Wealth Management in Basketball Terms

Video Transcript

Hey folks. Have you ever watched the NBA playoffs? There are some astonishing players in action. I once watched a guy hit seven out of eight shots from the half-court circle. That’s amazing!

Every team has some all-stars on it. But unless you have five solid players and a good bench, your team is probably not going to do well in the NBA playoffs. So I’d like to talk to you about our five players and our bench strength.

Of our “five players,” the first one is asset allocation. How I build this pie chart for you matters. How much do we put in the large stocks, small stocks, international categories? How much do we put in bonds to control risk, and how much into real estate, commodities, et cetera?

All this matters about how we prepare your pie chart. We do that based on a risk profile for your financial planning.

Second is investment selection. Which investments do I put in each piece of that pie? We have a concept called the “dream team.” We want to pick the very best possible investments from different teams.

You remember back in the Olympics when Michael Jordan and those guys put together a dream team with the best players from every NBA team? They went to the Olympics and just slaughtered everybody. It wasn’t even a fair contest. That’s what we’re trying to do here is put the very best of the dream team together.

Third is rebalancing. These pieces grow at different speeds over time. So one may get larger and another one smaller. When that happens, it changes your risk, and it changes your investment returns. So we need to reset that back to the original formula from time to time.

Those are your utility players but we also have two all-star players on our team. One is financial planning. Now, financial planning doesn’t show up as X percent return on your account statement, but it is very important for achieving your goals.

In fact, studies show that financial planning and tax management make up about one and a half percent extra return every year if you do them well. So it’s really important to know what do you want to achieve in retirement. You do not want to run out of money. Most people would like maybe to travel, to have a certain kind of vacation, to buy a certain car every so often, or to give money to kids or to a charity. Achieving those goals is really more important than making X percent return, isn’t it?  So we help you build a solid financial plan and make all this work towards that plan.

The next all-star player on our team is tax management. This is a little bit less obvious, but you know as CPAs we probably do a good job doing your tax return. We try to do smart things, and I believe we do that. But we really seek to control your taxes. But a little bit less obvious strategies within tax management is asset placement. For each of these things that we’re buying for you, you may have different accounts like a Roth account, an IRA account, or your individual account.

So here’s an example: I would like to buy the bonds in your IRA account because they’re going to pay income every year. I really don’t want that being taxed on your personal return, so I can defer the income until later. I like to buy the capital gains assets in your regular brokerage account because a lot of my clients are paying zero or a very low rate on their capital gains.

So why earn that money in an IRA just to pull it out later and pay full taxes on it when I can get a discount on the capital gains rate by paying on it as we go? With high growth assets that are going to make a lot of money – we’ve all had a little bit of that in our portfolios – I would like to have those in my Roth account because I will never pay taxes on those.

So we’re trying to do smart things with where we place the assets in the different accounts that you have on file with us. This is very important, and can add up to one percent per year for you with the tax management strategies that we use.

Here’s the last part: every good team has bench strength. When the players come off the bench and help a team when it’s not doing as well, bench strength is really important. We call that coaching here. So sometimes when the market is down, our clients get nervous. This is a very natural thing because investing involves a lot of pressure. But helping our clients not pull out when the market is down, that’s coaching.

When thinking about buying a new car, for example, our clients ask things like: “Should I borrow money or take the money out of my IRA and pay taxes on it? Which is a smarter strategy to meet my financial goals?” This is coaching and bench strength that we can bring to you, and we think it’s a key player on your team.

So that’s it folks. That’s our wealth management process in basketball terms.

[Financial Planning and Investment Management Services offered through Dickinson Investment Advisors, Registered Investment Advisor.  Statistics and market information provided by Litman Gregory Advisor Intelligence.]

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