Contributed by: Walker Capital Management
Wealth is created by taking risk. That truism cannot be legislated away, although government will try to do just that. Wrapped in a blanket of "consumer protections,“ initiatives backed by the Obama administration will restrict investment options in Individual Retirement Accounts (IRAs). On the surface, protecting citizens from "risky investments'' has a ring of common sense, yet safeguards can restrict access to wealth-building opportunities.
We hear campaign stump calls to "rein in Wall Street greed" and further tax everything from corporations, financial transactions, hedge fund managers, and the one percent to pay for everything from infrastructure improvements to free college educations. Those yelling "right on!” should pause to consider where wealth comes from.
Every business, every corporation, at its birth was an idea in the mind of an entrepreneur, inventor, or group of innovators and investors. Whether the idea had roots in the 19th, 20th, or current century, the process was the same. Money, time, labor, reputation, and sometimes, family, was put at risk to build something. A small or closely-held business owner knows that he or she will be called on to sacrifice in the quest to build a sustainable enterprise. You have to give up current income to invest in the future. Personal assets are put at risk to back loans. There always comes a time when people need you, whether clients or customers, employees, or family. You have to sacrifice something-time, money, commitment, sweat equity, putting yourself last. The owner is the last to get paid. So when owners cash out after successfully building a job creator, how much should they pay in taxes? What's fair? One candidate drawing big crowds proposes tax brackets of 70% or more.
What is the difference between "ambition” and "greed"? Wealth accumulation based on nefarious and immoral practices is greed and is wrong. In business, doing what is in the best interest of the client or customer is the bed-rock of success. But when bureaucrats and politicians decide to legislate "best interest," winners and losers are created.
The Wall Street Journal, 1/22/16, ran a story detailing how private equity firms are profiting handsomely from the heavy regulation of banks post the 2007 global meltdown. Traditional big banks are hobbled by regulations like Dodd-Frank, while private equity firms like the Blackstone Group are free to raise money from institutional and individual investors, providing capital to snap up distressed and bargain assets at attractive prices. When you buy a "bargain," there always is a risk that it will become a bigger bargain before it rebounds in price, if it ever does. There is an art to determining whether you have a wounded eagle or a turkey.
Such investment plays often are not liquid for periods of time, may be hard to value, requiring patience and longer time frames. In other words, risk. For that reason, certain investments require higher levels of net worth. For example, an "accredited investor" must have income of $200,000 per year individually or $300,000 jointly with a spouse for each of the last two years and expectation that such levels will continue, or net worth exceeding $1 million excluding residence. Under rules being promulgated by the Obama administration, possibly by 2017 private equity investments and other categories of investments with restricted liquidity no longer will be allowed in Individual Retirement Accounts (IRAs). Is that good or bad? You decide.
When government restricts choice, some may be saved from risky investments that turn out to be sub-optimal, but they also miss a shot at winners. For many, the bulk of what they save for retirement is in retirement vehicles like 401(K) plans, IRAs, etc., and they will have less options.
Risk takers will have to use personal funds outside of retirement funds, understanding that risk and reward go together. Outside of inheritances and the now 1 in 292 million chance of winning the Powerball lottery, real wealth is achieved only by long-term, methodical and disciplined saving along with prudent debt management, and taking a risk periodically, even if only investing in stocks and mutual funds. "No risk" vehicles, such as government guaranteed savings, have substantial "risk" in that future purchasing power may be eroded by inflation and taxes.
Investors sometimes say, "I am waiting for my ship to come in!" The expression originated centuries ago when opportunists would finance a voyage hoping for a gain when the vessel returned to port, knowing that pirates and storms were a substantial risk. Some today think that pirates live on Wall Street. But as the eminent theologian William G. T. Shedd (1820-1894) noted, "A ship is safe in harbor, but that's not what ships are for."
The Investment Coach® 1994, Lewis Walker is President of Walker Capital Management, LLC. Securities and advisory services offered through The Strategic Financial Alliance, Inc. (SFA). Lewis Walker and Mike Hostetler are registered representatives and investment adviser representatives of SFA which is otherwise unaffiliated with Walker Capital Management, LLC.