We all saw the story the other day of the women from Massachusetts who won over 700 million dollars in the lottery. I have no doubt that the majority of us fantasized about what it would have been like if we were the winner. That being said, there is a lesson to be learned from the lottery that could help you be a better investor.
As most of you know, lottery winners are subject to income tax, both Federal and State of Michigan. In addition, we know that lottery winners who take their money in one lump sum as opposed to spreading it out over 30 years, receive a reduced amount. Therefore, the recent lottery winner will net somewhere in the 300 million dollar range after taxes. I would venture to say that the great majority of us would be focusing on the over 300 million dollars, not the 150 million dollars or so that the tax man gets. After all, what ends up in our pocket truly is the most important number. Unfortunately, all too often, investors don’t focus on that number, but rather what they pay in taxes. As far as I’m concerned, that is a mistake.
I cannot tell you how many times I have met with investors and they tell me one of their main goals is to reduce their taxes. Whenever I hear that, I always use the example of a lottery winner. This same lesson should apply to investors for every investment we make. The main focus should not be on what is paid in taxes, but rather what ends up in our pocket. I always say that people who focus on reducing their taxes don’t want to win a mega lottery because they would have to pay a lot in taxes.
I don’t mean to suggest that taxes aren’t important, because they are. However, as investors, they are not the main focus. I see it all the time. Investors will sit down with a financial sales person and be fooled into getting into an investment because it supposedly lowers their taxes. That makes no sense whatsoever. Why do we want to invest in something that lowers our taxes as opposed to investing in something that will make us more money? The focus should always be on what ends up in our pocket.
If you want to fool an American about an investment, talk taxes. As far as I’m concerned, if you’re meeting with a financial person and the first thing they talk about is taxes, you know their focus is on the wrong area. Taxes are never the issue.
There is no doubt that we all want to win the lottery and we would have no problem paying the 150 million dollars in taxes. We need to follow that same logic when it comes to our investments. Don’t focus on what you are paying in taxes, focus on what ends up in your pocket. If you do that, you will be a much more successful investor.
If you would like Rick to respond to your questions, please email him at Rick@bloomassetmanagement.com.