Save content
Have you found this content useful? Use the button above to save it to your profile.
A young woman trades on the stock market from her laptop
iStock_damircudic_woman trading online

9 Valuable Investing Lessons Clients Should Know


Ideas that you consider to be common sense in investing might not have even occurred to your client. In this article, Bryce Sanders recommends leveraging your expertise and getting back to the basics to offer wise investment advice to your clients or for marketing yourself through podcasts, webinars and more. 

18th Apr 2022
Save content
Have you found this content useful? Use the button above to save it to your profile.

As an accounting professional, you see some concepts as common sense, and your client might be insulted if you tried to explain them. Here is a news flash: Common sense is not that common. The following concepts are good talking points, newsletter content or even subjects for webinars, podcasts or live seminars.

Lesson #1 – Make Your Annual IRA Contribution Early

It makes sense for your client to save for retirement. The deadline for making their contribution is the time they are due to file their tax return, typically April 15. The earliest they can make the contribution is on the first day of the tax year, January 1 (or thereabouts), which is about 15 months before their filing date. Many people put off making their contribution until the last minute. They are missing an opportunity that will cost them in the long run.

An article published by insurance company MassMutual highlighted the impact of making IRA contributions as early as possible. Consider the taxpayer making a $6,000 contribution at the earliest possible time every year for a 40-year period. Assuming a 5 percent average rate of return, they would have about $700,000 when they retired. If you always waited until the end of the year to make your contribution, you would end up with about $33,000 less. Compound interest is a good thing when you are building wealth. Those extra 12-15 months of earning interest can make a substantial difference over time.

Lesson #2 – Have a Silent Partner in Short Term Capital Gains

Investing involves risk. You don’t know what the future holds, especially when considering world events. The government encourages investors to think long term because they want industry to do the same. The dividing line between short- and long-term capital gains is one year. Suppose your client is a single filer making about $ 250,000 a year. This places them in the 35 percent marginal tax bracket. If they buy stock and sell at a profit a couple of months later, that profit is taxed at the short-term capital gains tax rate, which is equivalent to their marginal tax rate. Your client takes the risks, and the government pockets 35 percent of their gain when they sell at a profit. If they hold the stock for longer than a year, under current rules they are taxed at the long-term capital gains tax rate. Your client earning $250,000 annually would be paying 15 percent instead, a significant savings. It pays to buy good stocks, hold onto them and let the company’s management do what they do, trying to maximize value for shareholders.

Lesson #3 – Get Your Silent Partner to Pony Up When Making Charitable Contributions

We just established the government is your client’s silent partner where investing is concerned. If they are going to reach into your pocket when you do well in the stock market, you should return the favor. Many clients give back to the community through charitable contributions.  Hospitals, colleges and museums often run capital campaigns and ask for large gifts. Many clients think of charitable giving in terms of writing checks drawn on available cash. The government allows them to donate appreciated securities with long term capital gains for the full value, without having to pay taxes on the capital gain. Put another way, if a client owns a stock that doubled from $10,000 to $20,000, they might consider selling the stock, paying the 15-20 percent in tax on their long term capital gain and donating the remainder, $18,000-18,500, to the charity. If they donated the $20,000 in stock without selling it first, they have made a $20,000 contribution! This benefits both the charity and the client. Your silent partner allowed you to increase the size of your gift.

Lesson #4 – Understand Percentages

Interest rates have been very low for a long time. Meanwhile, the stock market has been doing very well for a long time. Many clients have chosen to divert money from savings into the stock market. Some buy individual shares in companies, while others buy mutual funds or exchange traded funds (ETFs). It’s is important to understand percentages. As an accounting professional, this seems obvious. If your client bought a $100 stock, watched it rise 15 percent and sold it at $115, they would be pretty happy.  Now imagine the stock declines about 33 percent. Their $100 stock is now $66. Although it only fell by a third, it now needs to appreciate by half (or 50 percent) before they are back where they started. The lesson is to watch your stocks carefully, selling those not working out early instead of hanging on and riding them down.

Lesson #5 – Figure Out the Easiest Way to Get a 15-percent Return

Your client invests in the stock market. Over the decades, stocks have averaged a return of about 10 percent. This makes equities one of the best places to have put money over the long term. If your client could earn 15 percent, they should be happy. There is a way, and it’s so obvious your client might have overlooked it. According to WalletHub, credit cards are charging 14.51 percent for existing accounts and 18.32 percent for new accounts.  This is a compounded rate of interest.  If your client used extra cash to pay down their revolving charge card balances, they are stopping paying about 15 percent, which is as good as earning 15 percent on their money. Even better, if they earned 15 percent in the stock market, they would be paying tax on their capital gains. Not so when you are saving money by reducing debt.

Lesson #6 – Understand the Rule of 72

Compound interest can work for or against you. As an accountant, this is obvious. The Rule of 72 tells us the rate of interest divided into 72 roughly yields the number of years it takes the principal amount to double. If you were earning 6 percent compounded on $10,000, in 12 years you should have $20,000, not considering tax consequences. Look at it from the other point of view. Your client uses their credit card constantly. The interest rate is 16 percent on their revolving charge card balance. They make the monthly minimum payment, but they charge more than they paid in the next month. Their balance never declines, it only grows! If your client is not reducing the amount they owe after about 4.5 years, the amount they owe would have doubled! Is this a common problem? According to BankRate, the average revolving charge card balance is $5,525. Clients need to make debt reduction a priority.

Lesson #7 – Understand the Painful Side of Buying Stock on Margin

Using OPM or “Other People’s Money” when investing sounds like a good strategy. Some investors choose to invest on margin, allowing them to own more stock than they could otherwise afford by borrowing money from their financial services firm. The logic seems simple. Suppose you buy 100 shares of a $100 stock at $10,000. The stock rises to $200. You sell your 100 shares for $20,000, having made a $10,000 profit. If you borrowed $10,000 from your financial services firm in your margin account, you could buy 200 shares! If they appreciated to $200, you are now selling $40,000 worth of stock! Your $10,000 has returned a $20,000 profit after you repaid the $10,000 loan. (This doesn’t take interest on the loan into account.) Problems develop when the stock market moves south. Suppose you own 200 shares at a cost of $20,000.  $ 10,000 is your money and $10,000 is the loan. If the stock declines in value, all the pain is felt on your side of the equation. If the $100 stock declines to $75, those 200 shares are now worth $15,000. Your $10,000 in equity is now $5,000 in equity. The loan never gets smaller, it only stays the same or grows with interest added. The lesson is not to have too much exposure to margin in volatile markets.

Lesson #8 – Saving After Tax Dollars is Hard

The lesson simply expressed is: Try to maximize your allowed retirement savings using before tax dollars. According to The Balance, the average take-home pay after taxes and benefits are deducted is about 77.6 percent. Next, you need to pay all your regular bills like your mortgage, electricity and wireless charges. Savings compete with impulse purchases for the amount left. It makes sense for savings to come “off the top” before you get a chance to spend the money on something else. Clients should maximize retirement savings if they buy into the logic that you somehow make ends meet with what you get in take home pay. You should also look at other savings options like your company stock purchase plan. It often allows employees to buy company stock at a discount.

Lesson #9 – Understand the Dangers of Variable Rates of Interest

Everyone is talking about the effects of inflation. Some businesses try to absorb cost increases for a while to keep customers and remain competitive. Your favorite restaurant might be trying to hold the line on prices. Banks and lenders don’t think that way. When the Federal Reserve raises interest rates, those increases are usually passed on to customers immediately. If your client has a large outstanding balance on their home equity line of credit, they will see rates increase immediately each time the Fed raises rates. They would be better off paying down debt, starting with loans charging the highest interest rates. If they can convert variable rate loans to fixed rate loans, that also makes sense.

These lessons sound obvious to you because you are an accounting professional. They should create “aha” moments for many clients. This is another way you bring value to the relationship.

Replies (0)

Please login or register to join the discussion.

There are currently no replies, be the first to post a reply.