I’m pulling out of ULTY — Am I making a mistake?

One of the biggest challenges investors face on the road to building wealth is deciding how much risk in their portfolios to take on.

It’s natural to want to play it safe and invest in assets that are not particularly volatile. In doing so, however, you risk missing out on stronger returns that could help your money grow.

Long-term investors are generally told to put a good chunk of their money into the stock market, despite the risks involved. It’s important to invest for retirement, for example, in a manner that outpaces inflation. The stock market has proven that over long periods of time, it’s capable of generating strong returns.

But while the stock market is pretty risky as a whole, there are certain investments that carry even more risk. And the YieldMax Ultra Option Income Strategy ETF, or ULTY, is one of them.

ULTY is an actively managed ETF that generates income from a portfolio of covered call strategies. Many investors turn to broad market ETFs because they can be a way of minimizing risk. ULTY does not fall into that category.

As of this writing, in the past month, ULTY shares have declined by almost 12%. Year to date, they’re down about 45%.

If you’re tired of seeing your ULTY shares lose money, you may be inclined to dump them like Reddit user talks about. But is that a mistake?

You have to be comfortable with the risk

Investing in an ETF like ULTY isn’t for the faint of heart. ULTY’s strategy is to sell call options and collect a premium for doing so. But in turn, the fund gives up the potential for gains above a certain level.

Also, ULTY’s high distribution rate is a draw for many investors. But when a fund like ULTY has to pay out more than it earns, it can cause a major decline in its share price.

Meanwhile, a number of the companies ULTY invests in have experienced price declines recently. When the underlying assets an ETF invests in lose value, share prices tend to fall.

All of this explains why ULTY shares have been on a steady decline. And that steady decline is reason enough to pull out of ULTY if you no longer feel you want to take on the risk.

To put it another way, pulling out of any given investment is a good idea if it’s causing you to lose sleep.

Generally speaking, you don’t want to unload stocks or ETFs the minute their share price falls, because if you wait things out, they’ll often recover. But ULTY has been on a steady decline, and it’s a very risky investment to begin with. If you’ve come to the realization that it’s no longer suitable for your portfolio, then that’s reason enough to get out now.

You can use losses to your advantage

Your goal as an investor is to make money, not lose it. But you should know that in some cases, selling shares of a stock or ETF at a loss can benefit you financially.

If you have a loss in your portfolio, you can use it to offset capital gains. So let’s say that by selling your ULTY shares, you’re looking at a $10,000 loss. If you have stocks you sold in your portfolio this year at a $10,000 gain, you can effectively wipe out your tax bill.

Though ULTY may be down about 45% year to date, the S&P 500 is up almost 15% year to date. So chances are, you’ve captured some other gains in your portfolio that you could use a loss to offset.

Of course, ULTY offers a lot of upside, so if you can handle the risk mentally, you may want to hang onto some of your shares. But if owning shares of ULTY is causing you undue stress, then selling before things get worse could be your best option.

It’s a good idea to consult with a financial advisor if you’re not sure what decisions to make within your portfolio. An advisor can also help you benefit from capital losses and figure out when to take them strategically.