Background: Clients often hear about a great performance for the current year and wonder why their account isn’t doing as well.
Our Case: Client called concerned about their account not doing as well as the S&P 500 this year. The entire discussion about investment diversification was confusing to the Client who had a farming background, so we decided to explain it using farming terminology.
The Question: Does a farmer plant all of his crops in one type of grain? Does a farmer look at the crop that did best the year before and then plant 100% of his land into this one grain? In reality, farmers have learned over time that following a plan of planting 10% of their acreage in Grain #1, 25% in Grain #2, 40% in Grain #3 and 25% in Grain #4 has the best chances of providing a better-than-average return. At the end of each harvest they can easily say they wished they’d have planted 100% in Grain #3 as it was a great year for production and prices for Grain #3 were the best of the four grains they planted. At the end of the year they can also wish they had planted no Grain #1 as the yield was bad and the price was bad. Grain #2 and Grain #4 were average. So, does the farmer plant 100% in Grain #3 next year and none of Grain #1? It would be highly unlikely, as the farmer has learned over years of experience to diversify. He may never have the best “could have been” but he will also never have the worst “would have been.”
The Results: The Client better understood the investment portfolio that they have and decided that their overall returns have more than met their goals. They appreciated our converting the investment world to the farming world, as they could much better understand what we had done.
Bottom Line: The client remains happy with the “average return” of a diversified “crop management program” and will continue down the path of looking at the overall results instead of one field’s results.
This is a hypothetical example for illustrative purposes only. The experience of this client may not be representative of the experience of all clients and is not indicative of future results. Any tax advice contained herein is of a general nature and is not intended for public dissemination. Further, you should seek specific tax advice from your tax professional before pursuing any idea contemplated herein. This advice is being provided solely as an incidental service to our business as financial planner. Securities offered through ValMark Securities, Inc. Member FINRA, SIPC. Financial Planning and Investment Advisory Services offered through B & E Investment Advisers, Inc., a State Registered Investment Adviser, Business & Estate Advisers, Inc., B &E Investment Advisers, Inc. and B&E Pension Advisers, Inc are separate entities from ValMark Securities.
Tax Efficient Giving
