Investing: Know What Game You’re Playing

One last sports analogy, and I’m done.  At least for a little while. Promise.

And here goes the bracket pools – a chance for fun, friendly competition, and maybe a little money.  March Madness is truly a little mad.

The way to increase the level of all three?  Know the rules of the game. 

Same goes for investing.

What the Heck Is a Bracket?

The collegiate men’s basketball tournament starts in March, spans three weekends, and usually ends by the first weekend in April. 

By the first Thursday of the tournament, there are typically 64 teams.  They play a single-elimination tournament until the final two teams battle it out for the championship title.

The list of competing teams and who plays against who typically comes out the Sunday or Monday before the first Thursday.   This is called the bracket.

When those awaited brackets arrive, groups of people – friends, family, office colleagues, etc. – will have contests to see who can pick the most winners in that bracket. 

(And, yes, there’s a tournament and bracket for the women, too, but that bracket is used way less frequently.  I know…big surprise.)

In investing, we talk about tax brackets – totally different concept and visual for another blog post.  You only need the gist of taxes to understand this blog.

Figure Out the Scoring System

Besides figuring out where to get a tournament bracket and fill it out, the next big question is, How is the contest scored? 

This is important. 

You might make different decisions if you knew what it took to win.  I’ve seen some contests where if you picked the championship winner – a pick worth 32 points – your chances of winning the whole thing increase dramatically because picking a first-round winner was only worth 2 points.

In another variation, the points earned each round might be the same, making picking a lot of game winners in the first round critical to winning the contest because there are 32 games in that round compared to one game in the final round.  

Strategies can change based on the scoring rules.

Investments Have “Scoring Systems” Too

There’s the obvious one:  Taxes. 

Investments can be taxable, tax-deferred or tax-free. 

In basketball, shooting from inside the three-point line usually results in more points than shooting from three-point range (it’s further away).

Same with investing:  You want to make sure you’re getting the best opportunity to make good money. 

If you get an 8% return on a taxable investment but your effective tax bracket is 50%, the effective rate on that investment is 4% (8% minus 50%).  A 5% tax-free investment would make you more money because the effective rate is also 5%. 

You can also go from a man-to-man defense to a zone defense. 

Roth conversions are a great example:  Pay off your government partner in taxes now to get tax-free returns in the future when the opportunity arises and you have the resources to do so.

Ultimately, You Want To Win

The best strategy of all integrates many sub-strategies to maintain flexibility and options for as long as possible because we don’t know what challenge you’ll be up against next. 

Allocating your money among may types of investments – both in type, tax treatment, and philosophy – gives you all those sub-strategies to weather any challenge and take advantage of any opportunity.

If you want to talk about tax brackets, please reach out.