Everyone loves getting a great return on investment. The market can provide some ups and downs along the way, and all in all, a well-diversified portfolio can help manage some of the downside risk. However, don’t expect parabolic returns either.
Up, up and away!
Sometimes clients want to take a piece of the pie and speculate. You hear that Tesla is a good investment or some new pharmaceutical is the next big thing. Assuming other boxes get checked, we have no problem taking a small percentage of your overall portfolio to use on the side.
Let’s say you want to speculate with a portion of your portfolio. Let’s assume you get the desired result and get a parabolic return (for example, you turn $10k into $300k). Where should this speculative position be in your portfolio? Probably not your taxable account.
If your bet pays off, you want to keep as much of the gain as possible.
- Taxable Account – You will pay capital gains upon selling the security
- Tax-Deferred – You create a tax bill for a future date
- Tax-Free – Inside of a Roth IRA or a Roth 401(k), selling a profitable investment will not trigger a tax bill as long as the funds remain in the Roth account.
Roth, Roth Baby
Clearly, the Roth side of things is where you want your mega-returns to stem from, if possible. Since Roth 401ks are limited by your employer typically to a handful of mutual funds, you are unlikely to experience the moon-shot gains here.
You might consider a Roth IRA if your goal is speculation. With a Roth IRA, you have a world of investment opportunities that you’d not typically have in a Roth 401k. However, it’s always wise to double-check your Roth 401k at work to see if you have a brokerage window that allows for investing in individual securities within your Roth 401k.
10 Actions To Take 10 Years Before Retirement
In this paper we discuss 10 actions you should take to develop and deploy a successful long-term wealth plan. It will help you make decisions about your financial journey today and well into your retirement chapter.