In this episode of Motley Fool Answers, longtime Motley Fool analyst Tim Beyers joins Alison Southwick and Robert Brokamp to discuss how much to invest in one stock; whether to invest a lump sum all at once; accounts for kids; and which types of options strategies are most Foolish.
To catch full episodes of all The Motley Fool’s free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
10 stocks we like better than Walmart
When investing geniuses David and Tom Gardner have an investing tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
David and Tom just revealed what they believe are the ten best stocks for investors to buy right now… and Walmart wasn’t one of them! That’s right — they think these 10 stocks are even better buys.
Stock Advisor returns as of 2/1/20
Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Alison Southwick owns shares of Amazon. Robert Brokamp, CFP has no position in any of the stocks mentioned. Tim Beyers owns shares of AT&T and Amazon. The Motley Fool owns shares of and recommends Airbnb, Inc., Amazon, FedEx, and Microsoft. The Motley Fool recommends the following options: long January 2022 $1920.0 calls on Amazon and short January 2022 $1940.0 calls on Amazon. The Motley Fool has a disclosure policy.
This video was recorded on April 27, 2021.
Alison Southwick: This is Motley Fool Answers. I’m Alison Southwick and I’m joined by Robert Brokamp, personal finance expert here at The Motley Fool. I just didn’t want to do anything this time. Robert Brokamp, Personal Finance expert here at The Motley Fool. Hi, Bro. How are you?
Robert Brokamp: Hello, Alison.
Southwick: Hey, it’s the April Mailbag and we’re joined by Tim Beyers, he’s a Senior Analyst here at The Motley Fool. He’s going to help answer your questions about dollar-cost averaging, investing with options Foolishly, and how to buy back into the market if you cash out. All that and more on this week’s episode of Motley Fool Answers. Tim, welcome to the show. Is this the first time you’ve joined us?
Tim Beyers: This is the first time I’ve been on Motley Fool Answers, and I’m slightly offended. But now I’m really happy because it’s been a long time but now, finally I’m on.
Southwick: I know, you are somebody now. Doesn’t that feel good?
Beyers: It does feel good. I was slagging along in the background, and now, here I am.
Southwick: Yeah. Here you are, I’m so excited for you. This is a real honor for you and I’m [laughs] so excited.
Beyers: Yes. That’s right.
Southwick: I’m so excited for you. [laughs]
Beyers: That is so on point.
Brokamp: I’m sure it’ll be worth the wait.
Southwick: We’re honored to have you, Tim. Way back in the day, Tim and I used to do a show, I think it was called 1UP. No, Level Up?
Beyers: Yeah, it was 1UP.
Southwick: Okay. It was investing but it was in gaming, entertainment. It was fun. I would pitch a question and then Tim and Nate Alderman would just talk non-stop for about 30 minutes and then I would come in for the close. That was a fun time.
Brokamp: How many years have you been contributing to or writing for The Motley Fool? It’s been a while now.
Beyers: It has. So December 2003, so what? 17 years and some months.
Southwick: Wow. That’s a good run.
Beyers: That’s not a bad run.
Southwick: Here’s to 17+ more into the future. As long as you’ll have us, we’ll have you. All right. Well, should we head into the questions?
Beyers: Let’s do it.
Southwick: Our first question comes from Heidi. “I’m in my 40s and spent much of the early part of my career in the non-profit and academic world. I moved to the private sector, and now, my income has tripled. I’ve always been diligent at saving for retirement. However, I have heard the rule is to have three times your income saved by your 40s. I was on track when I was making less, but now, I’m far behind according to that metric. How concerned should I be about catching up? It just seems so strange to go from on target with savings to way behind due to a big raise.”
Brokamp: Well, first of all, Heidi, congratulations on the raise. That’s outstanding. Heidi’s referencing the savings guidelines we’ve highlighted on the show before as recently as last week. The guidelines are provided by various firms but probably, the most well-known come from Fidelity. Fidelity says, by age 40, you should have three times your household income saved in your retirement accounts. Assuming the retirement age is 67, you want to retire sooner, you should have more. Heidi highlights one of the shortcomings of these guidelines in that they assume a relatively smooth earnings history and also no major changes in the cost of your lifestyle and they also presumed that you’ll need about 70%-80% of your pre-retirement income after you retire.
So Heidi, if you don’t change your lifestyle and you keep the same level of expenses you had before your new job, then your retirement is not only still on track, but you’re even in better shape, because now, you’ll be saving so much more. However, this isn’t what most people do. You may have heard the saying, ”Expenses rise to meet income,” sometimes referred to as Parkinson’s Law, named after C. Northcote Parkinson, I personally actually couldn’t find exactly where he said it. But anyways, what happens when most people get a raise, they just increase their level of spending and this actually can result in them falling farther behind in their retirement planning. As found in a Morningstar study called More Money, More Problems: How to Keep a Bigger Paycheck From Spoiling Retirement, that study found that most people engage in lifestyle creep. They get a big raise, they just spend more money. The problem is, the more you increase the cost of your lifestyle, the more you increase the cost of your retirement because most people want to maintain their lifestyle when they quit work.
Morningstar came up with this little formula. When you get a raise, spend twice your years to retirement. If you’re 20 years from retirement, you could spend 40% of your raise, but save the rest. All that said, Heidi’s raise is so significant, her income is tripled. I’m not sure any rule of thumb will really capture her situation. As long as she doesn’t significantly increase her expenses, I think she’s going to be OK. But if she really wants to know how much she should be saving and how much she can safely spend, I would say that she should use a few retirement calculators and maybe even pay a fee-only financial planner for an hour or two of time, just to run the numbers for her.
Southwick: Our next question comes from Matt. “My wife and I recently had a child and have found ourselves thinking more about the 529 plan and retirement. We recently received substantial bonuses, and while we are trying not to time the market like good Fools, does it make more sense to dump $25,000 that we have available into a 529 today with the assumption it will grow about 8% a year to roughly $100,000 by the time she’s in college? Or do we use dollar-cost averaging and put a few thousands in the 529 each year? A little background on our financial health, we max out our 401(k) contributions each year and have a six-month emergency fund and a down payment for a near-term home purchase. What should we do?
Beyers: Man. Well, what a great problem to have. First of all, congratulations on the windfall and just where you are financially, that’s amazing. I think you’re doing everything right here. I guess my answer is, why does it have to be just the 529 lump sum or dollar-cost averaging? The one thing that’s not mentioned in here is other options. Like could you take, for example, you may put in $12,000 into the 529, which is a meaningful amount and then you open a brokerage account. I mean, part of your college savings can be investing on your own in a taxable brokerage account, there is absolutely nothing wrong with that. In fact, as long as you are not trying to get the money out in the next five years, doing tax-advantaged investing in a taxable brokerage account with a group of common stocks that you really believe in can be incredibly powerful.
So I think I’d counsel you, Matt, to look a little more broadly than just centering in on the 529. Now, Having said that, if you are going to do a 529 and we have them for our kids, it is wonderful to find a 529 that suits you. Fidelity has some really great options. Your state probably also has some really great options. We have 529s through Fidelity. We also have 529s through the state of Colorado and those State of Colorado 529s, which is where we live, those are tax-advantaged because you get a little bit of a state kicker because you are investing in the state and we’re residents of the state. There are plenty of options that you could explore. But I think the one thing, Matt, that I would counsel you is to think a little broadly. If you don’t yet have a taxable brokerage account and you’ve got the wherewithal to stay in the game, investment in some stocks over the very long term, that might be a really powerful way to just amplify your savings for everything including college.
Brokamp: I’ll just add that if someone likes that idea of opening a brokerage account and getting away from the 529 but you still want that money for college, give Coverdell a look. It’s a much lower contribution limit, just $2,000 a year, and has some income limitations, although there’s some ways around that. You have actually up until May 17th of this year to contribute to a Coverdell for 2020. Something else to think about if you want to broaden beyond the 529.
Brokamp: Well, Justin, if you’re not sure the money will be used to pay for college, then an UTMA or UGMA is worth considering. Just to talk a little bit about what those are. The UGMA came first, came out in the ’50s, stands for Universal Gifts to Minors Act. The UTMA came out about 30 years later and stands for Uniform Transfers to Minors Act. One big difference between the two is that UTMAs allow for more types of assets, UGMAs are generally limited to the stuff you would find in your IRA, like stocks, bonds, mutual funds. UTMAs can include things like real estate, art, maybe even cars. The other big difference is the age at which the kids could control the money. With an UGMA, in most states, it’s at age 18. With the UTMA, it can be older in many states, as old as 25 in a few. Most states offer both, though you have to settle for just the UGMA if you live in South Carolina or Vermont and in some of the U.S. territories. There’s also some tax benefits; the first $1,100 of a child’s unearned income is tax-free, next $1,100 is taxed at the child’s rate, which is pretty low, but then anything beyond that is taxed as a parent’s income. The downsides are that these contributions are basically irrevocable. Once you put money into an UGMA or an UTMA, you can’t take the money back and you can’t change the beneficiary. Also, it’s considered an asset of the child for financial aid purposes, which might reduce aid that is available when it comes to time for the kid to go to college.
Also, the money has to be used for the benefit of the child: it could be education, summer camp, whole range of expenses, but not for things like video games, family vacations, things like that. Of course, once the kid reaches a certain age, the money becomes hers to do with as she pleases. If you’re not comfortable with all those drawbacks, what you can do is actually just open a brokerage account in your name, manage it for your kid’s benefit, and then gift the account when you feel she’s ready. The downside to that is then you’ll be responsible for the taxes on the income and the gains in the meantime. Just one thing I want to point out about the college savings accounts we just mentioned, the Coverdell and the 529, you’re right to be concerned because if you don’t use the money for qualified higher education expenses, the money will be taxed and penalized. But I do want to make sure you know that it’s just the growth that is taxed and penalized. Let’s say you contribute $20,000 to a 529 or a Coverdell, it grows to 30, you can take that 20 out, that will be tax and penalty free. It’s the $10,000 that will be penalized and taxed. Then up to that point, it grew tax-deferred, which is also available. I don’t want to downplay those taxes and penalties, but I do want you to understand that it’s not on the whole amount in the account, just on the growth.
Southwick: Our next question comes from Jordan. “I am currently an employee at Amazon. While I love the work that I do and truly believe that the value that Amazon has created and continues to create for all stakeholders has been a net positive, I’m also aware and concerned about some of the negative impacts that the growth of Amazon has on society, competitors, and the climate. I am a shareholder in Amazon and have a long-term time horizon, but I would like to know what will happen to my shares of Amazon if the company was forced to spin off some of its business units? Would I receive shares of the new company? If so, how many shares would I receive and what will happen to the value of the existing shares that I own?”
Beyers: It is a great question, Jordan. First of all, I applaud that you’re both engaged and concerned. You’re certainly not alone. There has been a lot of discussion around Amazon’s contributions to the world, both the positive and the negative. You raise a really interesting question because Amazon is one of those companies that’s under increased regulatory scrutiny right now, so there is a chance that Amazon will be forced to break up and its units right now that are in a conglomerate would become independent. Let’s talk about what would happen. Let’s say that that does happen, or and I think, this is honestly a little bit more likely here, Jordan, that Amazon, on its own, decides that it wants to split off certain portions of its business into independent units like AWS, which is the Cloud computing unit, becomes an independent company and it separates from the main Amazon.com. Were that to happen, there would be a splitting of the equity. Now, how that’s determined and how much you would get, that would be determined by the terms of the separation. There would be a lot of work with the SEC in figuring this out. But your overall stake in Amazon.com today would be divided up in a way. So nothing would happen. It’s not like the pie would suddenly become bigger or smaller, it would just get sliced. One slice would be, let’s say, AWS. Maybe another slice would be the logistics business that’s competing with FedEx and UPS. Another slice is the core e-commerce business. So you still got the same pie, but it’s been split for you. So that equity would be different equity, now that represents those slices, and you would hold that.
As an investor, that’s what you would get. When we see spin-offs like this or split-ups, it’s generally been very good for shareholders. I mean, we can go back through history on this. When the government forced Standard Oil to break up, it created a whole bunch of independent oil and gas companies around the country, and the shareholders of Standard Oil got a stake in all of those independent companies. Had you held on to all of them, boy, you would have made a lot of money. Same thing with AT&T. When AT&T was broken up, the government created all the Baby Bells. Had you held on to all of those independent companies, you would have made a lot of extra money. I think if you believe in Amazon here, Jordan, the best thing you could do is hold firm. If there is some kind of split up, it’s probably going to be good for you over the long term.
Southwick: Our next question comes from Jim. “What are the rules for an inherited Roth 401(k)? I believe I need to open up an inherited IRA and put the non pre-tax portion in that, and withdraw by the end of 10 years. For the remainder that is post-tax, can I add it to my existing Roth IRA? Do I need to take distributions at any time? P.S., I hope to travel soon and send you many postcards to make up for 2020.” Yay, we love those postcards, even though we don’t get them. [laughs]
Brokamp: [laughs] One of these days we will, certainly by the fall, we hope. Jim, I have to say, first of all, I don’t have a definitive answer for you because there are a lot of details about your situation that I don’t know, but here’s some things to consider. First of all, if you’re the spouse of the person who passed away, you can just make it your own account. Once you’ve done that, you don’t have to worry about any of the distribution rules about inherited accounts. The laws governing inherited retirement accounts were changed by the SECURE Act, so the options available to you depend somewhat on if the person who owned the account died before 2020, or in 2020 or later, and whether you are a named beneficiary in the account or you just inherited through the estate. But if you’re not the widowed spouse, you will definitely have to take the money out at some point. It might also matter, by the way, if the person who passed away was taking required minimum distributions in what they’re supposed to take before they passed away.
But here’s what I can tell you for sure: your options will depend somewhat on the 401(k) provider. So call them up and ask what they normally do in these situations. Your best bet will likely be to transfer it to a Roth IRA. If you’re not the spouse of the deceased, it will specifically need to be an inherited IRA, which has a special account titling and it should not be commingled with an existing Roth IRA that you already have. When you take money out, you won’t pay a 10% early distribution penalty even if you’re not aged 59.5, and since it’s a Roth, you won’t pay taxes, unless the account has been opened for less than five years because it still has to file the five year rule. If after you gather more info, you’re still not sure what to do, especially when it comes to the rules regarding when you might have to take money out, contact a tax professional. I’d be careful about the information you find on the Internet, you want to make sure it was written in 2020 or later to account for the new rules. You might start at irahelp.com, which is the website of Ed Slott, a CPA who was the guest on our March 9th show.
Southwick: Next question comes from Donald. “My entrance into the market was the Airbnb IPO. It’s nearly tripled. Should I let it ride or realize some gains? I recently added a few new positions, but currently, Airbnb makes up 70% of my portfolio. Suggestions?”
Beyers: You have an amazing problem there, Donald. I love it. That’s an incredible problem to have. I think, Donald, I’m going to encourage you to think about this maybe differently than taking some gains and more asking yourself, ‘Is it OK? Can I sleep at night? Am I comfortable with Airbnb accounting for 70% of my portfolio?’ The way to think about that is, let’s say, Airbnb tomorrow collapsed 75%, which means that 70% of your portfolio has now become dramatically smaller. Are you OK with that? Because you are really putting a lot of your wealth that you have invested in the stock market in one business, and that does create risk.
Now, if you know yourself well enough, and you’re going to be able to ride out the volatility over the next 10 years, and you’re comfortable with Airbnb occupying that much of your portfolio, then, OK. I would say though, be really honest with yourself about what would happen to you emotionally, what would happen to your financial plan if there was a dramatic sell-off in that stock, and you had 70% in that one stock. I’ll just say for myself here personally, Donald, I hate selling stocks, but I have sold when a position got to be so large that it was just occupying too much, and I could sell a portion of it and then redeploy that cash into some other positions. That’s worked out pretty well for me. That’s one of the rules I tend to abide by as an investor. Everybody is different, I mean, your mileage may vary, but do some soul-searching, do some introspection, and decide for yourself whether or not you feel comfortable having 70% of your investing worth in one stock. I think that’s an important question to ask and wrestle with.
Brokamp: Since he’s just starting out, I would say that I’m guessing that he doesn’t have a whole lot invested at this point, so just by directing future contributions to other stocks is one way to basically offset that, I think. Since he’s starting out, I’m less concerned about it. If this was someone on the verge of retirement saying they have 70% of their portfolio in one stock, I’d be a little bit more concerned.
Southwick: Our next question comes from Kyle. “I am 30 years old and just started a new job that offers a Roth 401(k) with an employer match. However, there is a vesting period of five years. I’m certain I will not be at this job long enough to meet the vesting requirement. Instead of investing in their limited 401(k) options should I just contribute that money to my Roth IRA with more investing options? Are there any negatives to this approach?”
Brokamp: Well, Kyle, the first thing I think you should do is check to see if a portion of the match vests each year, something like maybe 20% each year over those five years. If that’s the case, then it might make sense to still participate in the plan if you expect to be there for a year or a few. If not, then just go with the Roth IRA, which as you point out, will likely have more investment choices as well as potentially lower costs, and you’re not going to worry about the hassle of transferring the 401(k) to a Roth IRA after you leave the company. Also, it’s easier to get money out of a Roth IRA before age 59.5 than it is out of a Roth 401(k). Just in case you’re curious, when people leave a job before being fully vested, the unvested portion of the match is placed in an employer’s forfeiture account, where it’s then used to offset the cost of the plan, and sometimes it’s allocated to plan participants accounts. The unvested part is never wasted, but it usually goes to benefit the people who are still in the plan. There is no reason for you to do that though if you’re not going to be there long enough.
Southwick: Next question comes from Andrea. “Out of an abundance of caution around the election, I moved the balance of my 401(k) from index investments to cash, about $250,000. Now, I’m concerned about buying back into a market that is highly priced. Would it be better to try and wait for a correction or bear market, which some experts seem to think is due or to the dollar-cost average back in now? If the latter, over how many weeks or months should I buy it back in?”
Beyers: It’s really hard to answer this in a way that doesn’t just give you personalized advice here, Andrea. Since I can’t do that, I’m going to give you some general thoughts here. I appreciate that you’re looking at the market and seeing that things are highly priced, you’re right, things are highly priced. I wouldn’t put too much stock into experts who are telling you when there’s going to be a correction or that there will be a correction. Man, I wouldn’t even put that much stock in me as an expert. In fact, I’d put like 0% stock in me as an expert. But what I would say though, is that you are thinking correctly about what to do with this money. I do want to get back into the market. What is going to keep you engaged, I think, is a way to think about this. If one way to get engaged is to, say, set up a schedule. Whatever the schedule is, it can be once a week, I’m going to look at the resources I have access to and buy $100 of that stock. Then you just do that every week, and you just repeat the pattern over and over and over and over again. Wash, rinse, repeat, wash, rinse, repeat. Just like setting up a schedule that really works for you.
Well, first, it will get you invested, and second, it will help you build the habit. More important than even just figuring out the timing is actually building the habit and staying in the game over the longest term, and you’ve got a lot of money to deploy. I think you have a wide range of options here. But the two things I would look at is, how do you set up a schedule that works for you, that’s really easy that you like. Then second, helps you build the habit of investing regularly and just staying with it over a long period of time. No matter what’s happening in the market right now, that’s going to help you the most over the really long term. Great question though, Andrea.
Brokamp: I will just cite a Vanguard study that I’m sure I’ve mentioned before. It basically looked at, was it better to invest a lump-sum all at once or put it gradually in the market over 12 months. Historically speaking, two-thirds of the time, it was better to invest a lump-sum, one-third to put it in gradually. That’s just history, the stock market on average is up three out of four years. I certainly like Tim appreciate the fact that the market is highly valued and that makes me nervous, but I also know for me personally, I’m not going to need my retirement money for at least another 15 years. I’m fairly confident that even if I put money in now like I will my next paycheck because money will go into my 401(k), I’m pretty sure that money is going to still be profitable because I’m not going to touch it for another 15 years at least.
Southwick: I feel like someone needs to plead with Andrea to never cash out her 401(k) like that again.
Beyers: Yeah. I mean, look.
Southwick: Like, please, Andrea, please, just stay of course.
Beyers: Right. Yeah, just stay in the game. I mean nothing really amplifies your returns over the longest term than just time. I mean, I know nobody who manages money professionally wants to hear this, but what makes you a superstar investor? Time. That’s it, time does it.
Southwick: Time and the market, not time in the market, time and the market. [laughs]
Beyers: 100%. Like your intellectual horsepower and picking a great stock. Yeah, that’s amazing. That’s good, and we love that but way more powerful than that is your wherewithal to just even staying in the game with a lousy stock is going to be somebody who is amazing at picking a stock and cashes out after a year.
Southwick: Yeah. I mean, I have been working at The Fool for just over a decade now, it turns out, and so I have seen my fair share of elections and every election people just like pundits, reporters are like, “Well, this guy got elected, so the stock market is going to tank, this guy got elected, so the stock market is going to go up.” It’s never right. You just can’t predict what the market is going to do based on who is sitting in the White House. I’ve been through enough of these that I’ve seen it personally and experienced it personally to know that this is true.
Beyers: This is my favorite pop culture reference that illustrates this point. There is an old show, one of my favorites is called The West Wing. There’s a scene in which the chief of staff Leo McGarry asks two financial pundits, and he says, “All right, where is the market going to be over the next year? ” One guy says, “Up whatever amount and so forth.” The other guys says, “Down 400 points,” and then he looks at both of them and says, “About a year from now one of you is going to look really stupid.”
Southwick: Yeah. Or they won’t. Are you right? It’s amazing how you can be a financial pundit or expert and just be wrong for 10 years, right? Like just to be wrong that the market is going down this year. Guess what? It didn’t go down for a decade. [laughs] It’s one of these fantastic careers that you could enter into where you could be flat out wrong for 10 years and you still get gigs. Like how does that work?
Brokamp: That’s the only reason I still have a job.
Southwick: Bro, you’re right about lots of stuff. Our next question comes from Aaron. “I was on a financial literacy call for work and the speakers stated Roth IRAs were not subject to estate taxes. I pointed out that Roth IRA money was not subject to income tax, but if the value of the state is over the federal limit, the Roth money should be subject to the estate tax. The speaker then said, just to omit the Roth IRA from the estate, if the state is over the federal limit, only money in the estate will be subject to the estate tax. Can you omit assets from your estate that’s not paying estate taxes on them? If your Roth IRA is part of your estate, will estate taxes apply if the estate value is over the federal limit?”
Brokamp: First off, Aaron, when it comes to estate planning, see a qualified, experienced estate planning attorney, don’t rely on goofball podcast hosts.
Southwick: [laughs] You guys are killing me. One of you is like, “Don’t listen to me talk about what the market is going to do,” and then the next was like, “Well, don’t listen to this upcoming financial advice for your estate,” but here we go.
Brokamp: There you go. [laughs]
Southwick: Hashtag, at least pretend to know what you’re talking about. [laughs]
Brokamp: I have some facts. I have facts.
Southwick: [laughs] Okay. All right, thank you.
Brokamp: For example, one fact is that federal limit, it’s the estate exemption in 2021 is $11.7 million per person, and essentially, twice that for married couples, if the deceased spouse’s executor made a portability election on the timely filed estate tax return. Sound confusing? It is. That’s why you need to get an attorney. Generally speaking, most people when they hear that, they feel like, “Okay, I don’t have to worry about paying estate taxes on the federal level.” That’s generally true. It is important to know that the amount was essentially doubled in 2017 and it’s adjusted for inflation each year, but in 2026, the 2017 law expires and the exemption drops down again to about $5 million, and then there’s talks of bringing it down even further. Plus, 17 states in the District of Columbia levy separate estate and/or inheritance taxes often with lower exemption amounts. If you do have or potentially could have a few million dollars at some point, it is worth paying attention to estate taxes. Okay. What goes into valuing the estate? Well, it’s just about everything someone owned. It’s stuff, homes, cars, life insurance, policies which is why it’s important to pay attention to who is the owner of a policy and accounts, and that includes Roth IRAs.
Now, some people might try to get people out of their estates by putting them in irrevocable trust that has to be irrevocable, but as far as I know, you cannot put an IRA in a trust while you’re alive. You could make a trust the beneficiary of your IRA and then it goes into a trust after you pass away, but that doesn’t get it out of your estate, but I am just a goofball podcast host, so if there’s a lawyer out there who knows some work around, please let us know, but I think, generally speaking, what you were told on this financial wellness call was inaccurate.
Southwick: It sounds like Aaron was looking for that kind of answer from you.
Brokamp: I think Aaron knew the answer. He just wanted validation.
Southwick: Yeah, from a goofball podcast. You came to the right place.
Beyers: I’m waiting for the t-shirt. I’m waiting for the t-shirt that has Bro’s face on it that says, “goofball podcast host.”
Southwick: Take my money advice. [laughs]
Brokamp: [laughs] But maybe I can, maybe I’m wrong. Maybe I’m missing something. I’ve done the research so if I’m wrong, let me know.
Southwick: [laughs] That’s our new disclaimer for every broadcast episode. Hey, but maybe we’re wrong.
Beyers: Maybe we are wrong.
Southwick: Maybe we are wrong. We could always be wrong.
Brokamp: Specifically, when it comes to estate planning, because it’s very complicated and the laws are different from state-to-state, so whatever. We’ll see if anyone emails and says, “Bro, you’re wrong.” We’ll see.
Southwick: [laughs] Maybe you are wrong, so whatever. That’s the show. All right. Here we go.
Brokamp: We will give you a refund of anything you paid.
Southwick: Yeah. You will get your money back. The next question comes from Colin. “With the retail investing world suddenly thrust to the center stage of pop culture in the last couple of weeks, I’ve been hearing more and more about the options trading world. I know now, especially, at 28 years old, that my greatest asset when it comes to investing is time and the ability to weather the short term volatilities of the market. My question is this, do options have any place in the Foolish investment strategy? Is there a responsible way to incorporate options investing into a buy-and-hold investment portfolio? Since the exploration of options contracts removes that most precious asset of time and the ability to continue to hold onto things through the highs and the lows, my feeling is the answer is no, but I would love to hear your thoughts on the matter.” Colin, let me tell you, Tim is going to teach you a thing or two about the other side of options trades.
Beyers: Well, here comes the answer from the other goofball podcast host. This is a great question, Colin, and your instincts are right. For most investors, options are a bad strategy and one of the things that really gets me hot under the color is the amount of marketing of options as a tool to young investors that I’ve seen from different brokerages and just in the wider media. I think that is irresponsible, so I applaud you for thinking about this, thinking rationally about it. You’re absolutely right. For most investors, it’s not something you need and it’s something you should actively avoid.
Now, having said that, there are a couple of options strategies that we think are pretty Foolish that you can use once you have a lot of experience under your belt, and I really want to stress that. Give yourself a couple of years, build up a portfolio of common stocks, keep some cash to the side and do a lot of studying of how options work, take a look at option pricing, understand what your broker requires, read the disclosures, all of that good stuff, but here are two that you could use, the first is what’s called a covered call. Let’s say you have a stock that you own, and I think it’s best, to be honest, a covered call is best if you have a stock that you actively loathe. I mean really, one that you hate and you would be happy to sell. Let’s say, it’s like a cruise line, and the option, let’s say, it’s for a month ahead or two months ahead, and that option is going to pay you a certain amount of money to say like, “Hey, this contract says, if the price hits x, then the shares that you own, these hundred shares, are going to be called away from you. You’re going to sell them at that price, and we’re going to pay you for the right for that contract.” That’s called a covered call, and so if you would be happy to get rid of the stock at a certain price, a covered call can be a really interesting strategy, and what’s nice about them is if you have the stock and you’re not selling it, and you want to earn a little income while you’re waiting to sell it, a covered call can just be renewed. Like you have it for a month, you get paid, the stock doesn’t get called away. Ride another one, you get paid again and you keep getting paid until you sell it.
The problem is, if you write a covered call on a business that you really like and you want to hold for 15 years and it gets called away, the buyer’s remorse that you may experience could be intensive. Don’t do that. Don’t write a covered call on a stock that you would really like to hold and you could see yourself holding for 15 years. Now, here’s another strategy you could use. Let’s say, you think a stock that you really want to own is very expensive. You could do what’s called writing a put. A put is an option that creates profit when a stock falls. If you write a put, essentially, you’re selling the contract that says if a stock falls to a certain price, I’m going to buy it. I will be responsible for buying it at that price. Let’s say, you write a put on a stock you really like. The price is 10% lower. If you write that put and you get paid, you get paid a certain amount of money, and then if the stock falls to that price, now you have to buy the shares, or hey, you were thinking about stopping buying the stock anyway. So now, you got paid sto wait for a better price. It doesn’t always work out, but it’s a way for you to maybe reduce the cost basis for buying into a stock that you really wanted to own anyway.
Covered calls, sell them when you think that a stock that you own, you’d be happy to get rid of because you loathe that sucker and you want to make a little money in the short-term. Writing a put, if you’d like to buy a stock, but you’d really like a slightly better price and you’d like to get paid to wait for a better price, those are two Foolish options investing strategies, but please, don’t try this until you’ve really done your homework, but there are ways to use options Foolishly, Colin, so thanks for the question.
Southwick: Yeah. I would say that my husband loves Foolish options, like he loves both of those strategies you just said, but he also loves sitting in the basement for four hours every Sunday afternoon and researching them. Like options is not something that you should just dip your toe in. It’s something that you probably should do if you actually have a love of doing it, like a massively intrinsic value of just looking at options. Like if it’s something that bores you, fine, get out of there, don’t worry about it. Like I’m not putting four hours staring in front of the computer looking at options trades on a Sunday.
Beyers: Me neither. Goofy podcast host, not doing it.
Southwick: Goofy podcast host. You can go listen to my husband’s podcast, Options from the Basement. That’s his podcast coming to you soon. [laughs] All this is just keys clacking on a keyboard for four hours. Then me yelling, ” […], dinner.” Next question comes from Mark. “Does the wash-sale rule apply if you sell and buy back stock in different brokerages? For example, I sell Microsoft at a loss in TD Ameritrade, then buy it back in Webull?”
Brokamp: Mark, sorry, you can’t get around it that way. You violate the wash-sale rule. If you buy it back in another brokerage, if you buy it back in an IRA, your 401(k), if your spouse buys it back in another account, the IRS has thought through all these ways around it, and you can’t do it. Your option is to either A, to stick with the stock. B, take the loss, but then wait 30 days to buy the stock back, or in the meantime, buy something that is a similar type of investment, but not the exact same one. Just an example, since you used Microsoft, you could for 30 days own the technology sector spider, XLK, which has 20% of its assets in Microsoft. You would think that that would perform somewhat similarly to Microsoft over the course of a month. But generally speaking, I think when it comes to tax-loss harvesting, it’s probably better just to wait for 30 days. But there are some ways to have similar investments, but all the ways to try to really get around the rule, the IRS has already figured those out. Including options, by the way. You can’t put an option on Microsoft either.
Beyers: No. I would just say that just going to add quickly. I’m reading a book, and I’m interviewing the author William Greene on Motley Fool Live here, it will have aired by the time this podcast goes live. The book is Richer, Wiser, Happier, and one of the traits of all of the greatest super investors that he interviews is simplicity. Just, if you can stomach it, Mark, just go for the simple, just wait. If you really want to emulate the investors that got really, really rich, the one thing that you will learn reading this book is that they kept it as simple as humanly possible. Go for simplicity, man.
Southwick: Did that guy steal our purpose statement at The Motley Fool; make the world smarter, happier, and richer?
Beyers: Came close, didn’t he?
Southwick: I think he did. I should call him out on that. Ask for some residuals or something from that book. The next question comes from Estie. “I am a member of Stock Advisor and Rule Breakers, and I get a lot of recommendations that I’m excited to buy. The problem is that as I keep buying the new peaks every month, I’m accumulating too many stocks to keep track of. How do I go about adding new positions while keeping the amount of stocks to a manageable amount?” Bro, I think you’re going to start, but I think Tim will probably also have some thoughts on this.
Brokamp: Yes, in fact, because we’ve answered questions similar to this, but I chose this one again because I love getting the input of people like Tim, who’s been a Fool rider contributor, analyst for a long time. I will just say what I often say and that is, if you are not yet an experienced investor and your part of a Motley Fool service, I think it’s important to basically follow the service to the T, and if you have something like Stock Advisor and Rule Breakers and you’re part of those for years. You are going to accumulate well over 100 stocks. But that means just staying on top of the recommendation, staying on top of the sell guidance because there will be sell guidance as well. It does mean you’ll be very diversified, but because you’re basically, by belonging to the services, you have a team of analysts behind you. You don’t have to stay on top of them quite as much.
Now, as you do this for a few years, if you become a more experienced investor, then maybe you could do more picking and choosing, and whittle them down to the stocks that you think have the most promise. But again, if you’re not quite experienced yet, I think it’s important to stick to the service as closely as possible because I’ve come across the stories of many people who pick and choose, and then they miss out on some of the best stocks that we’ve recommended, largely, because they’ve already gone up very highly and people feel like, “I’ve already missed out. I’m not going to buy Amazon,” or whatever it was, because it’s gone up so much. But those are my thoughts. Tim, what do you say?
Beyers: I agree with that and I would say, Estie, try not to make any either-or decision here. If you’re getting just a ton of stuff and it feels like information overload. If you could automate like Bro was talking about saying, every time, I get a new recommendation, I’m just going to put $100 into that and you automate that. Then as you grow, as you read, as you learn more from us, maybe you listen to Motley Fool Live, you listen to Motley Fool Answers, other Motley Fool podcast, and you start growing in your interest and your knowledge then maybe you can concentrate a little bit more on, say, 10-15 stocks that you actually really want to follow and get to know better as businesses, even though your portfolio maybe like 150 stocks. The reason I like this strategy is because it allows you to just increase your odds of getting the bananas return you would get from one of those generational outperformers. The more stocks you have, the more likely it is, you’re going to get one of those generational outperformers.
When you have fewer stocks, your odds are lower, so you do want more socks. That is a good thing. Like what the research says, going back, it’s about 100 years now, it said, in a portfolio held for that long, basically, 100% of the out-performance comes down to less than 4% of the stocks in that portfolio. More stocks, better. Allow yourself to have a big portfolio. But as you grow in your knowledge, in your interest, decide what few stocks you want to spend some time with and learn about, and then let us take care of the rest. That’s a great way to give yourself the best odds of winning over a really long period of time and enjoy the process of investing over a really long period. Because you want both. We want you to enjoy it and we want you to win. Like smarter, happier, and richer, that’s what we want. Try not to make it any kind of either-or decision, Estie, have a big portfolio, just party on and then maybe concentrate a little bit later on.
Southwick: Well, we’ll just end on that party note then. Tim, thanks so much for joining us this week. Let’s not wait another 17 years to have you on, OK?
Beyers: Seriously, yeah, it was fun. Thank you very much, Alison and Bro, it was a good time.
Southwick: Let’s have a disclaimer. As always, The Motley Fool may have formal recommendations for or against the stocks we talked about on the show, so don’t buy and sell stocks based solely on what these guys have to say. I mean, come on. Maybe they are right, they don’t know, I don’t know. No one knows. The show is edited, […] by Rick Engdahl. Our email is [email protected] For Robert Brokamp, I’m Alison Southwick, stay Foolish everybody!