The market dive of 2008, ongoing recession and upcoming tax increases have made many high income individuals feel like endangered species. In his book, Investing Strategies for the High Net Worth Investor (McGraw-Hill), St. Louis researcher and portfolio manager Niall Gannon explores how to preserve wealth, generate income, deal with taxes and protect a financial legacy. Recently named Portfolio Manager of the Year by the Portfolio Management Institute and one of the top financial advisers in the U.S. by Barron’s, Gannon is director of wealth management at The Gannon Group at Morgan Stanley Smith Barney in St. Louis.
Q: What inspired you to write the book?
A: Investors have been demanding this type of research for the two decades I’ve been a portfolio manager, but the need is greater now than ever before. Investors in the top tax brackets lose more than 50 percent of investment earnings to fees and taxes. Wall Street tends to ignore this—most of the advice to wealthy families had been a rehashing of the advice given to pensions and endowments. But families don’t get the same returns as pensions and endowments.
Q: What did your research show?
A: We studied the after-tax return of stocks in the S&P 500 since its inception in 1957 and found that return to be 6.24 percent, close to the return earned by investors in tax-free municipal bonds. In fact, over periods of 10 to 20 years, bonds outperform stocks 17 percent of the time. Basically, during the last dip, wealthy investors would have had a much smoother ride, free of extreme volatility, if they’d known how to properly value stocks versus bonds.
Q: What does this mean for the high net worth investor?
A: The funny thing is, the most frugal South Side grandmother has probably done better on her investments over the past 30 to 40 years than the wealthy have, because she’s made better, more sensible investment decisions. Too many people were seduced by the siren song of unrealistically high returns. We’ve now endured a decade that saw two 50 percent market corrections, which may have caused us to lose an entire generation of equity investors. They’ll probably put what’s left of their portfolios into CDs and other conservative investments—understandably so.
Q: How will upcoming tax increases complicate matters?
A: They should cast a bright light on the reality of fees and taxes. The pending increases create a high barrier to a risk-adjusted return in three asset classes: hedge funds, high-turnover equity strategies and taxable bonds. Investors need to focus on an actively managed, diversified, low-turnover global equity strategy balanced with high-quality municipal bonds.
Q: What advice are you offering shell-shocked investors?
A: View your portfolio as if you were a business owner, not a gambler. Read the annual report. Do the math. Count the widgets. Understand the concept of earnings and value: Your experience as an investor over the long run will be your share of the business’ cumulative profits. Ignore the short-term noise of the stock market. Don’t get carried away by fads and returns that sound too good to be true. You’ll lose your wealth if you lose the ability to supervise your adviser.