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Charlie Retirement

Don’t spend a lot, to save a little on taxes!

Tax Aversion Bias

By Charlie Mattingly

We often talk about behavioral biases, and we are constantly trying to better understand behavioral finance and behavioral economics to make better decisions. We think it’s fascinating because it can have a huge impact on our investment returns, saving habits and therefore our success in retirement.

Another one of the things that it affects tremendously, believe it or not, is taxes. So how does paying taxes drive our behavior?

First, let me talk about behavioral biases. What do we mean by behavioral biases? Certain parts of our brains are wired to make snap decisions to help save our lives, and sometimes this quick thinking really does save your life. What I’m referring to is the limbic system. This system is the emotional center of the brain that takes over under stress. The limbic system is the part of the brain involved in our behavioral and emotional responses, especially as it pertains to behaviors we need for survival, feeding, reproduction, caring for our young, and fight or flight responses.

This system has no doubt led to our advancement and survival as a species, however it often fails when tasked with evaluating certain complex scenarios we face in modern society, especially those that are highly emotional such as our finances.

So, what I wanted to do is address some of the weird things we do as taxpayers to avoid paying taxes.

Of course, there’s nothing wrong with minimizing your taxes. We don’t want to pay one cent more than we’re legally required to, on the other hand, we don’t want to reduce our net worth just to minimize taxes. Unfortunately, that’s what happens a lot of the time.

My father-in-law owns a lake house here in the Knoxville, Tennessee area. The house is paid off and it has appreciated significantly in value over the years. It’s a beautiful place, but they don’t want it anymore. It’s a lot of work for them to properly maintain. So, maybe selling the property would bring them more peace of mind and less stress in retirement. However, he won’t sell it. The primary reason is because he’ll have to pay taxes.

What other ways has the tax aversion bias changed our behavior? Taxfoundation.org has a great article on some of these examples of tax aversion bias.

Have you been to Charleston, South Carolina and noticed that the buildings are narrow and close together? That design started in Amsterdam and was copied around the world. The buildings were intentionally built to be narrow because… you guessed it, taxes. In the 16th century, buildings in Amsterdam were taxed by the width of the property’s façade and how much street frontage they took up.

Real Estate Investing
Another fascinating example from Paris, is the design of the Mansard-style roofs. Architects actually created rooms above the roof line because taxes were levied on the number of floors below the roof line.
Mansard Roof
One of these behaviors that I struggle with and think about a lot is farm equipment. I’d like to buy a new tractor and I know a lot of you probably would too. Tractors are fun! That’s why towards the end of the year I hear folks say, “Hey, I need to reduce my taxes, so I’m going to go buy a tractor. Maybe even a bigger tractor!”
Again, if you need the tractor or farm equipment, that’s a different story, but don’t do things simply because it’s a tax savings. As my business partner, Kevin Gormley will tell you that’s the “tax tail wagging the dog”.

In summary, taxes are a very emotional issue, and this can affect our behaviors. Sometimes we let our emotions make decisions for us, such as the example where I’m not going to pay taxes no matter what or as little as possible no matter what. Just be aware that even though its painful, sometimes it might be smarter to just pay that tax.
Thank you for reading. Please reach out to us anytime. Leadingedgeplanning.com, My email is Charli@leadingedgeplanning.com. We’d love to hear from you!

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this video will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any information or any corresponding discussions serves as the receipt of, or as a substitute for, personalized investment advice from Leading Edge Financial Planning personnel. The opinions expressed are those of Leading Edge Financial Planning as of 09/06/2019 and are subject to change at any time due to the changes in market or economic conditions.

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Pilot Money Guys

Should you invest in Real Estate Now?

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Flight #8 – Should you invest in Real Estate Now?

Podcast Transcription:

 

 I’m excited. Real estate rentals. This, this is a topic that comes up all the time. Yeah.  

Charlie: Yeah, it is. It’s awesome. Right? Can be you see my sign on the back? I’ve got here. Can you all read that? I love real estate. I line through it. Yeah. It has an extra, for some reason. Anyway, I I’ve been a real estate investor, all my adult life. 

I can’t remember where the first time, not really intentionally, you know how it is Rob, you move around in the military, you end up keeping a house that you lived in, you end up renting. So that just happened to me a lot. It seemed like, and most of the time it worked out okay. Sometimes I made a little money and sometimes I lost some money. 

So we’ll talk about those today. Yeah. Yeah, exactly. But we’ll, we’re going to talk, you know, maybe if I could do my three point thing here, like we’re taught to do Rob and the air force three, three talking points, you know, the investment, you know, what is the in real investment? Most people don’t. Properly analyze this investment. 

So then it’s like poker or blackjack. You walk away from the poker table, the blackjack table. And you’re like, man, I really, I think I actually made money or there, I really believe that I made money. You know, I came in with a thousand. I only left with 200, but you know, I made money somehow. And you know, we, we kind of lie to ourselves a little bit. 

So that’s the blackjack mentality that happens in real estate. So we’re going to talk about how to properly analyze real estate investing so that you can make a great decision on whether it’s right for you or not. We’re going to talk about some tax pros and cons, and then we’re going to talk a couple other items, like maybe a LLC trusts. 

Self-directed kind of stuff in, uh, although I’ll lump those three topics into one point I had to only have three, so that’s okay. So we did that. You liked that very  

Rob: quick. All right. Yeah.  

Charlie: So what do you all think? I mean, I didn’t fall asleep on you. Yeah. You weren’t paying attention. Do you all want to, uh, What do you think about real estate before I jump into this diatribe that I have and do all this talking? 

Yeah. Give me some inputs. Yeah. And  

what’s  

Rob: the millennial perspective?  

Ben: Well, I mean, you get on Tik TOK or Twitter or Instagram. I mean, you hit  

Charlie: on Tik TOK. I know. 

Ben: I, uh, I downloaded it and then I deleted it within maybe 10 minutes of down there, but I do, I do see a lot of videos and, and a lot of them are about how it seems like it’s millennial focus or something, but about how, you know, it’s a second stream of income, you can get, get rich, quick doing real estate somehow. 

Um, you know, here’s all the tips and tricks to real estate investing and it’s exciting. I mean, it’s definitely something that I’ve always been interested in and, um, I want to participate more and do some rental. Yeah. Uh, uh, or some real estate investing. But, um, it, as far as the millennial perspective, it seems like it’s just a thing that right now people are just talking about like crazy, whether it’s, uh, with Airbnb being a huge, uh, uh, another driving factor of, of real estate in general. 

But, uh,  

Rob: you know, well, the market’s been such still great since, uh, 2008 there, right. Or 2010 issue. The market’s just been hot. So. No wonder everyone’s jumping on, but it won’t always be hot. I can  

Charlie: guarantee you that that’s right. Yeah. This is like our last podcast where we talked about the recency bias or at least I think we did because you know, prices are high right now. 

Everybody’s making money on real estate. Yeah. But like you said, Robin’s not always that way. So we got to look at the entire body of evidence and not just the last couple of years, because we know that’s a, that’s a fallacy that leads us down the wrong path. So we’re going to today, we’re going to talk about what are the real estate like big picture. 

Should you do it? Should you not? So, um, like I told you guys before we got on here, don’t let me get too negative. Okay. Cause I just, I just came out of a bad relationship rental relationship, but we’ll talk more about that in a minute, but there’s some really good things. Let me talk, start off with some good stuff. 

Okay. You get, uh, you get the advantage of leverage. Most likely, most people were going to buy rental real estate using leverage. Um, you also have an advantage. In rental real estate where you do not have the market. And that’s what I call the informational advantage, you know, in the stock market, we really don’t have. 

In fact, there’s a strong argument that says no one has an informational advantage unless it’s inside information, which is illegal. But if you’re doing rental real estate investment in your local community, you have the ability. I have an information advantage. You could know that market. In fact, Rob, you will know the Colorado Springs market better than I know the Maryville, Tennessee or Knoxville, Tennessee market. 

You will know that, you know, you will have the information advantage, right? So you can profit off of that. And, and, and, oh, by the way, if you’re willing to get in there, if you’re handy, if you, if you can do some, you know, sweat equity, there’s an advantage there. Uh, I can’t do anything, so I gotta pay somebody else to do all that stuff and I don’t want to do anything. 

So those things all go into this decision, but it can be a great thing. Also, it’s a diversifier, you know, it’s a different type of asset, which we love. Um, and there’s a huge behavioral advantage and here’s what it is. You’re not going to see the daily price of your rental real estate fluctuate wildly like you do on the stock market. 

In fact, you know, unless you, you know, even if we have 2008, the great recession, you’re not going to see. I said, unless we have that, because you did see those values decline drastically, but, uh, except for extreme scenarios like that, you’re really not going to see the daily fluctuation. You’re going to treat it, you know, like a hate, just an income producing thing. 

I know it’s probably going to average three to four to 5%, you know, um, uh, appreciation and that’s it. So there’s no, I’ve got to sell it. It’s down. I got to sell it. It’s up. There’s no, there there’s none of that stress. What do you all think so far?  

Rob: Yeah. Yeah. Uh, I think, uh, you know, it can be good. It can be good. 

I’ve got obviously being in the military, we’ve got tons of buddies who’ve done really well. Uh, lots of buddies who haven’t done so well. And, and I would, you know, just my small sliver of the pie seems about half and half. Yeah. Uh, on those who’ve done pretty well. And those who haven’t the one thing that, that I know you’re going to get into is, is the time and the pain that, uh, having the rental comes up becomes  

Charlie: yep. 

Cost to that.  

Ben: Yeah. And just that, that PA that extra passive income I think is, is just a really nice, you know, freeing feeling that you’d get from, from having real estate, you know, just a little something else that, again, even if it’s just basically, you’re, you’re only getting the appreciation on the, the real estate itself, just to having that extra monthly stream of income and letting it pay for itself. 

I think that’s kind of, uh, something that’s interesting to me and,  

Rob: yeah, and it’s a diversifier, like you said, the only, the only thing that comes to mind is, you know, the, you have, when you have that leverage and you have the opportunity to have that upside, you have risk. And sometimes that risk you can’t see coming, uh, you know, your roof and all the different maintenance costs that come with having a house and having renters. 

Who’s, you know, they’re living in your property. It’s not theirs. They don’t treat it like you would. So you’re going to obviously have some more costs with that. Yeah,  

Charlie: you’re right. And like we said, the leverage is a benefit, but it can also be a disadvantage 2008. Again, the great recession is people were over leveraged. 

Big time. People were not putting any money down. They were doing interest only loans. So we learned the hard way there. What happens when we all do that? A lot more to that story. We won’t go into that, but let’s talk about some numbers. So I kind of did a case study all, just we can talk to it and we can address a lot of these questions that people have and the reality of their investment return or how to analyze it. 

So let me start with the first rule of thumb, the 1% rule, and, and you all may have heard of this. Your monthly rent should be equal to, or greater than 1% of the total purchase price of the investment. For example, I buy a rental real estate investment property for 250,000. My monthly rent needs to be 2,500. 

Now I’ll be honest with you and in our area and maybe different in the Springs and in Denver. That’s a lot. I think that’s very high. I think that would be really tough to achieve. And I looked at some properties in this area before we got on the call here. That’s really challenging. In fact, I think it’d be closer to 0.6 to 0.7% versus one. 

Nonetheless, that’s going to vary greatly and it’s not a disqualifier. Um, yeah, if you, if you don’t meet the 1% rule, there’s a lot of variables there. Uh, the other rules of thumb, another really challenging one. If you want to make money real estate, here’s, here’s the three things you got to do sounds early elementary, but it’s really challenging. 

You got to make money when you buy, you’ve got to make money when you rent and you got to make money when you sell again, those sound like no brainers, especially the last one. I’ve got to make money when I sell. But a lot of times people do not make money when they buy. Because they overpay and just like stocks, we do not like to overpay for stocks because that means your future expected return is lower. 

That’s a big deal. So you better find a deal. You better be good at negotiating, or you better have some sweat equity that goes into that. And then making money when you rent is a big one, you know, you all know, and Rob, you fly with a lot of folks. Like I did that say, Hey, I’m trying to lose money on my real estate property. 

Oh, I’m like, why? Well, I want to pay less taxes. Well, don’t ever lose money on anything. You know, that doesn’t, that just doesn’t even pass the, um, the sniff test there. The common sense says, but we hate taxes so much, again, another behavioral bias that we addressed last time. So I’ve talked a lot there. You, I’m going to be quiet for a second, but those are some rules of thumbs. 

They get people going. Those are  

Rob: super important. And even, you know, we talked about, you know, you’re looking at the numbers and there’s so many terms that so many numbers you want to be looking at. That you want to be familiar with and really get into the, you know, first rule or one of the rules of real estate investing is cap rate, cap rate, cap rate, which is the capitalization rate. 

What are you, what are you doing with, uh, you know, how are you making that money? Which is, you know, basically it’s your net operating income divided by the purchase price. It’s just one number out there to help you, you know, figure out if this, this real estate is better than that real estate. Uh, but there’s a lot of terms out there. 

A lot of different, uh, markers that you should look at when you’re looking at this kind of stuff. I think the other one that I would definitely throw out there as the cash on cash return, which is your annual cashflow divided by the initial cash out of pocket. You’re going to want to know those numbers. 

If you are, you know, set on getting into this and again, just realize you do have, if you’re leveraging, you have the opportunity to make some pretty good money on these. If you’re in the right market, can you guarantee you’re in the right market? That I don’t think anyone can guarantee, but you can obviously have some informational advantage there. 

Charlie: Right? Bob and Ben, I know you’ve got something to say, but as soon as here in a minute, we’re going to talk about those ROI numbers and how to calculate them and what they should look like. And we’re going to go into more detail, but Ben, what you got.  

Ben: Yeah. Um, I just think, um, when you’re going into real estate, especially getting started in it, um, you know, I, I just think you need to find somebody that’s got some experience and maybe partner with them to, to get really into it. 

Um, you know, there’s so many different factors whether it’s buying the house that, you know, is, is the property going to be kept up? Is it, uh, you know, is the roof going to leak? Is it you’re going to have to replace the foundation? Do you have to get a good inspector? You have to know the area. No, no. What rent prices are typically got and then know how to work the bank as well and how to get the best rates you can. 

And if I’m going into a, uh, uh, real estate investment, I’m, I’m going to want some, somebody that knows what they’re doing to go in with me and partner with just because I don’t trust myself in making that right. That necessarily the best decision. I think that’s where that overconfidence bias may come in play. 

You may say, Hey, I know my neighborhood so well, I know this and that, but. You know, you got to think there’s so many real estate investors out there that are ready to make moves on houses. Why maybe haven’t they bought the house yet? So that’s another thing that I try to think about, think about what could go wrong, um, as well, but partnering up with somebody with experience. 

Rob: And when you partner with someone, you know, sometimes people partner with realtors and that can be good. That can be bad. Depends who you’re working with. But I almost think, you know, the realtor sometimes is you’re paying 7% to sell a house. Um, yeah. And I kind of think of that. I’m wondering what you guys think about this, but I kind of think about that is, is a bit ask, you know, spread, if you will, almost, you have to cover 7%, you know, off the top when you’re selling, just to kind of get back to even, I don’t know what you guys think. 

That’s a good analogy on that.  

Charlie: Yeah, I think it’s, I think your point is valid in that. It’s a cost, you know, when you, and when you partner with anyone, especially in real estate, because what value are they bringing to the table? You know, if I just partner with you, Ben, for knowledge, how do I pay you? 

What’s it worth? And how much does it cut into my profit? You know, so those are tough in the real estate world. Those are very difficult things to quantify. So I’ve seen real estate partnerships really struggle because what value is it that you’re bringing to the table to me? How do I pay that? And does it, does it reduce that hurdle rate, Rob, that you talked about my return on my investment because it will, the real estate fees will do it. 

In fact, let’s go ahead and transition into the numbers into my, into my supposed case study here and the RA and Ben, I’m going to pile on what you said there. You got to know, you know, you talked about knowing the financing, knowing this and knowing that, but what I learned as a real estate, uh, landlord, and not everybody. 

It was going to be a landlord. You don’t have to be a landlord to be a real estate investor, but most will, if you hold on to it, I learned how to deal with renters. I mean, I went into the deal like, oh, here’s a contract. I pulled it off the web. And, uh, see, uh, when the rent’s due, not really, really, I mean, you gotta, you gotta really be involved. 

You gotta really pay attention, detail, be directive, all those things up front. And I guess we call it operations, but you need to think really thoroughly and do your homework about the expectations you’re setting for renters. Otherwise you’re going to get burned, you know, and, and again, depending on who you’re renting to, you better be ready to either a, be a parent along with an investor, or, you know, if it’s a, maybe a higher income and then maybe less so, but you’re going to pay for that too in a different way. 

So let’s get into the numbers. Um, first of all, Rob, you nailed it. Before we got on this is just a risk return profile decision. You know, again, these questions do I use leverage? Do I use all cash? Let’s talk about it. Well, I’m going to use leverage if I need a higher return on investment, but I might use all cash. 

First of all, if I have it. You know, it’s not easy to throw down a couple hundred thousand on a property, but I do get a higher, you know, I get a higher, a clear, a higher cashflow. I get more cashflow subdued. So it’s just like a stock. Do I want appreciation? Or am I interested in cashflow? Most? Let’s just say most airline pilots, most professionals working now, they don’t need extra cash flow. 

In fact, they’re trying to minimize that because it’s just going to be taxed at the highest marginal tax rate, right? A 32% probably for, for a lot of the folks we’re talking to. And so maybe I don’t need cashflow. Maybe I just want to break even I want to appreciation. So that’s going to dictate what kind of property you buy. 

You better buy. If that’s what you want, you better buy a quality property in a quality neighborhood. You’re going to pay for that. You know, uh, if you want higher cashflow, Ben, like you were talking about, well, then you do what I did and I kind of do this by default. That’s my excuse. I didn’t do this intentionally, but I own two, I own two trailers. 

I had Charlie’s trailer park. That’s what I called it. I was a mayor of the trailer park. Yeah, that’s right. It was exciting. Uh, we’ll share some stories in a minute about the time that I had to evict of seven cats out of one of the residences while the kids were watching and crying and screaming for her mother, why is this man taking our cats? 

But anyway, uh, uh, allowed them to have one cat and they had seven, you know what the heck it’s the way it goes. But anyway, so that is a high yield bond because I didn’t pay much for those. I didn’t pay much for those properties, but they, I could charge a higher rent. And so my yield was phenomenal. 

However, you know, it was painful. You going to tell, I ain’t gonna lie to you. It was painful. Um, People threatened to burn them down and you know, all kinds of stuff. So that’s some good stuff. Good fun. Um, so that’s what you need to think about and Rob, you nailed it. Risk return. What do you want? What kind of property are you handy? 

Well, then go get something and fix it up. I flew with one, one pilot. He actually built his own rental properties, which I thought was genius because he was good at that. He could build them specifically to rent, which means they had concrete floors, very durable walls. And so, you know, that that was a pretty, a profitable thing. 

I believe. What do you have?  

Rob: Uh, just on something like that, you just want to make sure you have the right insurance. If you’re building a property, obviously you’re insured. If things don’t go quite the way you want them to, because we have professional builders, you guys, I don’t know if you guys have been a new house, I’ve been new houses where these professional builders to get in and they’ve messed all kinds of things up. 

It’s building the house. Isn’t exactly. It’s not rocket science, but it’s not exactly easy either. Yeah.  

Charlie: Yeah. That’s right. So think about, you know, when you’re looking at rental, what do we want? So in our case study today, we’ve got a $250,000 property, three bedroom, two bath, 30 year mortgage. Oh, by the way, as a, as a non-owner occupied property, you’re going to pay a higher mortgage interest rate. 

In fact, the going rate right now for a second property rental property is 3.5 to 3.75. And you could probably get a whole point lower than that. If you’re owner occupied. You’re also going to put more money down. You’re probably, I don’t think you can get away with putting less than 20% down on, on a rental investment property. 

That’s just my latest, uh, look at it. I don’t know. Have you seen  

Rob: anything different? The only exception there is, if you were in the military or whatever you were, you moved in, you owned it, bought it occupied and then left obviously,  

Charlie: right. That’s a good way to do it. Yeah. Um, you know, I looked around at our local area and I’m telling you $250,000 property getting more than about $1,700 a month in rent is a stretch. 

Uh, and that’s only 0.7% that doesn’t even make meat, our 1% rule. So there we go right off the bat. We’re a little bit behind, but you know, that’s not the only factor. Um, my income rental income, um, what’s a 1750 times 12. It’s about 20 grand. If I’m not mistaken. Cause somebody do that math. I did a different kind of math on that one. 

Great math anyway. Um, so, so basically we’ve got some income, you know, 18 to 20 grand. We’ve put 40,000 down. And so man, we’ve got some good income and let’s see what our mortgage would be about. I think I put mortgage in here somewhere. It’s about 1200 bucks a month. No, 11 1122 a month. Yeah. So yeah. So once you get your, your more, you know, your, uh, income minus your mortgage, you’ve got a pretty good rate of return there. 

In fact, you’re probably approaching the double digits or more, you know, I didn’t do the exact math, but let’s just say we’re in the, in the low teens. Okay. However, here’s where it gets. Here’s where you got to do the real analysis. Like you’re talking about Rob and the return on investment. If you’re having someone manage it 10%, it’s $180 a month. 

If you’re, uh, you will be paying some maintenance costs, you know, we’ve replaced roofs, air conditioners, septic systems, somebody decided to flush Snuffleupagus Snuffaluffagus. Down the toilet stopped up the entire septic system and in the rain, you know, we’re out there digging up a separate system and then I had to put them in a hotel. 

So there are some expenses you’re going to have. Yeah. And, um, so be ready for that. Again, usually a couple, like 2% might be a rule of thumb to use. You’re going to have some vacancy. You got to plan for that. You’re not going to be rented a hundred percent of the time. You know, you’re even in a good scenario, you’re going to miss a month or two a year, even just in the turnover. 

You know, if you’re getting one renter out and one end, you need a few weeks to get it ready. So that’s at a minimum. What is your time worth? What are you spending on these rental properties? Now I will tell you if you want to pass the real estate professional test, which we’ll talk about in a minute, you better be at least spending 15 hours a week. 

That is one of several tests. So if you’re a high income earner, I don’t know somebody can do that. Math for us. Let’s say you’re, you know, the average CFO makes, I don’t know what, 130, 140 bucks an hour average captain makes 240 bucks an hour. That’s pretty doggone expensive. Now. I’m not saying you’re going to do that because most people can’t. 

And so therefore you’re not going to be a real estate investment pro professional, but nonetheless, let’s say you spend four hours a month. And that’s probably about what I did. You know, there’s some bookkeeping involved. Even if you use a management company, you’re going to get calls. You got to make some decisions. 

You got to go visit, you got to do stuff. Well, that’s about 800 bucks a month and I just kind of averaged, you know, some hourly internet airline rates there. Yeah. So now we’re, we’re, we’re, you know, if you’re a rental real estate investor, you better be tallying up these numbers that I’m talking about it and I’m not done. 

I’m only halfway done. So now we have property taxes, usually about one to two, actually closer to 2% of the value. In this case, 375 bucks a month. Insurance, homeowners, insurance, uh, that’s going to be paid in escrow, probably about a hundred bucks a month. Mortgage interest. You’re paying interest on that investment you made and there’s turnover fees. 

If you change renters, you got to clean the place you got to clean carpets. You might have to paint you better average, you better be ready to spend about a thousand bucks every time you change renters. So put that in the formula. Okay, so now we’re going to talk in general. What is my average ROI after taxes, insurance, and expenses. 

You’re probably in the high single digits. You know, which is not bad, right? I mean, 8%, let’s say I get 8%. That’s not bad. However, the only reason I’m there is because I use leverage, right? One of the only reasons is, um, um, I’m leveraging and that might even get me to the low teens, mid teens if I use leverage. 

But think about that. We’re not, you know, when we go think about the investment, my alternative is to go into the stock market and buy real estate investment trust without leverage. And that’s been one of the highest, uh, performing asset classes. The last 20 years, probably high single low double digits. 

If I, you know, I didn’t look that up before the, before the show, but so now again, we’ve got to come, we’ve got to analyze it appropriately with all the numbers I’ve just talked about and we’ve got to compare it to alternatives appropriately. Okay. I’ve talked to,  

Rob: yeah. So just to summarize that, it sounds like Charlie, uh, to wrap it up a little bit on, on this part, If you’re not using leverage, your returns can be okay again, you’re buying, you know, maybe one, two, three houses, and those risks, you know, associated with buying one house. 

If anything happens to it, if the soil is bad, if the water’s bad, all these different things that can happen, the roof goes back, you know, you can be out some pretty good cash with that. If you’re in it. And this is just all non leverage. If you leverage, you can get into some pretty good money. Again, the risk is higher because you’re leveraging, but the return on investment can be a little bit, a little bit more. 

Charlie: Yeah. Yeah. And I’ll tell you, Rob personally, I would not even do it without leverage. You know, it’s, it’s, it’s a lot of work. It’s some headaches. Some people are really good at real estate investing, you know, there’s no doubt. And like I said, I don’t want to get too negative on this, but I just want to be fair on how you analyze this. 

But some people are really good at all those things we’ve talked about so far. They know how to manage renters. They know how to buy, they know how to sell, you know, they’re really good at it. They treat it like a real business. We have clients that treat it like a real business. They do a great job and they probably have, uh, returns, um, because they’re leveraging of mid to low teens, you know, maybe even low twenties, but that I would not mess with this. 

If, if I didn’t get at least a double G in fact, my hurdle rate, if I was going to do it would be at least 12%. Otherwise I’m going to put my money in a REIT, um, you know, publicly traded REIT real estate investment trust, and I’m going to just. Let it go. I don’t have to do anything, pay anybody or worry about somebody sticking their stuffed animal down the toilet, you know,  

Rob: and a lot of this too can be, uh, you know, there’s some information, uh, bias that you have, I guess, and in a lot of it’s luck, where do you live? 

If you live in California, you can be doing really well. But if you live in Ohio where I live, maybe not so well, you  

Charlie: know, places, and even within those, even within cities, there’s these micro markets, you know, even in a certain part of town, you can really be profitable, you know? Uh, but  

Ben: yeah, and on that Charlotte, like I was going to say like the, the, the, there’s some units in a building right next to me that they’re selling for $500,000, two bedroom. 

That’s going, you know, the rent is, uh, maybe $1,800 a month. So, I mean, talk about the 1% rule that’s blown out of the water down here. So. You just did it definitely depends on what area you. Yeah.  

Charlie: Yeah. Yeah. And I, you know, let me summarize that return on investment equation, because I just talked about the things you better be thinking about, but here’s the equation, you know, it’s annual return, you know, in other words, the rent that you take in minus your expenses, including your mortgage payment and all the expenses I just listed, uh, divided by your total investment, which is the cost of your property. 

So that’s just the formula, you know, and again, we just talked about some rules of thumbs, some things to think about, but make sure to fairly analyze your real estate investment and treat it like a business and do not try to lose money on purpose. A lot of S and I’m going to throw the CPAs under the bus. 

Kevin is a CPA and, uh, I’m going to throw them on the bus. Cause they say, Hey, you need to go out and buy our property because you pay too much taxes. It’s like, holy cow, that’s a terrible reason to buy a property, never buy at any investment. It’s strictly due to taxes. So anyway, we’ve seen that. I promise you and, uh, Real estate can be great, but don’t do it just for taxes, which probably is a good transition. 

Rob: There will always be that Sarah alive, uh, skid way back with Steve Martin. He’s the doctor. He’s like, I recommend you. You do some bleeding, bleeding already. Exactly. Who’s the doctor here. That’s  

Charlie: right. That’s what this is for bleeding is a good analogy.  

Rob: Sometimes, you know, I hate to, I guess I watch too much TV, but, uh, the other thing that this reminds me of is the back to the future. 

Am I going to be back to the future too? You guys remember that where he goes away and he comes back, uh, and the image might be an alternate universe, but the nice cush neighborhood, the neighborhood to live in all of a sudden. It’s not the nice neighborhood. And I think we’ve seen that in a lot of, a lot of cities around the world. 

So just because you do think the neighborhood is nice, you have a risk that, that, you know, some kind of regulation, uh, some different politics gets involved, get involved and all of a sudden it’s not the nice thing. So you  

Charlie: have that risk. Yeah. Just be ready. I think too, you know, people say it’s good. 

Passive income. Well, I don’t know. That’s debatable even though it’s maybe classify that as by the IRS. Um, Hey, I’ll tell you what, let’s talk taxes. It’s always fun to talk taxes, taxes, and real estate because that’s why people get into it. Right? Hey, your CPA says, I should, you know, I’m getting paying too much taxes. 

I need to buy some property. Well, let’s talk about that. So the biggest advantage tax advantage for real estate is depreciation. And so depreciation is exciting, right? We get to it’s, it almost creates, you know, re uh, real estate properties. Almost can be like an investment inside of an IRA because the depreciation allows me to defer my either gain or I can even defer some income. 

Right. So that means, right. It’s almost like tax free growth, right? Well, that is the one advantage as really pretty good. But, but you gotta be careful because once you start making $150,000 or more, you lose the ability to deduct passive losses against your active income. Okay. So now if I make a 500 bucks a month in rent, uh, then I can deduct that rental income. 

I can deduct my expenses and depreciation against that income, right? Because that’s passive income, uh, that I’m, that I’m getting rid of with my expenses from the rental property and appreciation. However, let me transition into this one. This is what most people want. I want to deduct my rental expenses and appreciation against my airline income. 

No, no, that’s a no-no that’s not going to happen. And let me explain the rule. For real estate. This is right out of IRS publication, nine 25. If you’re going to do rental real estate, read that publication and get familiar with it. So here’s the deal. If you make less than 150,000, then you can take up to $25,000 and let me correct that a little bit. 

It starts to phase out at a hundred. So the phase out starts at a hundred thousand of adjusted gross income, and it ends at one 50. So you make less than a hundred thousand. You’re able to take 20 up to $25,000 in losses in your real estate and deduct them against your passive income. Excuse me, against your active income, your airline income, your whatever you’re doing. 

That’s tremendous. However, above a hundred thousand, it starts to phase out above 150,000. That’s gone. Now, if you have losses, you can roll over those losses. There’s a more technical word for rollover losses. I can’t think of it right now. Kevin would know. Yeah, you can roll them over and definitely into the future. 

So that one day, when you make less than that limit, you can then take the losses. So what a lot of people try to do and way before I move on, are y’all tracking with me so far. I’ll try to throw out some tax stuff there and it gets convoluted at times. Am I being clear so far? Yeah. So the crystal crystal that’s right. 

Um, so that’s the holy grail, right? People want to deduct their rental law. That’s why I want to lose money, man. I got to lose money so I can do it. I pay less taxes on my airline income. Well, it’s not going to happen pretty much unless you’re making less than a hundred grand. Now you can roll over those losses indefinitely in the future. 

When one day you might make less than then you can use them. So how can I, is there a way to possibly take these losses against my airline income and you have to be a real estate professional to be able to do that. That means you’re. Active in the business, you are a real estate professional. Then you could take your real estate, losses and deductions and deduct them against your airline income. 

That’s what most people are trying to get to or think that you can get to. So that’s, that’s where some confusion lies, and that’s also where the opportunity lies as well. If you’re willing to go down that road.  

Rob: Absolutely. I think that, uh, Charlie, that the term we were looking for there was you can carry forward the losses carry forward. 

That’s it? That’s the,  

Charlie: that’s the phrase. Thank you. Not roll over. Carry forward. Thank you very much. Um, so, so I know you all are dying to know. Right. You’re dying to know how do I become a real estate professional? Aren’t you done to know that? Of course, we’ve got to know how to just do it now. Let’s just end the podcast there. 

That’s it. All right. So last night we were talking at our meeting. Ben, me, you and Kevin Rob didn’t show up, but anyway, so we’re talking about being a real estate investment professional. And Kevin had the good quote and, and, uh, he said the, uh, help me out ban the trail to real estate professionals is littered with bodies of, uh, tax, fraudulent people that have tried to cheat on something he’s like doctors, lawyers,  

Ben: pilots. 

So it’s  

Charlie: littered with those people. Yeah, exactly. Oh yeah. That’s  

Ben: the, like, that’s the main story they talk about. Uh, they talk about that story all the time and like every CPAs, uh, conference, they always get the final story of somebody getting, getting in trouble, claiming their real estate. Oh yeah.  

Charlie: So it’s pretty, you know, it’s interesting if you go online and you, you Google, I would Google. 

If you’re going to be a real estate investor. Or farmer pretend I’m doing air quotes for farmer. Cause we have some real farmers, but we have some fake farmers as well. And um, if you want to do that stuff, go Google court cases and look at how some of these people got, uh, kinda got burned. In fact, let me give you an example. 

One court case was, I don’t know how to say it. Edgar E G E R Gregg Egor versus the United States. First of all, do you want to, do you want to go to court against the United States that even if you win, is it really a win, but anyway, maybe if you want to stick it to the man, you could, but basically all of his deductions, all of his care for losses were disallowed by the us government because, because he didn’t pass the test of actually. 

And this is not just being a real estate professional. This is the very first test of, is it a rental property or not? You’ve got to meet some tests there that you’ll find in publication nine 25 as well. But basically he did not forego his ability to use his own property. So therefore they disallowed it as a rental. 

They said it was yours. You had access to it. And he had to essentially pay up, I guess. And again, when you’re going to court in the first place, that’s really, probably not where you want to be, but you can go on laundry, all kinds of court cases and of what not to do. Um, one, one story real quick is when I moved into our last place, it was 12 acres. 

We had a horse barn, we had a couple of rentals and we had a couple of chickens. Somebody said, Hey, you’re a farmer. I was like, really? I’m a farmer. You got two chickens, you’re a farmer. You collect some eggs, collect eggs, dude, you’re a farmer. You can deduct all this stuff. And that’s, that’s brilliant. So I’ll go to Google being a Spartan dude that I am, I go to Google and guess what? 

I find a court case or a pilot claimed he was a farmer because he had chickens. Ah, so I was like, no, I think I won’t deduct those costs of the chickens Charlie’s trailers and chicken or yeah, there you go. Or, or the tractor, I think I’ll just pay the taxes, you know? So anyway,  

Ben: oh, you got two chickens and you’re trying to deduct a tractor. 

That’s that one’s going to be hard to pass.  

Charlie: It makes perfect sense. Yeah. I need that tractor for those chickens. Um, but anyway, so yeah, you get the idea of, we’ve got to be careful. We don’t want to go to court with the U S government, even if we won, I still don’t really want to do that. All right. So faster funnier, as we say, the holy grail is being a real estate professional. 

Here are the, you know, some of the requirements. 15 hours a week and that’s actually 750 hours per year. I just said, Hey, 50 weeks, you know, you’re going to get a couple of weeks vacation, but you be able to better be able to show that you’ve got to log it. Um, that’s not terrible. Hey, 15 hours a week. 

That’s not much right. Well, now there’s the 50% rule I’ve got. Uh, you know, let’s say I’m an airline pilot and I fly our work. I don’t know how you quantify this, but I work a 40 hour week. Then I’ve got to be doing 20 hours or more of rentals, real estate activity. So there’s a 50% rule, more than half. I’m going to read it because I may have been confused, but more than half of the personal services you performed in all trades or businesses during the year were performed in real estate trades or businesses. 

So that’s a big one. These are big hurdles. And then like I kind of alluded to in that court case, it must truly be a rental. You know, in other words, if you’ve got certain access to the property, it’s not really a rental and those are losses will be disallowed. If you get audited by the IRS. Yeah. What now? 

Rob: A place you want to be. Yeah, that’s a lot of work that looks like a lot of  

Charlie: work, right? It is. And in this publication again, it’s some really good reading in here. There’s a lot of stuff. Hey, there are ways to, again, to be very profitable, but, but again, you also gotta be careful not to open yourself up to court cases and, you know, audits and you know, people say, well, can I do this? 

Can I do that? And Kevin, and I will say, you can do anything you want. Is it legal? Is that really what you’re asking me? No, you can’t do that. You know, but, but people say, well, I can do it unless I get audited. Right. So I don’t want to go down,  

Rob: not down that path. Don’t  

Ben: most people want this as a, you know, rental real estate. 

I mean, I guess obviously the returns, but the passive, the passive income. So if, if all of a sudden you’re having to create. A side business or, or do a side business just to get this passive income. That’s really active that you can then deduct against your airline income. I mean, it’s just, isn’t really think about what the point of getting into it in the first place. 

You want to have to have a second job just to get the, save some taxes. I don’t  

Charlie: that’s right. And how many days you go fly? Like a, you know, I pretty much calculated that, Hey, I’m going to get rid of these two trailers. I’ve got to get rid of Charlie’s trailer park and the chickens, chickens get eaten, by the way. 

I’m very sad to say, um, not about Hawks coyotes Bobcat’s, but anyway, um, I would just, I was flying at the time. I was like, I’m just going to fly a two day a month. You all and get rid of all this stuff. So anyway, that’s something to think about, right.  

Rob: Something to think about for sure. Yeah. Now speaking of, uh, you know, flying and 401ks and IRAs. 

How does this play in to a, an IRA or a 401k? Can you, can I take this and just go, go crazy with my 401k woo. Go into real estate. Wow. At least at Southwest airlines. I know that. Yeah.  

Charlie: Yeah. Ben, you T you, you had some great points at the beginning, you know, about. This topic, what were you saying? Those are, well,  

Ben: I don’t know if they were great points, but I appreciate you. 

Um,  

Charlie: they were mediocre. Sorry. They were very mediocre at best.  

Ben: There we go. There we go. Um, yeah, I mean, I, I’m trying to think of where I started this, uh, with those points, but, but basically you can invest in, in real estate, in a self-directed IRA. Um, you know, that’s a big thing. I’ve seen it. There’s a lot of stuff out there right now about it. 

I don’t know if it’s just some kind of a trend or some tic-tac video must’ve gone viral or something talking about it, but, but yeah, you can, you can. Um, but it’s, it’s very complicated. And as we talked about with that, the real estate professional. Tax advantages that you get there. I mean, to, to get the advantages of, of investing the self-directed IRA, and I guess really the advantage would be that you get to use your money, that, uh, from your retirement accounts to invest in real estate, but there are so many rules that you have to follow to be able to do this. 

Um, and you, you can get in trouble very easily by doing this the wrong way. So if you did want to invest in, in an alternative investment in your IRAs, it’s definitely something you want to, you want to think about a lot and, and consider all the alternatives. Um,  

Rob: and one of the biggest things I think about is the lack of leverage. 

You can use it going back to, uh, those points. Charlie was making them about. You know, if you’re just buying a cash, which in a self-directed IRA, you got to have that you got to pay for a cash, you can’t use the leverage. So you, you kind of forego all the higher return on investments that you could have, uh, if you’re leveraging outside of the software. 

Ben: Right. That’s and that’s where I had heard, like a lot of people trying to do the real estate and self-directed IRAs, at least from my, my understanding is that, uh, you know, if you can, if you can just get traditional loans from the bank or access to, to leverage through the banks, then you really don’t need to do the self directed IRA, uh, rentals in there. 

But it is a good, maybe it’s a good way for people who don’t have access necessarily to traditional leverage, maybe you’re you’re young, or you’re just trying to start out and invest in, uh, in real estate. You can’t get the loans, then maybe it’s an option. I know people will go around. They find other people to help buy into the, put money into the real estate, but. 

But, yeah, it definitely seems like a lot of work. Um, you know, I did, I did think about as well, just as far as diversification, you know, we talk a lot about that. Um, obviously real estate, you already having that in your IRA. Um, I like to think of my IRA is diversifier having it in, in equities. If you want to invest in real estate, you know, don’t spend all your money in your IRAs to, to invest in real estate when you can do that with, uh, with your, your own cash. 

Uh, I don’t  

Charlie: know if that made any sense, but  

Rob: yeah, I think too with that is, that’s just talking to IRAs when you start talking 401ks. I don’t think there are many 401ks out there, Charlie correct me if I’m wrong, but, uh, I don’t think there’s many 401ks that allow you to do what you can do in the self-directed IRA, which is use it for real estate. 

I don’t think you can do that many 401ks. Yeah.  

Charlie: Yeah. You’ve got to kind of do like an individual 401k, which we love individual foreign case for self-employed people. And if you’re a real estate professional, then you, you could open an individual 401k. And so there’s some things there, but, you know, uh, you know, I think the big P there’s a lot of complexity, you know, a little bit of nuts and bolts on these self-directed IRAs, lot of complexity, a lot of moving parts, you better cross your T’s and dot your I’s because in other words, you go to pay for a maintenance cost, you know, on your rental property. 

How do you do that? You know, do you pay for it within the IRA outside of the IRA? Is it a qual? Is it a non-qualified withdrawal? Are you going, gonna be penalized? Um, again, very, uh, very, um, you know, you get kind of highlighted when you do stuff like that with the IRS. So it better be advantageous. I think the biggest point is what you said, Ben is, Hey, wow. 

We need diversification in our 401k. We need diversification in our IRAs. Do the real estate stuff outside of it, because that’s the whole purpose is diversification. You get to use some leverage, you get some, some built-in tax deferral through the depreciation. If you get to take advantage of it. So going inside your IRAs or even an individual 401k is, you know, I don’t think that’s a, may not pass the sniff test for most people. 

It can be done. There’s higher expenses. So a lot of, uh, a lot of pros and cons just like anything else, but the man, I have a hard time finding, you know, a lot of good reasons to do that. Quite honestly, just my opinion and the other.  

Rob: Yeah, absolutely. The other thing I think of too is. Uh, when you’re, when you’re thinking of your overall investment strategy and your risk analysis, and we can help you determine what that is, but you want to think about where you’re living. 

Are you already, do you already have quite a bit of money in the place you live or are you already invested quite a bit in real estate in your hometown? Uh, REITs are great. You’re not using leverage leverage for REITs, uh, but they can be a great investment. That’s inside your 401k, inside your IRA. It’s a lot easier to take advantage of, and you’re not betting the bank on, you know, what Denver, Colorado, or any certain town you’re, you’re you’re most of those REITs are diversified in some or even overseas. 

And you can take care of, you know, you can invest in those a lot easier and diversify away that risk. And, uh, in a, uh, perhaps smarter, you may not get the returns on investment. You could, again, if you’re, if you’re just taking the risk with one, one town or one city or one house,  

Charlie: Definitely. Yep, absolutely. 

Yeah. A lot of, a lot of good stuff there. Um, you know, in the end, uh, again, I don’t want to beat up the rental stuff too much because it can be a good thing. Just know what you’re getting into, know if, if it fits your, you know, if it fits your preferences and I’ll be honest with you, I’m done with, I’m done with it. 

I don’t want everyone. And we moved and I’m like, it’s so nice to work on my own house. Even if it needs lots of work, at least I’m working for me, not somebody else, that’s just going to trash it. And, uh, but again, that was my experience. I did have some other experiences with higher income rentals and they were less maintenance, but I made less money, you know? 

So, um, so it just depends, but yeah. Pros and cons just like any other investment pros and cons.  

Ben: Yeah, definitely. This one’s a little more hands-on though, than some of our other investments, you know, a little, a little more hands on than some stocks and bonds. So  

Charlie: definitely it’s a big,  

Ben: I don’t know. You definitely have to love it. 

I would  

Charlie: say.  

Rob: Yeah. Yeah. You’re going to want to totally in there and get familiar and getting a mentor. Like you talked about Ben and yeah, that’s really important. I think when you get into this is having people who’ve been there done that can walk you through and sidestep those politics,  

Charlie: right. Leading edge is a good, good mentor. 

We can tell you, uh, give you some pros and cons and talk. Make sure you’re doing a realistic analysis at least.  

Rob: Absolutely. Yeah.  

Ben: We’ll definitely make you reconsider it. 

Rob: Well, think about it each their own. Some people really love it. Some people hate it. Like there’s just no, what you’re doing before. Yeah. Before we get into it. Anything else? Anything before we wrap it up?  

Charlie: That’s it  

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this Podcast will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any information or any corresponding discussions serves as the receipt of, or as a substitute for, personalized investment advice from Leading Edge Financial Planning personnel. The opinions expressed are those of Leading Edge Financial Planning as of 03/31/2021 and are subject to change at any time due to the changes in market or economic conditions.

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Education Rob

The Fiduciary.

The Fiduciary.

The first time I heard the term “fiduciary,” I said to myself, “fidu…what? Sounds fancy.” Then I fell asleep. Admittedly, this topic appears boring and could put my 16-year-old boy all hopped up on Mountain Dew to sleep. But, here is a wake-up call – knowing who is and who is not a fiduciary is the first step in finding someone actually to help you with your money.
So, what is a fiduciary?
A fiduciary is someone who acts on behalf of another person and has a fundamental obligation to put their clients’ interests ahead of their own, with a duty of undivided loyalty and utmost good faith. Fiduciaries are bound both legally and ethically to act in the client’s best interests.
SEC Chairman Jay Clayton defined the fiduciary responsibility this way, “This duty – comprised of both a duty of care and a duty of loyalty – is principles based and applies to the entire relationship between the investment adviser and the client.”
When someone is a fiduciary, it applies to the “entire relationship,” not parts of it. It is the highest standard in the financial world. You may be saying, “Okay. Great! Aren’t all financial advisors fiduciaries?”
I would say, “NO!”
Unfortunately, the term financial advisor is very nebulous and can apply to brokers (registered representatives), IARs (Investment Advisor Representatives), or hybrid advisors who are dual-registered and can act as both a broker and IAR. The bottom line is only IARs who are only IARs (not dual-registered) are fiduciaries always. They must do what is in your best interest, even if it hurts them. They are like financial knights, putting your kingdom before their own monetary gain.
You, “Great Rob, what about Bernie Madoff? Wasn’t he a fiduciary?”

You are absolutely correct!

Yes, Madoff was a fiduciary advisor  (before that, he was a highly successful broker). I am definitely not saying that just because someone is a fiduciary, they will do what is best for you and your money. However, I am saying, by law, they are supposed to do precisely that (Madoff was sentenced to 150 years in federal prison). There are criminals in the world, and you need to take steps to make sure they are not defrauding you. Fortunately, many changes have taken place since Madoff and, perhaps one of the most important was the shift to a custodian system. A custodian system is where your advisor does not hold your money. Instead, a custodian like Charles Schwab retains it, and you can independently check your accounts to make sure it is where you think it is…not off in a Ponzi scheme. So, make sure your fiduciary IAR has a third-party custodian, and they don’t hold your money themselves.
You, “How did you gather this knowledge?”
I have been interested in investing ever since I was knee-high to a grasshopper. However, I acquired this fiduciary knowledge several years ago when I was a newly minted first officer before becoming an IAR and before Reg BI (discussed below). At that time, I began a journey to find a trustworthy financial advisor for myself. As a military officer, money had not been a primary concern, and, to be honest, I didn’t have enough of it to matter. But as I began my major airline career (2013), I realized I would soon have enough money that I had better start thinking about how to manage it.         I knew I needed help. My focus was on learning how to be a First Officer while still juggling my Air Force Reserve career.
Many questions ran through my head. The biggest and most important was, “How can I protect my money?” The money I had worked so hard to accumulate. What I found surprised me.
Many investment advisors wanting my business were brokers. Some of these brokers were very intelligent and could sell with the best. One problem, they only had a “suitable” duty of care to me and my money.
What does “suitable” mean? It means they only had to put my money into investments they deemed…wait for it…adequate. They did not need to give me advice that was best for me. To be clear, I am sure there are many respectable, ethical brokers out there; I am not saying there aren’t. But, with a suitable standard, they had no legal obligation to do right by me and my money.
For example, say I had two financial advisors: an IAR (fiduciary) and a broker
(suitable in 2013). Let us say they both had the option to put me in one of two identical funds, except one fund has higher fees. The IAR, legally, could not put me in the higher fee fund. The broker could legally put my money into the higher fee fund and likely would if they were getting paid to do so, as long as they deemed it adequate. You, “Okay, but that was then, right? What about now and Reg                 BI?”Regulation Best Interest (Reg BI – effective January 1st, 2020), has attempted to change the relationship and move the ethical bar higher for brokers. Instead of only having a suitable duty, they are now supposed to have a “best interest” duty. The regulation takes several steps to raise the bar (like having to disclose conflicts of interest); however, it does not change the dynamics of how a broker operates. A broker is still paid by a 3rd party to put their client’s money in certain funds. This relationship has not changed. Now, however, the SEC expects them to use the client’s best interest.
You, “How can they do what’s in my best interest if they are getting paid by someone other than me to put my money into particular funds?”
Great question; you are not alone asking this. Some say Reg BI hardly moves the bar; some say it moves it a lot. Here is my take…
The regulation does not and cannot change the dynamics of how a broker operates via a 3-party exchange. The broker will still have the broker, the client, and the entity paying the broker to put the client into their particular funds (3 parties). This higher standard is potentially good, but brokers still get paid by people other than the client. IARs, on the other hand, are fee-only, meaning the client is the only one who pays them (i.e., IARs are not paid by mutual funds or companies to get you to invest with them).
Per the Investment Advisors Act of 1940, IARs have always had a higher fiduciary standard and deal with this 2-party exchange. There is the client and the IAR, that’s it (2 parties). There is no incentive for an IAR to put your money into funds that may not be in your greatest interest.
You, “So how are IARs paid?”
Typically, IARs are paid by you quarterly. They get paid a percentage of how much money they manage for you. In the business, this is called AUM (Assets Under Management). It means, if you do well, they do well (Leading Edge charges pilots 0.85 % up to the first $1 million). So out of every $1,000 you have invested, you will pay us $8.50 per year (paid quarterly – $2.13) or less than 2 cups of Captain lattes per year (This is different from a broker who is paid to sell you a product and gets paid regardless if your money does well or not).
You, “Why would I pay someone a percentage of AUM?”
Well, think about having a wingman, co-pilot, or workout buddy. You are more likely
to get where you want to go if you have someone helping you and encouraging you to get there. IARs help you stay the course when times get tough (Extremely wealthy people pay hedge funds similarly, but a much higher percentage of AUM). You do it because of the value you get from it.
Vanguard has studied certain financial advisors’ value and determined that advisors can add 3% to the client’s portfolios. This sounds like a pretty good investment to me!
You, “Okay, so I pay you $8.50 per $1,000, but you can add value of $30 per $1,000?” Although this is not guaranteed, this is precisely the idea. Generally speaking, if an advisor starts guaranteeing returns, tell them you’ll call them back, but our job is to add value.
You, “How or why is this?”
Morgan Housel (the author of The Psychology of Money) has a great point – Napoleon once said, “a genius is the man who can do the average thing when everyone else around him is losing his mind.” A good advisor is someone who can help you be average when everyone else is losing their mind. If you can do this, you can make a lot of money. Good advisors help you do just that.
Think of being an airline pilot; much of our training deals with emergency training. What is the goal? To get us to do the average thing when most people are losing their minds. IARs can help instruct you through these market emergencies.
Furthermore, IARs give you comprehensive financial planning. Comprehensive financial planning may include Estate Planning, Tax Planning Strategies, Risk Management, College Savings, Employee Benefits Optimization, Insurance Planning, Career Planning, and Financial Independence Planning. These services can help you sleep better at night knowing you have taken care of your future self and loved ones, which in my book is priceless.
You, “So I get access to all of these types of planning with my 0.85% payments?”
Yes, most IARs offer many of these services, included with your quarterly fee. If you are familiar with a retainer, this is similar. You pay quarterly fees and have access to all kinds of advice/planning all year long. At Leading Edge, all of these services, and more, are offered and are included with your quarterly 0.85% payment.
In airline terms, when passengers pay for a ticket, that ticket includes deviations around thunderstorms, ATC delays, de-icing costs, etc. When you pay an advisor, you get almost all of the fixings with investment advice.
You, “Sounds great, but what does fee-only mean?”
Fee-only means you are paying both commission (and other custodial fees) and advisor fees. Simply put, when any trade is made establishing an investment position, there are commissions paid to brokers. Brokers make the trades but are simply the mechanism for buying and selling. In this capacity, they do not act as advisors and are not part of the decision making process. They do not get paid by the IAR and do not pay the IAR. These trades are separate from a broker selling you a product for a fee.

Now brokers giving advice, not acting as fiduciaries, may come up with all kinds of reasons why they are better for you than an IAR. It should only remind you of a quote by Upton Sinclair, “It is difficult to get a man to understand something when his salary depends upon his not understanding it.”
I believe this is what Reg BI attempts to do. It tries to get brokers to act in the client’s best interest, but their salary often depends on him not doing so. I fear that many brokers will continue finding ways to put clients in funds that pay the brokers. Even in the regulation itself, the term “best interest” is ill-defined and very open to interpretation. Time will tell how the SEC enforces Reg BI, but it will not change the dynamics of a 3-party (broker) relationship vs. a 2-party (IAR) relationship.
A fiduciary IAR is the highest standard and likely will be for the foreseeable future.
Reg BI does take steps to ensure brokers disclose conflicting relationships, which is a good thing. However, the fact they have to admit the relationship is irrelevant, in my opinion.
It makes me think of getting hit with a rock by a bully. His parents have come along and told him he has to tell me he is hitting me with a rock before he does it…but he can still hit me with the rock.
Understand, the bully can be quite crafty when explaining why hitting me with the rock is best for me, but I still get hit with a stone at the end of the day. Why would I sign up for that? I wouldn’t, and I didn’t.
Now, if you have fallen prey to some of these brokers, take comfort in knowing you aren’t alone. Many hardworking people have trusted these people to do what was in their greatest interest, not knowing these brokers had no such obligation. Several studies have shown that most investors don’t understand their financial advisor’s duty (or lack thereof). Many people believed their brokers were always legally bound to do what was best for them. Unfortunately, this was and is not the case. Again, only IARs (Investment Adviser Representatives), who do not wear broker hats ever, have a fiduciary duty to you at all times.

Back to my hunt for an advisor (pre-Reg BI)… Armed with this newfound fiduciary/suitable knowledge, I arranged a meeting with an advisor through my airline company’s 401k plan.
During the conversation, I asked, “Do you have a fiduciary duty to me?”
What should have been a simple yes or no, was instead a bunch of hemming and hawing, but no real answer. Not to be deterred, I asked again. This time I received another vague response, so I asked again. Finally, this advisor told me he only had a suitable responsibility (today, he would have told me he had a best interest responsibility).
Case closed. He may have been a great advisor, but he had no legal obligation to do what was right for me. If he put me in a poor investment and lost all of my money, I had very little to no recourse.         Today, instead of deeming that same investment “suitable,” there will likely be brokers who find ways to make those same investments “best interest.”
What I wanted was someone who had a legal obligation to me and my money. I wanted my financial advisor to do what was in my highest interest. Furthermore, I wanted someone who had no incentive to put me in a particular fund. For me, the fiduciary is the answer.
You may be saying, “Great Rob, but how do I find out if someone has a fiduciary responsibility to me?”
This one is easy, ask.
Ask the following question, “If I hire you as my advisor, do you always have a fiduciary duty to me?”If the answer isn’t a fairly quick, “Yes.” I advise looking elsewhere.
If it is, follow it up with, “To be clear, you never put on a broker hat and always have a fiduciary responsibility to me?”
The answer should again be, “Yes.”
Beyond asking, you should also be able to find out by looking at the disclosures on their website or looking at their Form ADV Part 2A/Firm Brochure or the new Client Relationship Statement (CRS) mandated by Reg BI.
When I became an advisor, I knew I wanted to do it the right way and only become an IAR (fiduciary). Thankfully, Leading Edge Financial Planning (LEFP) shares this belief. Our Form ADV Part 2A says this:

Item 10: Other Financial Industry Activities and Affiliations
No LEFP employee is registered, or has an application pending to register as a broker-dealer or a registered representative of a broker-dealer.
LEFP only receives compensation directly from our clients. We do not receive compensation from any outside source nor do we pay referral fees to outside sources for client referrals.

If you have gotten this far and not fallen asleep, I thank you. As you now know, I am a fiduciary and vow to protect my clients’ hard-earned money with the highest devotion to their goals. If you want to chat further about this or any other subject, please give me a buzz at (707) 712-9387 or shoot me an email at robert@leadgingedgeplanning.com. Until next time, I hope you have only tailwinds and blue skies!

Robert Eklund
Leading Edge Financial Planner

Robert Eklund

Financial Planner

Rob is a Southwest Pilot and soon to be retired Air Force Lieutenant Colonel. He grew up working on his family’s ranch in Colorado and went to high school in Alaska.  In 2000, he graduated from the United States Air Force Academy, earning a Bachelor of Science degree in Legal Studies.  Rob has served over twenty years in the Air Force, ten years on active duty, and over ten in the Reserves. During his military career he flew the C-130 while stationed in Germany and the KC-10 in California. Rob has accumulated over 700 hours of combat flying hours and participated in multiple Operations.  He was hired by Southwest Airlines in 2013 and became a staff officer at USNORTHCOM’s Domestic Operations Division in 2016. While holding this position as an Air Planner, Rob helped areas recover from Hurricane disasters; specifically, he was called to active duty to aid in recovery efforts following Hurricane Maria.

While studying at the Academy, Rob discovered his enthusiasm for the study of personal finance and investing.  As his military service comes to a close, he is excited to combine his passion for helping and protecting others with his enthusiasm for personal finance.  This culminated in 2020 with Rob passing the Series 65 Uniform Investment Advisor Law Exam and joining the Leading Edge team as a fiduciary advisor.  A fiduciary’s role comes naturally to him as he enjoys helping people whether that benefits him or not.  Rob knows the tremendous trust clients place in their financial advisors, and it is his goal to grow that trust through the highest level of transparency and integrity.  In his personal life, Rob married up to the love of his life and has been married for 18 years. He is overwhelmingly proud of his son, whom he recently donated a kidney.
]Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this video will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any information or any corresponding discussions serves as the receipt of, or as a substitute for, personalized investment advice from Leading Edge Financial Planning personnel. The opinions expressed are those of Leading Edge Financial Planning as of 03/18/2021 and are subject to change at any time due to the changes in market or economic conditions.

Categories
Charlie Education

“The Envious Investor”

 

 

“My neighbor invested all of his portfolio in TESLA and now I’m envious!  It feels like I’ve FOREVER missed out.  And I might have less money in retirement because I missed the hot stock, ETF, Mutual Fund, etc.? 

 

“As an investor, you get something out of all the deadly sins—except for envy. Being envious of someone else is pretty stupid. Wishing them badly or wishing you did as well as they did—all it does is ruin your day. Doesn’t hurt them at all, and there’s zero upside to it.”

 

“If you’re going to pick a sin, go with something like lust or gluttony. That way at least you’ll have something to remember the weekend for.”

 

Warren Buffett

We understand these concerns and feelings because we’re investing for retirement too!  Furthermore, as investment advisors we hear these concerns almost every year.  If you’re a diversified investor, there will always be an asset class, a high-flying stock or mutual fund that has higher returns than your diversified portfolio.   

Does this mean we’ll have less money for retirement than our neighbor who’s ONLY investment last year was TESLA?  Historical evidence says you’ll likely do just as good or better over the long-term.  The “over the long term” part of the sentence presents the challenges.  In other words, it’s really hard to be a long-term investor when it feels like the world is falling apart around you AND your drinkin buddies are killing it with their daily newsletter stock picks!   

We all feel the pressure (envy) of missing out on great investmentthat we should have known were going to do better than all the others.  The good news is that diversification still works.  It’s never really “cool” nor does it ever feel great.  However, we believe, and the evidence supports the fact that your chances of success are better in the long run.  Check out the numbers from the chart below from BlackRock.   

 

Take a look at our short video where Charlie discusses what it was like in 2020 as investor.  How challenging it can be to stay the course and not chase recent returns.  Furthermore, the difficulties of feeling like you’ve forever missed out if your returns weren’t as high as your neighbor who invested in TESLA, Bitcoin, etc.   

Thank you! 

Charlie & the Team at Leading Edge Financial Planning 

 

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this video will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any information or any corresponding discussions serves as the receipt of, or as a substitute for, personalized investment advice from Leading Edge Financial Planning personnel. The opinions expressed are those of Leading Edge Financial Planning as of 03/12/2021 and are subject to change at any time due to the changes in market or economic conditions.

Categories
Retirement Rob

What Does Fiduciary Mean and Why is it Important?

Leading Edge Financial Planning is growing!  Thanks to you for spreading the word about Leading Edge, we’re adding new advisors to increase our capacity and continue to improve the quality of our service for current and future clients.   

We’ve been tremendously fortunate to have added three new advisors over the last few months.  Many of you already know Ben Dickinson as he’s been with us for almost two years now.  However, he’s moving into more of an advisory role as he’s increased his knowledge base, experience and met the SEC’s requirements to become an Investment Advisor Representative (IAR).   

We’ve also added Mark Covell as an IAR.  Mark is a soon-to-be-retired Marine fighter pilot as well aan American Airlines pilot And yeshe’s brilliant and talented in addition to being a Marine warrior for our country!   

For many of you, this article may be your first introduction to Rob Eklund.  He’s one of our latest additions to the team.  We’re very excited to add Rob to our team of advisors because of his passion and excitement for helping people with their personal finances.  Mguess is his enthusiasm will come through in this article. He tells his story of searching for a trusted, fiduciary financial advisor to help him and his family with their personal financebefore becoming an IAR himself.  Click here tlearn more about Rob’s background and experience, and please check out his article below... 

 

What Does Fiduciary Mean and Why is it Important

The first time I heard the term fiduciary, I said to myself, fidu…what? Sounds fancy. Then I fell asleep. Admittedly, this topic appears boring and could put my 16-year-old boy all hopped up on Mountain Dew to sleep! But here is a wake-up callknowing who is and who is not a fiduciary is the first step in finding someone to help you with your retirement and investment planning.   

I have been interested in investing ever since I was knee-high to a grasshopper. However, I acquired this fiduciary knowledge several years ago when I was a newly minted first officer for a major airline, before becoming an investment advisor myself.  At that time, I began a journey to find a trustworthy financial advisor for myself and my family. As a military officer, money had not been a primary concern, and to be honest, I didn’t have enough of it to matter. But as I began my major airline career in 2013, I realized I would soon have enough money that I had better start thinking about how to manage it. I knew I needed help. Furthermore, my focus was on learning how to be a first officer while still juggling my Air Force Reserve career.  

Many questions ran through my head. The biggest and most important was, How can I protect my money? The money I had worked so hard to accumulate. What I found surprised me.  Many financial advisors wanting my business were not fiduciaries. Some of these advisors were very intelligent and could sell with the best. One problem, they only had a suitable duty of care to me versus a fiduciary standard.   

The Suitability Standard 

The suitability standard means an advisor or broker only had to put my money into investments they deemed adequate. They did not need to give me advice that put my interests ahead of their own.    

The Fiduciary Standard 

A fiduciary is someone who acts on behalf of another person and has a legal and ethical obligation to put their clients’ interests ahead of their own.  SEC Chairman Jay Clayton defined the fiduciary responsibility this way, This duty  comprised of both a duty of care and a duty of loyalty  is principlesbased and applies to the entire relationship between the investment adviser and the client. When someone is a fiduciary, it applies to the entire relationship, not parts of it. It is the highest standard in the financial world.  

You may be saying, Okay. Great! Aren’t all financial advisors’ fiduciaries? Unfortunately, the term financial advisor is very nebulous and can apply talmost anyone.  In fact, most financial advisors are not fiduciaries.  Furthermore, more than half of respondents (53 percent) to a 2017 Financial Engines survey mistakenly believe that all financial advisorare already legally required to put their clients’ best interests first.    

Regulation Best Interest, aka “Reg BI”? 

Reg BI, effective January 1st, 2020, attempted to improve upon the suitability standard and move the ethical bar higher for anyone who calls themselves a financial advisor.  Instead of only having a suitable duty, they are now supposed to have a best interest duty. The regulation takes several steps to raise the bar (like having to disclose conflicts of interest); however, it does not change the dynamics of how a non-fiduciary advisor operates or receives compensation  

It is difficult to get a man to understand something when his salary depends upon his not understanding it.” ~Upton Sinclair  

I believe this is what Reg BI attempts to do. It tries to get brokers to act in the client’s best interest, but their salary often depends on him not doing so. I fear that many advisors will continue finding ways to put clients in funds that pay them a commission. Even in the regulation itself, the term best interest is ill-defined and very open to interpretation.  

Fee-Only versus Fee-Based 

The critical distinction is that an advisor operating under Reg BI castilbe paid by a 3rd party tpuclient’s money in certain investments or insurance products.  In other words, if an advisor gets paid by a third party (mutual fund company or insurance/annuity company) to put your money in certain investments or insurance products, then there is a conflict of interest.  And athat moment, the advisor needto disclose that they arNOT acting in a fiduciary capacity.      

Most fiduciaries operate in a fee-only manner.  This means the client’s fees are the onlsource of income for the advisor, and they are not paid commissions from third parties or outside sources that could bring into question the objectivity of the advice given.  Be sure to understand thdistinction between a fee-based financial advisor who may earn a commission and a fee versus a fee-only advisor.  The languagis very nebulous and confusing for a reason.   

Back to my personal journey in search of a trustworthy financial advisor; During one conversation, I asked, Do you have a fiduciary duty to me? What should have been a simple yes or no, was instead a bunch of hemming and hawing, but no real answer. Not to be deterred, I asked again. This time I received another vague response, so I asked once more. Finally, thiadvisor told me he only had a suitable responsibility (today, he would have told me he had a best interest responsibility).  Case closed! He may have been a great advisor, but he had no legal obligation to dwhat was best for my family and me 

 I wanted my financial advisor to do what was in my highest interest. Furthermore, I wanted someone whose advice was objective and had no incentive to put me in a particular mutual fund. For me, the fiduciary advisor is the answer.  

“How do you find out if someone has a fiduciary responsibility to you? This one is easy, ask.  

Ask the following question, If I hire you as my advisordo you always have a fiduciary duty to me?” If the answer is not a fairly quick, “Yes” I advise looking elsewhere. If it is, follow it uwith this question“To be clear, you never put on a broker hat and always have a fiduciary responsibility tme? The answer should again be, yes. 

Beyond asking, you should also be able to find out by looking at the disclosures on their website or looking at their Form ADV Part 2A/Firm Brochure or the new Client Relationship Statement (CRS) mandated by Reg BI. 

When I became an advisor, I knew I wanted to do it the right way and act as a fiduciary for my clients.  Thankfully, Leading Edge Financial Planning (LEFP) shares this belief. Our Form ADV Part 2A says this: 

Item 10: Other Financial Industry Activities and AffiliationsNo LEFP employee is registered or has an application pendinto register as a broker-dealer or a registered representative of a broker-dealer. LEFP only receives compensation directly from our clients. We do not receive compensation from any outside source, nor do we pay referral fees to outside sources for client referrals.” 

 If you have gotten this far and not fallen asleep, I thank you. As you now know, I am a fiduciary and vow to protect my clients’ hard-earned money with the highest devotion to their goals. Until next time, I hope you have only tailwinds and blue skies! 

Robert E. Eklund, CRD # 7317768 
Investment Advisor Representative  
www.leadingedgeplanning.com 

Robert Eklund

Financial Planner

Rob is a Southwest Pilot and soon to be retired Air Force Lieutenant Colonel. He grew up working on his family’s ranch in Colorado and went to high school in Alaska.  In 2000, he graduated from the United States Air Force Academy, earning a Bachelor of Science degree in Legal Studies.  Rob has served over twenty years in the Air Force, ten years on active duty, and over ten in the Reserves. During his military career he flew the C-130 while stationed in Germany and the KC-10 in California. Rob has accumulated over 700 hours of combat flying hours and participated in multiple Operations.  He was hired by Southwest Airlines in 2013 and became a staff officer at USNORTHCOM’s Domestic Operations Division in 2016. While holding this position as an Air Planner, Rob helped areas recover from Hurricane disasters; specifically, he was called to active duty to aid in recovery efforts following Hurricane Maria.

While studying at the Academy, Rob discovered his enthusiasm for the study of personal finance and investing.  As his military service comes to a close, he is excited to combine his passion for helping and protecting others with his enthusiasm for personal finance.  This culminated in 2020 with Rob passing the Series 65 Uniform Investment Advisor Law Exam and joining the Leading Edge team as a fiduciary advisor.  A fiduciary’s role comes naturally to him as he enjoys helping people whether that benefits him or not.  Rob knows the tremendous trust clients place in their financial advisors, and it is his goal to grow that trust through the highest level of transparency and integrity.  In his personal life, Rob married up to the love of his life and has been married for 18 years. He is overwhelmingly proud of his son, whom he recently donated a kidney.
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this post will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any information or any corresponding discussions serves as the receipt of, or as a substitute for, personalized investment advice from Leading Edge Financial Planning personnel. The opinions expressed are those of Leading Edge Financial Planning as of 02/10/2021 and are subject to change at any time due to the changes in market or economic conditions.

Categories
Education Retirement

End of Year Checklist 2020!

As we near the end of another year it is always wise to review your financial situation – especially after a year like 2020! Leading Edge has created a checklist to help you evaluate your progress, maximize opportunities, and set goals for 2021. Take this opportunity to do a quick financial self-assessment. Did you meet your financial goals? Did you pay off the debts that you hoped to? Did you keep within your budget?  If not, commit to making those changes for the upcoming year.

As always, we are here to help. Please reach out if we can help answer any questions or concerns. Schedule your free consultation today, 865-240-2292 

Download your copy of the checklist here:  LEFP Year End Checklist 2020

 


Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this document will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any information or any corresponding discussions serves as the receipt of, or as a substitute for, personalized investment advice from Leading Edge Financial Planning personnel. The opinions expressed are those of Leading Edge Financial Planning as of 12/23/2020 and are subject to change at any time due to the changes in market or economic conditions.

Categories
Charlie Education

What Lies Ahead? The Top Ten Investing Principles for Getting Through the Next Market Downturn, Pandemic, Recession, etc.

Not even Hollywood writers could have created a story like we lived out in 2020. In this video, Charlie Mattingly and one of Leading Edge’s newest advisors, Rob Eklund, discuss what this year has taught us, how to better prepare in the future, and thoughts about the markets and economy going forward.   

Leading Edge financial advisor Rob Eklund, a First Officer for a major airline and a retired Air Force Pilot, review what investors can learn from mission planning in the Air Force anairlines.  Foexample, how can we be proactive instead of reactiveMany times, people may remark how pilots need quick reactions to be successful.  As Rob and I know, if you are frequently reacting as a pilot, it’s a good indication you did not plan sufficiently.  We believe it’s the samwith investing and retirement planning.   

Although, it is to prepare prior to a recession or market downturn, there are many things we can do during the event itselfVanguard posted the following graphic listing just a few of the value-added strategies that are critical to consider during any market decline.  

 

In addition to the checklist above from Vanguard, we believe there are ten essential principles to help all of us remained focused and less stressed during the next market downturn or recession.  

 

Embrace the efficiency of the markets in the long term.   

 

In the short term, the stock market reflects investor phycology (and many other unpredictable factors).  However, over time, equity prices tend to represent the future cash flows of a business.  We can all share in those future profits if we have the discipline to remain invested.

Don’t try to outguess the market. 

Although there is some debate within the finance community on the exact level of impact on investment returns, most will agree that strategic asset allocation and the amount of time in the market (not market timing) havthe most considerable influence on investor returns.    

Resist chasing performance.  

Do not select investments based on past returns.  Funds that have outperformed in the past do not always persist as winners in the future.  Past performance alone provides little insight into a mutual fund or ETFs ability to outperform in the future.  

Let markets work for you.  

The financial markets have historically rewarded long-term investors.  We have the opportunity to earn an investment return that outpaces inflation by supplying capital to the companies we invest in. (I.e., stocks, mutual funds, exchange-traded funds) 

Consider the drivers of returns.  

Evidence shows that buying investments at a fair price (value factor), buying companies that demonstrate a consistent trend of profitability (profitability factor), and companies that tend to be smaller (small-cap premium) point to differences in expected future returns.   

Practice smart diversification.  

Diversification helps reduce risks that have no expected return.  Global diversification can prove beneficial over the long term while reducing the short-term volatility of a portfolio.   

Avoid market timing.  

You never know which market segments will outperform from year to year. Time in the market is much more profitable than attempting to time the market.   

Manage your emotions. 

It’s challenging to differentiatthe short-term ups and downs of the market from the long-term returnneeded to outpace inflationIn reality, the most significant risk we face is losing purchasing power over the long-term, during retirement, versus the risk of short-term losses in the market  

Look beyond the headlines.  

There will ALWAYS be a news headline that could prevent you from investing in the stock market.  The news headlines will either attempt to scare you out of the markets or lure you into the latest investing trend.  Either strategy increases viewership, which in turn sells more commercials.   

Focus on what you can control.  

As we mentioned at the beginning of the article, just like pilots plan for their missions in great detail, we believe thorough planning is the best way to ensure a successful investing experience plus a fulfilling and prosperous retirement.   

Please don’t hesitate to call or email us anytime.  We’d love to hear from you! 

Charlie Mattingly

Charlie@leadingedgefinancialplanning.com 

865-240-2292 

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this video will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any information or any corresponding discussions serves as the receipt of, or as a substitute for, personalized investment advice from Leading Edge Financial Planning personnel. The opinions expressed are those of Leading Edge Financial Planning as of 12/18/2020 and are subject to change at any time due to the changes in market or economic conditions.

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Charlie High Income Pilots Retirement Mistakes

Trust Your Instruments, Not Your Gut, When it Comes to Flying AND Investing!

​As a brand-new pilot, one of the first things you learn is how to mitigate the risk of the potentially deadly physiological phenomenon known as spatial disorientation or spatial-D. In pilot speak, spatial-D is when your body is telling you one thing and your flight instruments (and airplane) are telling you something completely different. Sadly, spatial-D has claimed the lives of many pilots.

In this video, one of our newest Leading Edge team members and previous Marine F/A-18 fighter pilot, Mark Covell discusses just one example of spatial-D.  Mark shares how carrier pilots tend to feel like they are pitching up as they are launched off the carrier at night due to the massive acceleration from the catapult. During daytime, VFR conditions this is probably a non-issue. However, in weather, or at night, this type of spatial-D is potentially deadly.

What does spatial-D have to do with investing and retirement planning? Personally, I feel like all of 2020 could be compared to being catapulted off a carrier at night and not knowing what is up or what is down.

During the heat of the battle from February until the markets settled a bit in early April, investor emotions were all over the place. Years of stock market gains evaporated in days, even hours. Furthermore, many people thought, and the news media quickly suggested we were headed for the second Great Depression. And don’t get me wrong, anything was (and is) possible. Sometimes, the unknown can be truly scary.

One slightly humorous example of investor spatial-D was early in the pandemic when the shares of ticker symbol ZOOM shot up due to investors buying up shares as quickly as possible. Zoom Technologies, a so-called penny stock had risen more than 240% in the span of a month before the SEC suspended trading. Unfortunately, the traders failed to realize the ticker symbol ZOOM did not represent the Cloud Video Conferencing company Zoom they thought they were purchasing – Ticker symbol ZM.

Here is the headline from MarketWatch.com dated February 27, 2020.

In the airplane, pilots must fight spatial-D by cross-checking and TRUSTING their instruments. If, as an investor, you did not trust your instruments during 2020, it may have been very costly.

So, it’s a dark night and the weather is terrible.  What are the instruments you trust?  What is your primary and backup instrument? Here are four instruments that I think can save your investments as well as your financial sanity during uncertain times…

1. Cash reserves – Emergency Funds.

    • Having extra cash can prevent withdrawals from retirement accounts or excessive credit card debt in emergencies.  Studies also show having cash in a bank account makes people happy. In an article posted on PYMNTS.com,  “Can Cash Really Make You Happier”, Joe Gladstone, research associate at the University of Cambridge in the U.K. and co-author of two recent studies about money and happiness said,

“We find a very interesting effect: that the amount of money you have in your bank account right now is a better predictor of happiness than your aggregate wealth,” Gladstone explained. “Having more money in their bank account makes people feel more financially secure, which leads to an increase in happiness.”

2. Have a working knowledge of financial history.

    • You don’t have to be an expert or financial historian, but I believe being familiar with financial history is akin to training before you go on a flying mission.  Pilots call this chair flying.  Athletes and musicians use a technique called visualization that helps them prepare for uncertainty and reduce anxiety for a sporting event or concert.

3. Admit that times are scary, and you do not know what’s going to happen.

    • This may sound silly, but I’ve seen many people get themselves into a “square corner” because they assumed that something was going to happen when in fact there was no indication or possible way of knowing what the future may hold.  We have heard investors say “my gut tells me…” many times.
      • Some of the best investors in the world invest with the mindset of preparing to be wrong. That’s why diversification is not popular or “sexy” because it’s like admitting you don’t know what’s going to happen in the future, so you must prepare for multiple scenarios.  However, diversification can feel disappointing but prove to be a profitable strategy over the long term.

BlackRock Investment Management Company posted the graphic below on their investor education website about diversification and “S&P Envy” over the last 20 years.

4. Prepare and Plan by having a clear vision of your goals and priorities.

    • If you don’t understand the “why” behind your investments as well as why you’re investing and saving in the first place, you will most likely bail-out of your plan during difficult and uncertain times.  Changing your investment plan mid-crisis creates a very high likelihood that your investment returns will be significantly lower.
    • Simon Sinek started a movement by encouraging businesses to “Start with Why.” It’s a powerful mindset that leads to trust, inspiration and success.  I believe the same applies to your financial and investment game plan.

5. Remember that you are invested in companies – not politics.

    • Sometimes our politics clouds the investment and retirement planning picture.  This rule falls under the axiom; “control the controllable.”  If you’re allowing your politics to affect your investment game plan than you may want to see rule number 2 above.

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this video will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any information or any corresponding discussions serves as the receipt of, or as a substitute for, personalized investment advice from Leading Edge Financial Planning personnel. The opinions expressed are those of Leading Edge Financial Planning as of 12/09/2020 and are subject to change at any time due to the changes in market or economic conditions.

Categories
Charlie Kevin Video

Retirement: Everything is Different Now!

You may be the type of person that enjoys managing your own investments.  And there’s nothing wrong with that.  However, as you approach or are in retirement things can be very different.  In fact, when your investment goal switches from accumulation to producing retirement income it may seem as though everything is different now!  

 

In this video, Kevin explains why managing your own investments is different when you are retired, and why a fiduciary financial planner may be worth the investment.  

 

Key Points:

We believe a globally-diversified investment approach is still the best plan for capturing positive returns in the long run. Furthermore, chasing the top-performing asset classes and changing your portfolio based on news headlines or current events has been shown to produce lower returns over the long run.  In other words, if you find yourself wanting to change your portfolio as soon as investment headlines turn negative, having a fiduciary financial planner may help you stay focused on your goals instead of abandoning your investment plan during a downturn.  

 

Whether you manage your investments yourself or you have a trusted advisor, here are three things everyone should do to increase your chances of success in retirement.  

  1. Write down an Investment Policy Statement to help you stay focused on your investment goals when everything in the news is negative.
    • For example; “I will invest this way to reach my goals in retirement….”
  2. Be careful chasing the high performing asset classes.
    • A diversified portfolio should stay diversified.
  3. Have someone who will hold you accountable in order to help you focus on your long-term goals when the going gets tough.

 

We appreciate your feedback! Please leave a comment on the video or reach out at https://www.leadingedgeplanning.com/ if you have any thoughts on the video!

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this video will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any information or any corresponding discussions serves as the receipt of, or as a substitute for, personalized investment advice from Leading Edge Financial Planning personnel. The opinions expressed are those of Leading Edge Financial Planning as of 10/31/2020 and are subject to change at any time due to the changes in market or economic conditions.