JUST PLAIN TALK: Take investing advice from Guy Clark
"Only two things that money can't buy, that's true love and homegrown tomatoes."
Country music DJs played just a handful of Guy Clark singles, at least the ones he released, but "Homegrown Tomatoes" was one they spun. Occasionally store-bought produce beats stuff from the garden, but never tomatoes. The two things money can't buy should be incorporated into the Certified Financial Planner exam. Do it yourself (DIY) gardening has benefits beyond the harvest; it's the only yard work I enjoy.
Doing things yourself can save money, but occasionally, a DIY novice can turn a home improvement project into a disaster. Likewise, some DIY investors recently said, "Hold My Beer." A California accountant shared a story about a client who sent him a 1099B 500 pages long. The client frantically traded on Robinhood and didn't realize his activity generated a massive tax document. In addition to an unexpected tax liability, wading thru a 500-page tax document increases accounting fees.
Using margin, another DIY-trader leveraged a modest balance, $30,000, and generated over $45 million in trades last year. While that may seem incredible, it's not unless you enjoy paying the government money. Profit on an investment held less than one year is taxed as ordinary income, not favorably treated as long-term capital gains. Compounding things is the IRS's "wash-sale" rule. Losses are disallowed if a trader sells and then buys the same or similar security within 30 days. An unsophisticated trader may not realize losses won't offset their gains until tax time. In this case, the trader had over $1.4 million in capital gains with a tax bill north of $800,000.
Jeffrey Levine of Buckingham Wealth Partners warns with the gamification of investing, and you're having fun, taxes are the last thing on your mind. When the party's over, the bill comes due. Inexperienced people often don't realize the type of account affects your tax liability. $45 million in trades inside an IRA won't generate a nickel of tax liability.
Morningstar's Christine Benz argues online platforms should trigger wash-sale alerts, much like how banking platforms warn for a repeated transaction. TD Ameritrade says their educational resources, along with their cost-basis page, provide customers with sufficient resources. That's true; I've got access to their platform, but that's work, and day-trader types are having fun. A learner's permit is required before someone can legally drive alone. Still, anyone can be up and running with online trading apps in less than five minutes.
The reality is investing, done correctly, should be as dull as watching paint dry. Investing is a tool to help you reach your goals. If you don't save enough, investing is not a magic wand. An astute investor with poor saving habits will likely fare worse than a poor investor with stellar saving habits. Frenzied trading is no more akin to investing than Publix tomatoes are to homegrown.
You can't always get what you want, but Buz Livingston, CFP, can help you figure out what you need. For specific advice, visit livingstonfinancial.net or drop by 2050 West County Highway 30A, M1 Suite 230.