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Be Fearful When Others are Greedy

by | Jul 7, 2022 | The Ship's Wheel

 

“Be fearful when others are greedy and greedy when others are fearful” -Warren Buffett

Warren Buffett is my investment hero.  I have studied his career, read scores of books on his investing process, and attended 18 of his annual shareholder meetings. But, I have to disagree with the above quote: You should be fearful before others are fearful and prepare for their fear.

We have seen some extraordinary things in the market since the pandemic started, from meme stocks to cryptocurrencies to exorbitant valuation for profitless companies developing emerging technologies.  The allure of quick, easy money can be too much to resist.  And why should getting rich be quick, easy, and fun?  Doesn’t it seem more reasonable that it should be slow, difficult, and boring?

It is easy to get excited about emerging technologies, as they often seem magical and promise better, easier lives.  But not all that glitters is gold.  Do you remember the excitement around the dotcoms?  Knowing the name of something is not the same as knowing something.  You have to do your homework before investing.  Don’t get caught up by Wall Street’s latest glittering investment that promises quick, easy money.  Wall Street is in the business of selling you things and making money off you, not providing you financial security. 

Imagine you saw the first car ever made rumble by and you foresaw how it would change the world.  You correctly predicted how people would move from cramped, city apartments to homes in the leafy suburbs, how families would be brought closer together, and goods could be delivered more cheaply.  You saw the auto industry’s tremendous growth as virtually every American family would have a car.  Seems like a great investment, doesn’t it?  There have been more than 1,600 auto manufacturers in the US (source: Wikipedia).  Pretty low odds of successfully investing in the right auto manufacturer, huh?  And yet electric vehicle manufacturers like Lucid and Rivian, with no product, let alone profits, are valued in the tens of billions.

Want a more recent example of the difficulty of picking the winner in an emerging field?  Google was the 27th search engine developed. 

There is a difference between opportunities missed and money lost.  The last three months or so have not been kind to speculative securities like unproven companies and cryptocurrency.  Speculation is neither illegal, immoral, nor (for most people) profitable over the long run. The media sensationalizes a handful of investors who have successfully speculated, but ignores the millions who lose their hard-earned savings and end up financially devastated. Losing money is more consequential to your life. You can miss a million opportunities in a lifetime and still become rich.  Don’t confuse speculating with investing. 

We favor investing in companies with proven products that meet buyers’ needs and produce actual profits.  That might seem old fashioned, but it is proven to work.  For our clients, money is for dignity in retirement. Wall Street may lose sight of that, but Jay and I never do.

Am I eligible to Convert my Traditional IRA to a Roth IRA?

Converting your Traditional IRA to a Roth IRA can be one of the best financial decisions made when saving for retirement if done correctly. Prior to 2010 there was an income limit that restricted the conversion to a Roth IRA if your (AGI) was over $100,000. As of 2013, the income limitation does not exist for a conversion, but it still exists for contributions. This does not mean it will not come back in the future, but for 2013 and beyond anyone can convert an existing Traditional IRA to a Roth IRA regardless of income.

For example, someone has a Traditional IRA with $350,000 invested, that IRA can be converted to a Roth and all the taxes need to be paid for the tax year the conversion was completed. After converting to a Roth, the money grows tax-free. Paying the taxes on this money now might sound like a tough pill to swallow, but the potential tax savings down the road can be significant. Wouldn’t you rather pay taxes on $350,000 now than pay taxes on $1,000,000 in the future? One of the keys to doing this correctly is paying the taxes with funds outside of a qualified plan. Paying the taxes with money from the IRA defeats the purpose and will negate the full tax saving potential.

This is just one example of completing a Roth conversion. You can do partial conversions as well. This means you do not have to convert the entire account. You could develop a strategy of doing partial Roth conversions over multiple years. The key is to consult with your tax advisor or accountant to make sure the conversion will not put you into another tax bracket. Every dollar you convert is taxed at your ordinary income tax rate. This strategy works best for younger investors who have longer to allow the money to grow and compound. It can also work well for an older investor who is in a low tax bracket. Another reason to convert to a Roth is that Roth IRAs are not subject to the Required Minimum Distribution after you reach age 73. For those of you out there that do not plan to use your IRA money to live this can be a huge advantage when it comes to passing along your IRA to your beneficiaries. Roth IRAs continue to grow tax-free after the conversion and after you die. There are distribution requirements for the beneficiaries, but the distributions are tax-free as well.
This strategy might not be right for everyone. I would advise you to consult with a Certified Financial Planner™ or your tax advisor prior to taking advantage of this potentially large tax savings. One of the best times to complete a Roth conversion is when the value of your Traditional IRA has fallen due to a market correction like we experienced in 2022. If you have questions on this article or would like to schedule a free financial review. Please contact Jay Chapman at 772-320-9658 or email [email protected].

Jay Chapman| CFP®

Jay Chapman| CFP®

Founder

Jay Chapman, CFP®, is founder of Chapman Capital Advisors, as a member of the advisory team. He has over 20 years of experience in the Financial Services industry.

Will Thompson | CFA®, CFP®, AIF®

Will Thompson | CFA®, CFP®, AIF®

Advisor

Will provides the in-house expertise of CFP®, CFA®, and AIF® that is uncommon for boutique firms.


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