I had a couple of beers on Wednesday with an old work-buddy who happened to be in southern Michigan. While we were talking, he took a call from his stock-broker and had to make a decision. One of his holdings hit his "sell" target and his stock-broker called him to ask if he wanted to sell and take the tax-hit or wait a few more months and push the capital gains into 2025.
While our pay histories diverged in our later careers they were never that far apart. I had kids and much less appetite for investment risks. Work-buddy never had kids and had a MUCH higher appetite for investment risks.
Work-buddy now has a net-worth in the low seven-figures. I assure you that my net-worth is much, much less than that. I never had a stock-broker call me because I had made so much investment income in one year that he was personally concerned about protecting me from excessive taxes. Maybe that is a service that is only available to clients with very high balances.
Perceptions about risk "inform" life-style choices
If you worked in a very secure, union job with outstanding retirement benefits then the perception is that you can spend every penny you make with no downside risks because somebody else packed a parachute for you. Public school teachers often marry other public school teachers. Between the two of them (in Michigan) they are probably grossing $140k a year and have most of June and August and all of July off of work.
And then there is the cultural thing. If all of your coworkers are doing something, then you feel left-out if you aren't it.
If you work in a job with large swings in wages over time and does not fixed pension benefits, then you already have plenty of risk in your financial life and you might be less inclined to spend every penny.
If you have high fixed-costs (like kids) then you are also less likely to have a bunch of discretionary money .and. those obligations mean that you cannot go jetting off to exotic locations at the drop-of-a-hat.
For the record
Work-buddy opted to take the capital gains hit in 2025.
Big mistake on your buddies part....
ReplyDeleteIt's not that elections don't matter, and the market won't continue to go up (the chatter is either candidate will make the market go north)... but it's the bird in the hand vs. 10 in the bush. I also get the capital gains risk, but does he think that 2025's taxes will be less painful to capital gains? Even if Trump wins (which _may_ lower his Cap gains obligation), his tax-code changes will take over a year to kick in. He's going to pay the same taxes in 25 as he would in 24, and there is a non-zero risk the market tanks between now and January.
That's a lot of risk. Take the money, pay your vig, you can always re-enter the market.
I'd be investing in non FRN assets at this point.
He still has the option of selling up to the last trading-day of the year.
DeleteExactly what he said
DeleteMy friend would not be worth what he is if he relied on me for investment advice.
DeleteHe has a much larger appetite for risk than most of us and is well into the curve before he feathers his brakes. Me, on the other hand, rarely exceed 40 mph.
ERJ, I understand the power of investing (even conservatively) but have never been very good at it. I played with very small dollars myself and while I did not lose money, it was a lot of stress. Now in the processing of going through the settlement of the estate, the stress is even higher because there is not only the factor of gain or loss but the factor of taxation and what is taxed and how it is taxed. To be honest, I find the whole thing very discouraging.
ReplyDelete