A Blue Ocean of Opportunity!
• Published on February 8, 2017
Founder & Trustee at Trustee & Financial Services LLC
When most of my clients were prospective clients they honestly had no idea what was really in their best interest. What is very unusual is what people do with their money. People do things with their money that they would never do with things that money buys. For example: Let me ask you a few things about money.
1. Do you believe that the dollar is worth more today than it will be tomorrow? A key to that question is how many candy bars can you buy with $1.00 today vs what you could buy 10, 15 or 20 years ago for the same dollar.
2. Are taxes going up or down in the future? (Another key is this. Ok, they might lower taxes in some areas but they will raise taxes in other areas in order to make up to difference somewhere else.)
3. If you have a choice to pay taxes on a small amount or on a large amount of revenue which would you choose?
1. If you answered yes to the dollar being worth more today, I would agree with you.
2. If you believe that taxes are going to go up in the future, I would agree with you there as well.
3. If you answered that you would want to pay on a smaller amount Vs. Paying taxes on a larger amount, I would agree with you on that one as well.
Now look, these are not loaded questions. This is about common sense and not about some miracle with unicorns and rainbows as we know that does not happen. History repeats itself. We have all heard that before.
If we agree on the basis of what is, not so much about what the possibility could be. There are always two sides to every coin, correct?
OK. If we are in agreement to those three questions above, then I must say that if you have a qualified retirement plan, a 401K, IRA etc., then you are 100% violating everything you agreed to above. If you recall, I stated earlier that people do things with money that they would never do with things that money buys. Correct? More on that later.
Here are explanations to my hypothesis above:
#1. You are giving up good $ Dollars today to get weaker ones in the future. We will not even get into the issues about what the government is doing with retirement plans.
#2. You in are compounding your tax because your tax is always going to be there.
#3. When you pay taxes on your retirement plan, you will be paying taxes on a higher dollar amount not the lower amount. Does this make sense?
Look, let us assume that we agree that the $ (Dollar) is a means for exchange. We buy food, automobiles, fuel for our cars, house and things to put into our homes. Correct?
Now, here is the part about what people do with money that they would never do with things that money buys.
Would you buy a loaf of bread to put in the freezer and to eat it in 20 years from today? NO! Of course not.
However, people will put good dollars today into a plan like a Qualified Retirement Plan & will wait 10, 20 and even 30 years to use it. That doesn’t make a lot of sense, does it?
Let’s be honest here about your retirement plan. Are you controlling it or is someone else?
How much do you really know about your plan? If you are like most people, you know if it goes Up, Down or if you are in a low, medium or high risk category / sector. That is because you get your monthly, quarterly, Semi-Annual or Annual report that tells you with their graphs and pie charts etc. Other than that, what more do you know?
Do you know the asset manager who is actually allocating and managing your risk as well as taking advantage of opportunities when they present themselves to your portfolio? How about alternatives that could be participated in with significantly low risk? In fact, when you meet with your broker, Investment adviser, registered representative or private client banker what do they have you sign? A risk disclosure that tells you that you have zero guarantees. If you have the right type of account, you might have an account that protects your extreme downside limit where your balance can never go below zero. Meaning yes, you can potentially lose everything. However, the upside is potentially what they say is historically “XX.X” percentage per year Return On Investment (ROI).
Let’s assume that you do not invest with those type of scenarios. Rather, you want to be real safe and buy a Certificate of Deposit (CD). Well, as of today, here is what you would get at the following banks:
Chase: 6 month CD = 0.02%, 1 Year CD=0.02%, 2 year CD=0.15%, 4 year CD=0.25%
OK. Here are a couple more for you to ponder: Capital One bank ranges from 1.45% to 1.60% and the maximum was 2.00% for a 5 year CD.
So for low risk, you get a low Rate Of Return (ROR) as demonstrated above. These quotes are from www.ratecatcher.com on 8 Feb 2017 at 14:14 CST.
To be honest with you, this is criminal. Heck. What if I told you “Hey, I will pay you 2% if you park your money with me for 5 years.” You would most likely tell me to go and jump off a bridge. At least I hope you would anyway.
When you buy a CD, what exactly are you buying? A contract, correct? You are buying a contracted Rate Of Return (ROR) in exchange for the amount of time that you allow the bank to use your funds. That is fair wouldn’t you say? Of course not. The contract is the most powerful tool in the world. Every country knows what a contract is. Whether both sides have the ability to perform on the contract or not remains to be known. Typically the parties must get comfortable based on the risk Vs. reward for participating in a said contract. The comfort level may be secured with a higher ROR. This is to ensure one party is more comfortable with the other parties ability to perform to the contracted standards. Here is where I am going with this.
There are many opportunities out there where you can earn 1.25% per month. This equals (1.25 x 12 = 15%) year. In many cases these are at the low end of the opportunities that are available to people wanting this type of ROR. Now, granted they may not be that easy to find but they are out there. These type of scenarios are typically from private firms that offer great ROR and they are very low risk compared to market risks that are out there. Some of these programs/contracts have far less volatility than the typical stock play.
Typically these scenarios also have a barrier to entry which include high minimums as well as locking up the funds for a long period of time. None of the funds or programs that I am aware of will do anything for less than 12 months. Others require 2, 3 and 5 year commitments. These are also based on real estate which means you always have an asset that is securing your funds. This is potentially good because there is something tangible that backs up the participation of your money in their program. I have seen programs all over the board with ROR as high as 5X+ (yes five times and higher) the participating funds in the program. I am aware of other funds where the entries and exits for the clients are very favorable. However, those have significantly higher barriers to entry. This is not for your $5,000 or even $50,000 portfolio. These programs are minimum $500K+ and you must be an accredited investor. There are programs available for any number of people who have the cash to do such a low risk high return or as referred to as High Yield Programs (HYP). No, these are not securities either. You truly have to know who you are dealing with and ensure that you do your homework prior to jumping into a program like that. There are many programs that perform even better and some that meet their minimum of performance. Regardless of whether they make 200% they will meet the minimum and pay say only 20% ROR because that is their contracted amount. Again, you are in a private contract to ensure that both parties have given consideration to the other side. I personally like to see firms who tend to understate and over perform every time. Then that becomes a win / win scenario for everyone involved.
Next time, I will be talking about great Tax Structures where you can significantly reduce your tax liability. In most cases, you can and will be legally 100% tax exempt for the rest of your life and forward into perpetuity. This will establish your legacy which will last for generations. Especially if you live in states like California or places like Canada where you have provincial as well as federal taxation. More to follow.