Questions for Dinner
Today, we continue our series that focuses on your questions. As I said last week, the motivation here is that we want to discuss the items YOU are most interested in. The reality is that if you have a question on your mind, that same question is probably on the mind of many others. This makes for highly relevant and engaging discussions – my favorite.
Personally, I think Q&A is very under appreciated. We attend conferences, training courses, etc., and the Q&A gets the leftover time at the end. Yet, the Q&A time is often the most engaging and informative time for the audience. So, my faithful readers, I advocate that we seek to flip the script. Let’s allow Q&A to be the main course versus the dessert – although dessert is very tasty too. Let’s usher in Q&A to be THE thought versus just the afterthought.
And, with that said, off to some Q&A…
What’s the benefit of giving during my life versus after (bequeath)?
Let’s simplify things here, you can basically do one of these four things with your money: spend it, invest/save it, give it, or donate it. I guess you could set it on fire, but I would not recommend doing that, not to mention it’s also illegal to do so (see 18 U.S.C. § 333).
If you are an A+ student when it comes to saving, investing, and managing your budget to achieve a positive cash flow, then you will have leftovers at the end of your life; you will be leaving an inheritance to your heirs.
If this inheritance is above a certain threshold, you may be subject to estate taxes at the federal level and/or the state level. This particular detail (potential estate tax) helps to give clarity to our question because there may be qualitative and quantitative reasons to give during your lifetime.
Let’s start with the qualitative. If we assume you have more than enough for your lifetime, and a well-crafted financial plan with reasonable assumptions supports this conclusion, then this decision becomes one of preference. I really shouldn’t have a preference for you, but in all honesty, I do. Please don’t let my clumsy, overstepping feet (opinion) crowd out your preference, but do hear me out.
Imagine you spent the last month or so trying to figure out the perfect birthday present for me. After lots of thought, effort, and emotional energy, you’ve done it! Everything from the packaging to the words in the card to the surprise of it all is just absolutely perfect. Now, let me ask you this: would you rather leave this gift on my doorstep or hand it to me in person to watch me unwrap this amazing and thoughtful gift? Here’s my preference, I want you to be there when I open the gift, I want you to see the appreciation in my face and the joyful tears that accompany my gratitude. Giving to your future heirs during your lifetime allows you to watch them open the gift, and that’s my preference for you – I want you to enjoy the fruits of your labor and have a front row seat for the joy those fruits bring to others.
Sure, there is nuance here. You want to make sure the gift you give doesn’t hinder or distract the recipient. I trust your wisdom regarding timing, and this is a great topic to discuss with your advisor.
Now, from a quantitative perspective, there are estate planning benefits that can be gleaned from gifts during one’s lifetime. Every dollar (or asset) that remains in your control and is growing means that growth is also growing your future estate tax liability. Removing that dollar out of your estate now reduces that future liability. This “removal” can be done in the form of covering specific expenses that have no gifting limits (e.g., direct payments for medical or education expenses), a direct gift within the annual gifting exclusion, or a larger irrevocable gift tapping into one’s lifetime exemption. The goal here is simple: to allow surplus (future leftovers) to grow outside of one’s estate with the goal of reducing or eliminating that future estate tax liability.
Again, I hope my opinion here is both informative and helpful, but at the end of the day, your educated preferences should be what drives your ultimate conclusion.
Why not just buy treasuries and avoid the stock market altogether?
This question is simple at face value, but the underlying meaning is much deeper. My wife has often reminded me to listen to what she means, not what she says.
The underlying emotion here is fear, sprinkled with a little bit of logic. The fear comes from a place of not wanting to experience or endure the downside of stock market investing. No one likes the 30% drops, and no one likes the accompanying uncertainty around how long the recovery will take. So, the initial reaction for some is to simply avoid the stock market.
The sprinkle of logic here sounds something like this, “Stock market valuations are historically high (unattractive for stocks), and interest rates are historically high (attractive for bonds).” Therefore, some investors conclude that they should own bonds and not stocks. There is truth here, but there are also some key truths that are conveniently left out in this line of reasoning. The collective fear of the stock market, driven by uncertainty, is what yields the reward (returns), also known as the “risk premium.” When someone opts out of owning stocks altogether, one is creating an opportunity cost made up of the returns missed out on by designing a portfolio grounded in fear versus the needs and expectations of their financial plan. If one thinks they can oscillate in and out of stocks and bonds by some timing mechanism, then they are simply delusional and should prepare now for future disappointment.
Please hear me clearly on this topic. Stocks will not outperform bonds every year. Stocks will disappoint, bonds will play their role as a safe haven, and we will all be reminded of the importance of diversification. But, from a long-term wealth accumulation perspective, stocks will have a greater attribution to long-term growth than bonds. The key here is to place the right expectation on each asset class. My bonds are intended to offer a safety net for my financial plan – I want high price stability and high liquidity for these allocations. My stocks are intended to GROW my portfolio, and I will accept price instability and some illiquidity in exchange for this growth.
I’ll say it this way, I’ve heard this own-just-treasuries conclusion many times and each and every time, this fear-based solution was destructive to wealth. This approach will rarely ever allow an investor to retain their buying power, when accounting for inflation this strategy typically operates at a slight loss. Yes, stocks are expensive, and you should be cautious about what types of stocks you own. Yes, bonds are more attractive today than they were three years ago, and you should adjust your portfolio design with this reality in mind. No, the conclusion should not be to exile one (stocks) in favor of the other (bonds).
Did I beat the market?
Short answer: It doesn’t matter.
Medium answer: If you want the return of the market, you should… own the market. If this question of beating the market causes you anxiety, then this answer should perfectly match your expectations – buy the market and you will get the returns of the market.
Long answer: What’s the market? Is the goal to own the Nasdaq when it does well but then shift to the S&P when it’s more favorable, then the Dow when those results are more attractive? I wish the dog would trust me when I tell him, you’ll never catch your own tale, you’ll just find yourself running in circles. Investors deserve this same advice when chasing returns only found at the end of the rainbow.
Please realize that this question is both common and distracting. Common because we, as human beings, are wired to compare. Yet, when we do compare our situation to a synthetic (fictitious) reality (e.g. your neighbors curated Instagram) it leads us to let down, disappointment, and eventually depression. Distracting because this question robs your attention from more important topics like your financial plan, casting the vision of your legacy, strategizing tax solutions, etc.
Your results do matter, and you should measure, analyze, and assess your results. I’m not advocating being indifferent about your returns and your portfolio construction; I’m advocating for being intentional and wise in the way that you measure those results. We don’t invest in dividend growth because it simply sounds like a novel and intriguing idea. We invest in dividend growth because we believe paying dividends is a prudent decision from company leadership, and a growing dividend is a leading indicator – a positive vote of confidence from leadership – on the future expected profits of a company. This truth, supported by the confirming empirical evidence of history, makes us dividend growth investors.
We also know that there will always be some investment in any given year that will potentially do better than dividend growth. This could be pork futures one year, cryptocurrencies the next, European equities another year, or any other investment you could imagine. My expectation for dividend growth isn’t to be the best each year, my expectation is for this strategy to generate a reasonable and sustainable return to fulfill the goals and aspirations of my financial plan.
It’s simple, keep your eyes on the prize and build an investment portfolio that will provide financial results that fulfill the desires outlined in your financial plan.
That’s a Wrap
Well, we’ve come to the end of our time together today. I enjoyed addressing your questions and I look forward to doing so again next week. Please reach out with any questions or comments, as I’d welcome the opportunity to add your inquiry to our mini-series.
As always, I hope today was both helpful and engaging.
Until next week, friends….
