Tax policy should never drive investing decisions: expert

Randy Frederick, vice president of trading and derivatives, Charles Schwab, joins Yahoo Finance to discuss inflation trade and the outlook on meme stocks and crypto.

Video Transcript

MYLES UDLAND: But let's begin this morning with the markets. And for more on all of this, we bring in Randy Frederick. He is the VP of trading and derivatives over at Schwab.

Randy, always great to talk with you. So let's-- let's start with yesterday. Coming off of a kind of a rough week to finish out the month of February, we saw that huge marketwide rally to begin the week.

How are you thinking about that in the context of a market where volatility still remains pretty elevated? It still feels like we're in a new market regime and some are waiting for the salad days of 2017 12 VIX handle to kind of come back. But does that seem unlikely, at least as you're seeing things today?

RANDY FREDERICK: Yesterday's rebound, I think, was just-- it was pretty abrupt. But I think it was mostly just a reaction to the overly bearish movement that we had the prior week. Inflation fears are being talked about a lot. And I think the market got a little bit jittery. I think it's a bit overdone so it's not surprising. But I think things should moderate a bit right now.

But frankly, seeing a 12 VIX is something we're probably not going to see for a very long time. The VIX is really-- I think it might have closed below 20, like, one day in the last 12 months since COVID hit. Until we get to a more normalized environment where we don't have the virus to worry about every day-- and clearly, that is-- we're getting there, and we might be there at some point down the road. It's going to be a while.

I do think that things will moderate from here on out as the economy continues to improve, as we see earnings improve. All the economic data, things that we're seeing, all the trends are going in the right direction. But we're still a few months away from that. I do think volatility will probably moderate, and we might see 17, 18 VIX. But 12 VIX, I mean, that's-- I think we're a long ways away from that.

JULIE HYMAN: Hey, Randy. You have a lot of insight into what retail traders are doing and, you know, when the sort of MEMS stock explosion, or whatever you want to call it, came along. That prompted a new examination of the role of retail traders, especially when there's so much passive money elsewhere in the market.

How are you thinking about retail traders now that that has calmed down a little bit? It hasn't gone away. How are you thinking about their role in the market and how that's going to play out over this year and the coming years, for that matter?

RANDY FREDERICK: Well, I mean, Charles Schwab, when it was founded many, many years ago, was founded to democratize and make investing available to everyone. And we've been on a trend that entire time. I've been with the company for 28 years now. And as commission prices come down-- now, they're pretty much at zero-- it has become more and more accessible to all sorts of investors.

We'll continue to tell them the same things we've always told them, that speculating is fine if you keep it to a very small portion of your portfolio. But the vast majority of your portfolio, 80% or more, should always be long term focused. I think there's a lot of positive new investors coming into the market right now.

Again, not if they're gambling or speculating, but if they're getting exposed to investing, to how the markets work, if they start to set up retirement plans 401(k)s as most companies offer these days and they start to look long term, you have to first understand how things work in order to invest. I don't think, again, speculating is not the ideal way to do that.

But it does give them an opportunity to sort of learn about how investing works for the long run. And hopefully, we'll continue to see that. But certainly, making commissions cheaper has made it a lot easier for people to do that. And certainly, we're part of that whole picture. But we always continue to educate people to make sure that they understand that long term investing is the ultimate goal, and that the majority of your portfolio should be set up that way.

BRIAN SOZZI: Well, Randy, one thing that that could hurt longer term investors is higher taxes. And I'm sure you saw the ultra millionaires tax, or the proposal put forth by Elizabeth Warren. Are you getting questions about a tax like that? And if that tax, for some reason, does get implemented, how might that impact the markets?

RANDY FREDERICK: Well, certainly the tax she's proposing only affects a very small percentage of the people. We do get taxes from investors-- we do get questions from investors about taxes regularly. One of the things that's fascinating about this is that I think a lot of times investors don't really-- aren't really looking at the whole picture, and they focus too much on taxes.

I've heard people say, literally, I need to sell this because I need some capital losses. And I always tell them, no one needs capital losses. I want capital gains, as many as I can possibly get. And I'm happy to pay those taxes, because it means that I'm profitable.

Now, if you happen to have some capital losses and you are trying to offset some substantial capital gains that same year, then sure, it may make some sense to sell some losers so that you can bring down that overall net profit. But no one actually needs capital losses. And you should never really let tax policy, regardless of what it is, drive your investing decisions.

Your goal in investing should always be to make profits, whether that's through dividends, whether it's through capital gains, or whatever means or interest payments, whatever it might be, that should always be your goal. And taxes are incidental to that. Now should you make tweaks to help that be less painful? Certainly.

Holding stocks for 12 months so that they qualify for a lower tax rate is always a good thing. But again, no one should ever be frustrated or worried about taking profits. And again, when you take profits, your share that you keep is always going to be larger than the portion that you have to pay in taxes.

So the money you need is there, and it will be there. So you should not let tax policy drive your investing decisions. You should take it into consideration as one of a number of different pieces of information you use. But it should not be a primary driver for anyone.

MYLES UDLAND: You know, Randy, this is not about taxes, but speaking of something that there are tax questions around, that, of course, is cryptocurrency. How are you guys thinking about crypto right now and the role it plays within the broader market?

RANDY FREDERICK: Well, the best way to think about crypto is almost exactly the same way you think about precious metals, gold in particular. That's not to say it's the same thing. I understand it's not the same thing. But there are a lot of the same fundamental drivers.

Gold does not have a CEO. Gold does not pay dividends. It doesn't have quarterly earnings reports. It doesn't buy or sell a product. Gold is a thing. It's a thing that has value because it is scarce.

Now, you could argue the merits of whether or not cryptocurrencies truly are scarce. The algorithms are set up such that they are scarce. And so particular-- a particular crypto-- again, you talk about Bitcoin, obviously, has built in scarcity because of the way it's written.

But the ability to create new crypto is not scarce the ability, in fact, to create a fork where you've got a single crypto that goes two directions is not limited. And at some point somewhere down the road, someone may very well create cryptocurrency that's far better than Bitcoin.

The fact that Bitcoin was the first makes it very unlikely to be the absolute best. It's simply the best known. And it's certainly by far the most widely-- widely held. But you should think of it similar to how you think of gold.

You want to put a small portion of your portfolio in it? Nothing at all wrong with that. Should you put all your money in it? Absolutely not. You shouldn't put all your money in Apple, or Amazon, or Exxon, or anything else. You should have a diversified portfolio.

And if that includes a small portion of a cryptocurrency or a precious metal, there's certainly nothing wrong with that. There may be some opportunities there. But I think the problem we run into with investing in cryptos is that, again, some of the younger investors, similar to what we've seen with some of the MEMS stocks, is they put everything they have into one and they're banking on that.

To me, that's like trying to plan your retirement by buying lottery tickets. It just isn't smart. Yes, you'll give up some potential gains when you have these big moves. But in the long run, you'll be far better off if you're diversified and you have things spread out across a number of different asset classes.

MYLES UDLAND: All right. I think that's a message people can get behind, Randy. You know, have some fun, but maybe not only fun all of the time-- a good lesson for investing, and life as well. All right, Randy Frederick, VP of trading and derivatives over at Schwab. Thanks so much for joining the program, Randy. I know we will talk soon.