Posted at February 9, 2023 Posted In Blog, Financial Freedom, Passive Income

Let’s do a little thought experiment. If you had a choice of receiving:

A. $10 at a guaranteed 50% annual return for 30 years -OR-

B. $100,000 at a guaranteed 7% annual return for 30 years

Which would you choose?

At first glance, most people would immediately take $100,000 at a 7% annual return. They would have been rewarded with a lucrative total return of $761,225.50. Not a bad little chunk of change.

But the few who chose $10 at a 50% annual return would have a total of $1,917,510.59. All from a $10 starting point. (Feel free to check the math)

As busy professionals, we consistently fail to recognize the potential of compounding, especially when the time horizon is extended. So, most of the time value component of compounding has been lost to those of us who believe we can “catch up” in later life for retirement. Rarely do we get another chance. Without using the benefit of compounding, we also lost efficiency, which extended our time frame, lowered our returns, and diminished profits with high taxes. Many of us typically do not consider financial efficiency and what our returns would look like after we pay taxes or the nominal returns after adjusting for inflation. What is left over is your real return or your Individual Rate of Return (IRR). With a tax plan in place, returns on an investment may be more than double, while the same investment’s returns can be halved with the absence of a tax strategy.

Many will justifiably contend that the 50% return in the example above is exceptionally high and unlikely in today’s market environment. While that may be true, that number was simply used to illustrate a point.

But what if we told you that there are ways to achieve 10-15%, 20-30%, and even 30-40% returns on investments? – If you acquire the right investment for YOU. We all have different jobs, goals, incomes, tax brackets, lifestyles, and financial problems to solve. But society has placed us in a “one size fits all” financial model that is extremely financially inefficient for YOU as an individual.

Let’s look at this another way. What if each of us went to our doctor with the complaint of generalized leg pain? The doctor didn’t ask how or when the pain started, they didn’t take a single x-ray, or even look at our leg. Then, the doctor gave all of us the same treatment plan – place a cast on it. That would seem like very odd behavior because leg pain can be caused by a multitude of issues. Now some patients would still benefit because statistically a few people might have actually had a broken leg. But everyone else who had some other ailment would have been far less likely to benefit from the treatment protocol, making that approach extremely ineffective and therefore inefficient.

What typically happens at the doctor’s office is they do a physical exam and figure out a differential diagnosis for each individual in order to establish a personalized treatment plan. We have come to expect this type of “health efficiency” and therefore demand such treatment from our providers. However, we don’t demand the same individualized treatment and efficiency from our financial adviser or brokerage firms.

But we should.

At RAIT we often discuss “Wealth Efficiency”. It is exactly as it sounds – instead of battling the inefficient headwinds of “one size fits all” financial advice, we consider individual tax situations, personal goals, market volatility, and business cycles. When we look at investment opportunities, we ask “What problem does it solve?”, “Is now the right time?” and “Who needs this solution in our group of investors?”. We personally speak with each investor in order to understand their specific needs and make an effort to identify the most efficient ways to help them reach their goals.

How many of you chose the $10 investment above? There was no wrong answer, but there was a more efficient answer. That is exactly why you should schedule a call with us today so we can help get you on the path toward “Wealth Efficiency” and your financial freedom.

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