April 2006

How successful chiropractors think

by Bruce Rhymer

Beyond bonds

One popular wealth‑building strategy among chiropractors is investing in tax‑free municipal bonds. Many chiropractors have done very well with this strategy and have amassed a sizeable nest egg over the years. What makes this strategy particular attractive and reliable is that 1) their money grows tax‑free and is 2) safe relative to other investments. A chiropractor who chooses this method of wealth‑building will know with a fair amount of certainty how much money he or she will have in the next 5, 10, 20 years for each dollar invested this way.

Holistic point of view

Chiropractors, like any other person who is conscientiously building wealth, are naturally inquisitive and want to know the most efficient way of reaching their financial objectives. Chiropractors are trained to look at health in a holistic or macro manner and know the whole is greater than the sum of its parts. When they can take this ability to look at an idea from many angles and apply it to viewing financial concepts holistically they can really get ahead of the financial game.

This article is designed to help you look at municipal bonds from a holistic/macro point of view so you know the strengths and weaknesses that they bring to your overall financial picture.

Muni bonds ‑‑ is what you see really what you get?

What you get with municipal bonds seems quite clear‑cut from the moment you invest. You get tax‑exempt growth, a stated yield, a fixed term and relative safety. This appears far more clear‑cut than many other investments where the outcome is merely a speculation. This aspect of municipal bonds makes them quite attractive and rightfully so.

What you rarely hear, however, is about the downside of investing in municipal bonds. Unlike other investments the costs of investing in municipal bonds are more subtle and are rarely discussed. Nevertheless, it pays to look at investments from all points of view if you're going to take a holistic, big‑picture approach to building wealth. Doing so can shave years off of achieving your financial goals.

Muni bonds ‑‑ liquidity and lost opportunity

One downside that few investors take into account is a concept known as lost opportunity cost. While most investors evaluate the best opportunity before they invest their money they often overlook the loss of the opportunity to invest in a more lucrative investment once they have committed their funds elsewhere.

As an example, let's assume you have decided to place your savings in municipal bonds. Six months down the road a golden opportunity to invest in a very attractive piece of real estate arises and you now need to sell bonds prior to maturity to get involved. In doing so, you'll receive the current market price, which may be more or less than your original cost. Suddenly, you've introduced an element of risk ‑‑ the risk you were trying to avoid when you invested in the bonds in the first place! In the end, if you need to sell your bonds for a loss, you may choose not to take advantage of the real estate investment at all. You've now lost that golden opportunity.

Life has its ups and downs, its opportunities and challenges. Investing in municipal bonds is a plodding strategy that doesn't allow you the flexibility (without potential penalty) of quickly moving money to other opportunities. This may seem a small thing at this moment but in a holistic world this cost of lost opportunity must be taken into account.

The real cost of investing in muni bonds

Proponents of investing your money in bonds will tell you it's better to pay the tax today and enjoy tax‑free growth. This flies in the face of what's recommended by those who advocate tax‑deferred investments such as a 401(k)s or SEPs. The bottom line is that both of these strategies have a very high cost. You'll have to pay your taxes either now or later.

So, let's take a look at what it's really costing you to invest in municipal bonds. As an example, let's say you're investing $100,000 annually in municipal bonds. The money invested in the bonds is put away after paying your taxes. How much, then, do you really have to save? In an assumed 30% tax bracket you'd have to generate approximately $142,900 to have $100,000 after tax dollars to invest. This is a cost of $42,900! Imagine if you had that additional $42,900 to invest each year, all things being equal, how much further ahead of the financial game you'd be. With a true macroeconomic approach, assuming a five percent rate of return, you could recover the taxes paid and end up with more than $1,489,000 over a 20 year period. Adding this amount to your investment increases your rate of return from five percent to more than eight percent, tax free.

Muni bonds ‑‑ only part of a holistic plan

A key factor to any wealth building plan is consistency. Whether you're building wealth through municipal bonds or the stock market you must keep taking positive action until you reach your goal. Therefore, from a holistic point of view, you must prepare for contingencies that could derail your plan.

Two such contingencies are disability and death. For instance, continuing with the prior example which has you investing $100,000 annually in municipal bonds, let's assume you're disabled and unable to practice chiropractic for a two year period of time. What happens to 1) your ongoing contribution of $100,000 each year and 2) your nest egg as you have to dip into it to pay your bills? This bump in the road, when extrapolated over your working years, will likely cost you hundreds of thousands ‑‑ if not millions ‑‑ of dollars. In the untimely event of your death (although you have completely eliminated 'your' need for money!) your family may be thrown into financial turmoil.

At this point, your immediate response may be to buy disability and life insurance and you would be absolutely correct in saying that this could reduce or eliminate such worries. However, if you're considering the purchase of such policies as separate from the investing you're doing in the municipal bonds, you're not taking a holistic view. The cost of the disability and life insurance, which will cost tens of thousands over your working lifetime, is directly related to preserving your investment in municipal bonds and therefore must be factored in as a cost of investing.

The bottom line

Whether you're investing in municipal bonds or real estate you have to look beyond return on investment (ROI) and look holistically to know the true effect your investments are going to have on your financial big picture. Municipal bonds do have some very attractive qualities but when you consider their inflexibility, high upfront tax cost and costs of contingency planning, your ROI is much smaller than you think.

A well constructed macro‑economic plan will eliminate most of the inflexibility and cost of following a pure municipal fund investing philosophy. It will also provide your family and you with greater security and the assurance that you will arrive at your chosen objective. The road to prosperity can be full of traps and adversity. Only by advancing your financial intelligence and understanding can you make the journey successful!

(Find out the most efficient way to use your hard‑earned money and request a free Quantum Wealth Analysis by contacting us at 800‑892‑3107 or go directly to www.quantumwealth.org to learn more.)