Building a Family Focused Investment Plan | AWM Insights #125

Where do you start when building an investment plan? What are the first steps and what’s most important? Should we maximize returns and let our investments run our lives or should we let our needs, wants, and wishes drive how we invest? Where do taxes fit in?

You have only one net worth and one effective tax rate. Thinking about your investments separate from taxes is never optimal. You will end up paying higher taxes than is otherwise necessary. When you are wealthy and you ignore the tax implications of investments, you leave money on the table that could have been used for greater impact. It’s that simple and it’s still missed by many in the ultra-high net worth space.

Aligning your financial resources to the things most important to you is vital before even thinking about what type of investments to make. Matching your investments with desired outcomes brings a better and more customized experience to the individual.

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EPISODE HIGHLIGHTS:

(0:57) Where do we start when building an investment plan?(1:17) How to optimize for your one net worth and your one effective tax rate.(1:35) Your financial structure is your net worth but it additionally incorporates the future. Human capital is valuing and accounting for future earnings.(2:30) Your financial asset stack is all your available resources which include cash, publicly traded stocks, public trades bonds, illiquid private investments, human capital, pensions, social security, and homes. (3:15) Aligning your asset stack to what you want to accomplish in life is the key to a successful investing experience.(4:11) Give money a job. Use your assets in the most effective way possible to achieve the priorities you want to accomplish. (4:25) If you want to pay for your newborn daughter’s wedding 30 years out, you don’t need those dollars now. This gives you the opportunity to invest in private equity and capture an illiquidity premium.   (5:30) Having the full picture of your financial stack and matching it to your priorities allows you to be specific and deliberate in how you are invested.(6:46) Time and duration is important in investing but so is tax efficiency. Optimizing where and how you hold assets avoids leaving money on the table.(7:56) We want tax-efficient assets to be in taxable accounts. (8:09) Higher taxable income investments can be put in Roth accounts which takes full advantage of their tax-free qualities.(8:45) Be careful of someone selling you outperformance in the public markets like stock picking or sector rotation. The real value comes from the planning aspect of investments, not from beating the market. (9:18) If you’re in illiquid investments like private equity, venture capital, or real estate you should be getting an illiquid premium. A return above what you could get in the public markets.(9:58) How do we think about the private side?(10:30) Illiquidity planning is not given enough attention and must be planned for. (11:15) Private investment data does support active management and average returns are actually not very good.   (11:32) We love the top-tier managers in venture. Getting access is the critical aspect. It is a relationship-based game.(12:11) You can really get hurt going down the path of venture or private equity.(12:30) If you strike out when selecting investments or managers you can end up way worse off than just investing in a tax efficient low cost way in the public market.(12:58) More access to private investments is getting easier but it is potentially going to hurt people too.(14:00) You should be putting money where you are rewarded for the type of risk. A careful approach and intentional selection can be very rewarding.