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💥 The SPAC crash

April 27, 2021 Sign up
TOGETHER WITH Finny

Happy Tuesday! Let's get right to the money topics for today:

  • The tax traps of trading apps. If you don't know about specific lots identification, keep reading
  • The SPAC crash, and why they've fallen
  • Thinking about a summer vacation? How to make your travel dollars go the extra mile

TAX

The tax traps of trading apps

As more and more retail investors pile into the so-called “democratization of investing” bus that’s supposed to take them to a destination of financial freedom, we continue to see the occasional traps that the oversimplification of investing can bring with it. 

Many avid users of the heavily criticized Robinhood app and industry counterparts like Sofi, Webull and others have unfortunately come to this realization when faced with the reality of taxes after realizing what they owe.

Specific Lots Identification 

To be fair, most investors have probably never given any thought to exactly what shares they’re selling when it’s time to cut ties or take profits. The benefits of understanding this and utilizing it to your advantage will be noticeable on your tax bill though, and that’s what specific lots identification is for.

Example: You purchased 100 shares of $ABC on March 1st for $100 each, and purchased 100 more shares on April 1st  for $150 each. Let’s say on May 1st you wish to start taking profits on $ABC stock because the share price has risen to $200. If you specifically sold the shares you’d purchased at $100, you’ve just accrued $10,000 in short-term capital gains. Consider though if you had sold the shares purchased at $150 instead. In this case, you only have $5,000 in realized short-term cap gains.

Either way, you are selling 100 shares of a $200 stock and adding $20,000 in buying power to your account. The only difference is in the taxable gain, which is based on the cost basis of the stock you sold.

This should paint a pretty clear picture of how this can be advantageous when it comes to tax time, and it’s especially valuable to investors who don’t want to fully liquidate their position. Which shares are sold, and which ones are held, matter.

Trading apps don’t have this functionality yet

Robinhood, Webull, and many other retail trading platforms do not allow their users this level of tax lot selectivity when selling their shares right now. Most of them use what’s known as the FIFO (first in first out) method versus the LIFO (last in first out), which means the shares you’ve owned the longest automatically get sold first when you place an order to sell stock that's less than your full position. 

This is specifically bad for stocks that have increased in value over time since the earliest shares you bought are likely the cheapest, leaving you with essentially the biggest capital gain bill possible every time.

So... what do you do?

The option to choose which share lots you want to sell will likely become available on these popular trading platforms eventually, but for now, you’ll need to circumvent it and create your own solution. 

Having multiple brokerage accounts, especially with one that allows you to choose your tax lot could be a smart move. Think Fidelity, Schwab, TD Ameritrade, E*TRADE, etc.

📚 Beware of the wash-sale rule when making these trades too. Take our 6-minute learning quiz to learn more about it:

INVESTING

The SPAC crash

SPAC stands for special purpose acquisition company. It’s a publicly-traded shell company of sorts put together by a group of investors looking to bring a private company public. Once the private company is identified and the merger is complete, the ticker will change from the SPAC’s name to the company’s. Essentially, it’s a way to circumvent the traditionally arduous IPO process.

SPACs as an investment

SPACs seem like a bulletproof investment from a distance. A floor of $10 that you’ll get back if the shell company fails to acquire an existing business looks like great security. The predictable pattern of pops that come with rumors and acquisition news that could rise as high as a 6x ($CCIV) or the prospects of even a 12x run when the merger goes through ($QS) provides tantalizing upside.

But beware. The potential of a merger going through and the price falling over 600% in the following few months, ($XL) or nothing happening at all with the price puttering around about $7 for a few months like $CLOV are a few snapshots of the reality of SPACs these days.

Why SPACs have fallen

SPACs are akin to Icarus in a way. While it’s great that they’ve proven they can fly and they do have some massive support from traders... they might’ve gotten too close to the sun. 

Although SPACs were all the rage late last year and in early 2021 as Quantumscape and rumors about Lucid Motors merging with $CCIV ripped bears’ faces off, they’ve since cooled off in a mighty way over the last couple of months.

  • General skepticism. This is partially due to overall choppy waters in the market, but those waters are being churned in part by analysts and investors who are bearish on SPACs as an investment or are generally more traditional and conservative in their assessments of the market.  Many, like Kevin O’Leary for example, critique them for being too similar to basic private equity—they want to be able to trust the minds behind the SPAC as qualified and shred players in the acquisition, not just folks with a lot of capital.
  • Not to mention a market in disunion. The S&P 500 is hitting all-time highs and certain stocks are doing great, while others, mainly growth stocks and, you guessed it, SPACs, are being beaten down in a split market.
  • Conflicts of interest. SPACs involve two main transactions—the initial IPO and then the merger—as well as two sets of players with starkly different outcomes. And when it comes down to it, retail investors are the ones usually left caught up in the frenzy and diluted, as outlined in the academic study A Sober Look at SPACs.  

When we combine all these factors, you’ve created the perfect storm for skepticism and FUD to take down this new form of investing. 

How to play this

Investors, especially newer ones, are scared off by this. It isn’t like it was in January, and paper hands are now in full effect. This recent skepticism doesn’t mean that all SPACs are now worthless and there isn't any money to be made in them. What we may have now are some investments on sale.

Our Take. But buyer beware. Evaluate and know what you own. If you’re convicted on the value of your purchases, you won’t be scared off by price fluctuations. 

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BUDGETING

How to make your travel dollars go the extra mile

Americans are seeking vengeance on COVID-19 by way of travel this summer.  If you’re one of the reported millions of Americans vying for vacation and making big plans for your travel itinerary, the least we could do is try to help you save some money in the process. Here are a few tips.

  • Include traveling in your budget. This is something many Americans forget about altogether, even though most partake in it regularly. Purportedly about 55% of Americans who budget leave off this cyclical item that can engulf a noteworthy percentage of your overall expenses. Approximate about how much you’d like to spend on travel per year and divide it by 12. You’ll get a monthly number to set aside for an earmarked purpose, making it more easily accounted for and obtained.
  • Compromise. Perhaps the simplest and best way to stretch your vacation budget is to not pick uniformly across your different expense areas. For example, if you don’t plan on being at your condo very much, compromise on the amount you spend there and save that for other amenities. If the place you stay matters a lot, allocate more of the budget specifically to that, and be frugal when it comes to going out.
  • Put it on credit. Yes, debt instruments can be good. Sometimes. Most of the biggest incentives on credit cards come in the form of travel-related compensation, especially if it’s a travel or business-oriented card. Whether it be flight miles or just cashback, the amount you can save, or “earn” in cashback, by paying for your vacation expenses on credit can be well worth it. Just make sure you can afford to promptly pay the balance off once it posts, to avoid accruing interest.

🧵 Have any words of wisdom when it comes to how much to budget for a vacation? If so, feel free to share on this thread:

✨ TRENDING ON FINNY AND BEYOND

  • Large-cap stocks with the largest price target upside—including some SPACs (Finnyvest)
  • Here’s where Americans are planning to go for that summer vacation (CNBC)
  • States with the lowest and highest average retirement savings (Yahoo! Money)
  • The rich face Biden's tax plan with anger and denial (Bloomberg)
  • Finny lesson of the day. If taxes are top of mind, take this quiz to learn if there are additional deductions you can take: 

Finny is a personal finance education start-up offering free, game-based personalized financial education, a supportive discussion forum, and simple stock and fund tools (aka Finnyvest).  Our mission is to make learning about all things money fun and easy! 

The Gist is Finny's newsletter to our community members who are looking to make and save more money, protect their finances and be their own boss!  It's sent twice a week (Tues/Thurs). The editorial team: Austin Payne and Chihee Kim.

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