Money Is a Tool - And It Plays By a Set Of Rules

I took an investment course in high school that really opened my eyes to the world of money. We learned about different investment strategies, the power of compounding interest, and the different properties of money. Money wasn’t good or bad, it simply was. It wasn’t the root of all evil because it didn’t have motives. Heck, it doesn’t even a mind of its own.

Money reminds me of gravity. Gravity has certain characteristics that can be used for or against you. If you know how gravity works you can develop some pretty killer technologies. On the other hand, if you think gravity is out to get you, I don’t see life being very kind to you. It’s the same with money. If you understand money, it can work for you. If you think money behaves differently for different people, its always going to burn a hole in your pocket.

But what in the world does money and its characteristics have to do with capital gains? For starters, its hard to have a capital gains problem if you don’t understand money!

Second, the most powerful characteristic of money (Compound interest) is one of the biggest drivers of capital gains. An example from my high school class of compound interest and the power of buy and hold investing still sticks in my mind today. 

HOG- Harley Davidson

Harley Davidson has an amazing story. You could have spent $178 for 100 shares of HOG in 1990. If we all had a time machine, that would be a no-brainer!

Today, that initial investment (without contributing a Dime more) would be worth over $150,000. Interestingly, this doesn’t even include dividends that could have been reinvested.

Now this is in no way meant to be an endorsement of a buy and hold strategy or any investment strategy for that matter. however, it is a simple illustration of how money can grow over time and its just as effective today as it was back in my early years.

The Problem With Highly Appreciated Assets

Many of you have highly appreciated assets that have grown over time, and that’s great! The problem with highly appreciated assets is what you do with them when you are no longer in growth mode. Hopefully you made the obviously wise decision to buy a ton of HOG stock back in 1990 because it is now worth a boatload of cash (maybe even two boatloads), but as you approach retirement having all that money sitting in one stock with no diversification poses somewhat of a large risk.

The problem is, you are trapped. The natural desire is to diversify your risk by spreading your money out between a broad range of assets. But you can’t!!! If you try to spread your money out you are locking in a substantial long term gain. Depending on your state of residence and AGI, your all in long term capital gains tax could wipe out a third of your profits! It’s no wonder that so many people feel trapped by their own investment success. It’s a nasty position to be in. In fact, running out of money consistently ranks as the #1 fear by those nearing or currently in retirement. How much worse is that fear when you have a large chunk of money you feel trapped to use.

The example above really pales in comparison to what many have experienced in the real estate market. Many in states like California have seen their home values double, some more than once! I talk to clients that would prefer to cash out and downsize but they can’t stomach the taxes, so they do nothing. 

They wait. 

What’s the problem with waiting? Specifically with real estate, home prices have a tendency to move faster than you can liquidate the property. It’s no secret that selling real estate takes time, unlike quickly being able to unload your treasure trove of Harley Davidson stock, you may have a for sale sign out front for a month or more.

The Solution

A solution that doesn’t involve refinancing a property, or timing the market and it doesn’t require a major out of pocket cost for you. Best of all it’s something that you can understand that not only solves your problems but also benefits society as a whole. 

At Leveraged Wealth Management we have helped hundreds of families diversify their assets, secure safe income streams, and reduce their taxes and capital gains through an awesome and fulfilling charitable giving plan. 

You may read charitable giving and think that means give all your money away, not so fast! 

For the right individuals a properly designed charitable giving solution can actually INCREASE your retirement income, REDUCE your investment risk, REDUCE taxes, and INCREASE your estate.