Author: Gene Gard

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A Regular Person’s Guide to Capital Allocation

Creating money for the future (Micheile Henderson | Unsplash)

Politicians and philosophers might disagree on how capital should be allocated, but they agree it’s the lifeblood of our economy and society. Regular people don’t usually consider themselves capital allocators, but that sort of mindset can be useful when running your personal budget.

Most simply, capital is money that makes more money. When money flows out of your bank account, it’s either for an expense (like an operating expense in business) or a capital expenditure. A capital expenditure is money that isn’t gone forever — it hangs around in another form that you hope will create money for the future.

Here are a few ways to apply capital thinking to your budget:

• Markets. The purest way to turn income into capital is to invest it in the markets. Today’s investment portfolios are a modern miracle — they have incredibly low costs to enter and strong prospects to provide a real return that outpaces inflation over time (despite inevitable fluctuations).

• Real Estate. Real estate can work, but it’s not a capital-accumulation panacea. Buying a house with a typical down payment is highly leveraged and therefore risky. An owner-occupied dwelling produces no income and instead produces significant expenses like interest, insurance, and general upkeep that can soak up capital as quickly as it becomes equity. There are lots of reasons to own vs. rent, but hoping for a quick financial windfall is not a good reason to buy.

• Vehicles. Cars quickly destroy capital via depreciation. Businesses buy vehicles to make money and embrace the tax benefits of their depreciation as a small benefit to the necessary cost of doing business. Families don’t get to deduct depreciation, and a vehicle for a family usually represents nothing more than a way of getting around. Buying fewer vehicles and using them less — by living closer to work and school, for example — will make a huge positive impact on household capital accumulation over time.

• Human Capital. College feels like an expense, but the right degree can make huge changes in lifetime capital accumulation. Not just any degree from any university will help, though — discernment is necessary these days to understand the exact purpose, utility, and value of a program. For-profit colleges have exploited many students, and even the most prestigious universities can produce graduates with significant debt and minimal opportunity, knowing they might have been better served on a different path.

• Hobbies. What’s better, running or scuba diving? Scuba diving requires training, equipment, travel, and storage space, while running requires shoes and clothes you probably already have. Even the most avid gearhead would spend far less on running than diving, and an avid runner probably enjoys the hobby just as much as a diver. Strategically finding less expensive hobbies you truly enjoy can make a huge difference when it comes to accumulating capital.

• Collectibles. Speculative collectibles might seem to pay for themselves, but by the time baseball cards, NFTs, or limited-edition anything looks like a profitable hobby, it’s probably far too late. If a major part of your hobby involves looking at price guides and auction listings to see if you’re making money, you probably won’t find the windfall at the end of the rainbow you’re expecting.

Looking at spending and saving this way might seem overly clinical but can be eye-opening once you get used to this mindset. Working people trade their time for income. Any opportunity to steer income away from expenses into capital activities that actually store and create value will bring about a day when capital can be used to free up your time — everyone’s only truly nonrenewable resource.

Have a question or topic you’d like to see covered in this column? Contact the author at ggard@telarrayadvisors.com. Gene Gard is Chief Investment Officer at Telarray, a Memphis-based wealth management firm that helps families navigate investment, tax, estate, and retirement decisions.

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Why You Should Care About Inflation

Photo: Andre Taissin | Unsplash

As we move to the middle of 2021, one thing is clear — inflation is back. For decades, most people almost ignored inflation, but it may be hard to ignore it in the future.

Inflation is simply another term for rising prices. While the causes can be obscure, the effects are very real for everyone, no matter their income.

You’ll likely first feel higher prices in everyday goods and services like food, fuel, and healthcare, but from there, inflation affects the economy in surprising ways. Things like mortgage rates, returns on stocks, returns on bonds, and the overall trajectory of the economy are all directly influenced by inflation and forward-looking inflation expectations.

The Federal Reserve spent decades keeping inflation as low as possible, but now it is actively pushing for more inflation to demonstrate it’s doing everything it can to support the economy. It used to look at 2 percent inflation as a ceiling, but now it is looking at using that rate as an average target that can be exceeded to get the actual average closer to 2 percent.

Today we understand prices are rising, but it doesn’t really affect our decision-making yet. I had a mentor who lived through the inflationary period of the 1970s and 1980s, and he would always tell me, “Inflation is a mindset.” He said in the 1970s he faced strange dilemmas, like “I better buy a new car this year because by next year, I won’t be able to afford it.” This was a period where his income was actually rising quickly, but he felt prices were rising more quickly, and therefore inflation colored all his decisions.

Inflation, in moderation, is actually a good thing. A deflationary environment —where your money increases in value each year — sounds great, but in practice it’s even worse than the reverse. The opposite sentiment to the one my mentor followed — “I might as well wait until next year to buy a car because it will be cheaper.” — can be devastating. Severe deflation will grind an economy to a halt.

The best and fairest environment for everyone is a world of stable prices, defined by most as inflation of 1-2 percent a year. We’ve enjoyed that regime for quite some time, but it looks like, at least for a while, we’ll experience inflation numbers greater than 2 percent.

How can you prepare?

The biggest way is to adjust your thinking. When inflation becomes meaningful, try thinking in real returns rather than nominal returns.

To explain, let’s look at current certificate of deposit (CD) rates. If you buy a one-year, $100,000 CD today, you might get a 0.50 percent nominal rate, meaning you’ll have $500 more after a year. In a world of 2.5 percent inflation, your purchasing power goes down overall by about $2,500 during the year. Taking both the interest and the inflation into account, the real rate on that CD is about -2 percent. That loss of about $2,000 is hard to see, but it is very real. It will feel real, too, if inflation creeps up much more than it already has.

Even at a reasonable 2.5 percent annual inflation rate, something that costs $100 today will cost $128 in 10 years. If you stuck a $100 bill under your mattress for that decade, you might think you broke even, but you would have lost 28 very real dollars of purchasing power during that time. Whatever the trajectory of inflation might be, thinking in real returns always makes sense.

The Fed has good intentions with regards to its inflation targeting, and it may get it exactly right with no overshoot. Whether or not it does, thinking in real rather than nominal rates gives you a more realistic approach.

Gene Gard is Co-Chief-Investment Officer at Telarray, a Memphis-based wealth management firm that helps families navigate investment, tax, estate, and retirement decisions. Contact him at ggard@telarrayadvisors.com.

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Picking a Plan: The Truth About Financial Goals

One of the first things a financial planner talks about with a new client is goals. That makes sense, as planning for something without a target in mind is tough. For most people, expressing goals is actually one of the hardest parts of the process.

The goals discussion usually drifts into topics like paying down debt, saving for retirement, and preparing for college. Those goals seem appropriate and are likely to be what the advisor wants to hear, but are side effects rather than the core of a real goal. Financial planning should support the rest of your life, not exist in an abstract sense disconnected from your true hopes and dreams.

Many people don’t even make it to the point of an awkward conversation about goals with an advisor. The ostrich syndrome is very real — if you don’t look at your long-term financial plans, then they don’t really exist, right? One way to think about goals is how long you want to work. These are a few approaches I’ve seen as a financial advisor.

YOLO: Work Until You Die 

A surprising number of people deliberately have no retirement or financial goals, even after achieving an income where they could save. They create a false dichotomy between delaying gratification until later and enjoying life while they’re young(er). In exchange for a slightly more carefree and extravagant now, those with a You Only Live Once philosophy take on a lot of risk. Unexpected life events happen, and not everyone gets to work as long as they think they can. To me, this seems more about rationalizing a way to avoid a difficult topic than a real strategy.

Go With the Flow: Work Until Retirement Age

This is the normal approach: Keep down debt, balance saving and spending, get that 401(k) match, accrue Social Security credits, and retire around your mid-60s. Your main financial goal would probably be: “I don’t know, but more is better.” Any big income advances are met with commensurate lifestyle increase, so retirement around traditional retirement age is a self-fulfilling prophecy, regardless of how much money you actually make.

Financial Independence: Work Until … ?

Some people decide to draw a lifestyle line in the sand. As income increases, they don’t spend more. The magic of compounding means that investments can cover living expenses surprisingly quickly. Then anything is possible, including travel, volunteering, a new career, or even keeping the current job. This approach creates a lot of resilience and opportunities in the future, but isn’t for everyone.

Where Are You?

Brainstorming your wildest dreams on a piece of paper with no regard to finances is a great way to start figuring out what your actual short-, medium-, and long-term goals might be. Your wildest dream might be exactly what you’re doing now, and there’s nothing wrong with that. Just figuring out what you want to do and finding the commitment to follow through is the hard part.

Advisors can model a path to almost anything you can imagine, if you just know what you want. If you decide what you want to accomplish and develop a willingness to commit and follow through, your future advisor — and your future self — will find that planning for it might be the easiest part.

Gene Gard is Co-Chief-Investment Officer at Telarray, a Memphis-based wealth management firm that helps families navigate investment, tax, estate, and retirement decisions.

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How Much Spending Will Bring You Happiness?

Photo: Blogging Guide | Unsplash

“Annual income £20.00, annual expenditure £19.97½, result happiness.

“Annual income £20.00, annual expenditure £20.02½, result misery.”

— Mr. Micawber, from Charles Dickens’ David Copperfield

Both the 20th and 21st centuries have provided an opportunity in capital markets unparalleled in history. Anyone can earn money by saving and investing. Returns can be volatile, but the idea of approaching a double-digit average return on investments year after year, safe from hyperinflation, expropriation, or other disruption, is very special.

This phenomenon has created the concept of retirement, where financial assets can grow over a lifetime and eventually replace the need to work. But how do you get your money invested and working early enough to make a difference?

When I ask my clients how much income it would take for them to live comfortably and save appropriately, the answer is usually the same — something like 20 percent more than what they earn now.

The irony, of course, is that it’s like a treadmill — someone else is dissatisfied living on your 20 percent higher dream income, and there are others desperate to make it to your baseline.

Money does equal happiness, but only up to a point. Studies have suggested that a household income of about $75,000 is the upper boundary of that zone. Everyone would appreciate a raise, but studies suggest that emotional well-being, defined as aspects of day-to-day joy, sadness, anxiety, anger, and happiness, is controlled by other variables once basic needs are met and income rises above $75K.

How to get there? Well, spending less is a lot easier than earning more. The only way off the treadmill is to truly believe that beyond a certain point more spending does not equal more happiness.

Bill Gates famously says, “It’s the same hamburger,” when asked about being a billionaire. He has the means to hire chefs or fly in food from the finest restaurants in the world, but he still eats a lot of hamburgers. More expensive options simply don’t make him any happier and he has nothing to prove by consuming more.

I used to have an almost-daily Starbucks habit that I decided to address. Rather than budgeting $10 or $20 every week to moderate it and occasionally treat myself, I realized I was paying a huge premium for an addictive product that didn’t really matter to me. I switched to homemade decaf, which I can take in my insulated mug down to a park bench among the Starbucks sippers essentially for free.

That saving strategy works for me not because I’ve trained myself to accept privation; it works because my mindset is now that spending money makes me feel deprived. Just like Bill Gates (well, maybe not exactly), I also have nothing to prove. If someone thinks my DIY coffee is less impressive than a Starbucks cup, so be it. I’d rather have the money.

To paraphrase the Dickens quote above, if you can find true happiness living below your means, everything else is likely to fall into place. That revelation is more powerful than a thousand life hacks or budgeting tips, even if you can’t let go of Starbucks. There are probably things you can release, which, with the right mindset, could leave you closer to financial independence — and just as happy.

Gene Gard is Co-Chief Investment Officer at Telarray, a Memphis-based wealth management firm that helps families navigate investment, tax, estate, and retirement decisions. Contact him at ggard@telarrayadvisors.com.

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Contributions Count: Boring, Consistent, Long-Term Performance is What Matters

(Photo: Wachara Kireewong | Dreamstime.com)

Warren Buffett is known as one of the great investors of all time. At the end of 2020, his 55-year record at Berkshire Hathaway was an annualized 20 percent return per year exactly.

Redditors chasing after crypto and meme stock returns might scoff at 20 percent a year — or 1.53 percent a month — but they’re wrong to laugh. Anyone can earn 1.5 percent or even 100 percent in a good month, but consistently solid returns over years and decades without big drawdowns is the real magic that identifies world-class investing.

I once attended an evening golf workshop where I struggled on the fairway with about 10 other students. The instructor correctly sensed we weren’t PGA tour material and said something I’ll never forget: “I hereby grant each of you lifetime permission to pick your ball up off the fairway and put a tee under it, now and forever.” He sensed that the minor accommodation, though against the rules, would greatly improve our experience and might make us more likely to enjoy a lifetime of golf. He was right. In golf, holes-in-one are like big wins in crypto and meme stocks: celebrated but not reliable or repeatable. What matters is boring, consistent, long-term performance, with as long a time in the market as possible.

Sooner is usually better in investing, but it’s never easy to get motivated. So I have something to offer you: I hereby grant you the right to count contributions to your investment accounts as part of your performance, now and forever.

For example, if you have $5,000 in your Roth IRA, decide to contribute $5,000 throughout the year (that’s just a little more than $400 a month), and at year-end see $11,000 in the account, don’t try to figure out whether you earned 10 percent or 20 percent — give yourself credit for the full 2.2x or 120 percent increase.

Averaging 20 percent returns each year — like Buffett — is not likely in the future, but it’s much more likely to happen when you count the money you put in as part of your returns. Growing your account by 20 percent a year means it will double every four years, regardless of where the money came from.

Just as a real golfer eventually stops using tees on the fairway, over time the impact of new money will be crowded out by actual investment returns as the driver of your account’s increasing size. Keep at it, though, and someday you’ll see the real magic: returns on an investment portfolio in a typical year that rival your annual expenses and even exceed your salary. At that point the idea of financial independence comes into sharp focus, maybe years before you otherwise might expect. Thinking about contributions as returns has helped me build up my own investments through some discouraging times — it turns out markets go down sometimes, too! Counting contributions as part of returns might sound like a gimmick, but if it nudges you in the right direction, your future self will thank you.

Who knows? Thinking this way might help you retire early and take up golf. Just don’t use tees on the fairway until you get permission from my old coach.

Gene Gard is co-chief-investment officer at Telarray, a Memphis-based wealth management firm.