TIP849: Average Returns Can Still Make You Wealthy w/ David Fagan

26:57But I understand where that's coming from. But I would probably say that you need a certain level of wealth. And you have to triangulate those three factors I mentioned before in terms of how much you save and what kind of return, and then how long you compound for to do that. But I would also be the first to say that some of the happiest people that I know, they by no means are wealthy. But I would also say they are above a certain threshold. I guess that threshold is different for all of us. But whenever you speak with people, they have their own lens of, what do we talk about, for example, if I say wealth accumulation states, and then everyone would have, oh, that's what happens at this age, and then you save so much money.

27:38It's very different from people. And so there's a lot of assumptions that go into this. And so I could assume that most people who listen to this podcast, they are saving up for retirement. and that's whenever they want to spend down their next deck. That's sort of like the way the industrial society has sort of like structured it. So you have stage one where you are depending on others, typically your parents. Then you have stage two where others are dependent on you, typically your kids. And then we accumulate wealth. And then stage three, that's sort of like whenever you're quote unquote free, I don't know if you would call it child free, perhaps that sounds bad to some people, but it's basically like no one's depending on you and you can spend down your savings.

28:19Now, my wife and I chose a slightly different approach. The way we're thinking about this, the first thing is that we always want to work. Some people have this at 67 or whatever the retirement days is in your country, that's whenever I'm going to retire. Of course, no one can predict the future, but I have this thing, I want to work always. And I understand that there's probably at some point in time whenever it won't be possible, my health would deteriorate and so on and so forth. But that is sort of like how I'm thinking about it. And I'm also very much thinking that I need to create an operating income, typically from a business, and then take the profits from that and then invest into a portfolio.

29:00So that is my investment income. And as long as we underspend the operating income, we can't get too much in trouble, even if the investment returns are subpar. And of course, I can give you a song and a dance about why the investment returns would be fantastic. But that's not so much my point, because the investment income can fluctuate quite a bit. Just because the market is up, which typically also means that your portfolio is up, it does not mean that you're necessarily a genius, but it also doesn't mean that you don't know how to invest because the market is down the next year. And so that's why it's so important to underspend your income, whether that's from a job, so underspending your salary or what I would call operating income, so underspending whatever you make in your business.

29:44And one of the things why it's so important that you also build up your portfolio is if something happens with your health, then you can hopefully live up your investment income. And one of the frameworks that you and I, David, have talked about quite a few times is that I have this thousands out of a thousand scenarios. And so I would like to think that my health doesn't deteriorate at all, or at least it doesn't happen before in my 70s, 80s, whatnot. But if I'm thinking realistically, a thousand out of a thousand scenarios, there are some, hopefully not a lot, where something goes wrong and something would happen to my health, even perhaps in my 20s, 30s and whatnot.

30:26And whenever you think about it like that, and perhaps I'm too morbid, but I was thinking about it like that. So I thought I needed to make a lot of money early in my career and then lean into compounding and optimize a lot more for the first dollar than the last dollar. And so I graduated at age 26. And I had then two corporate jobs upon graduation and then started two companies, one of them, TAP, with a podcast that you're now listening to. And I felt like it took me eight years for me to sort of like crack the code to achieve financial independence. And whenever I say financial independence, as you're like, in eight years, that doesn't make any sense.

31:05It wasn't because I had like tens of millions of dollars in my bank account. That was not my point. The way I would define it is it was the tipping point for me where I had double the passive income as our expenses in the household. And I also felt I had the blueprint to accelerate that financial journey. And so it took me eight years to do that. And so whenever I think about it, I think you can reasonably say that my wife and I were financially vulnerable for those eight years. If something had happened to me, I think we would be in a world of trouble. But I would also say that if something would have happened, my wife would probably be okay.

31:41She's for one, a lot smarter than me. But also we would at an age where we could start over if that was needed. And it's sort of like getting back to this point here, you had, David, whenever you were only seven, eight years old, like$40 for the Hot Wheels, it's probably the best purchase you ever made. Because it really sets you up for being smart with money. And of course, I don't want to revel in how you felt as an eight-year-old, losing$40. That's all the money in the world. And it feels like the end of the world. But as you alluded to, it's the right time to get those experiences. Because what really breaks my heart is whenever you speak with someone who is newly retired, and they've learned how to save money, but they haven't learned how to manage the money.

32:28And so all of a sudden, they're standing there in their early, late 60s, whatnot, with a lump sum of money, and they don't understand their financial markets and how to match that with the consumption. So all of a sudden, they start doing these crazy things where they're going to do options trading or whatever, because someone told them that now they need to invest in their retirement and have all this time on their hands. And perhaps there's something with their identity and what should they be doing with their time. And it's absolutely horrible. I think we all heard horror stories, but it's always breaking my heart whenever I hear that.

33:00Oh, man, that would be heartbreaking. And you make an important point, and I've seen this. I mean, some people, they arrive later in life with their capital, but without ever really learning how to become investors. And having money is one thing, but the knowing how to manage it is a completely other thing. And that's why I think we need to build investors, not just portfolios. And of course, teaching is so important. And that's why we're doing what we're doing today. We're trying to educate the world on this stuff. And I see this so often with business owners. Investing can become their second career, but it would be a lot easier to learn if the stakes weren't as high, right?

33:45And one of the things I like to talk about with people is the ABCs of front-end total wealth performance. the ABCs stand for Availability, Behavior, and Configuration. And they all play a very meaningful role in reducing this gap of underperformance that can happen in wealth creation. And just to dive into availability a little bit, some of the mistakes, they can add up pretty quick. Have you eliminated your investable savings balance? Are you trying to time the market? Is your investment strategy, is it clearly defined before the money even becomes available? And this is what we're talking about, right?

34:27And delays in availability, they create these silent gaps in compounding that just can never get recovered later. And it's important to know your action plan before you start. And there's two client experiences that I had this winter that just passed as I was reviewing investment statements and preparing the client's financial statements, corporate tax returns that really bring this into light. I had one client who had about$4 million in a really well-balanced index-type portfolio that he self-managed. He also had close to$1.5 million just sitting in a bank account earning no interest along with just a small GIC, that's a guaranteed investment certificate, earning just a nominal amount of interest.

35:15And when I asked him, when we were doing this tax review and financial statements, I asked him what he wanted to do with his savings or why he was sitting on so much cash. He said he was looking for a better time to buy the market. And I get that. Decisions always look obvious in hindsight, but knowing that this person wanted to invest his money in 2025, knowing that he follows a simple index strategy. 2025, Stig, that was a pretty expensive year not to be invested. And this led me to talk to him about the difference between reported performance and actual wealth performance. So when I looked at his investment returns, He had compounded at 18.2 % on the portfolio that he managed through his ETFs with a little bit of fixed income included in there.

36:07And that's a fantastic return. But if you take into consideration the cash that was sitting outside the portfolio, not being invested, and here's the clear point, knowing that he wanted to invest the money and knowing that this is a client, he still has two decades of work ahead of him. his return, it wasn't really 18.2%. It was closer to 15%. And I highlight this, not because those rates of return, they're not good. I'm just highlighting it because there's actually a gap. And so reported performance on a broker statement doesn't necessarily equal the actual outcomes. And that's what I'm trying to hammer home with this.

36:50And just to go into this a little bit more. I had another example with a client. She had freshly incorporated in 2024. She makes a very good income and lives modestly. And she had a tremendous savings rate towards the end of her first year of incorporation. And when she talked about getting her self-directed investment account set up, it took a fair amount of time to do this in 2025. And I'm not going to get into all the complexities around setting that up and how to do it. It's very lethargic. and there can be a lot of paperwork back and forth. And I get that. It is complicated. But what ended up happening is that for almost 11 months, this individual just wasn't invested in 2025, even though she started the year with a significant amount of investable assets.

37:40And again, hindsight is brilliant, but 2025 was a really expensive year not to be invested. And had she simply had the money sitting that was in cash on January 1st in her balance index fund strategy, which she is doing in 2025, she probably would have made around 15%. And if you simply compound that one year of missed return over the next 40 years, and here I am just throwing a rate out, but if we use 8 % just to put some quants around this, it's probably going to be a$3 million mistake or a mission on the back end. of her career, just from that first year missing returns. Now, fortunately for this individual, it's not going to make a material difference in their life, but it just shows us all the things that Warren and Charlie have been trying to tell us for years about getting invested, staying invested, and here's the big one, not interrupting compounding.

38:39And all this stuff, these are the soft skills that it takes to relentlessly compound. And anyway, those are a couple of stories I just wanted to hammer home with availability. But it's not just about money sitting outside the bank. I mean, to your point, Stig, people arrive later in life with their money and through major life events. And you've got to be ready to invest. And one of the most important investment lessons I have ever learned, and this came from a client a couple of years ago, was from someone who sold their business. And for more than 40 years, she and her husband had built just a wonderfully successful small business.

39:17And it was their livelihood. It was really their identity. This happens with so many entrepreneurs. And really, it was the only financial world they had ever known. But eventually, they sold it. And they received a multi, multi-million dollar payout. And from the outside looking in, Stig, I mean, it looked like a dream come true. Financially, they had one. Like when you do the math, they had their number. But a few years later, she said something to me that I've never forgotten. She said, David, sometimes I wish I hadn't sold. And I can remember being taken back by that comment, not because...

39:51It wasn't because she didn't receive enough money. They did. And it wasn't because the transaction went poorly with a vendor take back or anything like that. It didn't. The reason was so much deeper than that. She had spent 40 years learning how to run her business, but virtually no time learning how to live without her business. And she quickly had to learn how to understand yields and withdrawal rates, read broker statements, manage new conversations with wealth advisors. And quite honestly, it was very overwhelming for their family at this late, late stage in their life. And that conversation and the subsequent observations, it just taught me something that I've never forgotten.

40:38You don't want to learn investing for the first time when the stakes are the highest. Think about this. I mean, they received their retirement nest egg in one lump sum late, late in their career. And this just ties all the way back into availability. And when does your capital actually become available? Because those moments, they matter a ton. Here we are, we're talking about a business gets sold, but you could have an inheritance. Or maybe you sell a property, that San Francisco property for$3 million that you talked about. Or heaven forbid, something life-changing or unexpected, like a divorce happens.

41:17And then all of a sudden, you're sitting there with a whole bunch of capital. And then the question becomes, well, what do I do now? Wow. And the problem is that some of our biggest financial decisions that people often have to make, they happen during some of the most emotional times of their lives. I mean, think of these scenarios, selling a business, getting a divorce, moving across the country. And when life gets complicated, uncertainty, it's going to create delays. And I've seen people leave large amounts of money just sitting in cash for years while trying to decide what to do with it, when to invest, how to invest.

41:54And that delay, as we know, has a huge cost. Cash feels safe. And in the short term, it's always going to feel safe. And it's probably not a bad decision over a few months or so. But over long periods of time, idle cash, it can quietly become one of the most expensive decisions people ever make. I mean, the market and compounding isn't going to wait. And your future self, you look at yourself in 10 years from now, you just can't get those years back. And this is one of the reasons I love this Charles Schwab study. Does market timing work? I love it. It's super interesting. In the study, Peter Perfect, he was perfectly able to time the market bottom every year for 20-year period and pick the lowest day of that year to invest for 20 years in a row.

42:45and perfect timing, perfect entry points. But what fascinated me was not Peter Perfect, because of course, none of us can be Peter Perfect. No one has the crystal ball. It was Larry Linger. And Larry Linger kept waiting for a better opportunity to invest. And he just assumed lower prices were always going to be around the corner. And then over time, that cost of waiting just became enormous. And I'd encourage the listeners to just have a quick peek at that. It's a short memo. It talks about Matthew Monthly and Ashley Action and just how to get invested in the market. And I think there's a really important lesson in all of this that wealth creation, it's often less about perfection and more about participation.

43:34And that's why I think the behavioral side of investing is just so important. A person can have a fantastic investment strategy. But if the money is just always sitting on the sideline and not getting invested, it just becomes theoretical. And I don't know, Stig, how do you get people comfortable participating when the future is just always uncertain? We will never know what the future is going to look like. Let's take a quick break and hear from today's sponsors. One part of being an investor that I don't think gets enough attention is how hard it can be to continue to improve as an investment researcher.

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47:13The guide is free to you at netsuite.com slash TIP, netsuite.com slash tip. All right, back to the show. Yeah, that darn crystal ball. It's always broken. At least mine is. It's terrible. Mine is too. You know, whenever we're speaking with someone, if there's any way we can point back to the person's lived experiences. And I think that's the best approach. And of course, in the perfect world, that person is journaling. And you can then ask them, hey, go back 10 years and then see what you wrote and then what happened since. And of course, the world isn't perfect and not all of us journal. And even if we did, perhaps we don't journal about the financial worries or whatnot that we have.

48:01But perhaps we can point back to, say, 10 years ago, how unsure you were of raising your kids or changing jobs or move to a new house. And then looking back, what has happened and how you have adapted to that accordingly. But David, many people we speak to are business owners, and they understand the business really, really well, less so perhaps the financial markets, and they find them risky, especially because the future is always uncertain. They don't have anything that resembles perfect information. But perhaps we can remind them how many business decisions they've made with imperfect information.

48:39It could be hiring people or starting a new project, moving into a new market. And they've always done that with an uncertain outcome. It was always about diversifying, playing the probabilities. And in that sense, it's not that different in financial markets. You simply can't wait until everything becomes clear. That day never happens. You have to manage your risk. That's the way you run the business. That's the way you navigate in financial markets. And of course, most people don't like, whenever you throw statistics at them. It's for the same reason that you can't say that, let's say they want people to donate to charity, and then you can talk about there's 100 million children starving in Africa.

49:20That stat is not going to work. It sounds terrible, but it's not going to work. And it's certainly not an argument that's 100 times as effective as saying there's a million kids starving. It just doesn't work like that. But if you can tell a real-life story of, let's say, 10-year-old Amina from Algeria and how her and her mother divide the last handful of rice because the two younger brothers, they need to be fat. If you can appeal and say, what can you do to help Amina? Not the 100 million others, but Amina, then you have a very different case. And I know I'm sort of like going all kinds of directions here, but it's not too different whenever you're speaking to another person.

50:03Because you have to figure out what makes them tick, whether it's, in this case, we're talking about personal finance, it's more personal than it's finance. And of course, some people like statistics. Some people like to see the numbers and they want to know what they're buying and selling, and it all makes sense to them. And that is how they want to be informed. But most people are not wired that way. All those people that you may speak to, David, they don't want to hear about all those numbers. They might be asking you, how do you invest your wife's retirement? It's like, if it's good enough for David's wife, perhaps it's good enough for mine.

50:40It's something we can relate to, and we need to meet people where they are. Back in the day, there were this campaign. It's quite a few years ago now, so I'm going to display my A-tier. But there was this wonderful campaign called Friends Don't Like Friends Drive Drunk. And of course, I can say here tongue-in-cheek that they forgot the addendum, friends help friends achieve their financial goals. At least that is the campaign that I would have run. And to your point, David, you don't do that from time in the market. You do that from time in the market, and you help your friends stay invested despite uncertainty, because the future is always uncertain.

51:23But how do you think about this, David? Wow. Let me go back to your friends help friends achieve their financial goals. I love that. I mean, in many ways, that's been the story of my life, Stig. I've been in public practice for over two decades now. And I've seen a hodgepodge of just about every investment you can imagine with small business owners. And there's so many ways to grow your net worth. And for me, it starts with leading people on their path to prosperity. It's helping people find a way to invest that actually aligns with who they are as an individual. The older I get, that's becoming extremely important to me, not only myself, but understanding clients' temperaments and how they need to invest that's wired for their own composition.

52:15Because you have to invest in a way that feels natural enough so that when times do get hard, your strategy still makes sense to guess who? You, right? And for my wife's investment account, and now my daughter who started investing, she became 19. You could do that here at Nova Scotia. That means investing in a very methodical index fund strategy. It's simple. It's just easy to follow. And it doesn't require a lot of guesswork. And there are so many ways to compound capital. We have public markets, we have business ownership, real estate, private investments, our own human capital, and the list goes on.

52:57And even within the public markets, there's thousands of things that we can talk about there, right? For me, I separate portfolio performance from wealth creation. Portfolio performance, it matters a ton, but wealth creation is so much broader than that. I root this in practicality because I like to use net worth as a useful barometer for assessing performance for someone. Net worth, it captures so much more than just the investment returns. Think about what net worth captures. It's going to capture your savings rate, your spending decisions, tax efficiency, your business decisions, debt management, investments, and lifestyle choices.

53:48And the list just keeps going on and on and on and on. And in other words, when you look at it, it brings your whole financial life into picture. And I get it. net worth, it's not perfect. There's marriage, divorce, you can inherit money, you can be philanthropic and give all your money away. There's health issues, all kinds of things that can affect the number or distort the number. If someone's giving away all their money, maybe we need a separate calculation for that, right? And that would be a fantastic story. And with private investments, it's just hard to get accurate valuations. They're never as clean as publicly traded stock portfolio.

54:30But here's my point. Over a long period of time, say 15 or 20 years, if there's no macro level life distortions, the direction and velocity of your net worth, that can tell a lot about someone. So when I think about my own returns and opportunity sets, I think less about what did this one portfolio return and more as is my total net worth compounding in a way that supports the life that I'm trying to build? And that tends to be a very different question. And, you know, that's why I think that net worth, while imperfect, it can be a very practical scorecard during the accumulation phase of your life.

55:18And how do you think, Stig, how do you think about a person's opportunity sets? And when you look at wealth creation, how much do you put on portfolio returns versus other ways that you can compound your capital? Here you are, you're an entrepreneur and you're into all kinds of things. Maybe just share your thoughts on that. Yeah, I absolutely love that question, David. Thank you for asking. I was speaking with a member of our Mastermind community here the other day, and we discussed invest portfolio returns and how to track them and so on and so forth. And I told him that I was dollar weighting my investments, and he simply could not understand why I would do that.

55:57And to me, that makes complete sense. If I have$10 invested in a stock, I give them 10 times the weight of$1 invested in another investment. And to him, it doesn't make any sense at all. To me, it made all the sense in the world. And now we're also back to this thing here about whenever it comes to personal finance, I'm sorry to say once again, it's very often just more personal than it's finance. But to me, I'm like, I think the lens that I'm watching this through is that, I think the first thing I would say is that my goal of my portfolio is to preserve financial independence. And again, I'm sticking my neck out here and saying that money may not buy happiness in the conventional sense.

56:36You can't go down to the grocery store and ask for$1 ,000 worth of happiness. It doesn't really work like that. But you still need a certain threshold to cross the certain threshold to have a certain stand-up living, and then you can build on top of different relationships and so on and so forth. As you can tell, I think way much, too much like engineer perhaps about how I think about optimizing for happiness here. But for some people, above a certain amount of money, it's about winning and it's about playing a fun game. And money is just such a great scorecard for knowing how well you play the game because it's so easy to measure.

57:11But I'm pretty pragmatic whenever it comes to looking at a portfolio, the returns of that, and then compounding your net worth. I always start with financial goals. If you reach your goals, it becomes a more intellectual exercise whenever you think about your portfolio returns. One of the things that you alluded to before, David, was that you might have someone who said, oh, I made like 10X or perhaps even 100X on investment. Good for you. Truly good for you. But if you did that with 0.1 % of your net worth, it doesn't matter. And that's also why whenever I'm, for example, looking at my track record, I'm not just saying $10 in one stock and$1 in another.

57:50I'm also thinking about how much have I invested that year because a dollar is a dollar is a dollar. I like to say that I buy my groceries with real money, not imaginary money. And so that's why I dollar weight my portfolio. you. I can't go down to the bank and tell them, I identify as a millionaire, so you need to give me a million dollars. I know you can identify, apparently, a lot of things. It sounded very politically loaded, but you can't identify as a millionaire and then assume that you'll be getting a million dollars. It doesn't work like that. The grocery store takes real dollars, and they don't care what my relative returns, but they are.

58:30And so whenever you think about money in those terms, you might think differently about your portfolio. For example, all of a sudden it can become less attractive to have all your money tied into illiquid private assets, regardless of what kind of valuation you might put on them, whether it's by you or a third party. So you also have to think differently about the risk you have of permanent loss of capital. And you also have to consider that whatever kind of amount of money you're investing, it also needs to make a meaningful difference whenever you compound that money. It goes back to your point about having a lot of money on the sidelines.

59:05It's expensive in opportunity cost. And that's also why it makes complete sense to me that someone who has, let's say, a$100 million portfolio, they might be happy with a 6 % return, especially if there's virtual no downsides. Whereas an up-and-comer young investor, he might have$100 ,000 in his portfolio. He's looking all over to see if he can find a 10-bagger and he's way more concentrated. It's different styles, different goals, different people. And that's also whenever you realize how important it is to become anti-fedile. And the first step is to live within your means and invest the difference in hopefully a well-diversified portfolio.

59:42Now, continue speaking about grocery shopping. Going back to that example, David, we pay with after-tax dollars locally here. So David, I want to tee it up to you being a CPA. Could you please talk to us about taxes? I don't know how many people would tell you that on a day basis. Please tell me about taxes, David. Oh my gosh, it's my favorite day. I got to talk about taxes. But just quickly before we jump into taxes, I want to talk about something that we talked about one of our mastermind community calls within our inner circle. You've talked about it a few times already about happiness. I mean, one of the members who has been in our community from almost the start, he made a comment about financial independence and happiness that really stayed with me.

1:00:27It actually hit home for me that day when I heard it. He talked about financial independence, helping him be a better version of himself for the people around him. And I really connected with that. And sometimes it's so hard to measure what we don't have and the stress that you actually don't have to carry. Imagine taking everything that you already do, Stig, everything that you have on your plate, your family, your work, your health, all your relationships. And then you've got to add something that someone very close to you is helping you with, that if they didn't do it, you would have to do it.

1:01:04You have to carry the load. At some point, something's going to give. And at first, it's never obvious. I mean, it could be your creativity. It could be your health. For me, it would probably be my patients. And that's why I think financial independence can be a subtraction formula for happiness. I mean, it doesn't magically create happiness, but it can remove certain pressures from your life. And sometimes removing pressure, that's just as powerful as adding something new, right? And I think about this with my own life. My wife has certainly carried far, far more responsibility with the care of our two lovely daughters than I did.

1:01:47And because I knew her attention was there, because I knew certain things were being handled with care, I was able to focus on other things. And I know without a question that if I had to carry what she was carrying, there's no way that I would achieve some of the business success that we've achieved and that I was able to do. And sometimes success is created by what we don't have to do because someone else is helping carry the load. And I think financial independence works a little bit like that. I mean, if you can give yourself some room, it can help you become a better version of yourself. And maybe that's where some of the happiness comes from as it relates to wealth creation.

1:02:29Boys, we could probably talk a lot about this. There's probably so much more to this conversation. But here we are. I'm going to switch gears. You're going to have a CPA talk about taxes. Listeners, please, it's not time to tune out. Please don't tune out. Just lean in for maybe 10 more minutes here. It has been academically proven that tax drag can cost people between one to 3 % of their investment returns and even more in higher turnover portfolios. So why wouldn't we want to pay attention to it? Think about that. Just think about whatever rate you have compounded in your investment portfolio over the last decade, and then add 3 % to it, and then see what your portfolio balance would be.

1:03:18Do your future value calculations, take your 10-year IRR and add 3 % to it. And then I think that you're going to find that tax matters a ton. I've heard lots of sayings about tax. I'm always surprised just how little it gets talked about in wealth creation. Don't let the tax tail wag the investment dog or never make an investment decision solely for tax reasons. I agree with all of that. You shouldn't turn every investment decision into a tax decision. But the other side is also true. Ignoring tax, It's not wisdom. It's actually leakage. And because at the end of the day, you don't live off your pre-tax returns.

1:04:02And like you said, you pay your groceries with after-tax dollars. So being aware of tax is extremely important. And I'm not going to go into all the research reports around tax drag and that it causes in taxable accounts. But if we can just agree that it's there, tax drag is there, and it's worth being aware of, then even talking about it actually means something, right? And I get there's so many listeners from many different countries around the world, so it'd be very hard to talk details specific to everyone. But I do want to highlight just a couple observations from your friendly neighborhood CPA who's been in public practice here for two decades in Canada.

1:04:45Tax cost matters. And for corporate clients that are compounding wealth in taxable accounts, it matters a tremendous amount. And oftentimes, tax on investments, it's just a number that gets wrapped up into total taxes when it's in the same company as the operating business. I mean, for example, you could have a small business earning business income and in the same company earning investment income inside the same company and your friendly neighborhood accountant CPA gives you your tax bill at the end of the year. And are you actually associating which parts of the tax relate to business income or investment income?

1:05:27Have you gone so far as to determine the tax cost against your investment returns themselves? Stig, 99.9 % have likely never done this, right? You said this earlier, people just accept it, they pay it, and here's the big one, they don't want to talk about it, and they just move on. I'm shocked that people don't want to talk to you about taxes. They just don't want to talk about it, Stig. And they get the number and they pay it, what are my installments for next year? And there it is. But here's the secret sauce in today's conversation on taxes. By paying attention to it, it can change your compounding engine tremendously.

1:06:09That's what we're talking about. It's how do we change the compounding engine, just by a couple percentage points. And I'm just going to give you an absolutely crazy example here that's specific to Canadian professionals. I'll try to say it pretty quick, but it just highlights how important it is to pay attention to this stuff. And I get it. Paying tax is a first world problem. I mean, it's a privilege. You're making money, but the story, it still holds true. If you're a professional working in Nova Scotia, say you're a doctor and you're specializing at the hospital and you're saving inside your company for retirement, maybe you have an ultra conservative investment approach and you have$3 ,750 ,000 in fixed income in your company and you're still working and you're still earning$500 ,000 a year at the corporate level on your regular business income.

1:06:58Given your conservative investment regime, your fixed income, you're going to make 4 % on it. This is all hypothetical, but I'm just setting up the scenario. You're going to produce an even$150 ,000 of interest income. Well, here in Nova Scotia, there is a grind on your investment income that goes against your business tax rate. And here's the crazy thing. The taxes that you are going to pay are going to be more than the$150 ,000 of interest income that you earned when you take into consideration the loss of the small business deduction. So in fact, the taxes are$170 ,000 in this scenario. So while your broker statement shows an ultra conservative 4 % money weighted rate of return on your fixed income, your after tax money weighted rate of return is a negative almost 0.5%.

1:07:56So half of 1%. That is not underperformance. That is what I like to call compounding in reverse. And you would have been better off not investing at all. And so the point of my entire story is that you live with after-tax outcomes. And you have to be thinking about the totality of your net worth, not just what gets reported on a broker statement, for example. I mean, it's just too easy to brush it off like it doesn't matter. And listen, there are people who are compounding at significant rates of return and taxes are just a byproduct of those strategies. I mean, it's almost like a cost of goods sold for the people that are into options trading and can generate a 30 and 40 % rate of return.

1:08:42I mean, I always tip my hat off to the people who are consistently compounding at rates that are high enough that they don't even have to worry about taxes. But the reality is that many of us are not emulating Warren Buffett and compounding at 20 % CAGR in taxable accounts for two and three and four decades. Therefore, we need to pay attention to it. So just to pick up those couple extra percentage points, that has the ability to move the needle on your net worth. And we all know what it takes to separate the best professional athletes in the world. It's often just these fringe gains and the marginal performance improvements that separate someone who makes the PGA Tour from someone who never plays on it.

1:09:30And I started this podcast by asking the question, why can someone with an average return still significantly grow their net worth in meaningful ways? Tax awareness is one of these reasons. An average return with less than 1 % tax drag can be better than a higher return where the tax drag is greater than the outperformance itself. And so total wealth performance, it's about all of the front-end decisions by investing capital as it becomes available. It's configuring your compounding engine that works for you. That's really important. And ensuring that the capital becomes spendable wealth by using tax efficient strategies.

1:10:15And when I think of all the decisions that you have to make in investing, finding winners, minimizing behavioral mistakes, scaling your strategy across all your investment accounts, taxes are one of the easiest ways to make a difference because at least you know, or you can become aware of the rules and use the strategies to compete with them and to understand them and put them to your advantage. Just think of all of the unknowns and the unknowable in wealth creation. Taxes doesn't have to be in this realm. We generally know the tax rules when January 1st rolls around when we start the year. And that's really the point I want to keep coming back to.

1:11:00It's just like your total wealth performance. It's not just about what your portfolio return. It's what compounds after savings, behavior, taxes, structure, and life. And I mean, the real goal is just to let simple things compound long enough so that they can become meaningful in your life. Yeah, I think that's so well said, David. It really goes to your point about why you might be looking more at the compounding of your net worth than something like portfolio returns. And of course, portfolio returns is a little bit different. I also should say for the record, everyone, it's public information, everyone can look that up for me.

1:11:33But I choose not to publish my net worth, not because it's a secret, it's just private. And I think you sort of feel the same way. And especially in our community, we actually do talk about net worth, but it's different to do that with a small group of friends than it is to talk about portfolio returns, because it's sort of like a bit more of a living playing field in a way. And it's also because perhaps you don't have to think about taxes. I don't know. But you sometimes feel you're exposing yourself a lot more whenever you're talking about net worth than perhaps portfolio returns, even though that could be difficult enough for a lot of people.

1:12:07But hey, if you're still listening now, after we talked about taxes, I mean - I'm clapping here. If you're still listening, that's fantastic. I'm like, yeah, David. But there's probably a selection bias. We love talking about taxes. Most people, unfortunately, don't. But they probably should be thinking at least a bit about taxes. The hourly rate, if I can put it in those terms, for anyone thinking about their taxes and acting on it is probably better than anything else they could be spending their time on. And in any case, you hopefully get it at this stage here in the episode that the game, if you could call it a game, it's really about total wealth creation and how that leads into your financial goals because we spend with our tax money and tax is a real expense.

1:12:51And to your point, David, we know the rules of the game. We know that whenever January 1st runs around. But if you want to continue the conversation with us, David and I have a website called compoundinsumplicity.com, and we'll make sure to link to that. in the show notes. And you can find this and all the other podcast conversations we're going to have, well, in the future, but also the one we already had. And then we have a library of free educational videos that people can also check out about investing and how to execute on total wealth creation. David, anything else that we need to talk about here before we end the episode?

1:13:27David Steinberg Yeah. Well, when I was preparing for the episode, I didn't want to... It's very hard to get into specific details with taxable investors from around the world. Here I am, a Canadian CPA. If anyone in Canada wants to reach out to me and talk about some of the things that I talked about with taxes, the example that I gave about the negative compounding, it relates to aggregate investment income. It's pretty technical. If anyone wants to reach out and have a chat about that, if they're still working and investing and their tax bill is jumping up there, feel free to reach out. You can look me up on LinkedIn, Compounding Simplicity website or mbfca.com, which is the accounting firm that I manage as well.

1:14:10So there it is, Stig. Thank you so much for today's episode. And I can't wait to do the next one. Yeah. Look forward to doing the next one here next quarter, David. Thanks for listening to TIP. Follow The Investor's Podcast on your favorite podcast app and visit theinvestorspodcast.com for show notes and educational resources. This podcast is for informational and entertainment purposes only and does not provide financial, investment, tax or legal advice. The content is impersonal and does not consider your objectives, financial situation or needs. Investing involves risk, including possible loss of principle and past performance is not a guarantee of future results.

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