In this episode of Motley Fool Answers, Motley Fool senior analyst Jason Moser joins us to answer your burning questions about stocks! Including dividend stocks, spicy stocks, stocks about to be acquired, and more.
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This video was recorded on July 27, 2021.
Alison Southwick: This is Motley Fool Answers. I’m Alison Southwick and I’m joined as always by Robert Brokamp, Olympic hopeful and Personal Finance Expert here at The Motley Fool. Hey Bro.
Robert Brokamp: Hello Alison, how are you?
Southwick: So good. In this week’s episode, Jason Moser, senior analyst here at The Motley Fool will go for gold answering your questions including, what is the right number of stocks to own? How do stocks react to inflation and whether to sell or sit when a company you own is about to be acquired. All that and more on this week’s episode of Motley Fool Answers. Jason Moser, it’s been way too long.
Jason Moser: How’s everybody?
Southwick: Has it really been a year since we’ve had you on the show?
Moser: I don’t know, has it been that long?
Brokamp: Absolutely. It’s literally a year. Yes.
Moser: Yeah. You just keep busy and things just keep flying right by and then all of a sudden I’m like, where’s Motley Fool Answers been all my life? Thankfully, you guys have me back. I appreciate it.
Southwick: We appreciate you coming on and helping us out here. I guess we might as well just get into it. Our first question comes from Matt. “Thank you-all for what you have done to make my financial life so much healthier. I love your podcast so much. I’ve gotten my whole family to start listening.” That’s great. “I wanted to ask if there is ever a time to not have an emergency fund. I already have unemployment insurance which should cover nine months of basic expenses, cash to cover my annual maximum for health insurance policy, not to mention an HSA to refill that cash. Cash for a new or used car. I rent so major home repairs are covered by my landlord and I even have money set aside for a plane ticket should one of my parents suddenly get sick. It seems somewhat silly to set aside three months of expenses, let alone six or nine months in an emergency fund. I need Bro’s pessimism to tell me all the emergencies I’m not prepared for. Scare me, Bro.”
Brokamp: Well, Matt, I’m afraid I won’t be able to scare you too much since I think you’ve mostly got it right. It seems like you have most of your basics covered and if something does happen you actually do have some cash set aside for that car purchase or plane ticket that you could use if necessary. But if you told me you had a mortgage and kids and other large ongoing expenses I’d think differently, but it sounds like you could live lean if you had to. But I will offer you a few things to think about. First of all, one thing to consider and you may already have this is renter’s insurance. It protects your stuff in case it gets stolen or damaged, even while you’re traveling by the way and it provides some liability protection in case you get sued, maybe someone trips in your apartment or something like that. You mentioned having money to buy a new car, but you don’t mention if you already have one, but a large repair would be one unexpected big ticket expense that you might want to have some cash on the side for. Also find out how long it will take to actually begin receiving unemployment benefits. Even when you become eligible. It often takes a few weeks and sometimes longer depending on the state. I will say just to make it clear that when it comes to that three to six months for an emergency fund, it’s three to six months of must pay expenses. Just the things that you have to pay. It’s not as big as people often think. Also, another benefit to having the emergency fund isn’t just having cash on the side, but it’s cash outside of retirement accounts because the vast majority of Americans their saving happens in their 401(k)s and their IRAs. If you need that money before you’re 59.5, you either may not be able to get a hold of it depending on your company plan or you’ll pay taxes and penalties. That’s another thing to appreciate by having some money outside of your retirement accounts. Anyways, I’m not really comfortable saying that anyone shouldn’t have any cash on the side, but based on what you said, Matt, it’s probably OK if you have less than what is usually recommended. So maybe just one month’s worth of must pay expenses would be perfectly fine for you.
Southwick: Our next question comes from Serab. “I recently started investing in stocks. I’ve been thinking about it a lot and never was I able to take the first step partially due to my ignorance that I don’t have time to research and keep track of the stocks. But it ended when I saw an ad for Motley Fool Stock Advisor and I took the plunge. I’ve been investing for the last six months or so and it’s been an amazing experience. Not in terms of gains, but the community you guys have built so thank you.” Well, at least you got plans.
Brokamp: I think he meant in addition to the gains […]. I think that’s what he meant.
Southwick: Yeah, I’m sure that’s what he meant. “My question, I have been mostly investing in Stock Advisor and Rule Breaker stock picks and a few of the starter stocks. My portfolio currently has 49 stocks, yet I see more stocks being discussed and I also listen to the Fool podcast and hear about stocks on the radar. I’ve heard on the podcasts that you don’t want to own so many stocks that your gain starts to taper off like an index fund so how should I or anyone else approach this?”
Moser: First and foremost, 49 stocks after just six months, that’s impressive. It’s almost too impressive. In other words, he may be moving a little bit quickly. I think for me, especially for new investors, because I think a lot of folks feel like if they’ve not been investing when they should have been or they feel like they’re late to the game and then they feel like they need to play catch up almost and really move quickly. I would encourage you to pull back a little bit, take your foot off the gas. Don’t let yourself feel like you need to play catch up and move too quickly and buy every single recommendation that goes out there. The nature of stock idea services generally, and that’s what Stock Advisor or Rule Breakers are, is to give ideas and we utilize those starter stocks and those core stocks in order to be able to help you build up a portfolio of some of our favorite most timely recommendations of Best Buys Now. First and foremost, I want to tell you 49 stocks is not too many. It is something we hear a lot about with the podcasts and with members. What is that magic number? How many stocks should I own? As bad as it sounds, and I know it’s going to sound like a little bit of a cop out here maybe, but it is different for everyone, it really is. Some folks are very happy owning a very concentrated portfolio of just 10-20 different stocks. Some folks really feel better diversifying and owning 50, 100 stocks even. I don’t know that I would worry so much about your gains tapering off like an index fund.
If you look at just the S&P for example, that’s essentially 500 of the most important businesses around the world. That’s 500. Now there is an argument to be made that a small portion of those 500 really drive most of the returns. What we focus on here at The Motley Fool, obviously, is finding good businesses that we can invest in and own for long periods of time. The longer that you own these businesses, the longer that you keep building up your portfolio, the more of an opportunity for that wealth to compound over time. That mitigates that concern. I think of your portfolio looking like an index fund, so to speak. Personally, I own 30 different stocks. I could probably hold a couple of more, but I don’t feel like I really need to because I also own an S&P index fund to protect me from myself, so to speak. You see others like Shelby Davis, an investor from days back and I think he passed away with something like 1,000 or more holdings. Like, he just collected stocks over the course of his life. That worked out very well for him as well. I think you can do it any number of ways. But don’t feel overwhelmed or that you have to play catch up.
Feel free to just take your time, go about it slowly, be a little bit more picky perhaps with the companies that you want to invest in. Also feel free to add to those positions that you already own that you really like. Like David Gardner often says, and one of the greatest lessons I ever took from him is adding the winners. Find those companies that are performing. There’s nothing wrong with adding to a stock on the way up.
Brokamp: I’ll just add that for someone who subscribes to our services and listens to our podcasts, they’re going to hear about a lot of stocks. You may feel like you’ve got 49 and like, “Oh, but this company, I’m interested in this one too.” In a world of no brokerage commissions if there’s a stock you read about that’s trading for $20 a share just buy the share. There’s nothing wrong with just putting a little bit of money in a company, you might end up getting hundreds of companies over time. Portfolio purists will probably disagree with this, but if you just get in the habit of saying things like, “This company is interesting. I’m just going to buy one or two shares.” You’ll start following it a little better and chances are you’re going to be wealthier if you do that rather than spending that $20-40, $50 on going out to eat or something else.
Southwick: Our next question comes from Dan. Dan is a two actually. Here we go. “I have two questions that I hope you can answer. My daughter is 18 months old and we’re currently contributing to a 529 plan. My wife recently accepted a position with Penn State Health and one of the benefits is a 75% tuition discount for family members at Penn State. I’m considering stopping the 529 plan and instead saving the contributions in a taxable account for a few reasons. She might not want to go to college and the 10% penalty is daunting. There’s not really anyone we would transfer the 529 to if she decided not to go to college. The educational benefit is nice, but it might not be there in 17 years so I still want to save some money just in case. Is this an OK plan or do you have another suggestion?”
Brokamp: Let’s take that first question. Just so everyone knows, the benefits of the 529 is that you put the money in and depending on your state, if you participate in the state’s plan, in some states, you don’t even have to participate in the state plan, you get a deduction on the state tax return, so that’s nice. But the real benefit is that the money grows tax deferred, but then withdrawals are tax free if used for qualified education expenses. It’s just about any education expense related to college, but you can also use up to $10,000 per year to pay for private tuition and primary and secondary school. Given this situation, I still think it makes sense to save something for college.
First of all, the discount at Penn State is nice, but your daughter may not want to go to Penn State. You should probably save some money. You’re concerned, it sounds like you might put money in a 529 and then she doesn’t go to college, what do you do with the money? The 10% penalty, just so you’re clear, is only on the growth, so any money you put into a 529 will come out tax and penalty free, so it’s not the entire account that will be penalized. That said, if you’re still not comfortable with the 529, it’s perfectly fine to save in a brokerage account as well. I know some people do that because even though the brokerage account is taxable, you have more flexibility. One of the biggest downsides of the 529 is that you can only select from among a menu of mutual funds or ETFs, you can’t buy individual stocks. There are many people who believe, “You know what? I’m going to go with the brokerage account, invest in individual stocks. It’ll grow more than my 529 and that will outweigh the taxes that I’ll have to eventually pay.” I think that is worth considering if you are an experienced investor and you’ve demonstrated that you’re able to pick stocks that outperform regular index funds.
The final thing I’ll just say about that for anyone who does want to buy individual stocks, in a tax advantage account for education, there’s always the Coverdell low annual limit only $2,000 plus it’s subject to some income limitation, though there are ways around that. But definitely look into Coverdell if you’d like to pick stocks and save for college and as always, the best place for information about 529s and Coverdell is savingforcollege.com.
Southwick: All right. Dan, second question, “I’m currently contributing money to a Health Savings Account. I have a high deductible plan at my work and rarely go to the doctor. My wife covers our daughter on her plan. We can cash flow our normal medical expenses and I was considering leaving the HSA funds to grow with an eye toward covering insurance and medical expenses in retirement. If all goes well, I could see us retiring at 55,” Rule of 55, “But we’d need healthcare, hence the HSA. We may continue to work, but I’d like to give us options. Does this strategy sound OK?”
Brokamp: Yeah, and this is a great idea. The HSA is the account with triple the tax benefits, contributions are tax deductible, growth is tax deferred and withdrawals are tax free if used for qualified medical expenses. That includes healthcare premiums, including Medicare premiums when you retire, so it’s a great idea to stuff your HSA as much as possible and then if you can leave it alone until you need it in retirement, so I think this is a great idea. I’ll just highlight that Dan said the Rule of 55, what that means is generally if you take money out of a retirement account before age 59.5, you’ll be penalized 10%, there are some ways around that. One of them is the Rule of 55, with some employer plans. If you are 55 or older when you retire from that plan, you can take money out and not worry about the penalty. It’s not any old 401(k) you have, it’s if you retire from that company, just that company’s plan, if that company lets you do it. Like I said, there are ways around this though, what most people do who retire early and want to avoid that 10% penalty, they do something called substantially equal periodic payments, so look into that as well.
Southwick: All right. Next question comes from Adam, “When it comes to dividend paying stocks, should I be thinking about their current yield or the yield I’m earning based on my cost basis? Bank of America is currently yielding 1.8%, but I bought some shares back in 2011 and they are yielding over 13% on my cost basis of $5.28 per share. I’m reluctant to sell the shares because I believe I’m anchoring to the high yield on my cost basis, but I think it would be more logical to consider the stock’s current dividend payout and its potential for growth. Can you help me sort out my thinking?”
Moser: Well, I can try, Adam, I can try. You’re asking a good question. I like that you’re reluctant to sell the shares because you’re “anchoring to the high yield on your cost basis” but I don’t think you’re anchoring. I think what you’re really doing is you’re benefiting from the point of dividend investing in the first place and that is to own those stocks really for as long as you can. Typically dividend stocks are going to be lower on the capital gains side, but higher on the income side, assuming you own those shares for longer periods of time. You are buying a dividend stock, not really for the capital gains, not because you think the stock is going to double or triple, although it could, but you are really buying it because you liked that steady stream of income that you’re going to keep bringing in, in good times and in bad. You will see certain periods of time and I think back to the Great Recession, clearly banks had a tough go of it there. Then there were all weird conversations about nationalizing banks and whatnot. Thankfully, that never came to fruition and the banks made it through OK, Bank of America did as well. We saw during that stretch of time, dividends came under fire.
A lot of banks had to cut those dividends or stop them altogether for a certain period of time to get back into a physically fit shape. But generally speaking the idea behind dividend investing is to own those companies for as long as you can. I think personally you are looking at it the right way by looking at your yield based on your cost basis, because that really is the point of the investment in the first place. But Bro, I know you like dividends and I’m sure you run across this question a lot too with folks at early retirement, I just didn’t know if you had any thoughts on this?
Brokamp: Well, first of all, I want to congratulate Adam because it’s now trading at $38 a share, so he septupled his money that’s up more than seven times than he paid for it, so great. Obviously, he bought it at the right time. When things were going through a tough time, so good for you, Adam. I’ll mostly agree with what you said, if you bought this for the income and you’re happy with the income that you are receiving, it’s producing the income you want and you still believe in the company, I say go ahead and hold onto it, that’s the benefit of the holding a dividend payer for several years. Historically, dividends go up at a rate that exceeds inflation, so you just get a bigger and bigger check every year. That said, I do know situations where people hold onto a stock for the dividend even though in their heart of hearts they know it’s no longer a great investment, so I wouldn’t hold onto it in that case. Obviously in this situation too, he’s got a significant capital gain if it’s held in the brokerage account. We know that happens too, people hold onto a stock they no longer really want to hold, but they are doing it for tax reasons, so I generally think it’s better not to do that. If you still believe in the company, great, if you no longer think it’s a great investment, forget about the tax consequences, forget about the dividend and buy something else.
Southwick: Our next question comes from Jeremy, “About 10 years ago, my wife and I rented out our house and traveled for a year living off savings. It was an amazing experience and we’re talking about doing it again after we’ve saved enough money and things get back to normal, COVID wise, while this is still a few years off, are there smart investment moves we can make during a year in which we are expecting to have little to no income? We’ll still have some dividend and rent payments coming in, but those probably won’t amount too much. I was wondering if that no income year would be a good time to sell a chunk of our investments in our taxable accounts and then rebuy them to reset our taxable basis and what about rolling over some of our IRAs into a Roth IRA? I know that would normally trigger a complicated tax mess, but would that be easier to do in a year where our taxable income is at or close to zero?”
Brokamp: Well, to answer Jeremy’s question, yes, he is on the right path. Anytime that you are in a situation where your income is going to be extremely low, that’s a great time to do the two things that Jeremy suggested. The first with tax gain selling, we’ve all heard of tax loss selling. You sell a stock below what you paid for in a brokerage account, take the tax loss on your tax return, but you cannot buy the stock back for 30 days. Tax gains selling, if you recognize the gain, but because you’re in such a low tax bracket, you actually paid no taxes on that capital gain. You do not have to wait 30 days to buy that stock back. You can sell it today, buy it back tomorrow. The tax bracket is surprisingly not as low as you might think. In 2021, you can pay 0% of your capital gains if you’re single, and have taxable income less than $40,000, and that’s after the standard deduction. You’re actually over $50,000, and that’s double that or about $80,000 if you’re married. You can still have some pretty significant income, but still pay zero% on your long-term. That’s important, partially long-term capital gains. These years are also good to start doing some Roth conversions. Moving some money from a traditional account to a Roth account. Any money you convert gets added to your taxable income, is counted as ordinary income, but then it grows tax-free as long as you follow the rules.
The key, for Jeremy, here is that you don’t want to do too much of it, because then that does move you up into these higher tax brackets, and these points where you will start paying some taxes on these gains or conversion. Most of the big-name tax software providers, or tax companies like H&R Block, Intuit, TaxAct. They have these online tools that will help you estimate your tax bill. Just visit those, play with some scenarios. If you sell this much in capital gains, and then you did this much in Roth conversions, where does that put me tax-wise? Because you don’t want to do it so much, that it moves you up too high of a tax bracket. Because those two things are taxed somewhat separately, or somewhat differently, I should say. It does take a little bit of coordination. Just play around with those numbers, or if you have an accountant ask her or him to help you, to make sure that you don’t do it too much. One other thing to consider is, if you’re not working it sounds to me like you’re not going to be working. You might be paying for health insurance, through the Affordable Care Act, or something like that. The premiums you pay, will be based on your income. If you have virtually no income, you’re going to have some pretty subsidized premiums. If you realize a bunch of income, your premiums will go up. That’s just one other thing to think about.
Southwick: Our next question comes from Steve. “There’s been a lot of talk about inflation lately. My question is, how should I think about and plan for inflation with respect to retirement in 25 or so years? I’ve been using estimates of 2.5% inflation, and a conservative 5% annual portfolio returns to guide my planning. But if inflation starts to increase, do stock market returns and dividends more or less increase in tandem?”
Moser: Yeah, good question. I think Bro, you mentioned something earlier that is probably worth calling out here. Historically, dividends are performing very well over the course of time versus inflation. I think that’s something to keep in mind. Typically, looking 25 or so years out, that solves a lot of your problems right there. Inflation is ebbs and flows. We’ve been through a long stretch where inflation has been essentially a non-issue. Now we’re starting to see headlines, where inflation is becoming more and more of a concern. We’re certainly seeing examples of companies dealing with situations where there are signs that inflation is going to be, I think perhaps a little bit more than just transitory. I think there are some folks out there who think it’s going to be transitory, maybe it’ll not last so long. I feel like we’re in a place where it’s going to be a little bit more here to stay. I was just looking through Hasbro‘s earnings call this morning, that basically was just saying that. They were saying that freight in input costs for this business. Hasbro, just your typical consumer goods, toy company. They’re projecting for ocean freight costs to be more than four times higher this year than last year. Those costs are going up, and as such, Hasbro is going to be implementing price increases during the third quarter of this year. That should be fully realized by the fourth quarter.
Brokamp: Just in time for Christmas.
Moser: Just in time for Christmas. I think that’s why the market loves that news so much, because they know, right during holiday season, Hasbro’s going to benefit from some higher prices. People are going to go out and buy those toys for their kids no matter what. Because kids pretty much rule the world for a lot of us. I think inflation is something to be very aware of, because it does have an impact. Input prices rise, so consumers can purchase fewer goods. Companies’ revenues and profits fall. The economy slows down until we reach some balance. I always look back to something, I took this from one of my early Warren Buffett studies. I think it’s true. Buffett says, one of the greatest protections against inflation is to own part of a wonderful business. He says that because he believes that no matter what happens with the value of the dollar, that that business’s product will still be in demand. Really then, it’s imperative to just find those wonderful businesses. You find businesses where we’re going to need those products and services in good times and bad. Whether inflation is hitting, or whether not. Look at companies, look at Google for example, Alphabet. I don’t know that inflationary times are really going to impact how much we actually use in a Google search engine, or watch things on YouTube.
We’re going to be using that stuff in good times and in bad. I think that Alphabet is a good example of a business that you’re not going to worry so much about inflation. I think good insurers are another opportunity there. I think even banks, during inflationary times when those rates start going back up, that gives banks an opportunity to earn more, on that net interest income. We’ve seen they’ve had such a tough time here over the past several years because rates have just perpetually been so low. There are certain companies that will prosper better than others during inflationary times. But I think that regardless. I think what Buffett says is right, owning part of a wonderful business is the best way to combat inflation. I wouldn’t be looking for Bitcoin or gold, or things like that. You can if you want, but that’s not my speed. I’m focused on owning those wonderful businesses, because the longer you own them, the more it makes sense. You’re looking 25-years out, that would be the mindset I would approach this with.
Brokamp: I’ll just add that I like Steve’s assumptions that he is using this retirement calculator. 5% return on this portfolio, a low assumption there, a conservative assumption, always hopeful that you do better, but if not, what happens is people assume 10% a year, then they get to their 50s and 60s, and it’s too late to make up for it.
Moser: It’s like that, prepare for the worst and hope for the best, right Bro?
Brokamp: Sounds good to me, man.
Moser: There you go.
Southwick: Next question comes from Meryl. “My dad is 82, recently a widower, lives on a fixed income, has $50,000 in savings, and owns a small home that he just bought with a 30-year mortgage. He is disciplined with his money and lives below his means, his paper budgeting, and financial tracking rivals anything financial software can do. His guilty pleasure is spending $10 a week on scratch-offs, for which he produces an annual P&L, and his daily deposit to his dollar-a-day jar, to which he usually deposits more than a dollar. Recently he discovered $860 in AT&T stock that had survived a Chapter 7 over 10 years. I convinced him to add a little and invest in five Motley Fool picks that I chose for him. He’s leery of the market because of a bad experience he had with a margin call in 2008 that wiped him out and put him on a path to bankruptcy. An unscrupulous broker had convinced him to max his margin on some inherited stocks to settle debt for a failing business.
Anyway, he’s concerned about what he is going to leave us. I’m trying to convince them to invest more, up to 15% or 20% of his net worth, to increase his gains and hedge against inflation, given his income is fixed. He is a very sound mind, and could easily hang around another 10 years or more. His mental state rivals any 30-year-old. Curious what your advice would be for him. He’s concerned about hanging onto his cash, in case he ever needs it for healthcare reasons. Totally understandable, but I feel like he can afford to do a little more. By the way, I started him with partials of Intuit, MercadoLibre, IDEXX Labs, Disney, and Amazon because of his love for South America, cats, Walt Disney, budgeting and books. So far, he is doing very well, 90 days in.” Meryl and I might actually have the same dad because this pretty much sounds exactly like my dad. My dad’s not into cats and Walt Disney, but everything else, it sounds exactly like my dad. Meryl, we maybe need to talk.
Brokamp: Actually it’s funny, it sounds a lot like my mom as well, recently widowed and everything. Maybe a little more comfortable with stocks, but definitely can get scared out of stocks. I’ll just also point out that she’s been widowed for less than a year and already two guys have tried to kiss her. Hey, even if you’re in your 80s, it’s never too late. But let’s get to Meryl’s question, shall we? I think Meryl’s pointing his dad in the right direction theoretically. Every study I’ve read about asset allocation and retirement, every model I’ve seen from the financial services industry has some portion of a retiree’s portfolio in stocks, even for people in their 80s. We’ve heard that over 85% of five-year periods and over 94% of 10-year holding periods, U.S. stocks have made money and that’s pretty much all you need to do these days to beat cash. Having some money in stocks, Meryl’s dad could potentially grow his portfolio and maintain its purchasing power. At least that’s the theory, but the real answer is, your dad should only have as much in the stock market that he can hold onto. If he will sell the next time the market or his stocks drop 30-50% and that’s not a question of if, but when, then maybe he would be better off in cash.
This really is a situation where risk tolerance comes into play because he’s been burned before, he sounds very conservative. I would hate to push him into the stock market, the stocks go down and then he sells at a loss. I do think if he’s going to do it, 15-20% is a good start. I think Meryl’s on the right track with that too. The only other thing I would suggest is that he’s picked some individual stocks. Some of them are a little spicy. You might want to balance that out by throwing in some diversified dividend-oriented ETFs. Vanguard has two tickers, VIG and VYM. Then there’s the pro shares dividend aristocrats, ETF and OBL, which invest in the dividend aristocrats. I own all three, all three are in our model portfolios. Those are generally safer stocks, plus they produce the income and your dad might feel more comfortable with those. Jason, what do you think about the stocks that Meryl has picked for his 82-year-old father?
Moser: I’m with you, having some exposure there to stocks is a great idea even at that age. It’s funny because my father’s 79, and he’s a physician, he’s still practicing. But one of the things that we’d love to do together, we just love to talk shop. We love to talk about stocks, investing in different companies. He’s far more than 15-20% in individual stocks I can tell you that. Part of that is because he feels like he could just rely on me to bounce ideas off of. Generally speaking, those are stocks that can be a little spicy. MercadoLibre, a leader in its space, Amazon another one. They’re stocks where the valuations could be argued both ways, but they really are in strong competitive positions. IDEXX Labs, I’m actually a really big fan, I own that one personally.
As the owner of three dogs and a horse, I can tell you that the animal market, the pet market is just a phenomenal one. To your point about dividend stocks. One other way to participate in that tremendous pet and animal market opportunity in another stock that I own personally is Zoetis, ticker is ZTS and that is the company that produces all of the vaccines and medicines for our animals or pets and livestock and whatnot. Zoetis, a bit of a stable idea that does pay a dividend. You can get exposure to the growth with IDEXX and the dividend was Zoetis. But generally speaking, I do like those companies. They are all market leaders in their respective spaces, and so that’s important.
Southwick: Our next question comes from WGN. “Two of my companies, Xilinx and Slack, are expected to be purchased by larger companies. I plan to sell these positions. How should I determine whether to sell before or after closing to maximize my value? My Gardner-Kretzmann Continuum,” I have no idea what that is, “is around 1.5. I’m working to concentrate a little bit more.” What is the Gardner-Kretzmann Continuum? Does anyone know?
Rick Engdahl: Don’t you listen to RBI? Come on.
Southwick: Rick, who edits the Rule Breaker Investing podcast.
Engdahl: Let me fill you in.
Southwick: All right, Rick, drop some knowledge on us.
Engdahl: The concept is that you should own as many stocks as you are years old. Your ratio of age to stocks in your portfolio should be one or higher.
Engdahl: If you are 25-years old, you have 25 stocks, your GK score is 1, just little rule of thumb to like about how much you should have in your portfolio over time.
Southwick: It sounds insane and scientific, but OK.
Engdahl: It is totally unscientific, it came out of a random conversation between Kretzmann and David and it has since become canon.
Southwick: As it is said, so shall it be done WGN. Your Gardner-Kretzmann Continuum is 1.5, respectable I think. Is that good? That’s good, right, Rick? That’s good. Bro, I interrupted you.
Moser: It sounds like he’s trying to concentrate a little more. I think we’re trying to concentrate a little bit more, right?
Brokamp: He’s 1.5, which means he owns —
Southwick: Too many.
Brokamp: I would not say too many and as both Davids have said on the podcast which I’ve listened to. The reason it’s a continuum is because different people could have different numbers. If you’re an experienced investor and you’re good at identifying the winners and having GKC below 1 would be good because that’s a more concentrated portfolio. If however, you are a newer investor and you want to be more diversified, you should have a GKC above 1 because that means you have more stocks than your age and you’re more diversified.
Southwick: I maybe did lose my concentration. Jason, let’s just get to the answer here. “Should I determine whether to sell both before or after closing to maximize my value?”
Moser: We get that question a lot. Companies are getting ready to be acquired. It depends on the nature of the acquisition. Now, in this case, Slack, that deal is closed. Slack is now part of Salesforce, I don’t think the […]. However, Xilinx I can speak to you. Because Alison, believe it or not, Xilinx is a recommendation in our Next-Gen Supercycle service. Yes, indeed, I did recommend that stock.
Southwick: Go on then, expert.
Moser: It is being acquired. Interesting with Xilinx, Xilinx is being acquired by AMD, Advanced Micro Devices, and it is an all-stock deal. That makes this a little bit trickier if you are looking to actually sell these shares, because the implied price of Xilinx when this deal was made, the value for Xilinx is $143 per share and today’s Xilinx is trading below that. It’s trading around $135. What you’ll see oftentimes with all-stock deals or even part-stock deals, oftentimes, you’ll see before these deals close, there are arbitrage plays that are just being made constantly with investors trying to figure out ways to profit from the delta between the acquirer and the acquiree. That’s not something we really get mixed up with as investors here at The Motley Fool, it’s a bit beyond our specialty. That’s not our point, that’s not our focus. We obviously are very focused on just owning good businesses for long periods of time and we leave all that other trading behavior to folks that have an advantage on us there. Then it becomes an idea of when do you sell in order to maximize your price? That becomes a little bit more difficult. That is timing the market. You’re probably going to see that price creep up closer to that $143 per share target, the closer we get to this deal closing. This deal should close by the end of calendar 2021. That means we’ve got somewhere in the neighborhood of five months or so, this deal should be done. It could be done sooner, it could even a little bit later. But my suspicion is we’ll see this close by the end of 2021.
When you sell, that honestly is going to be up to you, and you have to acknowledge that there is going to be an opportunity cost here. If you are looking to maximize the value of the Xilinx share and sell it as close to $143 as you possibly can. Well, you may be, I’m not guaranteeing this, but you may be waiting for a little while. I just don’t know, it’s really difficult to say given the day-to-day gyrations of the market. But if you are waiting for some time, you may be foregoing another opportunity that may exist. If you’re not selling those shares to reinvest that money, well, you may be missing out on another opportunity. That’s something that you’ll have to come to terms with on your own in order to really figure out what matters most to you. You probably are not going to get right at $143 per share, because when this deal closes, the shareholders of Xilinx aren’t going to get cash, they’re going to get AMD shares. You’d have to determine, is AMD a company that you would like to own? If so, then you just let this deal go through and you become an owner of AMD. If you know that you don’t want to own AMD shares, at some point here in the next five months, you’re going to need to click that sell button, and then the idea really is to follow it daily and see if you can get it to as close to $143 per share as you want. But all along the way, you have to acknowledge there is an opportunity cost that comes with that in which each individual has to come to their own terms with that.
Southwick: Our next question comes from David. “I’m a longtime listener from Louisiana.” That’s fun to say. A longtime listener from Louisiana, “and I’ve listened to every Answers podcast, which is better than I have done. I do have one question about paying my wife’s federal student loans that have been paused since March of 2020. The balance is around $20,000 after starting off at $65,000 in 2017 and the interest rate is close to 5.2%. I have set aside enough money to make a large balloon payment on the loans once the payments start coming due in September, and I plan to fully pay them off by May of 2022. However, I do not want to make these large payments on this debt if some of it ultimately ends up being forgiven by Congress. Should I only plan to make minimum payments and use the extra cash I’ve saved to pay down debt such as my mortgage. Or at this point, should I not count on an act of Congress or executive order to pass in time to make up for the additional accrued interest. I will also add that I may not qualify for any forgiveness since our joint AGI is close to $150,000.”
Brokamp: Well, there are really a couple of issues here. First is that political one. School loan payments have been paused to September, I should say most school loans, so it’s definitely federal loans, some private loans have not been. There is some talk about delaying that even further, but that’s not been decided yet. President Biden when he was campaigning, campaigned on forgiving $10,000 on school debt, but then he has been pushed to increase that to $50,000. I think it was back in April, he tasked the Department of Education to find out whether that could be done by executive order. It’s not looking so great right now, but who knows? I would say, given the uncertainty and given the fact that you really don’t have to worry about this until September and maybe even later, I wouldn’t be in a hurry about that. Just pay attention to it and then see what happens. I’m going to guess that if it does happen, it certainly wouldn’t be the whole $20,000. It would probably be less and as you pointed out, because your AGI is pretty high, you may not qualify to begin with.
The second question is just whether you should pay off this debt sooner rather than later? There’s usually a couple of extreme situations. Someone has credit card debt and if you have credit card debt, you want to pay that off as soon as possible even before investing, in most cases. If you have mortgage debt, and these days, because of low mortgage rates, most people have refinanced where there is less than 3%. That’s a situation where I think most people shouldn’t be in a hurry to pay it off. You’re probably going to be better off investing money over the long term. It’s pretty easy to bait that hurdle rate of 2.75% or whatever is on your mortgage. Your interest rate is in the middle, it’s 5.2%. This is a situation where I don’t have a strong feeling about whether you should be in a hurry to pay that off or not. But just from what you said, it seems to me that debt bothers you and there’s always a psychological component to paying off debt. Once the whole school loan thing has worked out government wise and pay off wise, if you then are at a point where you have to decide whether you want to pay it off early or not, I would say do what feels good. You’re probably in a good situation anyhow, you have a good income. Ideally, you’re maxing out your 401(k)s and IRAs. If it just feels better to you to pay off that debt, go ahead and do that.
Southwick: Our last question comes from Kyle. “My fiance and I are currently renting in the New York, Connecticut area, but we’re planning to move South and purchase a home in 2-3 years. By that time, I’ll have finished an advanced degree and be changing jobs as well. We have about $150,000 saved. But right now that money is sitting in a savings account earning a measly 0.5% interest. It’s hard to let it sit there and not invest it in some way. But I don’t know how much there is to gain by putting it in stocks or real estate in the short-term. Is there a better way to use that money for the next 2-3 years?”
Moser: Well, first and foremost, congratulations because having about $150,000 saved is no easy task. That requires a lot of diligence and commitment. Congratulations to that and you’ve said something in your question, Kyle, that really is going to dictate my answer here. When you said two, three years, I’m going to go ahead and just go with two years because either way ultimately it’s going to be the same answer. I think in this case, if it were me personally, and this is coming from the perspective of a homeowner, that is a great time, it is exciting. It’s a new step in life. Particularly, you have a fiance, you’re talking about possibly a new job. It sounds like there are a lot of things on the horizon, a lot of change for you on the horizon here in the relatively near future. Typically our rule of thumb is any money that you know you’re going to need over the course of the next three years that you know you’re going to need, you should not have it in the market and I know it is so tempting to want to get in there and try to maximize that return. But the problem is that if you put yourself in a position where the timing just doesn’t work out, some crisis hits, something happens and the market plummets. You could lose a substantial piece of that money. You could lose a little bit of it. You could break even and lose none of it. Even if things go really well though, the payoff isn’t going to be, I think enough to really sacrifice the peace of mind knowing that you have this savings ready to go at the drop of a hat.
The return on this savings for you is the absolute confidence in knowing that you can stroke that check whenever you’re ready and it is a massive purchase when you’re talking about buying a new home. There are a lot of costs involved with that and I guarantee that you probably haven’t been able to think about 50% of the cost that will come with buying a new home, along with the costs that come with maintaining a home. Again, it sounds like you may have some other changes here in the near future as well. While I know the temptation is great to want to maximize that return, it sounds like you have a genuine purpose for this money. For me, I think the return is the confidence knowing that it’s there and it’s going to be safe and it is not going to put you in a position of being a desperate seller if something bad happens, of course, something bad might not happen. In hindsight, it’s always 2020. But having been there, that’s my approach. That’s just what makes me feel better about giving you this advice because I think that peace of mind for this particular purchase is just, I don’t know that you can really put a price on it.
Brokamp: Yeah, I totally agree with Jason. I’m just going to highlight another alternative for safe money. It probably won’t work for Kyle, but just so that everyone is aware of it and that is I Bonds, which have gotten a lot of attention recently. I Bonds are issued by Uncle Sam, so they’re super safe and the interest rate is based on inflation and because inflation has gone up, I bonds are now yielding more than 3.5%, which is great. It does have some downsides, you can only invest $10,000 a year per person. If you’re married, that’s 20,000. You have to leave the money alone for a year and if you take it out before five years, you pay a three-month interest penalty. It’s something to consider for some of your safe money, especially if you have a goal that’s more like five years away. But it could work in Kyle’s situation too, especially if he ends up waiting three or four years to buy the house. He’ll lose a few months worth of interest, but it’s still a pretty good return on a super safe investment.
Southwick: I’m pretty sure I saw Rick’s eyebrows go up like a cartoon character when you said 3.5% interest rate on the I Bonds.
Brokamp: You can buy them directly from Uncle Sam at Treasury Direct.
Southwick: Either that or Rick’s looking at something else on his computer screen.
Engdahl: It’s the first time I’ve heard a positive interest rate having anything to do with bonds in like 10 years, 15 years, 20 years.
Southwick: Yeah. It’s definitely a kind of moment for Rick. That’s all the questions. Jason, thank you so much for coming on the show. Please, let’s not wait another year to have you back on, huh?
Moser: Well, hey man, you know my email address so I am here whenever you need me.
Southwick: I sure do. All right, I should probably have a disclaimer. As always, The Motley Fool may have formal recommendations for or against the stocks we talked about on the show. Don’t buy and sell stocks based solely on what you heard here and that’s the show. It’s edited elliptically by Rick Engdahl. Our email is email@example.com for Robert Brokamp. I’m Alison Southwick, stay Foolish everybody.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.