How to invest $15,000 USD in a tax deferred account

July 12, 2020

This weekend I finally tackled the issue of how to invest a $15000 USD in a tax-deferred account. Tax-deferred means the gains are tax-free until withdrawal. The account comes with these constraints:

  1. I cannot trade options in it; this is a temporary constraint
  2. I don’t want to replicate positions from other accounts, which are heavy with tech stocks, the Nasdaq index, and an airline stock
  3. I’m ok monitoring the account weekly, then monthly after establishing a position

Given the above, here are some ideas and thoughts on each:

  1. Trade tech stocks since they are volatile and this is a tax-deferred account, but I’m already heavy in tech and want diversification
  2. Trade airline stocks since they are volatile and this is a tax-deferred account, but I already have a position with an airline and want diversification
  3. Buy and hold S&P 500/Russell 2000/Nasdaq 100, but I already have large positions with index funds
  4. Buy bonds, but the interest rates are at all-time lows. The return is simply not there, though better than sitting in cash
  5. Sit in cash; not the best option since the brokerage pays less than 1% interest; there are better returns
  6. Buy undervalued S&P 500 dividend stocks. This is what I did with Home Depot and Apple, back in 2017 when they were on sale from a potential trade war between the US and China. No trade war happened yet and the stocks have doubled in price

I’m ok with buying stocks since I have a long time horizon and a high-risk tolerance. While the idea of buying undervalued is good, executing the idea is challenging. Let’s tackle it one question at a time.

Which undervalued stock to buy?

Looking at S&P 500 stocks that are near their 52-week lows, the mall REIT sector has barely recovered. Specifically, SPG, Simon Property Group, the largest real estate company in the US, is trading at 9.9x PE. It owns roughly 200 malls across the country, many in tourism spots. I’m bullish on malls getting back on their feet especially in tourism hotspots, and SPG pays a quarterly dividend with an impressive yield of 8% while we wait. Its annual revenues have increased in the single digits until the epidemic struck. Its net profit margin as of March 31, 2020, is a healthy 35.2%.

What makes the stock risky?

A worsening global epidemic will lead to a delay in mall reopening. Even if the malls reopen, would sales per square foot bounce back to February 2020 levels? How would traditionally brick and mortar stores compete after the epidemic forced shoppers to buy online? Additionally, SPG is in the talks to buy JC Penny, Lucky Brand, and Brooks Brothers. It might overpay for one or all three. It is also suing its tenant Gap for $69.5 million in rent and other charges. Its net income has also decreased in 2019 by 13.89% before the epidemic worsened the drop to 15.95%.

What is the entry price, and how much to buy?

Support is $55 and stock price is $65. I will use a limit order of $60 and use half of the account and buy a multiple of 100. Will check back in another week to see whether it has been executed. If it has not I will either wait or purchase another stock.

How long to hold it for and what is the planned exit point?

Since this stock pays dividends quarterly with an annual distribution of $5.2 which is an annual yield of 8.1%, as long as its fundamentals are sound and there are no more ideas for the money, I’ll keep the position with a stop loss of 10%.

Though if SPG pops back near 52-week highs at 2.5x of its current price I might consider selling it. Hopefully, we will be out of the epidemic then.