Anyone who knows me, knows I love to tell stories from which we can learn real life lessons. Some stories might be pretty lame, but I don’t think this is one of those.
I have two clients who both died last year. We’ll call them Barry and Alvin. I had worked with both of them for more than a decade before I learned that they actually knew each other from college 60 years before and 2000 miles away. They were born in the same year, graduated college in the same year, married in the same year, and died in the same year. They even both retired in 1994 and lived off their nearly identical $3.5mil nest eggs during 23 years of retirement. As profound as their similarities were, their investing styles were polar opposites, as were their results.
Barry was fidgety and insecure, and Alvin was patient and optimistic. Barry would watch his money online every day and squeal with each nasty market drop, wondering each time if the sky was falling. Alvin barely noticed, and if he did, he was scanning his cash to buy more stocks at each drop.
As time went on Alvin’s dividend earnings (yield) began to escalate as his value increased and company stock dividends increased and increased again. Conversely, Barry’s income was derived mostly from interest, since bonds fit better with his low tolerance for market swings. Not only did this limit Barry’s income potential, it caused greater taxes than Alvin paid on higher dividend income because interest is often taxable as ordinary income. Accordingly, Barry’s portfolio was relegated to never gaining value because bonds mature in the future at their value today, and Barry would hold a stock at a profit and sell it whenever his whims said it turned negative. You can see how Barry ended up in the certainty of bonds. In contrast, Alvin also once told me that “certainty is over-rated”. Indeed.
I often talked to Alvin about certainty, risks, stocks, bonds, and stability, because I loved the way he thought. He always replied, “Why would I ever own bonds? Stocks always bounce back. As long as my dividends get paid, what does the current share price mean to me?” That’s Warren Buffett language. Preach it Alvin!
Barry on the other hand, always thought that a bird in the hand was worth two in the bush. Each decline came with talking heads on TV prompting emotional responses, and Barry was always quick to run for cover, despite my admonishment. Worse, he did his greatest damage in ways I could not see, having a side trading account. When Barry died, his CPA surprised me with news that Barry had racked up $400,000 in tax loss carry forward from trades elsewhere that I never saw. Barry left his widow the same $3.5mil he had 23 years earlier at retirement…sort of. Inflation has actually cut the value in half over those years, and unfortunately, he also left his kids a $1 million tax liability because he owned an annuity in his pension and a big IRA that his wife will only have to pay part of the income taxes on, but the kids will get hit later.
Alvin was another case altogether. In his last year, his dividend income was four times what Barry’s interest earnings were. You see, last year Alvin’s original $3.5 mil in stocks were then worth $19 million and he never reinvested any dividends. Alvin’s widow also received all of the combined assets having been cleared of any capital gains tax. Alvin had a $7.5 million untaxed gain at his death since he carried many stocks on his books for over 30 years without any sales and capital gains taxes are forgiven at the death of either spouse. The kids will also receive another cleansing of capital gains taxes at their mother’s death in the future. The kids will likely owe zero taxes despite inheriting six times as much value.
Barry and Alvin both had fantastic personal attributes. They simply had different perspectives on the future, likely emanating from how they were raised and the risks and opportunities that were burned into their psyches. I would bet a small fortune that Barry had experienced some financial trauma early in life that he vowed never to repeat. On the other hand, Alvin was an eternal optimist and his actions reinforced his faith in the future. If we learn anything from this, let’s all be Alvin.
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