Using Gamma in Your Portfolio and Financial Plan

By Jason Eagle   |   September 17, 2018

A gamma ray burst turned Bruce Banner into the Hulk and transformed a group of astronauts on an expedition into the Fantastic Four. And though we aren’t talking about gamma rays, we believe a different type of gamma can be harnessed in your portfolio and your financial plan.

With respect to portfolio performance, we talk about: alpha (α), a measurement of excess return; beta (β), a measurement of relative risk; and delta (∆), a measurement of change.  But there is little talk of gamma (γ), a measurement of the added value of making decisions based on logic rather than emotions.

THE ELEPHANT IN THE ROOM

So, why isn’t gamma widely discussed by most wealth managers or financial advisors?

Gamma is a difficult, complex, and time consuming financial measurement to articulate. Yet, the financial choices that you make could add as much as 38% to your net income during retirement, according to The American College of Financial Services.(1) That’s equivalent to portfolio alpha of approximately 1.82 percent, plus the increased income from Social Security-claiming strategies.

The value of gamma is typically broken down into the following six dimensions:

https://www.financialplanning.org.uk/sites/financialplanning.org.uk/files/user/morningstar_gamma.pdf.
https://corporate1.morningstar.com/uploadedFiles/US/AlphaBetaandNowGamma.pdf

However, we can bundle these six categories into three sets of decisions: overcoming behavioral pitfalls, integrative tax planning, and aligning your total wealth with your goals.

Specifically, valuing gamma requires a discussion about where you are and where you want to go. You must discuss your fears, hopes, and dreams. Furthermore, you also must have the technical expertise to utilize effective tax strategies and smart investment management principles to best achieve those goals.

Maximizing gamma is about minimizing the impact of taxes and aligning the rest of your financial plan in a way that prioritizes your needs, goals, and wishes.

AVOID BEHAVIORAL PITFALLS: PRECONCEPTIONS ARE NOT THE SAME AS FACTS

The biggest dose of gamma that your advisor can offer to you is helping you overcome your preconceived biases that may not have factual support.

Behavioral or cognitive biases live in what we tell ourselves, such as: “­I’ll never see a dime of Social Security” or “I never want to include the value of my home in my financial plan” or “I just feel good holding a lot of excess cash.”

The truth is that these circumstances are rooted in something truly deeper than just dollars and cents. It is true that Social Security has plenty of money to pay benefits for years to come, that you can create a more efficient plan by utilizing your home equity, and that cash is constantly beaten down by its arch-nemesis, inflation.

So why not take these factors into consideration for planning purposes? For example, Social Security-claiming strategies can add up to 9% of income in retirement. Additionally, if you consider all your assets for planning purposes, you can add up to an additional 6.1% to your income in retirement.

It takes courage for advisors to challenge their clients’ beliefs, but most financial firms do not have the frameworks or training to deal with these behavioral biases.  Even those that are speaking of bias do so solely within the investment space.  The power of gamma here applied to your biases and beliefs could lead to ~15% more income in retirement.

Is it worth exploring?

STOP MISSING THE MARK ON PLANNING

Tax planning involves much more than itemizing deductions, giving to charity, harvesting losses, and deferring as much tax as possible into the future. It goes well beyond paying the least amount of tax possible in the current tax year – though that may be the advice most people get from financial professionals.

Why?

Taxes are complicated and constantly changing. Furthermore, the industry does not reward proactive solutions to clients’ problems. Remember, your CPA’s job is not to necessarily help you minimize your tax bill, but to make sure you are not breaking the law.  Your other advisors may suggest general tax strategies, but most are not able to offer a true integrated tax planning solution.

True tax minimization is creating a tax plan that seeks to minimize tax over one’s lifetime. That may or may not mean minimizing tax to the greatest extent each tax year.  A client once brought me a tax return that showed $0 of income tax liability.  That sounds great, until you realize that they missed an opportunity to convert $50,000 into a Roth IRA to free those funds (and the compounding growth) from the shackles of taxes.

And the total cost for them to do this would have been, you guessed it, also $0.   

ENSURE ALL THE PIECES ARE MOVING TOGETHER

For many, advice comes from a rolodex of financial professionals with assorted specialties.

Your broker handles investments. Your agent handles your insurance.  Your CPA handles your taxes. Your TPA handles your retirement plan.  Your attorney handles your legal affairs and estate planning documents.

Yet, someone needs to help you bring it all together. If not, then different parts of your financial plan may be pushing in different directions.

Investment allocations need to align with your assets and resources. An effective way to analysis investment allocations is by proportionally defining them in three tax buckets of your financial plan.  Asset allocation – the practice of placing different classes of investments in certain tax buckets to realize the greatest tax advantage – can be immensely helpful to maximize your investment returns net of taxes.

You also want to make sure that your financial plan is forward-looking, nimble, and flexible to changes in the law.  Certain decisions can have long-term ramifications.  Making decisions about Roth IRA conversions far in advance of age 70 ½ could help to curtail the amount of mandatory income, which can in turn create greater tax flexibility every single tax year in retirement.

EAT DIFFICULT FOR BREAKFAST

There is an art and a science to Behavioral Wealth Management.  It takes effort by both the client and the advisor, but the results can make an astounding impact on you and your family’s future.

We believe the financial industry is broken because traditional wealth management has focused solely on numbers and ignores what we call, “the passion for the human factor.” Leveraging Behavioral Wealth Management, we believe there are boundless opportunities right in front of us, but it takes effort, patience, and the courage to look within yourself.

It is a complex challenge to weave an integrated plan that takes limited resources, properly diversifies risk, utilizes cutting-edge financial planning tactics, and address behavioral pitfalls along the path.

JOYN wants to help you meet this challenge.

(1) Retirement Income Certified Professional Coursework: HS 353 Retirement Income Process, Strategies and Solutions. Section 1. Page. 1.5

Investment Advisory Services offered through JOYN Advisors, Inc. Registered Investment Advisors. Insurance offered through JOYN Atlanta, Inc. Securities offered through Securian Financial Services, Inc. Member FINRA/SIPC. JOYN Advisors, Inc. and its affiliates are not affiliated with Securian Financial Services, Inc. 
Jason Eagle

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