When he died in 1935, Will Rogers was earning more money than any other entertainer in Hollywood. In addition to his film work, hundreds of newspapers around the country carried his weekly newspaper column. He was a political pundit as well with frequent speaking engagements. Rogers would love Twitter; he sent telegrams daily. Acknowledging he poked fun at many, he humbly admitted he “never met a man I didn’t like.” In this age of partisan divide, we should pay attention.
Rogers had an entrepreneurial bent, shrewdly purchasing 200 acres just off Sunset Boulevard when it was a dirt road. While the provenance is unclear, a quote often attributed to Rogers should be required for everyone, especially investors. “It ain’t what you don’t know that gets you in trouble. It’s what you know that ain’t so.” Misconceptions can be dangerous.
For instance, people focus on avoiding taxes when the goal should be having more money after taxes. Depending on your tax bracket, a tax-free municipal bond fund may earn less than a taxable bond fund even after taxes. While local real estate has bounced back from 10 years ago, there are scores of 1031 real estate exchanges still underwater (financially speaking). Losing money avoids tax liability, but it’s not an optimum strategy. A selling point for deferred annuities is tax-deferred growth, but high fees minimize their return. For heirs, deferred annuities can have a considerable tax liability, as well.
Paying off a mortgage usually gets the pushback that an investment portfolio is returning more than the mortgage’s interest rate. While often true, it is a comparison between a risk-free investment, i.e., paying off the mortgage and a risky one like a stock portfolio. A more appropriate comparison is to compare risk-free returns from certificates of deposit or Treasury bills with the mortgage rate. Stocks don’t always go up either; from 2000-2009, the S&P 500 had a negative return.
Retirees may fondly view the rates during the early 80s. I don’t. I was a borrower then. Ten to 12% sounds terrific, but we had double-digit inflation and it wiped out all the gain in buying power. Today, core inflation, as measured by the Consumer Price Index, is 1.8%, while Vanguard’s Total Market Bond Fund yields 2.27%. Inflation-adjusted returns are what you can spend, and it’s not a fancy trick.
Another reason to own bonds is they provide portfolio stability. On days when markets decline, all the stock indexes show red on my phone, but bond indexes are green. Capital gains spend just as well as interest from bonds or dividends from stocks. Instead of focusing solely on income, look for total return. Like tax avoidance can be a dangerous strategy, so can chasing yields. Allen Roth said it best, “Your portfolio is stored energy that gives you choices in life.”
You can’t always get what you want, but Buz Livingston, CFP can help figure out what you need. For specific recommendations, visit livingstonfinancial.net or come by the office in Redfish Village, 2050 Scenic 30A, M-1 Suite 230.