Dollars and Diagrams

Where to Speculate – The Parabolic Problem

Investments

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.

 

 

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