Are You Taking Unnecessary Risk With Your Retirement Funds?, Ep. 258

In the latest episode of The Capitalist Investor, hosts Derek, Luke, and Tony discuss a variety of crucial topics that resonate with both seasoned investors and newcomers to the financial world. Let's break down the five hot topics that dominated this episode:

1. Taking Unnecessary Risks
Tony brings to light the often-overlooked issue of unnecessary risk-taking in investment portfolios. He recounts a story of a client whose portfolio consisted of 20% Nvidia stocks. The advisor insisted on "letting it ride," despite the client's concerns about concentration risk. The discussion underscores the importance of understanding one's portfolio and actively managing risk to avoid potential pitfalls.

2. Tax Implications in Investment Decisions
One of the salient points discussed is the role of taxes in investment decisions. Derek emphasizes that avoiding selling stocks solely to evade capital gains taxes is not a sound strategy. Notably, taxes are a "penalty of success," and managing one's portfolio should be a higher priority than dodging tax bills. Luke adds that tax regulations might change, making it wiser to manage investments proactively rather than reactively.

3. Balancing Risk Based on Age and Financial Goals
Luke dives into the nuanced approach to risk management, tailored to the investor's age and financial goals. Younger individuals in their 20s and 30s have the luxury of time to recover from financial setbacks, making it more feasible to take on higher risks. Conversely, those nearing retirement should focus on preserving their capital, opting for safer investment strategies. This age-based strategy exemplifies a balanced approach to risk and reward.

4. Diversification and Risk Mitigation Strategies
In discussing ways to manage investment risk, Luke and Tony touch on practical strategies like writing covered calls or swapping individual stocks for ETFs. Whether it's selling Nvidia stocks and investing in a semiconductor ETF for broader exposure or trimming holdings to maintain an appropriate risk level, diversification is key. Tony elaborates on how their actively managed portfolios consistently trim holdings in volatile stocks like Nvidia to keep risk in check.

5. Football and Financial Planning Analogies
Towards the end of the episode, the hosts make an interesting pivot to football analogies to explain financial planning. Tony likens managing investments to football teams grinding down the clock to win a game. Just as a football team adjusts its strategy based on the game situation, investors should manage their portfolios dynamically to align with their financial goals. The engaging discussion even rolls into NFL talk, touching on team performances and player speculation, adding a refreshing and relatable layer to the financial discourse.

This episode of The Capitalist Investor offers a blend of serious financial advice and light-hearted sports banter, making complex topics accessible and engaging. From understanding unnecessary risks and tax implications to age-based risk balancing and diversification strategies, the hosts provide a comprehensive guide to prudent financial management. Tune in to stay informed and make savvy investment decisions.

Transcript

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Hello and welcome to this episode of the Capitalist Investor. As always, you have me, diamond hands d and back and better than ever, Luke Lloyd. Definitely not better than ever, that's for sure. Cool hand. Cool hand Luke and Tony the tiger. What's up, guys? Not much, man. Hey, dude. Luke, I saw some of the pictures of your, your fiance's bachelorette party and they were running around, these little fatheads of your face. And I'm still waiting for mine. I want my. I, Luke Lloyd face on a stick. I don't think anybody wants that. I do, because it will be. It will be used. It will be used at some opportune time to just hopefully it would be special. Do you think it'd be a good thing? Not at all. No. But I still want one. But what I will say is they are, you know, it's all supply and demand, so you get to pay up for it. Most of them have been pay for it later. Most of them have been destroyed because. Because there were like 20 of them and they're on put in bay. What do you think happened to them? You know, they lost them. They got thrown in the mud. Probably some random person walking down the street saw my face and was like, who the hell is that person? Is that guy from Fox? My mom asked that question. If they got anybody to say that. No, no one got to say that. I'm not Mark Tepper. All right, today's financial planning corner, taking unnecessary risk. Some of us do this when we don't know what we don't know, or we just like risk or, you know, we just don't. Maybe you don't know you're taking unnecessary risk. So what that means is that I've actually seen it just this last week, somebody, you know, I was meeting with a potential new client and they had about 20% of Nvidia. Nvidia stock took up 20% of their portfolio that another advisor was, was managing. And I just started asking simple questions. How do you feel about that? What do you think? And he goes, well, I left it on the advisor to make the decision. I'm like, well, then what does your advisor say? And the advisor said, let it ride. And I'm like, how do you feel about that? And they're like, well, you know, I don't. You know, it's not my lane, but I do feel like it is kind of heavy. And I'm like, have you expressed that? And he goes, no, not really. I just let them do what they want to do. And I'm like, well, that could be a problem, because at the end of the day, it's your money. And he goes, well, you know, like, one of the arguments from the advisor was that, like, well, if we sell it, you're going to owe taxes. And I said, well, my take on that is if you were paying taxes, you were successful. If you weren't successful and you lost money, you wouldn't be paying taxes. So unfortunately, paying taxes is a penalty of success is one thing. So we have to understand, when you've won the game and it's kind of like the browns up two touchdowns with two minutes to go, do they, you know, you see a lot of teams do this, they grind it into conservatism and, you know, so there is a point of being too conservative, you know, like, you don't get rid of all your Nvidia stock. Like, you take the profits, take whatever you invested in and put it on the sidelines and run with, quote unquote. House money or write options on it. I don't wait too far deep into that or write cover calls. So you're hedging against the downside, things like that. It's like, interesting, too, when it comes to risk, because really, our job at the end of the day is to manage risk. I mean, everyone thinks it's to make the most amount of money or save the most amount of money. It's like to manage lifestyle risk and market risk in a lot of ways is really what our job is. And when you're managing a 65 year old retirees money, it's different than trying helping a 25 year old, 30 year old. And what's interesting is the only way to pack, make a lot of money quickly, at least, is to take on excessive amounts of risk. The only way to preserve capital and preserve money is to take on less amount of risk. So it's like understanding that balance of where you're at with your income, with your expenses, with the assets that you have and your retirement goals and objectives, you have to balance all of those. And when you're young, I'm just speaking to the 20 to 30 year olds, it's okay to take excessive risk because it doesn't pay off. You have time to make that back as long as it's not completely destructive to your situation. When you're 65 years old, you don't have the time to lose 20% of your portfolio because Nvidia crashes, because it's up too high. I'm not saying that's going to happen, but it is time to start rethinking about risk, and it's not always about hitting home runs, it's about hitting singles and doubles when you're at that age of retirement. Yeah, absolutely. It's always a giant pet peeve of mine. The thing with the taxes, you know, there's many things to consider there, one of which is that capital gains taxes might go up in the future. So if it's, you know, if you're selling now or later, you're event someone is eventually going to have to pay those taxes unless you pass those stocks down and they get a step up in basis. And that's another tax rule that is always in the crosshair. It is always much better to continue to manage the risk, continue to manage your portfolio, versus just not trading on certain things that have gains. You really have to have a game plan and a strategy for that. Going into it and not making moves just because you don't want to pay taxes is something that I'm definitely against. You have to have your, the balance of your portfolio is way more important than, you know, not paying a tax bill on a, on a, on a big gainer, you know, on a winner. Well, but I mean, you know, going a couple of layers deep. Then it was like, well, you know, like. Cause the person I was talking to, like, again, not his lane, the finance, he's like, well, can I sell something? And like, offset, I'm like, yeah, that's called tax lost. Harvesting is the technical term, but yeah, you sell a loser, you sell a winner and your net sum is zero tax. But you know, when we, when we talk to, you know, people for the first time, what we try to do is show them, hey, you know, actually taking on lower risk upon retiring, you know, upon retirement, whether it's two months or two years or ten years before. If your plan is successful and we can show like, hey, toning down the risk is going to make you even more successful. Like, it's not about hitting home runs when you won the, when you can. Win the game or you could even. Another strategy you can implement is sell Nvidia and buy like the SMH or whatever it's called, like the semiconductor ETF that has all the semiconductors. That way you're not specific to one company you're diversifying across. I mean, I'm just throwing these out there like covered calls, each swap in there for an ETF. There's different ways to diversify than, like you said, just even going all cash to sell the position. Yeah, it might be step one, and then you can decide what to do. After that, maybe it's still getting exposure just in different ways. Yeah. In one of our actively managed portfolios, I explained this is that we do own Nvidia in our growth strategy, and they've trimmed it three or four or five different times to keep it at an appropriate amount of risk, the appropriate amount of allocation, because they're one bad earnings call away from going down 30%. But who knows? Maybe that doesn't happen for several years. I don't know. But at the end of the day, build a plan and figure out what your risk tolerance should be. But, you know, I've always had those conversations. People are like, well, I just always been involved in the stock market. I don't know if I can tone it down. I'm like, well, I'm not here to tell you what to do. I'm just telling you what recommendations make your plan work at the end of the day. Well, I also think, I don't know. For me, I just speak to myself and being a little bit younger and just my mindset is a little different. I think it's important to take risk into your own personal life as well, outside just every single financial decision, stock market, whatever it be. One of the reasons why I am selling my house right now is because I'm tired of waking up worrying about what's going to go wrong with a house or if a tree is going to fall on my fence like it has before, and I have to take the tree down like all that other crap. So that's a risk I don't want to deal with right now and I don't want to think about. So I'm going to go sell the house, go back to renting, and then that way I'm not being susceptible to that kind of risk in my life, so I can focus on other things in my life that I'm more productive at in some ways. So I just think throwing that out there as a mindset, I think it's important to think about that in a lot of your aspects of your life, not just financial decisions. Every time I think it's important. Absolutely. Yeah. All right. And I do. I do remember the Browns did actually lose to the jets with, what was that, a three touchdown lead? Wasn't that Joe Flacco on the other side, too? Yeah. You remember that game? That was a wild game. Remember that guy, how great he was for us at the end of last season? Yeah, he's gone now, sitting on a couch somewhere again. Almost. Almost football season, though. We're almost there. Did he get signed by anybody, or is he just going back to the couch? No, he got signed. Did he? Really? Colts, maybe. Really? I want to say colts. Who's our backup? You have any idea? Jamus Winston. Oh, that's right. Oh, my God, the memes on that guy. Oh, God. Anyway, I digress. See what happens, which is, wait, who's a Steelers quarterback now? Isn't it, like, Russell Wilson? Russell Wilson. And there's another one. Oh, Justin Fields. Oh, yeah, that's right. Wow. Well, guess what? I know, I know. It's pretty, pretty obvious what their offensive coordinator is gonna do is just have some obviously quarterback option runs, like, holy cow. Can you imagine? Like, if they were, it'd be interesting if they flip flop quarterbacks every, every game. Like, you don't know who's coming out on the field. You know what that would do for defense? Holy cow. Yeah. Well, I don't think Justin Fields is going to see the field too much. No, I don't. I don't think he. I don't think he's got it. But Russell Wilson does stink, so I guess we'll see. All right. All right. Well, we got some football in at the end of the planting corner, but, yeah, you know, make sure you're taking the appropriate amount of risk. I always tell people when people come in to see me for the first time, the risk that they say they want to take and the risk that they're actually taking, I'd say it doesn't match 90% of the time. So just make sure you're aware of your situation and you're planning properly for it. But thanks for listening this week. If you guys have any questions, comments, or concerns, hit us up at info connect.com and we'll talk to you next time. The opinions expressed in the podcast are for general informational purposes only and are not intended to provide specific advice or recommendations for any investment, legal, financial, or tax strategy. It is only intended to provide education about the financial industry. Please consult a qualified professional about your individual needs.