In today’s issue:

• Market Minute - The Fed’s Halloween Jobs Horror…

• Deep Dive - How one reader can use different accounts to increase returns by 23%…

• Wealth Hack - How Peter Thiel sheltered $5B from taxes…

• Brain Food - Optimizing asset location can help boost your returns…

First time reading? Sign up at https://shrewdinvestor.com

WEEKLY WISDOM

MARKET MINUTE

The Fed’s Halloween Jobs Horror

US Job Growth Fell Short of Expectations by 92%

U.S. non-farm payrolls were expected to add 130,000 jobs. Instead, only 12,000 jobs were added—less than 10% of what was forecast. What does this mean?

Recent job numbers have also been revised lower, suggesting actual job losses in the U.S. could be happening now.

Past revisions have lowered reported job growth by 30,000 to 80,000, so it’s likely we’re seeing negative job growth overall.

Does this mean a recession is on the way? It could, but not necessarily.

Most recessions do include negative job growth, but job losses tend to increase only about halfway through a recession. There have also been plenty of times when jobs declined without a recession following.

In this case, other factors like recent natural disasters in the South have put many out of work temporarily.

If we look back to 1971, payrolls have dropped in 114 months, but only six recessions followed. Slow or negative job growth doesn’t automatically mean a recession.

This slowdown could even signal a return to normal after the post-COVID hiring boom, when companies hired more than they needed to be prepared for demand.

While financial headlines may look dramatic, this could be a buying opportunity, similar to 2022, when the market dropped 25% and then quickly rebounded.

And, with election season here, you’ll likely hear more about this jobs report.

If you want a deep dive into past recessions and market crashes, check out Manias, Panics, and Crashes. It is one of the most interesting books I’ve ever read that chronicles how markets fail.

https://a.co/d/91IyRNQ

Read the full breakdown at:

• https://www.reuters.com/markets/us/us-job-growth-slows-sharply-october-unemployment-rate-unchanged-41-2024-11-01

• https://fred.stlouisfed.org/graph/?g=1xEaB

DEEP DIVE

What Investments Should I Put in My ROTH, 401(k), and Brokerage Account?

The Big Question: Sam, a young professional in her mid-20s, is saving regularly and wants to know the best way to structure her investments across different accounts.

The Details

• Age: Mid-20s

• Current Investments: VOO (S&P 500 ETF), QQQ (Nasdaq-100 ETF), and SCHD (Dividend ETF)

• Accounts: Contributing to both a ROTH IRA and 401(k)

• New Account: Recently opened a taxable brokerage account and wants to know which investments go best in each account

Quick Look at the Portfolio

Before we address her question, let’s take a closer look at Sam’s portfolio to understand her current strategy. Here are her current holdings:

First, let’s examine expenses. QQQ has higher fees than her other options because it’s tailored more for traders than long-term investors.

If Sam shifted her QQQ contributions to SCHG (with a lower 0.04% expense ratio), she’d save 0.16% in fees per year. Over 30 years, that small adjustment could add around 5% to her portfolio value, simply by opting for a cheaper fund.

Next, let’s talk about diversification. Although Sam is invested in three funds with a range of holdings, her portfolio is still 99% correlated with the S&P 500. Essentially, this means her returns would look nearly the same as if she only held VOO.

Now, let’s get to the main question: What investments belong in a Roth IRA, a 401(k), or a taxable account—and why?

How to Decide Where to Hold Investments

First, let’s consider the purpose of saving. We save now so we can spend later, and the government encourages this by offering different types of investment accounts, each with its own tax advantages.

Our goal is to use these accounts strategically to get the most benefit from each.

There are three main types of accounts:

1. Tax-Free: Money grows tax-free, and withdrawals are tax-free in retirement (e.g., Roth IRA).

2. Tax-Deferred: Money grows tax-free, but withdrawals are taxed in retirement (e.g., 401(k)).

3. Taxable: Money is invested with after-tax dollars, and any gains are subject to capital gains tax.

The usual strategy is to invest in the most tax-advantaged accounts first and work down to the least tax-advantaged. In retirement, the approach flips: you spend from the least tax-advantaged accounts first, allowing tax-free or tax-deferred accounts to grow as long as possible.

Here’s how it would look:

Where to Hold Specific Investments

Looking at Sam’s portfolio, she has two funds—VOO and QQQ—focused on growth, and one fund, SCHD, focused on dividends.

Since SCHD pays qualified dividends, those dividends are taxed at the lower capital gains rate of 20%, rather than the higher ordinary income rate.

To decide where each investment belongs, let’s consider two questions:

1. Which account will be the most tax-efficient for each investment?

2. Which investment will I want to access first in retirement?

Let’s see how her portfolio would look if she optimized her holdings versus not optimizing them…

Option #1: Mirror Portfolios

One straightforward option is to mirror her investments across all accounts. She could buy VOO, SCHD, and QQQ in each account and leave it at that.

This approach is simple and effective, but it’s not optimized.

For example, holding SCHD in a taxable account would create a tax drag of about 23% over 30 years, which would reduce her retirement income significantly.

Option #2: Let Taxes Be Your Guide

There are two main ways investments generate taxes:

1. Growth – The investment grows in value over time, and taxes are paid when you sell it.

2. Income & Dividends – The investment pays dividends periodically, and taxes are due each year on those payments.

Following this logic, we would place SCHD (the dividend fund) in tax-free and tax-deferred accounts to reduce tax drag, QQQ (high-growth fund) in tax-deferred accounts, and VOO (broad market fund) in taxable accounts.

If she contributes $45,000 per year, equally split between the three funds ($15,000 each), her strategy could look like this:

• $7,000 to Roth IRA: $7,000 SCHD

• $23,000 to 401(k): $8,000 SCHD and $15,000 QQQ

• Remaining to Taxable Account: $15,000 VOO

With this setup, here’s the impact:

✅ Reduced Tax on SCHD – By placing SCHD in the Roth IRA, we protect 47% of the investment from tax.

✅ Deferred Tax on SCHD – Holding SCHD in the 401(k) also defers taxes, cutting tax drag by 23%.

✅ Deferred Tax on High-Growth QQQ – QQQ grows tax-free until retirement in the 401(k).

✅ Easier Access to Safer VOO – With VOO in the taxable account, she can sell a stable asset first if needed.

This approach lowers her tax burden and creates a safer, tax-efficient setup for retirement.

WEALTH HACK

Hacking Asset Location

How Peter Thiel Built a $5B Roth IRA

When Peter Thiel co-founded PayPal, he made one simple choice that saved him billions in taxes.

Back then, PayPal was just a startup, and its shares were nearly worthless. At the time, startup shares are often valued at $0.001 per share.

Thiel took advantage of this by purchasing two million shares for only $2,000—all within his Roth IRA. A straightforward move that anyone could make when launching a company.

But when PayPal grew into an online payments giant, those shares skyrocketed to $5 billion.

And here’s the kicker: he’ll never pay taxes on any of it.

Pure genius.

https://www.nbcnews.com/tech/tech-news/billionaire-investor-peter-thiel-has-5b-his-tax-free-retirement-n1272317

https://www.propublica.org/article/lord-of-the-roths-how-tech-mogul-peter-thiel-turned-a-retirement-account-for-the-middle-class-into-a-5-billion-dollar-tax-free-piggy-bank

BRAIN FOOD

Asset Location: A Smart Way to Lower Taxes on Investments

Reduce the taxes you pay on your investments by placing them in the right types of accounts.

Different accounts have different tax rules, so choosing the best place for each investment can help you keep more of your returns.

Here’s how it works:

1. Tax-Free Accounts (like Roth IRAs): Investments in Roth accounts grow tax-free, so this is a good place for investments with high growth potential. For example, if a stock doubles or triples in value, you won’t owe taxes on those gains.

2. Tax-Deferred Accounts (like Traditional IRAs or 401(k)s): These accounts let your investments grow without being taxed until you withdraw. This is a good place for income-producing assets, like bonds, because you won’t pay taxes on the interest each year. Instead, you pay taxes only when you take the money out, usually at retirement.

3. Taxable Accounts: These accounts don’t have special tax protections, so it’s smart to put tax-efficient investments here. Things like ETFs or stocks that you plan to hold for a long time are good choices since they’re taxed at lower long-term capital gains rates.

By placing each type of investment in the right account, you can keep your overall tax bill lower and grow your wealth more effectively. Asset location doesn’t change what you’re invested in—it just helps you make the most of each account’s tax advantages.

STILL WANT MORE?

Share With a Friend and Get Shrewd SWAG

How to Get a Deep Dive?

Want honest feedback on your investment strategy? Submit your portfolio or question to Shrewd Investor and get expert insights in our weekly 'DEEP DIVE' feature.

Sponsorship?

If you are interested in sponsoring a future issue, send an email to [email protected]