Should I Trade Futures To Prepare For Retirement?
By Benzinga
If your 401(k) or Roth IRA isn’t performing well, you may be tempted to consider an alternative investment strategy. Futures trading is predicated on two goals: hedging against losses or speculating for gains. It is not explicitly wrong to trade futures as part of a retirement investment plan. But, it does entail some specialized knowledge of the nature of futures, their primary benefits, and their risks.
Who should trade futures?
Simply put, anyone with risk capital and insight into at least one security or asset class should try trading futures. It is important to emphasize risk capital. Because futures can generate losses greater than 100 percent of invested capital, keeping an adequate financial cushion is critical. Obligations to pay futures brokers can jeopardize other aspects of investment or even the ability to meet short-term expenses. Remember, it is more difficult to climb out of a hole and recapture losses than it is to cut losses to begin with and try again.
You’ll also need insight into at least one asset class. Futures are available for commodities, stocks, and so on. Average knowledge will give, at best, average results. However, less than average results can affect investor psychology, panic, leverage, and futures expiration dates.
If you can, it may be helpful to consider finding an online brokerage for futures.
Pros of trading futures for retirement
One successful trade can catapult gains into x2 or even x5 territory in a short time. A small amount invested in the futures market can magnify to an impressive cushion that can compensate for other losses or be used for a more comfortable retirement.
Cons of trading futures for retirement
Futures have an expiration date beyond which they are worthless, meaning that a trader has to be right about the price direction of an underlying security before the futures contract expires.
This is a difficult requirement to meet, and ties in with having insight into an asset class. Blind gambling or following financial news impulsively can result in net losses. Futures trading also requires starting capital with backing capital to meet broker requirements should trade go more south than expected. Getting to that level of disposable capital and then risking it on the volatile futures market is not easy to do financially or psychologically.
Final thoughts
Futures trading has its place in preparing for retirement. One or a few winning trades can yield very impressive gains and you can use them to lock in comfort, security, and offset other losses. Gaining extensive knowledge and paper-trading experience prior to jumping into futures with actual capital is itself part of the investment. Viewing the futures market as a gambling arena is a bad idea. Most futures contracts are traded by very informed professionals working for institutions, governments, companies, and the like. As such, taking a trade in the futures market means, very likely, taking on the opposite bet of someone well-versed in the market.
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