When enough is enough
Words matter.
I know this from having used so many of them, so many times, for so many years. At one time, I even used to make a living with them.
Sometimes, words can take on new meanings depending on how you choose to look at things. Let me share three recent examples:
Taxes
Every year, somewhere around the middle of April, we start getting calls from clients who have just returned from meeting with their tax preparers. All too often, the preparers want their clients to ask us why they have so much income from capital gains. We explain to clients that capital gains come from selling investments at a profit, and long-term capital gains (which come from investments held longer than a year) are taxed at preferential rates – typically 15% for the clients we work with – and not at all by the state of Missouri any longer.
Say what you will about the U.S. tax system, but one thing is true when it comes to investing: you only owe taxes when you make money.
And yet I’ve had conversations with some tax preparers who want us to do whatever we can to avoid taxable income, or at least limit it, even if it hurts long-term investment returns. Some of these folks would rather give up a dollar in capital appreciation to save 15 cents in taxes. That makes about as much sense to me as it sounds.
But one client recently reported that his tax advisor chose to look at capital gains a different way, and asked: “Would you rather have a tax problem, or a money problem?”
Words matter. And I plan to shamelessly steal that CPA’s words next tax season, after I send him a thank-you bouquet.
Dividends
The next example is from a wonderful new book I recently read, Profit from the Profit by David L. Bahsen, another financial advisor that I have great respect for. David is a huge proponent of investing in high-quality, successful companies with long histories of paying dividends and consistently increasing them.
Retirement income planning has become an industry unto itself over the last couple of decades as the nation’s baby boomers reach retirement age. And the prevailing “wisdom” of practitioners revolves around some iteration of the “Four-Percent Rule,” which requires investors to begin retirement by liquidating roughly four percent of their life’s savings and then repeating the process every year increased for inflation going forward, regardless of market conditions.
But when retired investors are surveyed, they overwhelmingly say they would prefer not to spend down their principal over their remaining years. Systematically liquidating a lifetime’s worth of savings and hoping you die before your money runs out simply doesn’t resonate with most retirees, including most if not all of the clients we work with.
Some wealth advisors – our own practice and Mr. Bahnsen’s among them – believe it’s possible to generate an adequate and sustainable income from a well-managed portfolio – an income that increases over time faster than our clients’ cost of living – without having to sell investments at unfavorable prices, if ever.
As David so simply puts it: “Withdrawing fruit from a tree without touching the tree is more durable than cutting down part of the tree in bad times.”
Boy, I wish I’d said that.
The seasons
My third and final example of using words to describe different ways of looking at things comes from something Adam recently ran across and shared with me.
We are all familiar with winter, spring, summer, and fall. But if you’re from around here, you know there are a lot more than four seasons:
Unofficial List of Seasons in Missouri
Winter
Fool’s Spring
Second Winter
Spring of Deception
Third Winter
“The Pollening”
Actual Spring
Summer
“The Devil’s Front Porch”
False Fall
Second Summer
Actual Fall
I’ll leave it to you to decide which season we’re in right now. But answer quickly, because you know it’ll change again before the end of next week.
The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Mike Brown and not necessarily those of Raymond James.
