By Robert K Mann |
For High Earning Americans, High Fees, Taxes, Modest Growth And Inflation Are Important Considerations:
Let’s Consider Each Item:
- High fees. Tony Robbins in his new book, “Money Master The Game,” explains it well. Mutual funds and advisors often charge 2% in management fees and about 1.25% in additional costs. Since most do not beat the indexes over a long period of time this cost is substantial. Example: If the S&P 500 averages 6.5% over 50 years in an index fund with expenses of.05% in fees, $1.00 goes to $30 in 50 years. Netting only 5% after fees, 1.00 goes to only $10 in 50 years. Considering that half of the gain is from dividends. Higher fees more than offset the dividends.
- High Taxes. If you paid the maximum state and federal taxes each year on your returns, even at the 6.5% return over 50 years your $1.00 would be worth $6.80. If you deferred taxes in a retirement account and paid maximum income and estate taxes your $1.00 would be worth about $6.00.
- Accepting a low rate of return on your savings guarantees a poor result. Consider a 2% return before taxes nets maybe 1.4% per year. After 50 years your $1.00 grows to $2.00.
- Inflation. The S&P 500 grew by about 100% from 2003-2013. However after inflation, buying power was not increased. After taxes these monies actually lost value. From 1840, the U.S. dollar has lost over 99% of its purchasing power when we consider the cost of things that people need like food.
Once You Consider The Problems And Quantify Them You Can Easily Do Better.
You need to invest in a way that gives you positive alpha net of advisory fees. You need to follow a disciplined investment process that offers a multiple unit of return for every unit of risk you take. You must be diversified and have a plan for risk control on every asset you hold. You must take personal responsibility for your money regardless of who you hire to manage it. The result should be a rate of return that beats the market over the long term..This process requires that you learn the rules of the game and be vigilant in protecting your assets from those who make their living off of and not with the average investor.
You must invest long term if your account is subject to taxes in order to build wealth, but capital preservation trumps buy and hold during down trends. The secret is to buy low. You are not a money manager competing quarter by quarter to get higher allocations of other peoples money. You can wait for opportunities when individual stocks and indexes are low. If you only invested when prices were low and held for several years your rate of return would be significantly higher than the buy and hold investor, in my opinion.
To have the patience required it helps if you have a conservative high yield tax free return on your bankable assets. Choosing a top performing institutional tax free municipal bond fund may fit the bill. The long term history of high, consistent monthly tax free income has been very attractive. Even here, you must have a plan for risk control during those infrequent periods where the fund may decline substantially. These funds may be bought institutionally with no commission, no surrender charge and low management fees. When you take substantial profits on your long term winning investments half or all the proceeds may be added to this account to increase your monthly tax free income amount.
The Magic of Compound Interest
Compound interest is such a powerful thing that Albert Einstein called it the most important invention in all of human history. Why do so few take advantage of it?
Why do Bill Gates, Warren Buffet and many others set up foundations? The following story told in “Money Master the Game,” by Tony Robbins will make the point.
When Benjamin Franklin died in 1790, he left $1,000 each to the cities of Boston and Philadelphia. His bequest came with some strings attached: specifically, the money was to be invested and could not be touched for 100 years. At that point each city could withdraw up to $500,000 for designated public works projects. Any remaining monies in the account could not be touched for another 100 years. Finally, 200 years after Franklin’s death each city would receive the balance– which in 1990 amounted to $6.5 million, with no money added over all these years.
If this $1,000 grew at 8% compounded for 100 years the principal amount would grow to $2,199,761. If maximum taxes were taken out each year it would grow to only $108,674. If maximum estate taxes were applied at the end of the 100 years it would only leave only about $50,000. Now you know why wealthy individuals set up foundations for their children and grandchildren to run for years and years.
Ben Franklin understood this way back in 1790.
Robert K. Mann is an experienced investment strategist. He has had senior executive experience as CEO of brokerage firms and advisory companies. He is co-author of a book entitled, “Non Random Profits”. You may visit his bookmarketer’s site at http://www.nonrandomprofits.info. The investment strategy described in Non Random Profits has worked since 1936. The period of 2003 to 2013 has recently been studied. The 280 stocks selected rose ten times the rise in the S&P 500 over the same period.