When I call J. “IchibomB” Allen, I’m just starting to think about my morning coffee. He’s done work for the day.

“The market got a pretty big move towards the upside this morning,” he says. “Take what it gives you and let it be, you know?”

At least part of this is due to time zones. Working as a day trader from Portland, Oregon, Allen watches markets thousands of miles east of him. This means he sometimes keeps odd hours, like staying up far past midnight to track the start of the day’s trading in London. In fact, Allen says he often wakes up hourly throughout the night to keep tabs on market conditions.

But his ability to skip out from work early really comes from a series of lumps earned at the School of Hard Knocks. A former audio engineer, he started trading two years ago and quickly lost all of his initial capital. Since then, Allen says he’s spent more than 6,000 hours watching stocks and developing trading rules to access what he calls “my edge.”

To my untutored eye, “edge” is to day traders what cheap rotgut is to writers of pulp fiction: that necessary and mysterious fuel that turns dross into gold. Day traders get downright shirty when you ask them about it, like Colonel Sanders talking about the 13 secret herbs and spices. Allen’s particular edge can reportedly pull in up to $3,000 on a good day and let him finish work well before lunch.

And he doesn’t need a bull market to do it. Thanks to short selling, day traders can make just as much money when stocks plummet as when they soar. Short selling entails borrowing some kind of publicly traded financial asset from a third party, selling it on the market, and then later buying back that same asset and returning it to the original owner. If the asset’s value has gone down since the first sale, the short seller pockets the difference in price. Short selling thus constitutes a kind of bet that an asset’s value is about to decrease.

I ask Allen how he feels about making money when markets dive. “I don’t care,” he says. “I look for it to go either way and hop on the train when it does.”

That kind of mercenary attitude explains why day traders don’t really go out of their way to engage public attention. I should mention that Allen struck me as perfectly friendly and well adjusted.

But the fact remains that day traders aren’t an especially forthcoming lot. To a man of my excessively modest talents, they rank somewhere below talking unicorns but above Pope Benedict XVI on the List of Difficult Sources to Find. The Pope, on one of the rare points of contrast between His Holiness and day traders, at least appears fairly regularly in the news and before large crowds. Before speaking with Allen, day traders seemed to me to have a lot in common with Bigfoot – spoken of in whispers and seen by friends-of-friends, but tough to spot in the wild.

Allen attributes this to the same popular sentiment now animating the Occupy protests movement across the Western world[1]. “I think there’s sort of a stigma with traders being evil because of all the corruption that goes on with the bigger banks, especially right now with all the protests going on with Wall Street,” he says. When times get tough, owners of golden geese generally don’t crow about their lot.

According to Allen, discretion also plays a big role in making a successful trader. Those that don’t exercise it tend to lose their shirts. “I think a lot of the traders that blow up their accounts quickly are the ones that have bigger egos,” he says. “They don’t understand that the market doesn’t care what you think. It’s a totally separate entity. It has no feelings for you or your money, and it will take your money away quicker than you can blink an eye.”

But for those with a stomach for the tough love the market dishes up, day trading can offer a lucrative career. Allen, who describes himself as “just a regular guy that has an intense amount of passion for trading,” has no formal training in professional finance. He says he makes about $1,000 on an average day. He’s also learned almost everything he knows about day trading online, and he sounds genuinely happy to me when talking about his job.

“This is my truest passion,” he says. “Out of everything I do, this is the thing I love the most.”

There are plenty of arguments out there that warn against investing in the stock markets. Some suggest that it’s a rigged casino in which big institutional players like Wall Street investment banks and sovereign wealth funds play the role of the house. Others say that the global economy itself is on the verge of a once-in-a-lifetime collapse, and that the markets will naturally fall apart alongside it.

Recent history may not support the doomsday scenarios, but it certainly provides ample evidence that investing in the stock market isn’t the easy ride to prosperity that so many imagined after the roaring bull market of the 1990s. For example, take the S&P 500, the most broadly tracked North American index in the world. On January 14, 2000, it sat at just a shade over 1,465. On January 14, 2011, it was at 1293.24. If you’d invested $10,000 in the index back in 2000, you’d be more or less even by now when you factor in dividends. But that presumes that you didn’t sell in panic during the crash in 2002, or the more recent one in 2008. Many did.

With that in mind, many so-called retail investors have fled the stock market in favour of safer ports of call, like GICs and government bonds. But if that’s your strategy, I’m here to tell you why that’s as big a mistake as selling during a downturn in the markets. In fact, it might even be bigger.

1)    Interest rates are near zero, and they don’t look like they’re going anywhere for a while

That’s great news if you’re a homebuyer or a business looking to expand, but it’s terrible if you’re an investor looking to earn a reasonable rate of return on your cash. Even long-dated bonds yield next to nothing right now, and whatever they do return is almost guaranteed to be eaten up by inflation. The realized interest rate – the spread between the long term yield on Government of Canada bonds and the rate of inflation – has hovered around two per cent for the last few years, leaving investors with precious little to show for their patience. And if inflation takes off? Well, if you’re locked in on a long-dated bond you’ll be looking at a loss.

2)    Governments are trying to create inflation

They won’t admit it, of course, but the combination of targeted bond purchases –  quantitative easing – and low interest rates that western policy makers are pursuing represent an attempt to create inflationary pressure in the economy and kick it out of neutral and back into drive (or, at the very least, keep it out of reverse).  This isn’t a bad thing, necessarily – moderate inflation could be just what the global economy needs right now – but it makes bonds and other fixed-income products a losing bet going forward.

3)    Stocks pay more than bonds

Yes, you read that right. It’s a rare occurrence to see a dividend yield on the S&P 500 that is higher than the ten year bond yield, but that’s the case right now. You can do far better than that average yield, too, by investing in dividend blue chip stocks in a variety of sectors, from telecoms and pipelines to utilities and insurance companies. Each of these sectors offers a selection of companies to choose from, many of which sport dividend yields in excess of five per cent. Better still, those dividends – if collected in a taxable account (ie NOT an RRSP or a TFSA) receive preferential tax treatment, effectively making them even bigger.

4) You can’t afford to squander your biggest advantage

It’s no great secret that time and the benefits of compounding are an investor’s best friend. If you need a reminder, consider this example. Let’s say you invest $15,000 at the age of 25, and earn a rate of return of 5.5 per cent. By the time you’re 50, the miracle of compounded interest would leave you with $57,200.89. Your friend Jimmy, on the other hand, waits until he’s 35 to invest his $15,000, at the same rate. By age 50, he’d only have $33,487.15.

When it comes to investing, it literally pays to start early. If you’d started investing a decade or two ago, when interest rates were more reasonable, you could tie your money up in a savings account or GIC and let the compounding process do your work for you. But those days, for now, anyways, are over, and you can’t afford to squander the time advantage by tying your money up in a savings account, a GIC or a government bond that pays next to nothing.

5)    You probably don’t have access to a defined-benefit retirement plan

If you do, then congratulations are in order – you’re among the dwindling number of Canadians who have access to a private employer pension plan. Fewer than 40 per cent of Canadians have that luxury, and it’s a figure that’s been on the decline since the 1990s. While we can hope that the trend reverses itself in the years to come, with a ballooning number of Baby Boomer retirees tapping into perilously under-funded pension plans that were badly affected by the recent market turmoil, the odds of that happening don’t look very good. If anything, it’s more likely that pension entitlements will be withdrawn or reduced.

With that in mind, you’re going to have to take some calculated risks if you want to have the same kind of retirement that your parents or grandparents are currently enjoying. Right now, that means investing – carefully – in the stock market.

Visual: Pie chart – ask me about this, Kinney.

There’s nothing quite like corporate tax cuts to galvanize voters in a federal election – err, wait a minute. Let’s try that again. No issue could be a lousier hill to die on than corporate tax cuts. Politicians would have you believe otherwise, but the debate over how much, or little, Canada’s big businesses should be taxed boils usually down to ideology.

On the one hand, Conservatives say lowering Canada’s corporate tax rate – down to 16.5 per cent this year and then to 15 per cent in 2012, provided Mr. Harper has his way – will stimulate and strengthen the national economy. The logic is that companies will re-invest their newfound windfalls back into the economy, stimulating spending and competition, which in turn will create more jobs. The Liberals, perhaps more willing to acknowledge Ottawa’s precarious financial position, argue the cuts are reckless, although shipping magnate Paul Martin made today’s proposed cuts seem modest during his tenure on Parliament Hill.

The truth, of course, is somewhere in the middle. It turns out the cuts translate into $1.6 billion in foregone revenue in the 2011-12 fiscal year, $3.9 billion the year after, and more than $10 billion over three years, regardless of who’s in office, according to the Ottawa Business Journal. To the average voter, that’s a sizable chunk of change. It’s even harder to fathom how a government can at once squeeze personal incomes while lightening the load on big business. If you’re wondering how you, too, might grab a share of those corporate perks, perhaps it’s time you considered the merits of personal incorporation. For the uninitiated, here’s an Unlimited primer:

First things first

The first thing to consider before printing personal business cards is that not all professions are created equal. Saving a few bucks by writing off minor purchases like staples and pens as business expenses only seems like good reason to affix an Inc. or Ltd. to your name. “I wouldn’t look at it quite so narrowly,” advises Jason Boland, a partner in tax services with PricewaterhouseCoopers in Calgary. Step back and look at the big picture, he says. Creating a professional corporation isn’t for everybody. It makes sense for the physicians, architects, accountants, dentists, engineers and lawyers of the world, but gets dicey if you’re a freelance writer scraping by on intermittent paychecks and Mr. Noodles.

Income earned by an incorporated employee won’t pass the taxman’s sniff test, either, Boland cautions. “You’re really an employee but you’re trying to carry on business through a corporation,” he explains. “You don’t get those really low tax rates and you do have some restrictions on what you can deduct if you’re in one of those businesses.”

Defer and delay

Not surprisingly, one of the main perks to incorporating yourself as a business has to do with taxes. Businesses can defer paying tax on income, provided the money is left in the company and is not distributed as shares or used for personal consumption. Maximum deferrals in all provinces ranged from $125,000 to $175,000 in the 2010 calendar year (the sums here help explain why incorporation isn’t for everybody. Henceforth we’ll call this the Mr. Noodle threshold).

If earnings warrant it, deferring taxes makes sense, especially considering that levies paid on corporate versus personal incomes are wildly divergent. The corporate income tax rate was just 14 per cent in Alberta in 2010 compared to 39 per cent paid by the top bracket of individual income earners. In Nova Scotia, the split was 16 per cent versus 50 per cent, respectively. “To the extent that you can earn money and leave it in your company, there’s a big advantage to that,” Boland says. “If you’re going to take it all out for personal consumption, then the advantage of having a company is virtually lost from a tax perspective.

Family Inc.

Income splitting is another reason to incorporate. Depending on which province you call home, your budding firm could start paying dividends to family members, creating the opportunity for splitting professional income with money earned by a spouse. That in turn reduces the overall tax burden on a single household. Savvy taxpayers might also consider paying family members salaries for services rendered.

But be careful, Boland cautions. “There are shareholder benefit issues you need to be thinking about,” he says. Among other considerations, that means using corporate funds wisely, “because there is a distinction now between what’s a corporate asset and what your personal asset is.”

A professional corporation can choose to receive remuneration either as a salary or as dividends, which in practical terms allows Joe Engineer to set his salary high enough to cover the maximum annual contribution to a Registered Retirement Savings Plan or a Canada Pension Plan. An incorporated entity can also increase personal retirement savings via tax-deductible payments to an individual pension plan.

Liability

Writing off equipment purchases and deferring taxes are far from the only reasons to think about personal incorporation. There’s also liability insurance to consider, and the riskier the job, the more forming your own company makes sense.

Imagine, for instance, you’re an independent gas fitter. A devastating accident could precipitate legal action. So long as there’s a business involved, it’s the corporation that gets sued, not the individual. “You don’t want to lose your house because you blew somebody else’s house up,” says Joanne de Waal, a Canada Revenue Agency spokesperson. “That’s why you carry liability insurance, and you want the corporation to have that.”

From sole proprietor to corporation

The decision to move from running a bakery in your kitchen to selling cupcakes as a commercial entity should not be made in haste. Shedding a sole proprietor (one tax return) status for a seat at the corporate café entails paperwork – and lots of it. The attention to detail required tends to catch people off guard, Boland says. “They’re used to filing a personal tax return. Well, now they have a tax return for their company, and if they’re paying salaries now they’ve got to prepare T-4 slips and if they’re paying dividends they’ve got T-5 slips – there’s a bunch of extra filings they’ve got to be conscious of,” he says.

At the CRA, de Waal is of a similar mind. The shift from sole proprietorship to incorporation “really becomes more of an accounting exercise. There are programs out there to help you through it,” she says, “but if it’s your first time, you’ll be a little bit shocked.” Fortunately for the agency, most people that approach Boland at PwC for advice are hardly new to business. “I think most people, by the time they’re making that decision, their business is usually up and running,” he notes. For the newcomers, “It’s probably worth a conversation with your lawyer and your accountant just to figure out what the right structure is.”

By Jeremy Derksen

The radio crackles through a swirling white deluge: “Thirty seconds.” Those are two words warning avalanche techs that a charge is about to be detonated. It’s routine procedure for ski resort avalanche control, but the risks would make most of us nervous.

“We’ve got unstable weather, remote locations…the destructive forces of nature. And on top of that, we’re handling explosives,” says Troy Leahey, an avalanche forecaster at Revelstoke Mountain Resort in British Columbia. “Risk is a combination of probability, consequence and timing. We mitigate that as much as we can, but working in the industry for a while we become comfortable with the risks.” An element of personal, along with professional, risk not only comes with Leahey’s job – recognizing how to work with it makes him good at what he does.

Most of us won’t face the physical challenges or life-threatening conditions Leahey faces, but taking professional risks can be a good thing. Our instinct is to avoid risk. After all, too much risk could jeopardize your job, pension and house. Widespread corporate risk has undone financial institutions and rocked the global economy

But avoiding risk is impossible and, it turns out, unwise. Without it, business stagnates, careers stall. “Risk aversion can prevent us from looking at opportunities as they arise,” says Michael Ungar, a sociology professor at Dalhousie University, in Halifax. “As a result, we may jump too late rather than anticipate change.”