Do you know how the tax system really works? They say that the way to beat a system is to understand it from the inside out. With that in mind, here’s a quick primer on how your taxes are calculated. Read more

Many people have the dream of becoming wealthy but have no idea how to get started or who to turn to for help. It’s no wonder when there is so much conflicting information out there. On this episode of New to the Street, host Jane King and Financial Gravity CEO, John Pollock, discuss how Financial Gravity is helping small business owners grow their wealth with the help of the tax code and strategic tax planning.

 

Unless you’ve won the lottery, balancing what you earn vs. what you spend can be a daunting task. But just because something is daunting doesn’t mean it’s impossible. Instead of being paralyzed by phrases like wealth management or tax preparation, we want to give small business owners more time to devote to their craft and themselves. Simply put, Financial Gravity exists so that small business owners can be better versions of themselves. By implementing tools like our Tax Blueprint®, a wealth management plan designed entirely around the tax code, we save small business owners, on average, $20,000 per year on their taxes.

Paying less tax will not increase your chance of being audited. Sure, tax evasion is illegal but tax avoidance is absolutely not. All of the 130+ tax saving strategies we implement are actual laws written into the tax code, which means using them does not increase your risk of being audited. In fact, it decreases the chance. Just like stopping at a red light won’t increase your chances of getting a ticket, lowering your tax liability won’t increase your chances of being audited.

Lower Your Taxes, Grow Your Wealth.

Financial Gravity wants everyone to benefit from integrated financial advice, something that is currently only accessible to the uber-wealthy. We are currently working on digitizing the tax code in order to combine the best of both professions; an accountant (who loves to put numbers into boxes) and a financial services person (who is mostly product focused.) Aside from Financial Gravity, there is no one-stop-shop for all your financial matters. Hence why your head feels like it’s exploding when tax season looms or you have to make a big purchase for the company. Financial Gravity is disrupting the financial services industry as you know it by letting the tax code determine your wealth plan. The result? Legal, moral, and ethical results (and less tax, of course.)

Don’t want to read all 70,000 pages of the tax code to reduce your tax liability? Download this free eBook: http://www.johnpollockinc.com/taxbook

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The 10th and final rule of Factor Based Investing® is that discipline beats greed. Let me tell you a story to explain.

A couple years back, the S&P 500 was the No. 1 performing asset class. I had a client with more than $1 million with us, but he had a 401(k) through his job in an S&P 500 fund that had about $10,000. He was comparing the $1 million—which was designed for his entire portfolio—to the $10,000, since it was in the No. 1 performing asset class.

The problem was that we set up the entire portfolio based on his wishes and desires. A third of the money was in cash because he wanted to buy a new house, and yet he was comparing a third of the money that was in cash. When looking at the entire portfolio, more than half was actually in cash or bonds, and he was comparing it to an S&P 500 fund.

 

Stay disciplined, stay the course, design the portfolios using the rules of factor-based investing, and you’ll be fine.

 

Obviously, he was getting greedy and not being disciplined.

Secondly, he wanted to have this one asset class, so I asked him if he realized that over the last 25 years, the S&P 500 had only been the top-performing asset twice before. Would you want me to put your entire portfolio in an asset class that has just a 10% chance of being the winner any given year? The answer is, of course, no, but retroactively, that’s what you think I should have done. This is just ridiculous.

When you see an asset class or stock that over-performs, stay disciplined and don’t get greedy. What has already happened already happened—you can’t capture last year’s returns! Don’t start chasing returns because if you’re chasing returns, you’re always behind. Stay disciplined, stay the course, design the portfolios using the rules of Factor Based Investing®, and you’ll be fine.

If you have any questions about the rules of factor-based investing, give me a call or send me an email. I’d love to speak with you!

Rule No. 9 of Factor Based Investing® is patience beats fear. Allow me to explain.

Whenever the market crashes (and it will crash again), people tend to get fearful and make terrible decisions. Those same people usually decide to get out of the market and wait for it to recover.

I read a report recently that said because the Dow, Nasdaq, and S&P 500 were showing record numbers, many people are just now getting back into the market. At this point, that’s seven, eight, nine years after the crash and the market is now fully recovered and even gone way up. That’s not a good time to enter the market, but that’s a subject for another day.

As an example of this kind of behavior, we had a woman call us in September 2008 wanting to sell everything because the market was going to zero. I told her the market was unlikely to go to zero and then asked where she would put the money she got from her sale. She told me the bank, to which I replied if the market was going to zero, that means the banks will be gone too. I explained to her that based on her irrational, fearful thinking, major companies like Walmart and Coca Cola would also disappear.

 

Be patient during these tumultuous times.

 

One of the things we teach our clients is to be patient during these tumultuous times. There will be another market crash, so you have to be mentally prepared for those kinds of things so you can hold the line, stay the course, and let the market recover. Barring a thermonuclear war, markets always recover, and if a thermonuclear war does happen, odds are your portfolio will be the last thing on your mind.

In times of fear, we tend to think irrationally, so remember to always think rationally. Patience beats fear, and during market downturns the best solution is to be patient.

As always, please don’t hesitate to reach out to me with any additional questions that you may have. I look forward to hearing from you!

Math and time beat feelings and hope, which is Factor Based Investing® rule No. 8. Have you heard someone at a casino say “I’m feeling lucky?”

Hoping that a strategy works or hoping that someone somewhere with some algorithm will get you a better return is not a good way to build a portfolio. One of the things we talk about when addressing this topic is a casino. The reason the house always wins is because they have time and statistics on their side. All they have to do is wait. They may lose $1 million on someone that got really lucky, but over time, the house always wins.

 

Be the house, not the gambler.

 

The same goes for portfolios. If you build on the first seven principles that we have already covered which you can see by clicking here, you’ve got math and time on your side. That makes you the house instead of the gambler.

If you have any questions about Factor Based Investing®, don’t hesitate to give me a call or send me an email. I’m happy to help.

A little background first—there was a great debate about this in 1995 at a Schwab Institutional Conference between Rex Sinquefield and Donald Yacktman that you can read or listen to by clicking here. I recommend it if you can spare an hour; it’s very interesting and should change your perspective on active versus passive.

The bottom line is that active management success can’t be bottled. In other words, if I’m successful in picking the right stocks at the right time, can I duplicate that over and over again? There is some belief that the best mutual fund of last year will become the best mutual fund of next year despite the fact virtually every fund says that past performance is no indication of future results.

The purpose of Factor Based Investing® is to create a series of disciplines that will give you a better likelihood of a better outcome using science and math. Science and math will give us a better return over a longer time if we stay disciplined.

 

Modern portfolio theory states you can get a higher return with lower risk by mixing asset classes.

 

Modern Portfolio Theory (MPT) won a Nobel Prize and basically posits that you can get a higher return with lower risk by mixing asset classes. I’ve joked before that it’s based on an ancient portfolio theory from Proverbs, which basically just says to diversify, although, in Proverbs, they were diversifying among sheep and olives!

MPT is basically a mathematical formula that allows us to say whether adding another asset class will increase returns and lower risk or increase risk and lower returns. Based on the past, it allows us to have a better idea of the possibilities of the future. When you buy an asset class, you’re buying potentially thousands of stocks.

You can read all about modern portfolio theory, but remember that most of the bad press is from active portfolio managers. We believe that modern portfolio theory (math, science, and history) beats somebody picking the right thing at the right time or being a genius for a small period of time.

Stay tuned for rule No. 8 when we’ll talk about staying disciplined. In the meantime, give me a call or send me an email with any questions you have. I’m always happy to hear from you.

Disclaimer: Past performance is no indication of future results.

Today we’re talking about rule number six of Factor Based Investing®. Similar to rule number five (Value Beats Growth), rule number six is small beats large.

This rule is a little easier to follow because there is a lot of sophisticated math involved in determining value. Small is a little bit easier to identify, but it can actually be a big problem within people’s portfolios. A lot of the portfolios we see with a suite of stocks tend to feature large cap, growth stocks such as Walmart or Home Depot.

The problem with investing in large companies like Walmart is that they cannot double in size this year; they are just too big already. A company like Financial Gravity actually has a chance to grow. It’s not because one company is better or because we run things differently; it’s because we’re a smaller company.

Doubling a $10 million company is much easier than doubling a $10 billion company. Even if I was a $10 billion company, I would have to buy $10 billion worth of other companies in order to double my success. It is easier for $10 million companies to buy other $10 million companies, so small companies tend to be better investments in the long run.

 

Smaller companies are more likely to grow.

 

The challenge with small companies is that it is more likely for them to go out of business. While it’s not likely that Walmart will double this year, it’s also not likely that they will go out of business either. A company like ours can easily double but there is the potential to go out of business. Of course, it’s more likely that we will double, but there is a risk there that is not present with larger companies.

When the market last crashed, people came up to me saying, “We need to get out of the market! It’s going to go to zero!” The market cannot go to zero because there are large companies out there that will be safe. Still, if you want long-term growth, investing in small companies is the way to go.

After all, large companies came from somewhere. Someone created and innovated to make their small company grow. It is important for you to build a highly diversified portfolio, so you need to include small companies.

If you have any other questions about investing in small companies or Factor Based Investing® in general, just give me a call or send me an email. I would be happy to help you!

The fifth rule of Factor Based Investing® is that value beats growth.

You’ve probably heard of value-based investing from Warren Buffett because that’s what he does, but unfortunately, most of us can’t do what he does. Buffett bought Duracell at a deep discount because he owned shares in the parent company—we can’t do that. He did the same when he saw value in the See’s Candy brand, taking it nationwide and growing it.

You can’t just go out and buy a See’s Candy or a Duracell, but you can look at book-to-market value. In fact, there are companies that will do that for you. A Nobel Prize was even won on this. One of the three factors of Eugene Fama’s model that won a Nobel Prize is that value beats growth.

 

One of the three factors of Eugene Fama’s Nobel Prize-winning model is that value beats growth.

 

If you take a broad swath of growth stocks and find the ones that happen to have a higher book-to-value than the average, it becomes a value. It’s very scientific in its methodology and has a higher risk, but it also has a much better risk-adjusted return than buying just growth.

We try to build this into all of our portfolios as a tilt toward value. If you have any other questions about this or any other aspects of factor-based investing, give me a call or send me an email. I’d be happy to help!

Today we’re discussing rule No. 4 of the 10 rules of Factor Based Investing®: equities beat fixed income.

Like all the rules of factor Based Investing®, following this one means your likelihood of success will go way up. Past performance isn’t an indication of future results, but it’s a pretty good barometer. That being said, we can only deduce trends from past performance—not science. Factor Based Investing® is all about science.

Build a portfolio based on owning instead of loaning.

 

When I say equities beat fixed income, I mean owning something typically beats loaning in the long run. If I loan you $10,000 and you pay me back 6%, I should have a worse return than if I gave you $10,000 and owned equity in your company that could potentially grow to the point where I could sell that $10,000 equity for $20,000.

In the long run, if you buy equities you’ll beat stuff like fixed annuities, credit default swaps, and bonds. This is a general rule that works over time, but it’s also one of the riskier strategies.

If you have any questions about this rule or any of our other investing strategies, please feel free to give us a call or send us an email. We’d be glad to help!

Today we are moving on to part two of our series on Factor Based Investing®. We’ll continue with the second law, which is that institutional beats retail.

When you buy retail, there are a lot of different layers. Let’s take the example of a candy bar. If you want to buy one, first, the company has to make the candy bar, then send it to a wholesaler, who then sends it to a retailer, who sells it to you. There are layers of complexity and costs for your candy bar.

The mutual fund industry is no different; here is a building analogy to explain. You can get everything you need to build a home at Home Depot (a retail mutual fund), and you’ll get a better deal than you will at a local hardware store (like buying all 500 of the S&P 500 on your own). However, a contractor can build 10 houses, add their fee on top of that, and still build a cheaper house than you can on your own or through a discount retailer. Do you understand the fidelity of this idea? You realize this is not a vanguard idea?

 

Retail is the chip, institutional is the corn itself.

 

For some reason, people tend to think financial services are different and they can go directly to a retail store (mutual fund) and get a really good price. However, when you go to a large “mutual fund store,” you will have a hard time determining price because they bury fees within their prices. Some mutual funds have as much as 5% in internal and hidden costs. Products that are meant to be sold are not always the best products for you.

For example, corn is a vegetable that is widely outsold as a byproduct of itself, tortilla chips. Less people eat actual corn than eat corn that has been pressed and fried, and pay more for it. Retail is like the chip, while the institutional form is the corn itself.

Keep this in mind, and we’ll be back next time to talk about why institutional gives you access to things you will never get in retail. If you have any questions in the meantime, give us a call or send us an email. I look forward to hearing from you soon.