💸 Being a Conservative Investor Can Cost You Dearly

What’s on the Menu 🍴

Being a disciplined, patient investor is key…

But what happens if you’re TOO conservative?

Today, we’re taking a look at some expensive mistakes you can make…

And looking towards a busy week ahead!

• What To Watch This Week 👀

•  How Being a Conservative Investor Can Be an Expensive Mistake 💸

• Stock Based Compensation: A Guide To Avoiding Mistakes 📖

Today’s newsletter is a 5 minute read.

What To Watch This Week 👀

Last week Nvidia’s strong earnings report kept the party going in stocks, while Ethereum’s relative strength kept the party going in crypto.

Will investors appetite for risk continue this week?

The economic backdrop looks supportive based on low unemployment in the US, declining inflation in Canada, and Walmart’s report showing the consumer in good shape.

Market technicals also look strong, but not yet excessive. The majority of mid & large cap stocks are trading above key moving averages:

This will be another busy week for retailer and software company earnings, with Zoom, Salesforce, Snowflake, Lowes, Best Buy, and Macy’s reporting:

The macro calendar also gets busier, with important data releases including:

• Japan inflation (Mon)

• US durable goods orders (Tues)

• European Inflation data (Thurs / Fri)

• US personal income & spending (Thurs)

• China manufacturing (Thurs)

• US manufacturing PMI (Fri)

• Japan consumer confidence (Fri)

We’ll be keeping an eye on the following assets & sectors:

📈 Rising Recently:

• Semiconductors (SOXX / NVDA / SMCI)

• Ethereum & Crypto (ETH / BTC)

• Retail (XRT)

• Cannabis (MSOS)

• Chinese stocks (FXI / KWEB)

• Homebuilders (XHB)

• Biotech (XBI)

📉 Falling Recently:

• Cleantech & Solar (TAN / PBW)

• US Government Bonds (TLT)

• Natural Gas (UNG)

• Regional Banks (KRE)

 How Being a Conservative Investor Can
Be an Expensive Mistake 💸

A couple months ago, we interviewed successful investor, Billy Murphy, who’s built wealth with a few concentrated bets.

He took his skills as a professional poker player, and applied them to investing.

His methodology relies on finding “high EV bets”, described this way:

This got me thinking about how many young people make the mistake of being too conservative with their investments…

The word "conservative" might sound safe, but for the young and ambitious, it could spell missed opportunities.

Here are some reasons why playing it too safe might not be the smartest move for your portfolio.

• The Magic of Compound Interest: One of the cornerstones of wealth building, compound interest, works best with time and a bit of audacity in investment choices. Conservative investments typically offer lower returns, significantly reducing the potential exponential growth of your wealth over decades.

• Risk Tolerance and Time Horizon: Young investors have a unique advantage: time. This allows for a higher risk tolerance since there's ample opportunity to recover from the market's inevitable ups and downs. By not leveraging this, young investors miss out on the chance to see substantial growth in their portfolios from more volatile investments that can offer higher returns.

• Inflation – The Silent Threat: A conservative portfolio might seem like it's holding steady, but with inflation steadily eroding the purchasing power of money, such an approach can lead to a decrease in real wealth over time. Investments with higher growth potential are more likely to outpace inflation, preserving—or even increasing—the real value of your savings.

• Opportunity Costs of Playing It Safe: The market is replete with growth opportunities, from burgeoning tech firms to renewable energy startups. A conservative stance might mean missing out on these high-growth investments, which could turn modest capitals into significant assets.

• Educational Value of Diverse Investments: Diving into a variety of investment vehicles not only has the potential to increase financial returns but also offers invaluable learning experiences. Navigating through different market conditions with a diverse portfolio can sharpen investment acumen, better preparing investors for future decisions.

• Adaptability in a Dynamic Market: The financial market is ever-evolving, with new sectors emerging as potential goldmines for investors. A conservative approach might lag in adapting to these changes, potentially causing investors to miss out on the ground floor of the next big investment wave.

So, while a conservative investment strategy might seem like a safe harbor, especially for young investors embarking on their financial journey, it's essential to weigh the potential long-term costs.

We’re huge fans of risk management - And part of managing risk is making sure you’re not under-invested for your risk tolerance.

Embracing a well-considered level of risk could not only lead to higher financial returns but also enrich the investor's experience and knowledge, setting a robust foundation for future financial success.

Stock Based Compensation:
A Guide To Avoiding Mistakes 📖

Stock based compensation (granting of stock shares and stock options to employees) has become very common with many employers (especially tech companies).

While stock based compensation isn’t “new”, we’re seeing companies negotiate sign on packages with it more than ever.

Stock based compensation comes in many forms, and unfortunately, it can easily be mis-managed which can become very costly.

A quick review of the main types of stock based compensation and mistakes that I see:

1. Stock Options: These can either be incentive stock options (ISO’s) or Non-qualified stock options (NQSO’s). The way they are taxed at exercise (you actually choosing to purchase the shares) is a little different and ISO’s may give more favorable tax treatment in the end.

   The mistakes made? With ISO’s when you exercise, there is what’s called an AMT adjustment that may cause you to have an unexpected higher tax bill if you have higher income. The “discount” you’re getting on the stock gets added as income and causes this possible issue. Consult with a financial professional before exercising large amounts of ISO’s!

   NQSO’s still have a tax associated with any discount you’ve gotten on the stock at exercise as well. This can catch people off-guard when they get their tax bill.

   Be sure to pay more estimated taxes or have higher with-holding of taxes if you expect to exercise a lot of options with big price discounts. Also, watch out for having too concentrated of a position in your company stock (a large percentage of your net worth).

2. Restricted Stock Units (RSU’s): These have become quite common and many people don’t understand how to manage them. RSU’s are essentially shares of stock that get issued to employers usually as long as they stay with the company long enough for them to vest. So your employer may have RSU’s vesting every 3 months, 6 months or longer.

   The big mistake I see is people not having a plan for holding or selling the shares.

   The value of the shares upon vesting are actually included in your income as wages (this income shows up on your W-2). So you’re paying taxes and establishing a cost basis in the shares.

   You want to make sure that you don’t let the stock price go below your cost basis! This is supposed to be income and unless you’re okay with downside risk in your company stock, many people like to sell the shares as soon as they vest to limit risks.

   Now, that’s not to say you can’t hold some of the stock to “stay invested” over a longer time-frame. However, you want to do this with a strategy and a thesis on why you think it’s worth doing. Holding lower cost basis shares for the longer run could be a good strategy, and sell higher priced shares to lock in the income along the way.

   You also want to be careful of concentration risk as well.

3. Employee Stock Purchase Plans (ESPP’s): While this isn’t considered stock based compensation and it’s more of an “elective plan” you can participate in, it involves stock and it can be easily mismanaged. I think it’s worth discussing!

   An ESPP allows you to purchase your company stock at a discount up to 15%. If you enroll, your employer will pull the percentage of your salary you elect from your paycheck (you can buy up to $25,000 of stock per year), and purchase the company stock with it at the end of the offering period.

   Taxes on ESPP’s can get complicated very fast. There are also qualified and non-qualified plans to add to the complexity. Most plans will be non-qualified.

   Mistakes with ESPP’s are similar to RSU’s. You have to have a plan of action for the shares. Know what you’ll hold, and what you’ll sell. You also want to be sure you stop your salary withdrawals if you don’t want to buy anymore of the company stock (aka: withdrawal from the program).

   What will get you with ESPP plans? The complicated taxation rules. I highly suggest consulting a financial professional if you’re unsure what to do with your shares.

Taxes get complicated specifically on ISO’s and ESPP’s because there are different rules for:

1. Qualified Dispositions= You hold the shares 1 year from purchase AND 2 years from grant.

2. Disqualifying Dispositions = You DON’T hold the shares for BOTH 1 year from purchase and 2 years from grant.

So, a lot of mistakes get made by not properly planning for taxation and managing the overall position you have in the company stock.

There could be hundreds of thousands (or even millions if you’re a high level executive) on the line by not being in the know about your stock based comp.

You should take a look at what you have granted to you and put it in a spreadsheet with grant dates, vesting dates, and amounts you expect to vest.

Getting it all in one place and then analyzing your company stock fundamentals may help you make some better decisions on what to do!

Food For Thought 🧠

"When something is important enough,
you do it even if the odds are not in your favor.”
- Elon Musk

DISCLAIMER: We are not investment advisors, and this content is for educational purposes only. We don’t offer financial, legal, or tax advice. Nothing we say is a recommendation to buy or sell any assets. Trading and investing are extremely risky, so please be careful and do your own research.