Author Topic: Risk in a Roth  (Read 1142 times)

brellis1vt

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Risk in a Roth
« on: June 24, 2021, 03:39:27 PM »
I recently read an interesting article about how Peter T leveraged a Roth IRA to avoid a ridiculous amount of taxes. 
 https://www.marketwatch.com/story/how-peter-thiel-turned-2-000-in-a-roth-ira-into-5-000-000-000-11624551401
Any advice for adding risk to a portfolio?

seattlecyclone

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Re: Risk in a Roth
« Reply #1 on: June 24, 2021, 04:37:48 PM »
I recently read an interesting article about how Peter T leveraged a Roth IRA to avoid a ridiculous amount of taxes. 
 https://www.marketwatch.com/story/how-peter-thiel-turned-2-000-in-a-roth-ira-into-5-000-000-000-11624551401
Any advice for adding risk to a portfolio?

I guess my advice is "don't", unless you know what you're doing and/or can afford to lose it all.

Thiel's IRA reportedly started with a $2,000 investment in the brand-new company PayPal (you may have heard of it). He reportedly paid 0.1Ę per share, as the company basically existed on paper at this point. This was a small part of the seed money for the operation. It grew like crazy. eBay bought the company a few years later for a return of over 10,000x, turning his initial $2,000 investment into tens of millions.

If Thiel was being prudent he would have converted the whole thing to VTSAX at that point. Once you win the game, stop playing, right? He may have done just that with a majority of the gains. But he also put sizable chunks into Facebook and Palantir at a similar stage to his PayPal investment. That's how he got such a ridiculous sum in his IRA. One 10,000x gain isn't enough for that. Stopping there he'd end up with a paltry $20 million or so, similar to what Buffett reportedly has in his IRA. No, you have to double down on another set of extremely speculative bets.  Peter Thiel made it work. He clearly has a talent for this stuff. Do you?

Telecaster

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Re: Risk in a Roth
« Reply #2 on: June 24, 2021, 05:02:28 PM »
IRAs were created to be a vehicle to help middle and lower income Americans save for retirement.  That's why there are income phase outs, and back in the day there was an excise tax on excessively large accounts. 

Now they are vehicles used by the wealthy to shelter taxes.  I don't think this is good public policy. 

The Hin

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Re: Risk in a Roth
« Reply #3 on: June 25, 2021, 11:25:56 AM »
If you're going to do any stock trading (or enter into any positions that you might want to exit before the gains would be taxed as long term capital gains) it's best to do it in a tax-sheltered account like an IRA rather than a standard brokerage account. For purposes of tax efficiency, brokerage accounts are best used for long term buy-and-hold.

MustacheAndaHalf

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Re: Risk in a Roth
« Reply #4 on: June 25, 2021, 01:47:17 PM »
I recently read an interesting article about how Peter T leveraged a Roth IRA to avoid a ridiculous amount of taxes. 
 https://www.marketwatch.com/story/how-peter-thiel-turned-2-000-in-a-roth-ira-into-5-000-000-000-11624551401
Any advice for adding risk to a portfolio?
It's difficult to find certainty in the stock market.  Last year some stocks were 70% off, priced to go bankrupt.  Investing in those stocks and their call options was a great move - investing in the idea stocks recover.

I currently have some deep in the money call options on the S&P 500 in my Roth IRA.  For example, SPY (S&P 500 ETF) is currently $426.60.  You could buy $200 strike calls expiring in Dec 2023 (2.5 yrs) and have about 2x leverage without much of a markup.  The upside is 2x the S&P 500 gains.  The downside is getting wiped out after a 50% drop (2x losses, too).
https://finance.yahoo.com/quote/SPY/options?p=SPY&date=1702598400

Note if you take risks in your Roth IRA, and you wind up with losses - you get no tax benefit.  Both capital gains and capital losses don't count in a Roth IRA.

mistymoney

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Re: Risk in a Roth
« Reply #5 on: June 25, 2021, 06:47:44 PM »
I've always tilted the roth to the higher risk/reward. But you don't need to go pink sheets to do it!

My first roth account which I contributed to for a number of years is in VSGAX because small cap is a little extra risk reward - or so it was said at the time. And looking at a graph it is a bit over what the sp500 returned for the past 5 years. So? Winning? Can't get a 10 year chart.

But - ya - no billions for sure. It's up to 87k, so not too bad. In 2013 it was at 34.4k and haven't added a penny since.

It's - something anyway.


ETA, so got a comparison from late 2011 to present, sp500 is up 271% and VSGAX is up 304%. So - I did win :)

« Last Edit: June 25, 2021, 06:53:00 PM by mistymoney »

brellis1vt

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Re: Risk in a Roth
« Reply #6 on: June 26, 2021, 02:55:10 PM »
@seattlecyclone you are correct that I don't have the talent or the time to pick the next PayPal.  I would like to introduce more risk but not buy penny stocks.  I also agree with you that once you win the game you reduce your risk.
@Telecaster you are correct this isn't good public policy but I don't see a way to fix it.  Very rich people have teams of people to avoid taxes in legal ways.
@mistymoney  and @MustacheAndaHalf thanks for the ideas. These things are want I'm looking to do (take more risk but not necessarily gamble.)

zoro

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Re: Risk in a Roth
« Reply #7 on: June 26, 2021, 04:00:57 PM »
I think of it in a different way than a lot of you. Situations I select for our Rothís are the lowest risk - as it is expensive money to lose, and I also select the highest return special situations where possible.

For example in my kids Roth IRAs at the moment they bought 99 shares of MTEX this month for $24.41
and they are tendering into offer at $26. They get odd lot pref  as they have less than 100 shares
So thatís 6.5% in a month admittedly on a limited amount of money. I usually have five or six of these little arbs going in all of our Roth accounts.

Outside a Roth these would all be short term cap gains, they are non standard risk situations with a high mathematical rerun expectation, thatís why I do them in the Roth

ChpBstrd

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Re: Risk in a Roth
« Reply #8 on: June 26, 2021, 09:54:30 PM »
You have a very limited number of dollars to place into this awesome, semi-magical account which offers tax-free compounding, tax-free dividends/interest, and tax-free capital gains. That means any dollars you are able to get into your Roth are more valuable to you than the same $ in a taxable acct. To illustrate, consider if you had a choice about where to lose $10k: in your taxable account where the loss would offset some of your income tax or in the Roth where, if you max it out every year, the lost funds can never be re-deposited and where the funds would otherwise have grown tax-free. Obviously the Roth dollars are worth more to you.

This is an argument for putting your risky investments in taxable, or at least pre-tax. That way if they fail, you lose the less valuable $.

MustacheAndaHalf

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Re: Risk in a Roth
« Reply #9 on: June 27, 2021, 06:33:02 AM »
For example in my kids Roth IRAs at the moment they bought 99 shares of MTEX this month for $24.41 and they are tendering into offer at $26. They get odd lot pref  as they have less than 100 shares
So thatís 6.5% in a month admittedly on a limited amount of money. I usually have five or six of these little arbs going in all of our Roth accounts.
How percentage chance do you assign to acquisition being successful?
How did you come up with the probability?

If the deal falls through, the stock should at least fall back to $19.80, and probably further as investors suspect there's something bad that stopped the deal.  A deal failure means a 19% loss, so if it's 75% likely, this is a breakeven investment.

zoro

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Re: Risk in a Roth
« Reply #10 on: June 27, 2021, 07:28:27 AM »
For example in my kids Roth IRAs at the moment they bought 99 shares of MTEX this month for $24.41 and they are tendering into offer at $26. They get odd lot pref  as they have less than 100 shares
So thatís 6.5% in a month admittedly on a limited amount of money. I usually have five or six of these little arbs going in all of our Roth accounts.
How percentage chance do you assign to acquisition being successful?
How did you come up with the probability?

If the deal falls through, the stock should at least fall back to $19.80, and probably further as investors suspect there's something bad that stopped the deal.  A deal failure means a 19% loss, so if it's 75% likely, this is a breakeven investment.

That is not what is happening here, it is not a merger or acquisition - the company is simply buying back its own stock through a tender offer.  I have done over 500 of these and two have failed, and when they did they didnít drop very much.  The reason the opportunity exist is because they typically will only buy 5% of your shares if you have a lot, so you wonít get the high price on everything.  So for small accounts with less than 100 shares that are guaranteed to be taken - they have an advantage. So the 6.5% is real, and it is pretty risk free but it is scale limited.  I put this in the ďsmall scale arbitrageĒ class. I have discovered about 20 of these type of arbitrages that occur in the market. When I find them I use the families Roth IRAs to exploit them

EliteZags

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Re: Risk in a Roth
« Reply #11 on: June 29, 2021, 03:23:33 AM »
on the subject of Thiel, I happened to yolo a significant portion of my Roth holdings into PLTR this year (while it was around/under $20)
prob will holdout several years in hope of something like 5X+, same strategy with my taxable PLTR holdings though

zoro

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Re: Risk in a Roth
« Reply #12 on: July 04, 2021, 08:07:35 AM »
For example in my kids Roth IRAs at the moment they bought 99 shares of MTEX this month for $24.41 and they are tendering into offer at $26. They get odd lot pref  as they have less than 100 shares
So thatís 6.5% in a month admittedly on a limited amount of money. I usually have five or six of these little arbs going in all of our Roth accounts.
How percentage chance do you assign to acquisition being successful?
How did you come up with the probability?

If the deal falls through, the stock should at least fall back to $19.80, and probably further as investors suspect there's something bad that stopped the deal.  A deal failure means a 19% loss, so if it's 75% likely, this is a breakeven investment.

That is not what is happening here, it is not a merger or acquisition - the company is simply buying back its own stock through a tender offer.  I have done over 500 of these and two have failed, and when they did they didnít drop very much.  The reason the opportunity exist is because they typically will only buy 5% of your shares if you have a lot, so you wonít get the high price on everything.  So for small accounts with less than 100 shares that are guaranteed to be taken - they have an advantage. So the 6.5% is real, and it is pretty risk free but it is scale limited.  I put this in the ďsmall scale arbitrageĒ class. I have discovered about 20 of these type of arbitrages that occur in the market. When I find them I use the families Roth IRAs to exploit them


So I just got paid for this. After reading some of the comments Iím thinking of writing an article on small scale investing techniques, and why people with smaller amounts of money (less than say $10M) have significant advantages and opportunities that are not available to larger amounts of capital. It might be interesting for the more enterprising out there.