TFSA Investing v.s. Trading | Page 3 | Tax Free Savings Accounts | Discussion forum

Bill said
There you go, all sorts of opinions! I personally don't see using stop-losses once a week, on its own, enough to be operating a business but Judge Norman1 might rule against you.…

That's because you didn't consider the entire situation like a Tax Court judge would to calculate the taxpayer's intent.

It does look like they were principle residences and gains made from selling them should be tax free as the taxpayer lived in each and did not live anywhere else during the time. Never mind the time period was six years, that seven houses were involved, or that each house was sold shortly after the renovations were completed.

Tax Court judges are used to sifting through malarkey and finding taxpayer's actual intent.

I'm just wondering if it's really possible to get ahead of longer term investing by the stop-and-go method with a 1% stop loss. It seems to run contrary to what we've always been told about investing.
Does anyone have any data on this?
Is the main problem the repeated capital gains? But, if so,how could it ever be a successful business and why would anyone consider it one?
If it doesn't really get you any or much further ahead, then there is no need to take the risk of offending the tax man.

And on the matter of running a business, how does it prove you are running a business if you simply plug in your stop loss and purchase criteria and let it run by itself basically? I don't do this kind of investing, but would I be correct in assuming the buys and sells would automatically execute if you set up all the necessary parameters?

Bill said
The intent of investing and trading is the same, to make money, so it might not be a bad idea for some young folks to challenge the old notions of what is a normal level of activity, of what and how much you can and can't do to be considered an investor or trader. Spending your day day-trading is clear, but is swiping your phone a few times every few weeks really operating a trading business?  

Trading itself doesn't make it a business. The question is to what degree trading activity takes up a person's day and what else the individual does to earn an income. If someone spends 5 hours a day trading and doesn't have other meaningful sources of income, it's likely to be considered a business.

Up thread, someone mentioned 1% stop loss presumably for illustrative purposes only. I've never heard of a stop loss set that tight. A lot of stocks move that much in a day. One would potentially be stopped out more than once a week with such tight parameters. Investors are more likely to set a 10% trailing stop in comparison. One still has to make the decision as to when to get back in, if that was the intent.

It is primarily whether this is the primary source of income for that individual which I mentioned a few times, including post #46. It is the same for house flippers, art dealers, and the like. If CRA sees trading is the primary source of income, they then look at what else are pertinent facts, e.g. professional trader at his trading desk, amount of time trading (traders don't really research stocks - they are looking at trends and technicals of various sorts).

Some people spend a lot of time in front of terminals using various forms of trading software. Vector Vest was one that was heavily promoted at one time. Seems to have faded... maybe their algorithms were not so good after all?

Loonie said
I'm just wondering if it's really possible to get ahead of longer term investing by the stop-and-go method with a 1% stop loss. It seems to run contrary to what we've always been told about investing.
…

Strategies like that don't work in practice.

1% stop loss becomes a market sell order when triggered. One is not guaranteed a fill at -1%. So, the loss won't necessarily be just 1%.

One can use a stop limit order that turns into a limit sell order. But, if the best bid already below the limit price, then the sell order won't fill and one will still own the shares.

Hedge funds use all sorts of tools like those. They don't enhance returns.

Warren Buffet's ten-year $1 million bet with the hedge funds, written about in CNN: Warren Buffett beat the hedge funds, supports that.

Ditto with stock options. Most stock options end up expiring worthless. Morton Shulman, author of Anyone Can Still Make a Million, learned that fact and had an epiphany: One can make a killing then by being the writer of those options!

He and a partner started an option writing venture and lost their shirts.

Loonie said
This brings me back to the question, is it really the time spent that matters, or is it the frequent trading (and winning, if one wins) that is at issue?  

I dont think the time spend matters, CRA cant proof how much time u spend trading vs investing each day anyway.
Its what you do on your day job (if u have one), the frequency of trading, how much of ur total gross income is coming from employment vs others, and the size of the TFSA that matters.
As mentioned multiple times, a TFSA total contribution is around $75k, so if a TFSA portfolio is like $0.5mm of more, its likely to raise a red flag for CRA to investigate given its a potential revenue source for CRA to go after.

TFSA_Newbie said

Thanks, Loonie. I wonder how many people have someone else (aka a professional) manager their TFSA accounts for them as maybe they would have more insight or maybe they simply just push their clients into their companies mutual fund products? I obviously am self directed 🙂 However I also trust the group and what I have heard so far is that the issue is complex and needs to be dealt with on a case by case basis. Given the differences presented so far it makes me feel better that my confusion was acceptable.  

I doubt there are many who hire someone to manage a TFSA alone. Unless you got really lucky with a stock that took off big time, you wouldn't have enough money in a TFSA yet to interest those kinds of professionals. Their minimum is typically 500K, sometimes 1 million, and there are a few that will take 250K.

If one wants a manager, at lower levels, one is better off with either a robo-advisor system (e.g. Wealth Simple) or one big diversified balanced fund (e.g. Mawer, I think it's #103 or 104), or a small well chosen selection of ETFs (e.g. one Cdn, one US, one global) which one rebalances oneself every six months or so or when they reach a point where they diverge significantly from your asset allocation intention. When you've accumulated enough, you could move to a professional manager if you wanted.
I doubt very many people on this forum hire a manager. Someone who understands what they are doing can normally do as well without them, and people here seem to like to be in control.
The other day, for example, I was given some unsolicited advice by a well intentioned multi-millionaire, who was willing to give me the name of her wealth manager at Big Six bank. She told me he'd made 18% for her last year and thought that was impressive. I came home and looked up what spouse had gotten on the one mutual fund (diversified) still owned, and the return on that was 18.1% last year. The MER on that fund is higher than what a manager would cost, so in fact this fund did better after MER than her manager. It won't always be this way, but the point is that it's quite rare to get much more value from a manager over time. They are useful, however, for people who might otherwise make stupid mistakes out of ignorance, haste or greed, and I think there are more people in that category than want to admit it. One thing a competent manager should be able to do is keep you below CRA radar.

What I had meant was that you could consult a lawyer or accountant for advice in order to get a more reliable opinion on the complexities of TFSA investing.

savemoresaveoften said

Dont we all want to buy low and sell higher all the time? hindsight is 20/20 tho

I agree. It was not certain that the shares would drift further down to $24 when they had drifted from $28 down to $26.

The shares could have drifted down to only $25¼ and then headed back up, never tripping the buy at $24 or $25.

Trader Jesse Livermore wrote in the 1920's about traders who tried to capture that last bit of money: “One of the most helpful things that anybody can learn is to give up trying to catch the last eighth [of a dollar in the price]---or the first. These two are the most expensive eighths in the world.”

In the end, it wasn't that important that I bought at $24, $25, or $28. What was important was that I bought at one of those reasonable prices and stayed invested on the way to $548.