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.
The tax hit is probably the difference between short term and long term capital gains, and risk - holding over a year could reduce taxes, but the stock could also drop in that time.
DeleteJonathan
Or it might be that he does not have a "better" place to park the money than the stock it is in. No point in moving it unless you need to lock in the gain or have a better alternative to move it to.
Deleteunless it is the difference between short term and long term capital gains, the smart money says if you are going to sell, do it before the election.
Delete*If you are going to sell* is the big thing.
You can park cash right now at 5% in money market (taxable interest), or go muni bond funds (tax free) at about the same or just a bit less.
If the plan is to sell, at a given price then best do it while at that price, all other things being equal. The tax rate won't change between now and then.
There are short term and long term capital gains rates. There are also 2 tiers of long term rates depending on overall income. Maybe your friend didn't want to get caught in a higher cap gains rate.
DeleteERJ, 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.
ReplyDeleteI have the temperament but not the time to do well at it, so I pay someone else to do it. They make me more than their fee, so it's worth it.
DeleteJonathan
for very little time investment, you can make about 15% on your money in dividends. Pretty much just passive income.
Deleteless than an hour a week.
I don't think there is a conservative investment that has a 15% dividend rate.
DeleteDefine "conservative". I have stuff that has paid the same dividend for the past 10 years, and is likely to do so into the future. Some more than 15%.
DeleteCare to name a couple of them?
DeleteInvestopedia; What Is Conservative Investing?
Conservative investing is an investment strategy that prioritizes the preservation of capital over growth or market returns. Conservative investing thus seeks to protect an investment portfolio's value by investing in lower-risk securities such as blue chip stocks, fixed-income securities, the money market, and cash or cash equivalents.
I entered the work force at 30 and left my aerospace job with a pension to work in IT at small businesses. That's when I hired a financial advisor who is paid a percentage of what she manages so she has no incentive to churn my account. I'm 68 now and my net worth is low seven figures after being the sole wage earner for my and raising a child in SoCal. It is all about focus and being willing (and able) to live below your means so you have savings every year to salt away.
ReplyDeleteCongratulations!!! That is an amazing accomplishment.
DeleteI am going to assume that you stayed married. That seems to be a common thread in the stories of high net-worth men.
Yes, we are still married.
DeleteSame here for the most part, I started saving for retirement and salted away 18% of every check. Invested in index stock and bond funds. It wasn’t easy, I didn’t have a lot of extra money for new cars, flash vacations etc. I Retired at age 58 with low 7 figures.
DeleteInvest early, invest diligently and stay married. Index funds meet or beat Schwab, fidelity, vanguard etc. . It’s not rocket science.
Y'all that use financial advisors must have some special insight to pick ones that actually work well for you. In my 40+ working years, I've gone through several, and always seemed to pick ones that have been a net loss especially after fees. Took the few remaining savings I had and tossed it to luck (roboadvisor) when I retired a few years ago - so in the remaining time I might actually have something left, assuming we don't all go down the tubes here in a couple of weeks...
ReplyDeleteWe meet with our advisor every year to discuss our investment strategy, and note that her fees will only go up if the value of our portfolio goes up. She suffers the loss of income when it goes down. We were very aggressive early on but have moved to a much more defensive stance now. One thing that helped was having the discipline to NOT constantly monitor stock prices. "It doesn't matter what the price is NOW, what matters is the price when you sell. You Buy and Hold for a reason."
Delete100% agree with this.
DeleteTIME is the best way to becoming rich. Invest early and consistently, Buffett didn't become wealthy overnight.
ReplyDelete