Investment Goals

Everyone has his or her own plans and dreams, so part of Barnett & Company’s initial process in setting up a portfolio is working with our client to articulate and quantify investment goals and objectives.

If the investor has funds in both taxable and tax-deferred accounts, we often recommend that he or she consider putting income-oriented assets into existing IRA and tax-deferred accounts and appreciation-oriented assets into personal accounts.

Theoretically, there is no difference to an investor whether returns generated from a tax-deferred account come from income or from appreciation since, with the exception of Roth IRAs, all returns are taxed as ordinary income when they are distributed. In reality, however, income is generally more predictable than appreciation.

Should appreciation become depreciation, capital loss from a taxable account can be used to offset capital gains elsewhere. No such offset is available to a tax-deferred investor.

Since capital loss in a tax-deferred account cannot be replaced by larger contributions in future periods, any principal lost in a tax-deferred investment represents an immediate loss as well as a loss of the capital’s earning power during future periods.

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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