Chapter 3
The Key to Protecting and Building Wealth in Good Times and Bad
We strive to build a quality portfolio for our clients using multiple investment ideas and offering a financial table with numerous legs. Just as the Olympic basketball team includes the best players from the NBA, we believe finding the consistent players in each asset class is imperative to long-term financial success.
Always remember The Wealth Code Golden Rule: that something will go wrong. Though in any given year one of the legs on a truly diversified financial table might fail, as long as you have many other legs on the table to provide support, you can better survive whatever financial storm comes your way. See Figure 3.1 and 3.2.
Figure 3.1 True Diversified Table
Figure 3.2 True Diversified Table with Broken Leg
General Practitioner versus Specialist
Figure 3.3 shows all of the investments that are available on the planet. Everything can be grouped into these basic categories. Understanding every investment category is not the most important thing at this point. Understanding the concept of The Wealth Code from 20,000 feet is however, and I will keep it at that level for most of the book. A more complete discussion of each investment class is included in Appendix B for those whose curiosity is getting the better of them for any particular asset class.
Figure 3.3 All Possible Investment Choices
When I published the first edition of this book, I had just turned 38. Some financial advisors would say I am too young to know anything.
Though fairly young and not having 20 years in the business, I knew one simple fact. I could never be the best at everything. There would always be somebody better. Knowing this provides clarity and vision.
If I can’t be the best, who is?
Who has the track record, the years of experience, and the know-how to do the job they say they are going to do? What groups in each asset class have demonstrated that they are consistently the best or one of the best? These are the specialists whom I hire on behalf of my clients.
KEY WEALTH CODE CONCEPTMy job as financial advisor is to be a general practitioner for my clients. I need to be someone who spends my time reading everything I can get my hands on, in many disciplines of finance. Not just stocks and bonds, but insurance, estate planning, income tax reduction, real estate, oil/gas, pensions, mortgages, rare coins, and so forth. Being well versed but always hungry for more. Never satisfied with what I have learned, but constantly trying to improve as well as question what I believe to be true.
Isn’t that why the person with a BMW or Ford hires an experienced mechanic who specializes in BMWs or Fords? I don’t believe any one person can call himself a financial advisor and try to be an expert at all these different asset categories. The stock picker, the real estate buyer, the developmental oil/gas driller, the coin collector: each requires considerable expertise. We choose to hire those who focus on one thing and one thing only, and we put them together as your Olympic team.
As an example, many of the groups we hire in the Institutional Grade Real Estate asset class have been in business longer than I’ve been alive. They have focused only on this asset class for their entire careers, and they don’t deviate from their basic game plans. They are among the best of this asset class. Will they have down years? Absolutely. But they are persistent in their efforts to be successful and try to maintain a positive track record overall. The Lakers might not win all their games, but they consistently stick to their game plans.
We do not hire them to provide services for other legs of the financial table, as we don’t hire a BMW mechanic to fix a Ford truck.
When looking for a financial advisor, ask them what legs of the financial table they work with, and more importantly will not work with, and why?
If they tell you a particular investment asset class is terrible, high risk, and will lose you all your money, ask them to give specific examples and experiences. No generalities. We find time and again that financial advisors who know nothing about a particular investment, or cannot represent a particular investment because their broker dealer (employer) forbids them from offering it, will automatically represent it as too high risk. Or they will claim that they are “conservative,” meaning careful with the investments they recommend. “It’s bad, terrible; stay away,” they say. Then they promptly follow up with, “I have a great mutual fund, stock, bond, blah, blah, blah.” Think about it. If someone were truly conservative in their approach, would they have allowed their clients to lose 30 to 40 percent or more of their wealth while holding stocks and bonds they have recommended?
In Summary
Up to this point, we have covered the concept of conventional thinking and how it is not always in your best interest, but possibly somebody else’s. My view of most financial advisors is that most are very myopic in their ability to help people with their finances. Most do not promote the concept of true asset class diversification as a means to protect and grow an estate in the best and worst of times.
Chapter 4 introduces the concept of your wealth bucket and the process of building wealth. It covers why certain firms focus only on high net worth clients, as well as common brokerisms, a word I use to describe the excuses a financial advisor will use to never admit a mistake. Chapter 4 also discusses a simple secret of the wealthiest people in the world.
Chapter 5 describes the most common leaks in your wealth bucket, leaks from which countless dollars drain out of your pockets and into others’ every year.
Chapter 6 delves much deeper into the concept of True Asset Class Diversification and gives a viewpoint on money as a financial table that even a third grader can grasp, yet few financial advisors ever will. This chapter also begins laying out a road map for making changes that will greatly improve the strength and stability of your financial table.
Chapter 7 explores fundamental concepts for the various legs on your table which need to be understood. They are like the glue that holds The Wealth Code table legs in place.
Chapter 8 describes a framework for you, the reader, to understand and craft a successful financial plan for yourself. You are not expected to be able to implement a complete financial plan on your own, considering most of the investments we’ll introduce have to be purchased through a licensed financial advisor or broker, but nonetheless, you’ll be able to put together the blueprint that will match your personal goals, and not the planner’s pocket book. In this chapter, as well as Appendix A, there are case studies of hypothetical plans to fully immerse you in the Wealth Code methodology of portfolio design.
Chapter 9 includes a brief overview of my thoughts on where life insurance and annuities have a place in one’s portfolio for both estate tax purposes and investment goals. It will also include the little secrets few insurance agents teach to prospective clients before they buy a particular type of annuity.
Appendix B covers all of the investment asset classes in detail, including the pros and cons of each one. There is no such thing as the perfect investment, something that returns double-digit growth every year, is guaranteed, and is completely liquid. All investments have their drawbacks. The idea is to find those investments whose pitfalls are not bad for your situation and to blend them together with many different financial tools to provide investment balance.
Not to be missed, Appendix C covers income tax reduction planning as one of the most successful and consistent investments you can make. My discussion revolves around converting an IRA to a Roth IRA at a fraction of the normal reportable income.
Appendix D covers the basics on real estate 1031 exchanges, which is a powerful tax advantage used by the super wealthy to transfer wealth from generation to generation.
I believe that, once finished with this book, you will have the tools to build a strong financial table for yourself and your family, and be better able to ride out the worst of any economic calamity that comes your way.