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Three Things: September 30, 2019

September 30, 2019
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This week I was inspired to share some long-run stock market data, a morbid quote from a famous economist, and a child crying while playing a board game. 


Adam Harding, CFP / Smartvestor Pro

If this is your first time receiving this email, here's some background: "Three Things" is a quick weekly email to recap some things that stood out to me in the previous week. I try to find inspiration in articles, videos, images, and anything else that I can tie into a financial planning or investment tip. Let me know if there's something you'd like to see covered, or if you happen to spot something interesting which you'd like to share. I hope you find this insightful!

Thing #1: 

The Visual Capitalist

Putting your savings at risk can be hard to do. We work, earn, spend, and save as much as we can and it can be hard to watch market values decline when we invest those savings. This piece tells us what many of you already know: if you have time on your side then you have significantly lower chances of actually having to recognize losses during those declines.

Key Takeaway: This article from Visual Capitalist contains the below graphic which shows stock market returns over every 1 year, 5 year, 10 year, and 20 year period after adjusting for inflation. As you can see, negative real returns (in red) are fairly common in a single year, less common in 5 year periods, even less common in 10 year periods, and nonexistent when the timeline is extended to 20 years. 

A couple weeks ago I commented about “Optionality” which is the ability to choose something without being required to do so. If an investor has the ability to maintain optionality around when they sell stock holdings, then history shows a significant increased likelihood of capturing positive stock market returns. 

Thing #2: 

Quote: “In the Long Run We Are All Dead"
John Maynard Keynes

In Thing #1 I highlight how large returns for stock investors are more likely to occur in the long run. However, financial planning isn’t just all about accumulating money and never spending it. 

Earlier this week I was reminded of the quote by famed economist and mathematician, John Maynard Keynes: 

In the long run we are all dead. 

Yikes…That dose of reality starts to make the short run gyrations of the markets seem less important. In fact, what it really conveys is something that I try to embrace as a wealth advisor: you need to spend your money. 

Of course, we need to deploy some sensibilities when spending money, but it’s not always wise to postpone spending in exchange for maximum long term wealth. 
Simply put, enjoy what you’ve built.

Thing #3: 

Video: "boy learns taxes in monopoly and cries after paying”

If you haven’t seen this video I recommend you do so with the link above… Hilarious! 

In the video, a child is upset about taxes hampering his ability to win at Monopoly. We hear ya on this one, buddy. 

As a quick refresher on the rules; when players land on the Income Tax space in the game they owe 10% of the value all of their cash and properties held. This 10% tax is a true Wealth Tax.

Unlike the real world, property values in Monopoly are stable and they produce income which isn’t taxed (oddly enough, there is no actual Income Tax in the game). Stable values means it’s easy to calculate a 10% wealth tax. 

In the real world, properties are purchased with dollars that are leftover after income was earned and taxed. Despite the element of double-taxation, a wealth tax on hard-to-value assets would be extraordinarily difficult…I agree with this kid and I’m not a fan of the wealth tax. 

In Monopoly, owing this tax is 100% based on chance --if the dice cause you to land on the space, you owe the tax. Fortunately, in the real world, outcomes are more predictable and we can plan around taxes and make moves to optimize the impact they can have on our financial circumstances.

For this reason I aim to hold two separate tax-based discussions with clients each year: one in November/December to discuss what can still be done for the current year, and one in February/March to get organized for the previous year’s tax filing. I’m not a tax advisor or CPA, but the CFP® curriculum goes into enough detail to prepare me to make meaningful progress and loop in the appropriate tax advisors if needed. 

If we plan well, hopefully we can not end up in tears like this kid.

That’s all for now, see you next week. 

Adam Harding, CFP®