Should a Beginner Investor Speculate on SPACs?

As you probably know - if you've read one or more of my past blogs - I am not what you would call a daring or speculative investor. Even so, I urge anyone considering a SPAC investment to dig deep before making a commitment.

Names and personal information are excluded to protect privacy. NOTE: Since I’m not a credentialed financial advisor, the answers (observations) I give are strictly my opinion.

Q: Are Special-Purpose Acquisition Companies (SPACs) generally considered good investments for beginners?

A: Not in this old conservative’s mind.

But first, let’s define the term Special-Purpose Acquisition Company (SPAC), also known as a blank check company. It is an empty shell that raises money for the sole purpose of looking for a target to merge with and take public. SPACs have a set period, usually two years, to search for an acquisition. They’re not new (what is?), but suddenly they are very popular vehicles for taking shortcuts to the public markets…cheaper, faster alternatives to an initial public offering (IPO). They often utilize public figures (influencers) to attract attention to their fundraising efforts, which is typically a red flag to me. But the SEC has tightened regulations and procedures for SPAC activities, and they now have to register with the SEC.

SPACs generally have to place investor funds in a trust or escrow account until a target company is publicly announced. If investors don't like the deal, they have an opportunity to recover their funds. SPAC investors… and often the sponsors… don't know how their money will be used, making a SPAC deal difficult on the front end to evaluate. And there is that long gap, up to two years, before a SPAC actually buys a target company and starts operations. Dollars sitting idle for that long makes this old investor very nervous. Recent studies show that the average SPAC underperformed both the S&P 500 and the Russell 2000 indexes during the 3-, 6-, and 12-month periods after merger completions. By the way, getting into a SPAC is not as simple as buying regular equities. It helps if an investor has an existing relationship with a SPAC sponsor. In short, hedge funds, mutual funds, and the deep-pocket institutional boys usually find out about new SPACs first.

In my opinion, SPACs are not for long-in-the-tooth investors like me. Money can be tied up for a year or two, uninvested. Small investors are usually kept in the dark about ultimate funds disposition… not so much for sponsors and institutional investors. And, of course, there are no guarantees. SPACs are speculative investments because they tend to acquire startups or struggling companies… by nature, high risk. The allure is that SPACs offer smaller investors a way to participate in the IPO game – not necessarily up front, but not too far behind.

Lazy investors like me shy away from SPACs and allow the Amazing Power of Compounding to do the heavy lifting.

Q: Will some people be getting $1,400 stimulus checks in the mail? I’m reading about the new $1.9 trillion stimulus bill and getting mixed messages on that aspect.

A: My most recent read is that the latest stimulus check will be $1,400. When added to the late December/early January’s $600 stimulus check the combined would total $2,000.

By the way, the latest stimulus package is not yet law – but parts of it seem destined to pass a Democrat-controlled Congress. It’s still up in the air who might receive those checks, individuals with incomes up to $50,000… or $75,000, and folks filing jointly with incomes up to $100,000… or $150,000. Right now, the rumor mill favors the high end of the ranges. Incidentally, no individual earning more than $100,000 or couple earning more than $200,000 would receive a relief check. Previously, only children listed as dependents on a federal tax return could receive a payment. A new tweak to the law says all adult dependents in the household (such as college students) can be counted and receive money. This foregoing information is House bill info. The Senate could very well lower the income thresholds to lower the bill’s final cost.

Stay tuned.

Q: What percent of your portfolio annually should you anticipate withdrawing for daily expenses in retirement? More importantly, what are the percentages of your asset allocation. Stocks, bonds, cash?

A: I recommend 3-4% annual portfolio withdrawal, adjusted for inflation, for day-to-day expense coverage. The top end of that range might be more appropriate for “total” withdrawals during the early retirement years when folks are more inclined to travel, tapering off during the middle golden years, and increasing in the later years due to the probability of increased medical issues. But those “top of the range” numbers are often financed by tapping what I call the “capital buckets”; whereas day-to-day expenses are usually financed with cash flow assets (Social Security, annuities, pensions, etc.).

Day-to-day expense withdrawals in retirement tend to mimic those of pre-retirement lifestyles. But don’t overdo this 4% rule. I’ve read where only about 16% of retirees exhaust their assets within a given timeframe. Many end life leaving small fortunes to their kids. Michael Kitces, noted financial planner, hypothesized that “The 4% retirement rule has quintupled wealth more often than depleting principal after 30 years.” In short, many retirees spend their lives fretting about money, and then let their kids enjoy spending it.

As to asset allocation, my approach differs from that of many folks for two reasons: I’m overly cautious about inflation (we can’t print bushels of money forever and not finally pay the price), and I refuse to accept near-zero returns on a majority of my long-term investments. Thus, my allocation (80:20) is virtually the reciprocal of the general rule of thumb (20:80) for my age. Risky, yes, but I’m a buy-and-hold guy… and even if I run out of time, I expect my heirs to also be buy-and-hold folks.

Q: Hypothetically, what investing strategy should somebody pursue that doesn’t plan on retiring? What if you plan to retire in your 90s… or never?

A: Interesting question.

I’m going to assume health is not an issue, but for safety’s sake, make sure you have Medicare Parts A, B & D coverage plus one of the better “Supplemental Health Care Plans” (I personally prefer a supplemental over the various Advantage Plans that can be full of surprises). A good dental and eyewear plan might be in order, too.

With this in mind, I would worry more about inflation and less about a periodic balancing toward more bonds due to aging. Why? Many folks who plan NOT to retire probably own profitable ongoing businesses or possess fatter-than-average portfolios of investments, which produce reliable income streams. If this assumption is true, your concern might be more about keeping up with inflation (dollar power erosion) than outliving your savings. Not to say some rebalancing shouldn’t be done, but to a lesser degree than someone retiring on a slowly declining portfolio of savings.

My own experience suggests continuing investing more like in your 40s and 50s, but somewhere along the way (60s and 70s) start adding in a larger (but not excessive) percentage of Target Dates or the like as a safety precaution against cognitive decline.