well?

Although I was unprepared to see the unrealized (paper) losses, I wasn't over-leveraged. My trading allocation and risk plan worked. If you haven't taken steps to clearly identify your risk management and exit strategies for your trading positions, I encourage you to do so. Now.

· I had the right amount of capital (based on my personal financial situation and appetite for risk) decked against shorter-term trading vs. longer-term investing. If you haven't done so recently, review your trading vs. investing allocation.

· I lost sleep during that week, but not because of the paper losses. (It was because I was teaching my 16-year old to operate a non-self-driving automobile.) If you're losing sleep because of market volatility, it may be time to reduce risk. (And, if you're teaching your child how to drive, maybe you can explain to me why merging onto the interstate is so hard!)

What didn't go so well?

· Mistake #1: I didn't fully expect the unexpected. I took higher risk positions, and I was traveling on business. This made it tougher to actively manage risk and led to a feeling of having no control.

· Mistake #2: Emotionally, I was unprepared to see a large short-term drawdown in my trading account, even though I could "afford" the losses. This was painful.

· Mistake #3: I have spent a lot of time and energy learning about trading and active investing, but I haven't spent enough time on long-term wealth planning.

My key takeaway, and what all traders should do:

My drawdown led me to re-evaluate my overall financial health and long-term plan. I started by using some of the advice tools and services offered by Schwab.

All of this helped me answer the question, "Am I going to be okay financially?" The process was simple — and it didn't require a huge time commitment.

The result: Yep, I'm doing just fine. My plan was stress-tested based on different market scenarios, and my probability of success — like paying for college and retirement — is strong. And my long-term asset allocation looks good. The amount of trading versus investing assets is appropriate based on my plan. I'm saving the right amount of money for retirement. I'm on track. (OK, my college savings plans may be a little light. Have you seen the cost of college these days?)

If you're a trader, and you trade all or most of your investable assets, I encourage you to take a step back. Take some time to review and act on your long-term financial strategy and ensure you have a clear delineation between short-term tradable assets and long-term investing assets. For many, active trading is fun, and even considered a hobby. Trust me, I get it. But, hobbies are way more enjoyable when you can afford them.

You may think to yourself, "I'm a tough and cool trader, I don't need long-term planning. I have the markets all figured out." You may be right, but it's also worth having a plan. Try it. Having a plan may even allow you to engage or trade more.

OK, I'm going back to trying to figure out this market.

What You Can Do Next

· Learn more about investment advice at Schwab.

· Schwab is happy to discuss your portfolio whenever and wherever it's convenient for you. Call us at 877-807-9240, visit a branch or find a consultant.

· Interested in investing now? Open an account.

Important Disclosures

Options carry a high level of risk and are not suitable for all investors. Certain requirements must be met to trade options through Schwab. Covered calls provide downside protection only to the extent of the premium received and limit upside potential to the strike price plus premium received. With long options, investors may lose 100% of funds invested. Multiple-leg options strategies will involve multiple commissions. Spread trading must be done in a margin account. Please read the Options Disclosure Document titled Characteristics and Risks of Standardized Options.

Writing uncovered options involves potentially unlimited risk.

Investing involves risks, including loss of principal. Hedging and protective strategies generally involve additional costs and do not assure a profit or guarantee against loss.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.


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