The Keys to Financial Success

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Why Wall Street Wants your Focus Elsewhere

30 years ago, when I started out as a broker, I thought the key to financial security was investing well and getting a big rate of return. After all, I read many of the pundits telling me that I need to invest well. Growth Stocks, Commodities, Real Estate, etc. were the road to great wealth and financial security. Over the years, I have come to realize that Wall Street wants our focus there so that we won’t see what is really happening.

See, if your focus is on making the highest returns on your investments, you won’t see the higher fees that you are paying for those investments. You may not notice the higher taxes you are paying; you may even miss the telltale signs of things going wrong with your investment. This is why Bernie Madoff’s clients didn’t ask questions, even when things were so clearly going wrong. As long as the returns were high and regular, folks didn’t bother to question the taxes they were paying, the huge expenses they were being charged, or the fact that their returns were much higher and more consistent than any market in history.

The fundamental key to success is: know what you can control and what you can’t! I had a client tell me back in 2002 that his broker had doubled his money in 1997, 1998, 1999 and one more double and he could have retired! His lament was that “the market screwed me” and he lost nearly everything he had earned in the previous 3 and a half years! In reality, he had lost more, because he had already paid taxes on all those gains he gave back, so he actually ended up with less than he had when he started. The market doesn’t know who you are and doesn’t care.  He thought the market screwed him, but it was oblivious to him. You definitely have no control over the stock market. You also have no control over the real estate market, the bond market, gold, oil or any open, freely traded market.

That being the case, what can I control? The only two things I can control, when it comes to my money, are costs and taxes. When I work with a client, I add value by helping them keep more of what they earn, both from employment and investments. When it comes to investments, I can only help my clients with strategies that will keep them from having a financial catastrophe resulting from a change in a market or the economy.

To be in control of taxes, you must be diversified under the tax code. Our tax code is really a series of smaller tax codes. We have rules that pertain to ordinary income, capital gains, dividends, estates and specific investments like real estate and Oil and gas drilling activities. Since nobody knows what will happen to tax rates in the future, this type of diversification is essential. If you were saving all of your money in an IRA, 401k, or similar tax deferred retirement account, that money will be taxed as ordinary income when you take it out. So, if you retire with $2,000,000 in that retirement account it really is more like $1,400,000, for the average taxpayer. If congress raises taxes by 30%, that will cost another $200,000 of your nest egg! If you were tax diversified, with other options, you could draw income from other accounts to manage the damage, but still have the same amount to spend.

In order to control costs, you need to look at how you spend money and invest. The fees you pay for investments are one area of cost we can control. Some investments come with such significant fees, you may never make a reasonable rate of return. Many mutual funds hide some of their costs through moving expenses to items that don’t have to be disclosed. Other costs that can be controlled are; insurance costs, financing costs (especially mortgages), lost opportunity costs, utilities, and many other expenses that we incur in our daily lives.

Most folks are losing money unknowingly and unnecessarily, just through how they spend money every day. The key is delivering your lifestyle at a lower cost, without sacrificing your enjoyment of life. This is the basis of our work, showing clients where the money is leaking out and teaching them how to minimize those costs. This allows for them to keep more of what they earn, which lets them take less risk in their investments. This in turn, increases the predictability of their future outcomes.

Controlling what can be controlled is the key to a great financial future. If you have questions on how to do this, or want to discuss how these costs relate to your personal situation, just contact us, and we can take a few minutes to put money back in your pocket!
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