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Are You a Trading Hobbyist or a Wealth Builder?

by  D. R. Barton, Jr

�Music is a hobby, because I'm not making any money out of it, but I put just as much conviction into that as I do into my acting."

                                                            --River Phoenix, actor

I got a keen insight from author Michael Masterson this week.  Michael has just written a book that has hit the best selling lists called Automatic Wealth.  I had the pleasure of talking to him about several different financial areas, including business start-ups and investing.  I found him to be engaging -- and extremely practical. 

Michael made a very insightful comment that really struck me.  He told me that he had recently spoken to a fairly large audience at an investing conference.  Afterward he spent some time talking to the folks in attendance and came to a rather remarkable conclusion.  �They were all investment enthusiasts (or hobbyists).  Very few were really wealth builders.�

Said another way, this was a room full of people more interested in the trappings of investing than they were in making money.  I�m sure you�ve met these folks in other walks of life.

There�s the golfer who has a bag full of the hottest new golf clubs.  He or she spends tons of time keeping up with the latest equipment trends.  But you only see them out on the golf course once or twice a month. And you never see them on the practice range.

Or maybe you know someone who subscribes to seven different cooking magazines.  They watch the Food Network non-stop. Every time an issue of Wine Spectator shows up in they mailbox, it is immediately displayed on the living room coffee table like a museum piece.  They have a kitchen full of European cookware.   But when they finally invite you to their house for dinner, they order out for pizza and pour you a Miller Lite in a plastic cup.

Trading and investing hobbyists tend to function along the same lines.  They are more involved in the �stuff �of trading than they are in actually trading. Here�s how you can find out if you�re a hobbyist or trader:

�        How important is the �stuff�?  Hobbyists are almost obsessed with �stuff.�  Do you have to have the latest computer, the best software, or the fastest Internet connection?  Traders tend to stop in their search for the latest and greatest when they find something that is functional and gets the job done.  For hobbyist, this becomes a never-ending quest.

�        What trading and investment publications do you get?   Hobbyists and traders tend to get the same periodicals.  If I had to guess, hobbyists subscribe to a few more than the typical trader.  The only difference is � traders actually read the publications they get.

�        How do you spend your trading and investing time?  This is the ultimate question.  Traders and investors spend most of their time on researching analyzing, system development and managing trades and portfolios.  Hobbyists search for a better broker. Or a better piece of charting software.  Or a new guru. 

If you are a trading and investing hobbyist and you love it, then more power to you.  But if you want to be a wealth building trader or investor, make sure that you are spending your time on the process of trading and investing, not on the �stuff� that is tangential to the process.

D. R. Barton, Jr. will be teaching the upcoming Proven Tactics of Swing Trading Course, August 2005 and is a featured speaker in the Van Tharp Institute Course, Make Money Work for You. 

He is the Chief Operating Officer and Risk Manager for the Directional Research and Trading hedge fund group. D. R. has been actively involved in trading, researching and teaching in the markets since 1986.  D. R. has taught extensively in many investment areas including intra-day trading, swing trading, and cutting edge risk management techniques. 

His writing credits include co-authoring Safe Strategies for Fin-ancial Fre-edom and co-creator and contributing author on Fin-ancial Fre-edom Through  Electronic Day Trading. He also writes a stock screening newsletter called Ten Minute Trader.

Editors Note: Throughout the issues you will see certain words with odd spellings, such as Fre-edom and mort-gage. This is because spam filters are likely to block message that contain certain words and this is one solution.

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Tax Tip: 

Tax Tip of The Week

Roth IRA�s and Your 401-K Plan

By Stephen S. Meredith, CPA

The 2001 Tax Act contained a provision allowing elective deferrals (contributions made from payroll deductions) to Section 401(k) plans to be placed in a Roth IRA beginning in 2006. Congress felt the tax-favored savings choices that some individuals prefer, such as Roth IRAs, should be available to 401(k) participants.

Beginning in January 2006 plan participants can elect to have all or a portion of their 401(k) deferrals treated as a Roth IRA contributions, provided the deferrals go into a separate account set up within the 401(k) plan by the plan sponsor. Deferrals treated in such a manner will be included in the participant�s income in the year contributed, and the deferral will not be deducted from your W-2 taxable wages as it would with a regular 401(k) deferral.

The good news is that distributions from such an account will normally not be taxable, and it will be treated similar to other Roth IRA�s. Traditional 401(k) contributions are not included in current income, but are included in taxable income when received, usually after retirement.  Beginning in 2006, plan participants can designate whether they want their contributions to be made before or after tax if their employer�s plan adopts this new provision.  Adoption of this provision is not mandatory and is up to the employer.  The employer must amend the 401(k) plan document to effect this change.

Up to $15,000 in 2006 can be deferred in a 401(k) plan, plus an additional $5,000 if age 50 or older at year-end under the �catch-up� provisions.  Therefore, $20,000 could be deferred in 2006 towards a Roth IRA if you are over 50 and if it is done through the employer�s amended 401(k) plan.

Where�s the real benefit?  Upon implementation in 2006, higher income individuals, who cannot directly contribute to a Roth IRA because of the adjusted gross income (AGI) limitation, will have the option to designate all or a portion of their allowable elective deferral amounts as Roth contributions. Further, elective deferral participants will not be limited to the annual Roth IRA contribution limit ($4,000 in 2006, plus an additional $1,000 if age 50 or older at year-end).

What if you are not over the AGI limit for contribution to a regular Roth IRA?  There is no prohibition against participants designating elective deferrals as Roth contributions, and then separately contributing the $4,000 maximum amount (plus an additional $1,000 if age 50 or older at year-end) to a regular Roth IRA in 2006.  So, a fully qualified individual, age 50 or older at year-end, could presumably contribute up to $25,000 ($15,000 in elective deferrals, $5,000 in catch-up contributions plus $4,000 in regular Roth and $1,000 regular Roth catch-up contributions) in Roth accounts in 2006.

Note that only employee elective deferrals are eligible for designation into a Roth account; any associated employer matching contributions will be designated as a non-Roth pretax match. Also, if you subsequently elect to make a rollover distribution from the Roth IRA portion of your 401(k) plan, that distribution can only be rolled over to another Roth account, whether in another 401(k) or a regular Roth IRA.

This is a powerful savings program for retirement and for general estate building.  Consult your tax practitioner to see if you are eligible under the new law taking effect in 2006.

Disclaimer: This article is for general information purposes only, and is not intended to provide professional tax, legal, or financial advice. To determine how this or other information on this site might apply to your specific situation, contact the office for more details and counsel.

Stephen S. Meredith is a CPA in Richmond Virginia.  He specializes in preparing income tax returns for all types of businesses, individuals, estates, and trusts.  He also consults with new business owners on how to properly structure their business to get the maximum benefit from current tax laws.  Steve deals with many stock market and real estate investors.  He has clients nationwide and lectures regularly on tax topics. Contact [email protected]

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Peak Performance 
Home Study Course

"I just finished Volume 5 of the Peak Performance Home Study Course...

"I can summarize my learning experience in one sentence: "All causation is mental." This isn't my quote but, for me, it exemplifies the power of the mind. Robert Kiyosaki interviewed Dr. Tharp on a tape that was included in the CashFlow 202 game. I was completely absorbed by the approach (so different from most trading commentary), that Dr. Tharp used in his thought processes. What held my attention was the similar 'it's in your mind' component of the BE - DO - HAVE equation that Kiyosaki teaches. I see crystal clear that the seed of the results we get in our lives is germinated first in our minds. The growth or death of that seed also depends on our minds. To me, in hindsight, it's obvious that the most important part of trading is the one doing the trading. The trader is completely controlled by the trader's mind.

"I heard it said once that, in healthy human evolution, we proceed from dependence to independence to interdependence as we grow and mature. This [Peak Performance] course has introduced ways to think dependently, independently, and interdependently; I believe there are useful ways to employ all three modes that will support successful trading.

"The course taught me the basics of fishing instead of depending on someone to give me a fish. The real benefit is the fact that the material can put the power of the material where it should be - between the ears. I anxiously look forward to reviewing the course, using it as a model to build my trading business, and studying further with Dr. Tharp's material.

"Hopefully, you find this useful and an encouragement to keep up the good work!" � Rick Redel

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