In the course of our research, we recently came across a survey of investors published by a large investment organization1. It contained an example of a technique that might be used to manipulate investors into a less-than-optimal path.
Would you rather minimize taxes, or achieve the highest investment returns? Many people might think that this is a straightforward question: the survey reported that 61% of baby boomers preferred to minimize taxes. In our opinion, it is indeed straightforward—just not in the way they think it is.
We pondered that question, and wondered why there was even a choice between minimizing taxes and going for higher returns. Generally, an investor comes out better off if she or he aims for the highest after-tax returns.
Peddlers of financial products know that if they can get a prospect to focus on taxes, then it doesn’t matter whether the investment is really any good or not. It merely needs to meet that very important objective of minimizing taxes. A tight focus on taxes takes the spotlight away from the actual investment and its performance.
We think a better approach is to include the potential impact of taxes in our investment decision-making. You may hate taxes, but it would make no sense to go for 1% tax free instead of 6% taxable (all other things being equal)—the higher rate would leave you better off even after you paid the tax.
Some of you are more concerned about income taxes than others. It doesn’t matter what your object is, we need to agree that seeking the highest after-tax returns is a more sensible goal than either minimizing taxes or achieving higher returns. In our reality-based approach, we can integrate both objectives to work towards a more sensible plan.
Each of you is free to make whatever decisions you would like to, with your money. (We never forget whose money it is.) If you bring it us, we are never going to focus on just minimizing taxes, or just focus on achieving high returns. That is a false choice, and a seller who presents that to you may be trying to manipulate you.
We seek to achieve the best after-tax returns—that is the path that potentially leaves you with the biggest bucket. No guarantees, of course. Clients, if you have questions about this or any other pertinent issue, please email us or call.
1 2016 U.S. Trust Insights on Wealth and Worth survey, U.S. Trust Bank of America Private Wealth Management
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific situation with a qualified tax advisor.
This is a hypothetical example and is not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.
All investing involves risk including loss of principal. No strategy assures success or protects against loss.