For these reasons, we recommend
that IRA and tax-deferred accounts be invested
in income-oriented assets, with the level of
income being a function of the individual investor’s
level of risk-tolerance. Clients who are retired
and living off the income from their retirement
accounts may be able to fund their distributions
using cash flow from these investments if the
investments contain sufficient capital.
Barnett & Company looks at taxable accounts
as vehicles primarily for appreciation-oriented
assets if the need for income from the portfolio
is minor, taxes are an issue, and tax-deferred
assets are material. Since current tax law provides
for lower tax rates on assets held for the longer
term, a strategy of ownership for at least twelve
months, if possible, represents a very cost-effective
form of tax shelter. If an investor’s
income needs are covered by cash flow from either
tax-deferred assets or another source, of course,
it becomes easier to be more philosophical about
the inevitable fluctuations of the stock market
in general.
We find this construct to be a useful starting
point in our initial discussions with a new
client, although there would have to be modifications
to the approach if assets are to be more oriented
to either taxable or tax-deferred accounts.
Factors such as risk, time frame, income needs
and tax exposure are all determinants in settling
on the investment objectives that fit an individual
investor’s exact needs.
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