(Dinar Recaps Note: This post is for informational purposes only. It is not legal, tax or investment advice. Dinar Recaps advises that everyone should do their own due diligence and seek local Professional tax, legal and/or investment advisers.)
LESSON 7: WEALTH MANAGEMENT
CAVEAT: THe information is my own personal opinion. I am not a professional in this area, so please hire one to suit your needs.
While I appreciate that you need to hire somebody, you bear responsibility to be an educated person to converse intelligently with your new professional. It is only the fool who would hand all their assets off to a wealth manager without understanding what he is or is not doing for you. And this fool deserves to lose all their money in two years.
This is a huge area that is not easy to simplify or boil down. There are thousands of books out there. This is a synthesis of much studying, experience, and school of hard knocks, so it is not footnoted.
BASIC TERMINOLOGY FOR THE NEWLY INITIATED (there are many more nuances, but let's stick to basics):
Instrument: any investment that is legal & is normally essentially a legal document and contract. An instrument can be a stock, bond, annuity, mutual fund, and others. A promissory note is an instrument that is merely a contract but it is usually secured (i.e., rests on some tangible asset like a car, a house, real estate, etc.), but not always!
(a loan to a family member may be a promissory note, but it is all hope and good will. And BTW, ANY such loan should be a simple promissory note that gets notarized and signed by the parties. This is business and you must do it legally and properly, not just open your wallet and drop $1000 into a cousin's hands. Learn to be a business person).
Security: An instrument that has SEC approval (see next). This gets us into regulation law and securities law both for the USA and each state, so it is a huge area!
SEC (Securities & Exchange COmmission): a USA governmental agency intended to license and regulate the industry against fraud, etc. From its website: Our mission "is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation." Remember Bernie Madoff? Well it was the SEC who brought him down.
Bernie's investors had a legal instrument that was indeed registered with the SEC as I recall it, but he did not comply with SEC regulations. That's what got him in trouble.Paper assets: Those which are effectively a contract or agreement and you cannot touch the asset.
There are two large categories of paper assets: Secured and unsecured. Unsecured are things like a stock, a bond, a Mutual Fund, and ETD, etc.
A secured asset is one that has some tangible value behind it. A promissory note against real estate is an example. Normally secured assets have priority over unsecured assets in a liquidation situation (when a company goes bankrupt.) TO clarify the concept think of fiat currency and asset-backed currency.Stock: a small share of a company's equity, i.e. its calculated value, or worth or assetsBasis: what you paid for something, less costs to do so (such as transaction fees)Mutual Funds: a group of stocks put together (legally) and managed by Wall Street typically that allow you to spread your investment over many companies instead of exposure to only one.
The cost of a MF is most often determined nightly by calculating its Net Asset Value (NAV) and that will be the price tomorrow on the market. Many companies in a MF pay dividends. These are normally reinvested, which adds to your basis. Something most people miss is that you must keep records of this or when you sell you only get your original basis and not all the dividend add-ons.
This is a more advanced topic, but it is important enough for this audience to realize and be prepared to ask questions about this point. It could be HUGE for us in coming years. Who wants to pay tax twice because these dividends are taxed in the year you earn them via a 1099-B issued to you annually by the MF company (that is Mutual Fund!) and again when you sell if you don't keep good records.ETF: Exchange Traded Funds.
THese are also offered by many brokerage companies or by the trading exchangesBonds: a small share of a corporation or government's debt. The corp/gov sells you a bond so that entity can get some money to do projects it wants. You are acting like a bank lending agency but in very small amounts. Annuities: an insurance product sold by insurance companies. There is often a life insurance component but it may be quite small.
The money invested grows tax free (like an IRA) which is a HUGE benefit. There are stiff penalties for removing the assets early (say 10-15 yrs). There are typically growth phases where you can be more aggressive to grow the pot, then move to the distribution phase where you start receiving a fixed income annually and the growth equations change.
The growth phase can be variable (dangerous in down markets!), can be protected to a loss line, can be small to compensate for the down years, etc. The good part here is that you are guaranteed an income later in exchange for taking a more limited growth that is/may be guaranteed over the years. Many have a component where you can leave as inheritance the part you don't use in later life. One could write a whole book on annuities! But this is it in a nutshell. HIre a professional!
Real Estate: Property, Plots of land, Buildings, developments, farms, etc. Mother earth. There are also RE Investment Trusts (REITs) where RE has been monetized (they sell shares) and you can participate in much larger entities.Hard Assets: These are things that are tangible. You can touch and hold them. Examples are real estate, gold, silver, art work, jewelry.
Not all of these (antiques, art, etc) necessarily make good investments, but they may well represent part of your portfolio or family heritage. NOrmally these investments are not regulated by the SEC, which deals in "paper" instruments.Brokerage: a company (or "house") licensed by the SEC (Securities Exchange COmmission) in a country selling various usually public instruments that maintains possession of said instruments for you.
Most are now online and provide varying levels of reporting, some quite good. They sell through the major Trading Exchanges normally for one country unless they have "seats" purchased for quite high prices on other exchanges.
Trading Exchanges: New York Stock Exchange, NASDAQ, ISX (Iraqi Stock Exchange), Toronto SE, London Stock Exchange, Hong Kong Stock Exchange, Singapore Stock Exchange, Japan, China, Europe, etc, etc. There are many choices. There are also Bulletin Board (BB) stocks (those that are traded differently & ar normally quite small companies with few assets, and highly risky), Over the Counter OTC SE (SE is a stretch, but it is just a different way and a lower tier of companies, normally startups, that can be bought publicly, and only slightly more valuable than BB), Private offerings (which future currency trades might become), and the list goes on.
The US exchanges are regulated by the SEC.INDEX: Various groups of stocks on exchanges that are meant to reflect the larger movements of the entire exchange. The DOW JOnes averages (remarkably for only about 30 companies) are for the NYSE, NASDAQ for the Nasdaq, S&P500 is a long standing index for a selected 500 companies, Russell 2000 represents a larger composite of 2000 selected companies. Checking an index for an exchange tells you what happened in a nutshell in the market for the day.
Ok, the list can go on and on, but let's get on with it now that we have a common vocabulary.
There are many dimensions to wealth management to consider.
Risk tolerance is the single biggest differentiator when it comes to your portfolio. Some people are risk-averse, some are risk-takers, and some fall everywhere in between. Your exposure to risk necessarily involves your age and earning potential. Those in their twenties have more time to recover from more aggressive risk programs than those in their sixties. Your portfolio will necessarily change its character over the years as your risk aversion changes.
It is also prudent to never invest "all in." Diversify, diversify, diversify. That means assets ought to be allocated:
Conservative: Those assets you really want to protect and not lose should it all go south in a hand basket. This is the money you want to remain available to you in your retirement years reliably and normally represents a baseline standard of living. Opinions vary on where this money ought to reside. Some say annuities, which are in the end paper assets, but are insured and come with guarantees from the insurance industry that is among our oldest establishments in the western world. Annuities are the closest thing IMHO to a sure thing that is available on the market. See BASICS above. Some say real estate, some say gold, etc.
Hard assets: (see above terminology) and I would include secured instruments here.
Paper assets: stocks, bonds, mutual funds, Exchange Traded Funds ETF (my personal favorite unsecured paper asset for many reasons). Mutual Funds normally come with management fees annually whether you make or lose money. The fees are deductible expenses but you need to keep records to get it. Some pay dividends, and you usually reinvest those; that adds to your basis so you need to keep track of this too or you get double taxed when you sell and that can be HUGE over the years.
These can be further divided along a spectrum reflecting your tolerance for risk. There are large cap (very big money), medium cap, small cap (which in my book are still very large companies). There are dividend paying companies, ranging from 1-7% per year payable to you usually quarterly. Some are bell weather companies that have paid dividends for decades, such as Pepsi, Johnson & Johnson, Proctor & Gamble, AT&T, etc. These are also found on the DOW.
Some Nasdaq dividend payers are Microsoft, Intel, Frontier, Qualcomm, and so so many more. The return beats the banks if you can tolerate the volatility of the market and the risk. EVALUATE YOUR RISK AVERSION.
Most of us want to create a family inheritance in perpetuity (forever). Some will want to be more specific about terms. Here are but a few ideas.
Trust funds that may be given to recipients at some age or after having achieved some milestone in life, (marriage, degree, etc.) It is easier to quantify the milestones than how the money will be spent, FYI. A GOOD trust attorney would be required to set this up. Check out internet ads for these guys and decide if they are ambulance chaser types or professional. This is money well spent to get the best as it lives well beyond you.
Specific Use Trusts: Mine will be for education for heirs. Education is the one and only legacy you can give someone that nobody can ever take away by robbery, divorce, or loss. And it becomes theirs to make of it what they can. "It is what it is, but it becomes what you make of it." This is incentive-oriented sort of gift.
You can make applications required. You could specify that the educations supported include degrees in science, math, teaching, finance, etc. and exclude Ancient Greek Cultures, Scientology, etc. Or you could specify objectives where one objective could be degrees where jobs will be plentiful.
PROTECTIONS: Consider conditioning such trust proceeds as having to be the sole and separate property of the blood heir. That way you will protect the unsuspecting starry eyed younger person from gold diggers and early mistakes that dump your whole intended purpose for your heirs. To err is human.
Many of you plan to Pay It Forward. I am delighted! I encourage the others of you that haven't considered this to please plan to give back for this marvelous opportunity and gift. Give both to God for his generosity and trust He has placed in you and back to humanity to better your fellow man.
For your biggest advantage please see the TAXATION Lesson on Donor-Directed giving for the most advantageous way for you to give in perpetuity. Also please read the LESSON ON PROTECTIONS because there truly are people out there who will hunt you.
Some of this money should be used to either fix those human error destructions left in your wake or to improve your lot in life. This includes paying off all those debts, student loans, other loans, mortgages, etc. It might include a nicer house, car, etc. Each one will have to find the level of wealth you wish to portray through your possessions as these become walking advertisements of your advantage in life.
I remember the story of a very famous man whose name you would ALL recognize. He had been married to my best friend. When he became famous and very rich, he showed up one day and handed her keys to a car and walked away saying, "It doesn't make up for how poorly I treated you, but know I still love you." She was stunned. Stun somebody you've hurt!
Please do not consult your kids or your friends, unless they have a proven track record of success in this area. Find a real professional, licensed as a financial advisor or life insurance agent. This is not the time to cut corners or trust the well-intentioned but uninformed. I would not offer advice for this reason. I will beef up this section later.
[This isn't all I had intended to write, but I have to run. I may edit and do more later. sorry.]
Link to Lesson #1 Dinar Rates and Contracts:
Link to Lesson #2 Choosing a Bank and Accounts:
Link to Lesson #3 Your Appointment
Link to Lesson #4 Taxation Consideration