The Risks With Fund Investing

Risk, Cash, and QCD Update

Not investing carries a higher risk than investing does. One of the letters to the AAII editor shared some important concepts regarding investment risk. Robert’s reminder to define risk is very important, and I believe his definition is correct. However, permanent loss of capital, compounded by the drag of inflation and income taxes can increase an investor’s overall risk. Here is what Robert said in response to “How to Find Funds Suitable for You,” by Charles Rotblut, CFA, in the February 2024 AAII Journal:

“In discussing risk, one needs to define it. I maintain that my 100% allocation to equities is much less risky in the long run than any portfolio containing bonds. I define risk as the probability of permanent loss of capital.

That can also include the probability of attenuated gains over time, since an unnecessarily reduced long-term gain can also be regarded as a destruction of capital. A reasonably diversified portfolio of good equities provides ample protection against permanent losses, provided one stays the course and doesn’t try to time the market. A single low-expense-ratio domestic equity index exchange-traded fund (ETF) can provide such a portfolio.

Also, this article uses volatility as its measure of risk. As Warren Buffett said, ‘Volatility is far from synonymous with risk. Popular formulas that equate the two terms lead students, investors and CEOs astray.’” – Robert A. from North Carolina

Cash Within a Portfolio

At the present time Cindie and I have about $148K in cash in our eight Fidelity accounts. This is more than I usually like to have, but there are good reasons to maintain a more sizable amount of cash. One of the reasons is that short-term interest rates are sufficient to add more cash each month. At 5%, the annual cash income from interest on the $148K is over $7,000. That reduces the urgency and necessity of being fully invested at all times.

This was a helpful reminder from AAII: “Maintaining a cash position can make sense for many investors, particularly when short-term interest rates are close to or above their long-term averages. By reducing the allocation to stocks and bonds, a cash position can reduce portfolio risk while offering investors the opportunity to take advantage of price declines in individual stocks or the overall market.” – Page 10 AAII JOURNAL MARCH 2024

There are at least three good reasons I want to have cash on hand. The first is the ability to buy investments when investor sentiment becomes bearish. There are bargains when bad news strikes, especially if the bad news has more of a short-term consequence. Cash is also valuable to sell cash covered put options.

The second is to have funds available for charitable giving. Of course, you can give your stocks and ETFs to a charity, but I prefer to keep those engines running, producing cash for future charitable purposes.

The third reason to keep cash has to do with either the RMD we must withdraw from our traditional IRA accounts or to cover living expenses. We recently took one of our granddaughters to Hawaii. Although I used our Fidelity Rewards VISA card for most of the purchases, we had cash waiting in checking to pay off the VISA balance when it came due.

Cindie, Mia, and Wayne in Hawaii

QCD Giving Update (Qualified Charitable Deduction)

By the end of next week we will have been able to give $30K in charitable donations. This has effectively avoided paying $6,000 in total income taxes for 2024. To say this another way, we were able to increase our gift total by $6,000 using the Qualified Charitable Deduction.

This has the added advantage of taking care of $30K of my 2024 IRA RMD. The Required Minimum Distribution must be taken before any investments are rolled out of the traditional IRA into my ROTH IRA. I look at this as a $30K opportunity to move assets into the ROTH, saving income taxes and increasing income for the long-term.

By the end of 2024, Lord willing, we will give at least $90K to charities using the QCD method. This means that we can give an additional $18K to charities with no income tax consequences. The maximum per person QCD for 2024 is $105K. That is a worthy target as well.