“I did NOT have Three Thousand Pairs of Shoes…, I had One Thousand and Sixty”
This quote from Imelda Marcos strikes many as one of the pinnacles of opulence in our time. It strikes me as an example of how a person’s “perspective” shapes their world. When it comes to shoes, one person sees 1,060 pairs as a reasonable number until they can find time to shop for more, while another jumps for joy when they get to trade in their old white runners for a shiny new pair.
In personal finance, individual perspectives vary just as much. What we have found in working with many families is that when we provide a little extra ‘financial’ information, many change their perspective.
For example, a couple feels great about their 60/40 (equity/bond) portfolio in their brokerage account. The equity markets have been up in the last few years and their account statement shows increasing balances. What’s not to like?
Well, when we zoom out a bit and look at the account statement and the tax return together, we might see that the equity portfolio has generated short term capital gains, and the bond portfolio has generated taxable interest. If we take the year-end account statement and write in big red ink the taxes paid, and then subtract those taxes to see the net returns, it may very well change one’s perspective.
One of the biggest wealth transfers (i.e. financial inefficiencies) we see is families trying to grow their after tax savings with actively traded equity portfolios and taxable interest paying bond portfolios. If solely look at the account statements, we might feel good about an annual 7% equity return and a 4% bond return. However, the feeling changes when we look at the annual marginal tax rates and see those returns eroded by 30% to 50%. Without the proper perspective, families often think they are doing the best they can with their hard earned savings, when in fact, if they only had a little extra information, they might be able to do better.
We help families change their perspective day in and day out by sharing our knowledge of where the wealth transfers lie in their unique financial situation. In doing so, we help many find the money to live the retirement they dreamed of, and yes, also to buy that new pair of shoes.
This is written as a general information article meant to help the reader understand basic concepts in personal finance.
Nothing in this article should be considered a guarantee of any investment performance.
An investor should consider his or her current and anticipated investment horizon and income tax brackets when making any investment decision. This article does not reflect factors for any individual reader.
Tax and/or legal advice is not offered by Mark Guthrie. Please consult with your tax professional or legal professional for additional guidance regarding tax and legal related matters.