Our office will soon move to our new location, a fully remodeled former government building. The project is extensive due to our need for a larger conference and event center. We also needed to bring it to current code and efficiency standards. One of the first things to go was the bullet-proof reception area in the main entrance. I suppose if you are running a not-always-popular government agency, having bullet-proof glass between your staff and your sometimes-unhappy customers might make sense, but it wasn’t the image we wanted to project.
As we began removing the heavy glass and thick metal frames, complete with the secure tray through which documents could be safely passed, we noticed something interesting. Apart from the window structure itself, the rest of the wall was completely unprotected. Built of wooden studs and sheetrock, the walls surrounding the bullet-proof window were anything but bullet proof. In fact, one worker easily put his fist right through it. For nearly 20 years, government workers felt safe in this building behind their bullet-proof glass barrier, but in truth, their safety was only an illusion.
Many investors list “safety of principal” as a prime goal. I often wonder what people are expecting when they make that request, and realistically, do they actually believe it is possible?
Investment salespeople commonly use words such as “safe,” “risk-free” and “guaranteed” when describing their products. I have even heard the expression, “This investment is bullet-proof.” But is true safety possible? Can an investment really guarantee no loss of principal? The answer will depend on how you define “principal,” and if you are making allowance for extraordinary circumstances. For example, if your bank savings earn less than the rate of inflation, the dollar amount of your account is technically “guaranteed” (up to limits), but there is no guarantee what those dollars will be worth. So, is your principal guaranteed, or isn’t it? I would say technically yes, but practically no. Nor is cash locked safely in your home safe or under your bed truly safe.
Insurance companies offer products that guarantee principal, but those products depend on the claims paying ability of the insurer, as well as being subject to inflation risks. Even government guaranteed investments have risk. I have a nice collection of 2000-year-old Roman coins, all of which are backed by the full faith and credit of the Roman government. History teaches much about government guarantees.
An investment is like a building. There is no such thing as completely safe. It needs to be monitored, maintained and remodeled from time to time. It needs its systems, including security, to be reviewed regularly. There is no perfectly safe way to fully protect your investment portfolio. It requires continual vigilance to try to grow it enough to at least stay ahead of the many risks that are constantly trying to eat away at it. Far too many investors live their lives behind financial bullet-proof windows thinking nothing can hurt them when, in reality, their safety is largely an illusion.
I do not drink but I have probably watched every episode of Cheers. I did some research and found that the legendary “bartender therapist” is actually still very common. Recently, I read a report on these new “soda bars” that are becoming so popular in our state. These establishments, designed like a traditional bar, offer non-alcoholic, but often highly caffeinated “cocktails,” complete with all the social conversation, mixed nuts and even a little “barista therapy” when needed. I asked some teenagers why they would go to one of these places and pay four bucks for, essentially, a glass of soda. Their response focused mainly on the whole social experience. I suppose Utah, in its unique way, is trying to create its own sinless version of Cheers.
While pondering this trend I contemplated how Cheers would have been different if Woody had been replaced behind the bar by one of those new barista robots. Robots are fast, accurate, dependable and never ask for a raise. While watching a video of one I was definitely impressed but asked, “What about the therapy?” Can a robot be a listening ear to someone who just needs to talk? Does a robot know loneliness, fear, or sorrow? Can a robot offer a shoulder to cry on? As so much of the modern world turns to automation I find myself wondering if, in the interest of efficiency and profits, we have decided that we just don’t need each other anymore?
Investing has gone through many changes over the years but none perhaps more dramatic than some of the current moves into automation. Robo-advisors, as they are called, much like a robotic barista, take a quick look at your data and then proceed to mix up a cocktail of investments mathematically calculated to satisfy your needs. These robots are fast, efficient and cheap. But they lack what I have found to be the single most important element in financial advice. Our business has never been just about the investments any more than a bar is about a beer or a soda bar is about a cola drink.
A true financial planner’s real value comes from understanding you as a human and creating a plan to help you achieve your life’s dreams. Then, during those times when the chips are down, either through personal tragedy or national crisis, your advisor sits down with you, human to human, to help you do the right thing. In those moments, and I have seen a lifetime of them, it is no longer about money or numbers, but about people. It is in those very human moments of great emotional stress, far beyond the capacity of any robot to understand, that the very best financial decisions need to be made. No matter how good a robot may be at math, it will never be able to feel the pain, or understand the dreams, of the people whose money it manages; the humans whose very peace of mind depends on an advisors’ wise counsel.
I was once asked what fast food restaurant I would like to own. My immediate response was “In and Out Burger.” Of course it is privately owned so I will never have one, but I have long admired the genius of their business model. One only need to drive over at midnight and see the line of 20 cars in the drivethrough to know they must be doing something right. And what is this brilliant company doing that fills their dining room almost every minute they are open? Is it their wide selection of healthy menu choices? Are they keenly in tune with the changing culinary tastes of their customers? Are they tracking and imitating the competition?
A gentleman recently commented about a poster I have with a picture of a plane and the caption, “Fly the Plane.” He asked what that phrase had to do with investing. I told him it is a pilot expression that reminds us to always remain focused on what is most important. Many planes have been lost when a pilot became obsessed with solving some minor issue while forgetting to continue flying the plane. Many investing fortunes have also been lost when investors got distracted by some event and forgot to continue doing that which mattered most. Corporate America often has the same struggles staying focused in a fast paced world, essentially responding to the noise of the world while forgetting to fly the plane.
“In and Out” is an iconic corporate example of “Fly the Plane.” In 1948 the Snyder family wanted to do just one thing. They wanted to make a great burger with fries and a shake. Now 70 years later, they still sell the same three things, and nothing else. It is all they do, but they do it very well. I am certain many have suggested to the Snyders over the years that they should expand their menu to keep up with the competition, but they stayed focused and recognized that their greatest success would come from continuing to do what they did best.
“Flying the Plane,” is the one of the greatest challenges for investors. Every day they are pelted with news ranging from economic opportunities in distant lands to a neighbor who has been doing really well with a particular stock. The temptation to be distracted is great, and the desire to venture off into unknown areas, even worthy ones, can cause an investor to lose sight of what really matters most to them.
Success in investing does not come from having everything on your menu. It does not come from imitating your neighbor. Stay true to what you do, and be good at it. If you somehow think you will be less successful if you don’t have all your neighbor has in their portfolio, take a drive over to “In and Out” and see how long the line is for the three menu items that they have been selling for nearly 70 years.
Last week I began the story of Farmers John and Jane, who were faced with the decision whether to pay tax on their seed - as happens with a Roth IRA - or defer the taxes and pay on the crop – as happens with a traditional IRA. John chose to have his seed taxed and Jane chose to pay on the crop. So let’s return to the story.
The harvest is now complete, the taxman has come and collected his 20% tax on Jane’s crop, and now the two stand looking at their respective stockpiles of corn to see which one made the best decision. Having paid tax on the harvest, Jane paid significantly more in taxes than John did since he only gave up a small amount of seed. But Jane’s ability to plant more seed produced a larger crop. In the end, all that really mattered to these two was, who had the most corn in their barn when the harvest was over and all taxes were paid.
I have heard many opinions on the Roth vs Traditional argument as to which will produce the highest return to the retiree but in the surprising end to our story, as John and Jane looked at their respective piles of corn, they found they both had the exact same amount. Using simple math, and assuming all things are equal such as tax rates, return on investment, etc., whether you pay taxes on the seed today, or on the crop tomorrow, the end result is the same.*
So if it doesn’t make any difference, why is there so much debate on this topic? The answer is quite simple and it is that our fable assumes that all things are equal. Most importantly, it assumes that Farmer John and Farmer Jane are being taxed at the exact same rate – 20% in our illustration. But what are the odds of that happening?
I see the Traditional and Roth decision to be one that largely falls upon one simple, yet actually impossible question. Will your tax rate in retirement be higher or lower than it is now? Unfortunately, no one can know future tax rates so we are left to make an educated guess. Many assume their tax rates will be lower in retirement since they won’t be working, in which case the Traditional IRA makes sense. But my experience has often been the opposite of that. Many of my clients who are still working and have children, mortgages and other deductions, have very low tax rates compared to their retired parents.
Additionally, there is always the risk, (some would say “likelihood”), that tax rates may rise in the future. For what it’s worth, it has been my personal preference to pay my taxes now, when I know what they are and while I have lots of family deductions. I choose not to let some future politician decide what my tax rate will be, but that’s just me. Call me a farmer John. What type of farmer are you?
Hi, I'm Dan. I'm a CFP® Professional.
Securities and advisory services offered through Commonwealth Financial Network®.
Member www.finra.org / www.sipc.org , a Registered Investment Advisor. Wyson Financial, 375 E Riverside Dr, St. George, UT 84790
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