Latest / Brick by Brick - Wealth Building Conversations / The Function of Wealth: Stop Chasing Returns and Start Planning With Purpose

Transcript

The Function of Wealth: Stop Chasing Returns and Start Planning With Purpose · Brick by Brick - Wealth Building Conversations

• Gary Preisser: And if you are aspiring to grow your net worth and to grow your income in the future, well then now is kind of is probably the best case scenario for you to pay taxes now and never pay tax in the future. Even if that's difficult to pay now, it's going to be so much better than the future. Now, if you're expecting to be to fail in the future, then that's a different story. But nobody plans to fail, right? And so I really appreciate that. If you are aspiring to be more successful in the future, you are going to have to pay tax in some way, shape or form at some time. I would rather you pay that now while you're married, while you have kids at home, while you have deductions, while you have some losses, you have some depreciation. All of those opportunities keep you in a lower tax bracket. How are you utilizing that tax bracket as a tool to make sure that your assets are as tax efficient for you in the future as possible. Loren Wernette: Welcome to another episode of Brick by Brick. Today we have with us Gary Pricer. He is the partner and founder of Stonebriar Wealth Advisors, creator of the Function of Wealth framework. was 20 plus years in the tax prep field, financial advising and investment strategy space. And he's currently writing Function of Wealth book series, building advising facing software and AI tools. So you're just involved in all the things, wealth and Gary Preisser: You Loren Wernette: capital building. related. Gary Preisser: I'm trying to cover it all. Loren Wernette: So I always like to ask, so well, first off, before I go to this, I give you a little bit overview of what you do. Give us what you actually do on a weekly, daily, monthly basis. Who are you? Gary Preisser: It's great question. What I really focus on with all of my experience over the years, it's brought me to this. Every dollar that we have is going to be spent by somebody at some point in time. It has to have a purpose and it needs to function when it is needed. And so I help my clients, I help train other advisors to understand that assets are not tools, they're not trophies rather, they're not just something to have, they're something to use. We want our wealth to function. By helping my clients to show them how to improve the function or the capacity to function for their wealth, what it really does is add value to their lives. And that's really the end result of all of this. It's not about having more money, it's about adding more value. And so that's what I really focus on. Loren Wernette: So how did you kind of get to that mindset? Because so much of our culture and us even in investors is how do I take a dollar and turn it into a dollar 20 as fast as possible? And then how do I take that dollar 20 every single penny of it and turn it into the next investment that's gonna give me a return? Gary Preisser: That is how we look at assets as just something to continue to grow. And there's a purpose in that, absolutely. But what I've seen over my career is those that have done that very well, they've grown their assets very well. but they've never been able to really make a difference in their lives with it. They haven't been able to utilize it. They haven't been able to use it to add value. And I see how empty that pursuit is. If our goal is only growth, that's a finish line that we will never reach. It's always in the future. It's never something that we are able to accomplish. And there's always going to be somebody that has more or has done it better. That is not satisfying. That is not adding value. I don't think that's why we're here is just to grow. Again, growth is very important. We want to do that efficiently. I can talk all day about that. But we have to take a step back. Why is this? Why do we have this wealth first? What's the purpose for it? And that is different for each person. Each individual should have a different purpose for their money. And as we're advising them, as we're advising our clients, we need to keep that in mind so that we're accomplishing the client's purpose, our client's purpose, as opposed to just growing for the sake of growth. Loren Wernette: how often do your clients come in and actually know what that purpose is? Because I feel like, just the people I know and myself, I don't know how many people I talk to and they're like, I'm like, what's your goal? They're like, I wanna be a millionaire. I'm like, I really doubt that. I think that there's something else you're trying to do with that million dollars. Like a million dollars, you can't eat it, you can't, and you can play with it kind of, but you don't do anything with it besides spend it on stuff. So what is the stuff you wanna spend it? Gary Preisser: That's a great question and I'm glad you're asking that because when I talk to my clients and I ask them that exact question I get this glazed look in their face. They have never thought of it. They think of it in terms of long term goals. I want to be able to retire with this and you know as you said our industry focuses on what's your number and what are you trying to accomplish. First of all, how do we know what that number really is until we know what is the money meant for? When is it going to be used? What is it going to be used for? And so it is an education process. And I think in my view, our industry, the financial services industry as a whole, starts with the wrong questions. We start with asking about what. And a great example that I came up with this kind of metaphor, right? I recently got met. married, my wife has had three knee surgeries in the last year, so she's been going through it. She went to the surgeon and she told him that her knee was, she was having pain in her knee, something was wrong. The surgeon asked her how old she was, which we don't need to talk about right now, and the surgeon asked her how she felt about pain, how much pain she was willing to endure in order to get a good result. So those were the only two questions the surgeon asked. And then he started talking about the pros and cons of three different scalpels that he could use for the operation. This one's really strong. This one's really precise. This one's really reliable. 92 % of people that use this scalpel have a good result. That's a ridiculous story, right? No doctor ever does that. But financial advisors do that every single day. You walk into a financial advisor's office and they ask you how old you are. They ask you how you feel about pain, otherwise known as a risk questionnaire. And then they start making recommendations for products without ever asking what is the purpose of the money. And this is what most clients are used to. This is what the industry continues to push. And so it requires advisors like you, Lauren, who are asking the clients, what are you actually trying to accomplish? What is this purpose? And when you get that glazed over look in their eye, taking the time to educate them about the importance of purpose, what the options are. And then once we know that information, purpose determines the timing. is critical to understanding what is the appropriate investment for that portion of the portfolio. It does take time, but I think it is time super well spent because if we don't know what we're aiming at, well, then we're going to be hitting nothing, right? We're never going to accomplish our purpose. Loren Wernette: So to your story, is the correct question the doctor should have asked, are you planning to go play tennis or walk? Gary Preisser: That's right. You got to start with what's the purpose? What's the problem, first of all? We need to understand what's really causing that pain. And then what is the realistic expectation? for what she wants to accomplish. She really wants to walk. And that may be obvious, right? And the problem is we take that idea that it's obvious to the financial services industry, well, you just want to grow. No, that's not what it's about. We want growth. I keep saying it. We do want that. I don't want to take anything away from that. But it's funny that I spend most of my time with my clients. Most of them are retirees, 60 and up for the most part. I spend most of my time encouraging them to spend more of their money. They really relate to and admire the ants from Aesop's fable that saved food for the winter. For my younger, for my advisors, I have to talk about a bug's life, right? Because they don't know who Aesop is. But the ants save food for the winter. So my clients are my clients because they have done a great job of saving and accumulating. But then I ask them, what happens at the end of that fable? And again, they give me that blank look. They don't know. The ants eat the food. They don't just show it off. They don't just talk about it. They don't brag about it. They don't take selfies and post it on Instagram. Look at what we did. The only value in that food is that it was utilized to fulfill its purpose. and our wealth needs to do the same thing. It is not just about having it, it is about utilizing it and about making sure that that wealth functions when we need it to function. Loren Wernette: So not about not building your net worth. It's about knowing when the point is to just building, building, building, and when you need to start spending for, know, to basically build the lifestyle that you want. You're not saving just to save. And I think that, Gary Preisser: That's right. Loren Wernette: I'll get into this in second, but I think a lot of people fall into the trap of they spent 40 years building. And then the thought of spending that thing that they've built, like rips a hole in their guts, right? Gary Preisser: It is so difficult. It's amazing to see. You know, for younger people that have bad habits maybe, they're really good at spending. For my clients especially, they've saved, you're exactly right, they've saved their entire life. It is a big mindset shift. They just cannot comprehend that they can spend their money. A lot of my clients, I point out to them, you have a million dollars. They have no idea because they put their head down and they saved and they saved and they saved. They don't realize what they've accomplished. For some of them, they've got 10 million or more. But they don't feel like that. They don't recognize it because their advisor has always been talking to them about growing more and more and more. They never feel like they've accomplished anything. And so we get we need to get to the point where they are actually using that money to accomplish their and fulfill their purpose. And that is not a clean line in the sand. It's not an immediate go from accumulation to distribution. The reality is we're constantly using a portion of our wealth for short term needs for emergency funds, for baseball tournaments. said you got your son that's doing baseball and hockey and all those. You got those buying a house, investing in your business, investing in properties, investing in other There's always a need for short-term cash, short-term liquidity. Even for retirees, we're not planning a three-year retirement. This is not like 100 years ago when it was retire and expire. We are planning for a 30, maybe 40-year retirement. Not only that, most of our clients are going to be leaving money behind to the next generation. We're not just investing for our clients lifetime, we're investing for their legacy. So it's a constant battle, it shouldn't be a battle, it's a constant reconciliation between the money you need in that short term and how should that be invested versus money that you're not gonna need for decades. And unfortunately, our industry just lumps everything together and says, you're moderately conservative and you're this age, so this portfolio is likely to be successful for you. That isn't enough, it shouldn't be enough. And especially with your that are trying to get the most out of their money along the way, we should not accept, they should not accept just these generic portfolios that are good for everyone because the reality is that they're really not optimized for anyone. Loren Wernette: I think part of the nervousness, at least even I, is that 40 year old thinking about, I have no idea how long I'm going to live. I have no Gary Preisser: Yep. Loren Wernette: idea what the cost of medical expenses are going to be when I'm in my old age, right? And I have no idea what taxes are going to be like. And so you're like, okay, yeah, maybe I need $7 million, right? To live a good lifestyle. But that's based on today's prices with appreciation and everything else. Like, I have no idea. And so there's a just inherent nervousness about running out of cash if I decide that, I'm gonna retire at 65 and I live to 100, which I plan on doing. Gary Preisser: Yes. that I joke that at Stonebriar we create perfect financial plans if we know when our client is going to die. We know everything that's going Loren Wernette: Yeah Gary Preisser: to happen between now and then. Everything is going happen in their lives. Everything is going to happen with tax code. Everything is going to happen with the market. Right. Since that has not happened yet maybe it will someday. And the only thing that we can do is try to emulate the Apollo Moon mission. That was off course, 99 % of the time, whatever the stat was, but we are constantly making adjustments to make sure that we arrive at our destination. The problem is, how do know what adjustments to make if we don't know what that destination is? And to your point, you want to retire at 65. That's a great start, absolutely. But there are 65-year-olds that are retired that are in very different situations. I have 65-year-olds that are, let's say they're both spending $5,000 a month, but one has $4,000 of Social Security. The other also has $4,000 of Social Security, so that's the same. over here has another $3,000 of a pension. So they have more income than they need each month, whereas this one with less income than they need They're having to use those assets every single month to be able to just survive. The second household has options, right? They have discretionary income. They can do whatever they want. The sad thing is that in our industry, these two portfolios are going to be managed exactly the same if they both say that they're moderately conservative. But their cash flow indicates that their needs are very different. And if we ask the right questions about When are they gonna use the money? What are they gonna use it for? What's the purpose? Then we can really customize a plan to optimize all the assets that each household has and make sure that we're functional in fulfilling their needs and their desires. Loren Wernette: Got it. What is your take on the concept of, well, I'm just gonna live kind of the way I've always lived and if I have extra money, great, I'll just give it to my wife when I die or I'll give it to my kids when I die. And how does that go into this planning mechanism? Gary Preisser: Well, if you aim at nothing, you will hit it, right? It's that default and you just assume that if I do the same thing everybody else does, then I'm going to be okay. And that may be the case. For us, it's just not enough. And majority of people, I don't really care. That's fine, right? It's the mob mentality. We're going to do the same thing that everybody else does. And if everyone else is going to be OK, we're likely to be OK. For me, my focus is to add value to optimize assets, to optimize wealth. And so I'm focused on those that want to, that feel like they're really stewards of their wealth, right? We all have these opportunities that come with having wealth or the opportunity to accumulate wealth. How are we utilizing those efficiently? Are we burying our talents in the ground as it were? Are we just letting things happen? Are we being reactive and being almost a victim of whatever the circumstance may be? I know there are people like that. My guess is that they're not listening to your podcast, based on what Loren Wernette: haha Gary Preisser: you're trying to accomplish. For your audience and really for my clients, for everyone that I am talking to, the goal is it's not enough to just get by. It's not enough to survive. It's not enough to do the same as everyone else. we want to optimize our opportunities, optimize our wealth. And it's interesting to me that a lot of your listeners, they are trying to take advantage of every opportunity that they have in all aspects of their life. They expect the best. And I see this a lot with super high level professional athletes and entrepreneurs and business owners. They've had huge exits. They demand the best in every aspect of their life. And yet their portfolio is just on a default. It's a 60-40 stock bond split based on their age and based on their risk profile and that's a disconnection. I've had a lot of conversations about this recently. The concepts that we use in our functional wealth, the function of wealth, are concepts that are used in all other aspects of your life. If you're making a decision, what's the first question? What are you trying to accomplish? The why is first. Once you know the why, then you know the timing. Once you know the timing, then you can create a design that allows you to fulfill that goal, that purpose. I think everyone sees that in other aspects of their life with their health, with their relationships, with their businesses. And yet when it comes to investing, especially in the public market with stocks and bonds, everything just gets left to default and there's no reason for it. I think our industry has kind of said that this is OK. It's enough because that's easy for them to scale and easy for them to continue to make money. That is not the purpose. That's not my purpose at least. My purpose is to help each client, each household to get the most out of their investments, the most out of their wealth, the most out of their opportunities, so they can add more value to their lives and to the lives of those around them. And if that's not the point, then I don't know why anybody bothers, quite frankly. We've got to focus on what does that value add. Loren Wernette: Make sense. So let's walk through a little example here. I know you have a concept called the functional wealth clock, right? So, Gary Preisser: Yes. Loren Wernette: and the concept is there's different times to do different things. So let's say we have two individuals, one that's 45 and Scott $2 million and one that's 60 and has $2 million, both similar conservative, semi-conservative, know, investor base, both kind of have a similar kind of why. What are we, how is that conversation different and what are the different things that each of those people is gonna do differently? Gary Preisser: Assuming their purpose and a broad sense are about the same, they feel the same way about volatility, it's a great example. The difference is the timing for them. 45-year-old, they have at least, let's say, 15 years until retirement. If that $2 million, this is where taxes become a big deal, Taxes are always a big deal, but especially here. If it's in a tax deferred or a Roth account, that's money that they can't touch for 15 years, whether they need to or not. If they have some in a non-qualified or just a taxable account, well, that's what they're gonna use for that short-term discretionary income for the vacations, for the education, paying for weddings, paying for travel, paying for investing in business opportunities, et cetera. So we wanna make sure, first of all, that they have enough to cover that short term. But a majority of that's going to be covered by their income because they're still working. For that 60-year-old, things are very different, though. If they've retired at that point in time, they still got a couple of years until Social Security starts for them. The goal here or the purpose for each dollar is now to be spent. A bigger portion of it, at least, is going to be spent on a more regular basis. And so the money that is going to be spent in the next 10 years, and that's going to be a much smaller amount for the 45-year-old than it will be for the 60-year-old, I cannot afford to expose that money to volatility. A lot of people in our industry, they assume that risk and volatility are the same thing, but they are not. Volatility is movement in the market. Movement becomes a problem or becomes risky only when it collides with a cash flow need. for a vacation or for a gift or for education, whatever that is, and the market's down 30%, now we've introduced risk. That's where it's a problem. If we have time, then volatility actually becomes an opportunity. That's our best chance to get the most growth as possible. And so with our functional wealth clock, we are trying to design risk out of the portfolio by assigning volatility to the right timing of when the money will be needed. Our industry focuses so much on duration of time and they do these projections and Monte Carlo simulations that are very average and very generic. But you don't live in averages of time, you live in moments of timing. And for that 60 year old, those moments of spending are much sooner. than they will be for the 45 year old. And so the portfolio should be constructed and designed to meet that unique timing of each of those households. I would expect that that 60 year old would have more money in a higher percentage of their portfolio that's in CDs and money markets and maybe some fixed annuities that are gonna be used in the short term because we don't wanna introduce volatility for money that we need in the short term. Loren Wernette: Mm-hmm. Gary Preisser: But still, even for that 60 year old, there's money that they're not gonna spend till they're 75 or 80 or 95. And that money still needs to have volatility in order to grow. For the 45 year old, if they're not going to touch that money for 15 years, then that purpose is still growth for now. But as they get closer to being 60, then that shifts not because they're 60, but because their timing of when they're going to use the assets is shifting. Loren Wernette: Yeah, that makes a ton of sense. You got high amount of volatility, you can't touch it. So that's the lower the younger person. And then as they get older, you reduce the volatility and you basically increase the amount of free available capital in CDs and things of that nature. What role does thinking about taxes play into this? And specifically, I'm thinking like, I assume just based on history, taxes are going to be higher in 20 years than they are today. Right? But then you've got Roth IRAs, which are taxed now and not taxed when you pull it out. So should I put more money there or should I really dump as much of that pre-tax dollars when I'm at kind of this high earning potential into an IRA or 401k and then pay the taxes later? How does all that go into this conversation and what is your recommendation on some? Gary Preisser: It's a critical part of the conversation because it's not what you have, it's what you can keep. So we need to understand that. We also need to understand that... timing is critical to every decision that we're making, especially taxes, because when we pay tax determines how much tax we pay. If we recognize a million dollars of income in one year, well, that's going to push us into the highest highest tax bracket. If we show a million dollars of income spread out over 10 years, well, we're to pay a lot less in taxes from a percentage standpoint, because we're going to stay in lower tax brackets. Now, that's that's assuming that taxes stay the same Going forward to your point. I agree with you. I think it's very unlikely that that's gonna happen. Tax rates are going to go up higher. at some point in time, they have to. Something's got to give. But if we look beyond the macro level of it and we look at each individual situation, the reality is every decision that we're making, we have to ask, am I going to be in a higher tax bracket now than I will be in the future? Or am I lower now than I will be in the future? Or is it going to be about the same? And it's really a binary question. I see so many people saying, diversify, put a little bit in Roth and a little bit in IRA. I appreciate getting as much into Roth as possible, don't get me wrong, but let's not default to that. Every situation is different. If you're in the 24 % tax bracket right now, and this is another important part about taxes, they're relative, 24 % may sound really expensive, but as we project forward, if we expect that you will be in the 32 % tax bracket, well, that's worse. And I would Loren Wernette: Mm-hmm. Gary Preisser: rather you pay as much tax at 24 % if we're avoiding tax at 32%. down the road. Now another example, this is a little bit more common, you're in the 24 % now. But when you retire in two years, so you have at least some kind of confidence that tax rates will stay where they are, you're going to be in the 12 % tax bracket. Well, then why do I want to pay tax at 24 when I will be paying at 12 in the future? I want to defer tax as much as possible now and then strategically pay tax when I'm in the lowest bracket and really fill up that lowest bracket. I want my clients to pay as much tax as possible possible in lower brackets to avoid tax at higher brackets. And I think this is a mistake that a lot of people make. It's an oversight. The focus is always on how low their tax bill was for last year. And that may be a great thing, but in most cases, it's a missed opportunity. Because if you constantly defer tax liability, the likelihood is you get tax compression. You get more income that you have to when you're actually distributing that income. And in a lot of cases, unfortunately, you may be married your entire life, now you get into your 80s and your spouse passes, now you're filing single, which pushes you into a higher tax bracket. And now you have required minimum distributions and you have more expenses on Medicare, it becomes the snowball effect of taxes. What we want to do is really look at, and especially a lot of your listeners that are real estate investors, you get so many tax breaks. Business owners, so many tax breaks. The only value in those tax breaks though, is that you have more room to pay tax at a lower bracket. If you are, I see so many people that have a negative tax liability. Unfortunately, the government doesn't pay you to have a negative tax liability. You just wasted that opportunity. Let's make sure that we're filling up the lower bracket and that's relative to each person. And one of the best ways to do that is to get money into a Roth. If you can get money into a Roth, that's the best money for you to have. You paid the tax now, you said, Lauren, you'd never pay tax on that money again for the rest of your lives, plus 10 years for your beneficiaries. The second best is taxable. And I know that doesn't sound like it would be best necessarily, but with taxable assets, you now have long-term capital gains. opportunities. You have the, for your legacy, a step up in cost basis. It can be super tax efficient. The tax deferred is actually the worst money to have long term. Now it still has a purpose. If we can reduce those taxes at 24 % with the plan to convert to Roth at 12, that's a fantastic plan. But we have to be, it has to be forward looking. It cannot just be reactive. Loren Wernette: Yeah, I think all good points. think, you in a lot of our listeners and myself included and people I know, like the struggle is like at this age, 40 years old, I pretty much am pretty sure that my income is going to be, at least my net worth is going to be much higher in 20 years than it is today. And so then it's less about what my net worth is. It's what am I actually taking home and reporting as income? on an annual basis and how that impacts my taxable, my tax level. And so I think that's a big lever that we have to think about. And then from, and I'm not a CPA, so this is way outside my league, right? But I think about Gary Preisser: You Loren Wernette: this stuff on a regular basis. I just know a lot of people in real estate that they're just like, they're so excited. I got a $10,000 refund this year. I'm like, great. So you gave the government a $10,000 interest-free loan for a year. Awesome. Or, they're so tied up in I have to move every single dollar of profit into the next exchange, or I've got these super creative ways to ensure that I pay a big old goose egg for taxes on this multimillion dollar sale. And like at some point that rooster, that chicken's gonna come home and roost and either you're gonna leave that at the feet of your children, know, there's some ways around that, or you're gonna take that hit on a massive investment property that you sell when you're 85 or 90 and your basis is going to be off off the charts and you're to have the higher interest or a higher tax liability because of higher taxes. Gary Preisser: You brought up a couple of things that are super critical, Lauren, and I'm glad you did. One is you're expecting to grow your net worth. I think so many people, they actually are trying to limit themselves. They're saying, I don't want to pay taxes. And so that by reducing their tax liability, they're reducing their opportunities to make income, to build up their net worth. And if you are aspiring to grow your net worth and to grow your income in the future, well then now is kind of is probably the best case scenario for you to pay taxes now and never pay tax in the future. Even if that's difficult to pay now, it's going to be so much better than the future. Now, if you're expecting to be to fail in the future, then that's a different story. But nobody plans to fail, right? And so I really appreciate that. If you are aspiring to be more successful in the future, you are going to have to pay tax in some way, shape or form at some time. I would rather you pay that now while you're married, while you have kids at home, while you have deductions, while you have some losses, you have some depreciation. All of those opportunities keep you in a lower tax bracket. How are you utilizing that tax bracket as a tool to make sure that your assets are as tax efficient for you in the future as possible. The other thing that I appreciate you brought up is about these, the multi-generation. You want to be successful, not just for yourself. You want to be so successful that it outlives your lifetime. So we're talking about your legacy. So many, I hear people talk about, well, I don't care if my kids pay taxes, that's their problem. Okay? The reality is, how are your kids going to be paying taxes on the legacy that you give them? They're going to be using your money to do that. So the question is, do you care about whose name is on the tax return? Or do you care about how much of your assets are going to the government? For me, it is definitely the latter. I am much more worried about how much of the assets are going to be going to the government either now or later, whatever that timeline looks like. And so we need to be strategic from a And we need to be forward looking in determining the timing of those taxes. Loren Wernette: Yeah, mean, it's my kid's problem. They'll deal with it. Well, how you think they're gonna pay for it? They're gonna sell off your assets to pay for it. I mean, Gary Preisser: It's still off your assets. That's right. Loren Wernette: this is exactly why wholesalers and real estate people go after people that inherit properties to try to get them to sell because those people that inherit the properties now have this tax liability that they maybe don't have 15 grand or 20 grand to cover. And so they have to sell them at a discount. And so... Dealing with that over 15, 20 years is always gonna be better strategy than trying to deal with it all at one time. Gary Preisser: That's right. Absolutely. Loren Wernette: All right, so we could keep talking about taxes for hours because I mean, it's a topic that I found that the wealthier I get, the more people that I hang out with that are wealthy, the tax conversation just becomes a higher percentage of the conversation, right? Gary Preisser: And let me talk about one quick thing on taxes that's super critical, especially for your audience. And that's the concept of asset location. We talk a lot about asset allocation, assigning volatility based on your risk profile, based on the timing of when you need the money. But asset location takes into account the taxes. And the easiest way to explain this, let's say you have a traditional IRA and a Roth IRA. And there's the same amount of money in each, and you want half of your money in in an investment that's going to earn about 5 percent. For your audience, let's say about 8 to 10 percent. Let's be a little bit more aggressive there. You have another investment that can earn between 15 and 20. Which one do you want to be tax-free? You want that 15 to 20 % investment to grow tax free because that's going to optimize the tax benefits of the Roth account. Whereas you still want all of your assets to make money, but if you have to pay tax, you want to pay tax on that lower percentage. The problem is in our industry, go ahead. Loren Wernette: Couldn't the argument be that you want the investment to be in the non-tax right now so that your base is bigger? So $1 earning 8 % over 20 years is gonna earn a lot more than 80 cents over 20 years, right? Gary Preisser: That's right. You were looking at the higher the growth. If you have higher growth, you want that to be tax free. And it's relative to each portfolio, right? For some people, 15 % is being super aggressive. For others, not necessarily, right? It's all relative. But the key is, if you have two options, we have to understand the tax treatment and try to optimize that. Our industry, unfortunately, would say, OK, you want half your money in this lower volatility, half your money in this higher volatility. We're going to put half your IRA in each, your traditional IRA. in each, we're going to put half of your Roth IRA in each. Whereas what we should be doing, functional location says put all of the higher volatility in the Roth, put all of the lower volatility in the traditional IRA. And I know each individual situation is different and the math doesn't work out that way, but do not rely on just basic generic diversification across your entire portfolio, we need to understand the tax implications of each decision, even if that's the investment decision itself. Loren Wernette: how should an investor look at the different vehicle options? Meaning, whether it's Roth or IRA, you can have stock markets, you can put stuff in ETFs, you can put stuff in an equity fund, a syndication, a REIT, annuity, a CD. I mean, understand that low volatility, we already talked about low volatility versus high volatility, Gary Preisser: Right. Loren Wernette: but let's say you've got a... credit fund that's got relatively stable stabilization and a pretty easy redemption period versus something in a stock market, which is both are gonna give you eight to 10 % depending on the year over long term. How does one make a decision on how to distribute their different chunks of money into those different vehicles? Or are there vehicles that you just like, hey, at this point in your life, you probably should just stay away from that. Or is it all just a function on volatility expectation? Gary Preisser: It is about volatility. It's about timing. And it all comes back to purpose. So it's a great question and one that I'm answering all day, every day. If we know the purpose of each dollar, then we know the timing. If we know the timing, then the investment options get whittled down automatically. What I appreciate about the way that you framed the question, Lauren, is you're right. There are so many investments available. We could spend the entire time just listing all of the options that are out there. And if we don't know what the purpose is, then it's impossible to choose from which investment is better. Because all of them have pros and cons. Every single investment has trade-offs, right? And I see too many people that come into my office and say, well, what should I invest in? Or if I gave you $100,000 or a million dollars, what would you put it in? We can't answer that question without knowing what is the money for and when does it need to be used. So once we know the timing, then we can whittle that down and decide, OK, money that we're going to use in the next 10 years, well, I'm not going to put that in the stock market at all. Private credit may be a great option as long as the liquidity works. A fixed index annuity may be an option as long as the liquidity works. It's all about liquidity and getting the most growth we can while taking no volatility, right? out past 10 years, now we got a whole open Pandora's box of different investments. Again, we need to look at what are the trade-offs and how does that affect the ability for the wealth to function in fulfilling purpose. And if we understand that purpose as clearly as possible, that becomes much easier. A REIT could be a great investment, but we need to know what's the liquidity on that REIT. And we also need to know what is the upside opportunity compared to other opportunities that we have available. And for a lot of my clients that we've got a lot of clients that have real estate, especially if they have public investments, right? They're in stocks, bonds, whatever the case may be. One of the critical things that everyone needs to know is the concept of or the metric of alpha. Alpha measures performance relative to alternatives, relative to the benchmark. Now in order to understand our alpha, understand our performance, we need to set an expectation. That expectation is set by beta. Beta measures volatility relative to the benchmark, typically the S &P 500. Let's use that as the example. If the S &P always has a beta of one, so if your investment, whatever it is, mutual fund, REIT, real estate, whatever it is, has a beta of 0.5, then it has half the volatility of the market. What that means is if we're taking half the volatility, we should expect half the return. If we have a beta of 2, then we're having twice the volatility. We should expect twice the return. So if the market's up 10 % and you did 7, well, some people will say, well, that's great, because my Monte Carlo simulation says if I average 7%, I'm going to be OK. I should rely on that. But the reality is, if you are taking half the risk of the market, then 7 is actually great. You outperformed by 2%. The market did 10. You took half the volatility. you should have done five, you did seven, you outperformed. But if you took the same volatility as the market, you should have gotten 10. So if you Loren Wernette: Mm-hmm. Gary Preisser: got seven, you actually underperformed by 3 % in that year. Now one year is not that big of a deal, but we understand if you underperform consistently year over year, decade over decade, by 3 % that's a huge deal. Makes a huge difference. And the problem that I have with it, the biggest problem I have, is you could have just put your money in the S &P 500 and done 3 % better for free. And so the problem that I have with this is that not enough people know what their alpha is. And if you don't know that, please go to Morningstar, Yahoo Finance. You can see what the alpha is for each investment that's at least available on those websites. So that's one problem. The other problem is that over 96 % of mutual funds and money managers actually provide negative alpha. And they are charging Loren Wernette: Hmm. Gary Preisser: people to do it. And there's no reason for it. Our industry, think, makes investing seem very complicated. But it doesn't have to be. The reality is, if you want to take half the volatility of the S &P 500, then there's an easy way to do that. in the S &P, put half your money in a money market, and at least you're going to get what the market gives you. But the reality is, especially for your listeners, please go out and see one of the criteria that you need to look at when evaluating an investment is what is the performance of alpha? What's the track record for alpha? Have we consistently outperformed the benchmark relative to the volatility? Now, just because it's happened in the past doesn't mean it will happen in the future. But I see so many people that are in investments that have never outperformed the benchmark relative to their volatility in their entire existence. And yet they still invest in those because they simply do not know. Loren Wernette: Interesting. And is that a number, and this one I should know, that you can directly correlate across some like a money market or stock to something like a private investment in a fund or something like that? Gary Preisser: It's a little bit trickier to do that calculation and it may not be as readily available. But if you can, and the tricky part is you can compare returns from previous years and get a good sense of the market did this, this private investment did that. But what you don't know is how much volatility did that private investment take in order to achieve that result. And so if they're not able to provide that for you readily, please ask. Ask them about alpha, ask them about beta, ask them about the volatility level so you can see the performance relative to the volatility. Average rates of returns are easy to report, but they do not tell us the whole story. So for your listeners especially, as you're evaluating those investment options, make sure you understand the volatility associated with them and make sure that they can report and show you that they are actually outperforming the benchmark. whatever benchmark they are they're matching themselves to over that time period. It's not going to guarantee that that's a good investment. I'm not saying you should invest in every positive alpha investment. I'm not saying that. But there's no reason to invest in negative alpha. There's just no reason to. You're just adding a weight and adding unnecessary friction to your portfolio, which is the last thing that you want to do. Loren Wernette: Yeah, lots of good investments out there. You just have to pick the time to look for them. And I tell Gary Preisser: Yeah. Loren Wernette: people regularly, I spend most of my life on the fund investing side. And so I tell people all the time, it's far less to do like what the pro forma of the fund says. It has a lot more to do with what the track record of the fund manager is. If you can find a fund manager that's had a couple of successful funds and they've returned good capital and they communicate with you well, Like they're gonna be a lot better off than someone that just has a website that says they're gonna give you 47 % returns, know, or IRR, so. Gary Preisser: Absolutely. So track record is a big deal. Just make sure that you're looking for outperformance, not just average rates of return. Because, you know... You've had a lot of people in the market recently. I know we've had some volatility in the stock market. But over the last, really since 2008, you could probably put your money anywhere and you'll make money. You'll have a good average rate of return. But if it's less than what you should have gotten relative to your volatility, then that should be unacceptable. And unfortunately, we see billions and billions, if not trillions of dollars invested in vehicles that are underperforming consistently. And there's just no reason for it. And I can't change the entire industry. I wish I could. But each of your listeners, please take this to heart. Make sure that you are outperforming so that your dollar is fulfilling that purpose. If the purpose right now is growth, let's make sure we're fulfilling that as efficiently as possible. Loren Wernette: Makes sense. So I think we skipped over something that I think we should probably cover real quick. Purpose. You keep mentioning purpose, right? But I think giving the listeners a definition or some examples of purpose. I mean, I have something in my head that I think of as purpose, but I think it behooves us to say, here's what we mean by purpose and what you should think of when you're thinking about what your purpose is for these funds. Gary Preisser: So the shortest definition of that that I use is purpose is intent. What is the intent for each dollar? Now, that doesn't really help us very much. It's just more of a synonym than anything. And I think our industry too much focuses on goals. Well, my goal is to not run out of money or my goal is to have this much and when I die, that's too abstract. So when we're talking about purpose, yes, I think it's obvious that you want to make sure you have enough money. Let's get that off the table. The more important question is, how much do you need to spend this year? How much do you need to pull out of your assets to spend in addition to your income or whatever other income sources you have? What's the money you need to spend in two years? That's a lot easier to get very specific. And the more specific we can get, the more accurate we can be in our planning, in our designing, the more efficient we can be in optimizing your resources. Now, this is not something to hold you to. This is not something to limit you. This is really something to give you the room to utilize these assets, whether it's for vacation or for another investment or to build a business or whatever the case may be. And we want to err on the high side. We want to be conservative in setting plenty of money aside so that your other money you know that you will not need to touch for a longer period of time. The problem that we see isn't that we have bad investments necessarily. It's that at the wrong time, if we have to pull those assets out, if we have to sell out of desperation. that investment that could have been great over a 10 year period becomes terrible over a two year period. And so if we understand that we have a vacation, we've got education, we've got some college funding for kids, we've got a wedding to pay for, we've got an investment that we need to make, we want to gift money to our kids, make sure we're filling up that 19,000 per year. These are just examples of specific purposes for each portion of the portfolio. I love the name of your podcast, Brick by Brick. Instead of talking about what's the building look like, let's talk about each of those bricks, right? What's the money that you need this month and next month and a year from now and two years from now and five years from now and 10 years from now? That takes time. And it doesn't have to be a ton of time, but it takes more time than most advisors are willing to spend. But if we know what each of those bricks requires, now we can build a structure design a structure that actually fulfills the purpose of each portion of that portfolio. We are not just making, we're not allocating to percentages based on a risk profile. We are designing and we are assigning volatility to meet and fulfill the purpose for each dollar that you have. For some of it, a lot of your dollars, especially right now, Lauren, you're four years old, super young, you got a lot of years ahead of you. A lot of that purpose is just to grow for now, for the next 20 years, maybe 30, maybe longer. But for a portion, you're gonna need money set aside for those baseball tournaments or that hockey equipment or the vacation or the next house or the next investment. The more specific we can be, then the more accurate we can be. Now, going back to the Apollo Moon mission story, right? We don't know the future. We don't know exactly how things are going to work out. But if we're more specific, then we know when to adjust clearly. We can be very accurate in our adjustments. I see too many people that have been in investments or been in portfolios that only adjust when they've gotten older, just because they've gotten older or because their feelings about volatility has changed. We see the Loren Wernette: Hmm. Gary Preisser: market drops. I'm scared of volatility now. Let's reallocate all of your portfolio. And now the market is going to take off and rebound. I love volatility now. I'm so bad that I missed out on the growth. Well, let's reallocate. You're always chasing those returns. and you're missing the bug. If we can be specific in our purpose and really provide governance for ourselves to say, this dollar is not going to be spent for 15 years, I am willing to take that volatile ride in order to give myself the best opportunity for growth over that time period. And I know that I'm never going to have to sell that out of desperation. You may still need to change that investment because there may be other things outside of it. But for our clients, they should not be selling out of a good investment because we haven't designed the plan properly to make sure they have enough liquidity to fulfill their short-term purpose. Loren Wernette: Yeah, that's exactly what I was trying to get to with the purpose. I think it's too much of I want this much money and not enough of I want to maintain my lifestyle. I want to visit my grandkids on a monthly basis. I want to do five trips a year, that kind of stuff that really dives down to help you figure out what you actually need to live and where you need to get to. And then from there, you can just pile the gravy on top. Gary Preisser: And that's the fun stuff. It's amazing to me. We've had really good success in the market this year, especially with our models. Fantastic. But what I get excited about is to say I had a conversation with a client a couple of weeks ago. Do you realize that you're up $3 million in your account this year to date? And her face was like, she had no idea. She turned to her husband, did you know about this? And it's not that we did great with their investments. We're glad that we did that, absolutely. But the next part of the conversation was the fun part. Because now I said, what would you like to do with it? Now you are empowered to do more than you thought you could. How do we want to take advantage of this opportunity and make a bigger difference, add more value to your lives and to the lives of those around you? That's the fun part. Loren Wernette: And I love that you use the word opportunity because money isn't about just compiling cash. Money is a tool for opportunity, right? The more money you have, the more opportunities you have, and the more opportunities you have, the better you can design your life. Gary Preisser: Absolutely, could not say it better myself. Loren Wernette: Awesome. Gary, so we're getting close to wrapping up here. Is there anything that we didn't cover that you think the audience just desperately needs to know or that you would like to kind of leave us with? Gary Preisser: I think we covered a lot, so I appreciate your questions and love the conversation. But I think the biggest thing that I need to clarify is or make clear is, if we want better outcomes, we have to start with better questions. As I said, our industry starts with what instead of asking why. And I owe a huge debt to Simon Sinek, start with why. It really drives a lot of this. I think it applies in all aspects of our lives. And I think it's a shame that it hasn't applied to our finances, to our wealth in the same way. But if we start with why and then we, the why will help us understand the when, then things become easier. I'm not saying it's easy. not saying it's always going to be successful, but it becomes so much clearer as far as what your decisions are, the decisions that you're making. the trade-offs that we have in every investment, they may be great for somebody in one situation, they may be terrible for somebody else in a different situation. If you don't understand your situation first, then it's impossible for you to be able to choose the investment that has the best likelihood of fulfilling your purpose for you and your family. So please start with the right questions, why and when, and I think that will make everything else so much smoother. Loren Wernette: Well said. If anybody wants to reach out to you, Gary, how can they get a hold of you? Gary Preisser: You can find me on LinkedIn. My last name is pronounced Pricer, but it doesn't look like that. It's Gary and then P-R-E-I-S-S-E-R. Happy to connect on LinkedIn. My website is stonebriarwa.com, for stonebriarwealthadvisors.com. We've got a couple of e-books there that you can talk about some of these concepts that we discussed today. Those are free of charge. Our goal is to really... help people understand their wealth a little bit better, a little bit differently, so they can add value to their lives. So please reach out. Loren Wernette: Awesome, and I will make sure all those links are in the show notes, so anybody that wants to reach out to you can do that. Gary, it's been a true pleasure. I've really enjoyed our conversation. I learned a lot. I hope the audience gets a lot out of this. So, I appreciate your time today, and to everybody listening, I appreciate your time listening to Brick by Brick. If you got any value out of this, please make sure to share it with a friend or tell somebody about it, because we grow by having you recommend us. to people that are like-minded and want to build their wealth brick by brick. Until next time, it's Lauren Renau.