One of the biggest advantages a Deferred Sales Trust offers you when you sell a substantially appreciated asset is not only deferral of your capital gains taxes, but also the opportunity to build and maintain your wealth and that of your family. This is especially true when you use a DST as an alternative to a 1031 exchange.
Allowable DST Investments
Unlike a 1031 exchange that requires you to reinvest in like-kind property, your DST can invest in virtually anything you want to invest in, including the following:
- Mutual funds
- Angel investments in which you provide seed money to a promising startup, usually in exchange for an ownership interest in the company
- And YES, you may even invest back into Real Estate or a Business
Thus a DST allows you to diversify your investments to provide you with, for example, retirement income. It can also allow you, working in conjunction with your DST Certified Trustee and Registered Investment Advisor, to develop a strategy to produce and grow generational wealth while offering you realistic asset investment protection.
Purely for the sake of discussion, let’s look at a couple forms of popular investment strategies employed by experienced financial advisors.
Modern Portfolio Strategy
In the past, many financial and investment advisors used the modern portfolio strategy in an attempt to protect their clients’ investments from potential capital losses. This strategy is focused in large measure in measuring risk and has been very popular among those who are much more concerned about relatively short term loss of capital than they are maximizing gains. The performance of a given component of a portfolio either up or down is less important than how it affects the entire portfolio and often relies on the correlation of how different asset classes perform against each other. For example you hear about portfolios designed around a 60-40 or a 35-65 mix, meaning the ratio of equities to fixed income investments. As the market has become considerably more volatile over the last 10-15 years, however many of the assumptions underlying the modern portfolio strategy bear closer scruitiny.
Perhaps one of the most important assumption changes is that allocating a substantial portion of your investments to bonds will protect you against the ups and downs of the stock market, especially a significantly long down market, because bonds are less volatile than stocks, and some would argue provide a counterweight to keep portfolios from sliding down too far in down markets or recessions. Unfortunately, stocks and bonds have pretty well correlated in the same direction in recent years, negating the traditional protections bonds afforded in the past. It became apparent to some that a new strategy was called for. One of the secondary risks mentioned but less frequently discussed is the risk of secular decline as a result of excess debt in the face of low growth which could occur over a period of years. In such occurrence, many experts warn that the only way out is to default on debt or devalue currency and inflate our way out. The result of all of this could be interest rates going even lower for a prolonged period and capital investment and growth stagnating or under performing over similar extended periods.
Dragon Portfolio Strategy
Christopher Cole, founder of Artemis Capital Management, LP, posited exactly that. He created what he calls the Dragon Portfolio Strategy, an investment strategy that creates opportunity from change. Based on his 100-year portfolio model for growing and protecting generational assets, Cole discovered that the traditional 60/40 split between stocks and bonds no longer worked as well as it may have in the past. One particular aspect of this theory is to include counter cyclical assets in your portfolio at all times.
For example, investors seeking diversification need to invest in things that do not rely on low market volatility to make money. You need “defensive assets” that not only make money for you during a rainy decade, but also allow you to reposition yourself as necessary, not simply in a panic to sell at the first signs of a devaluation. Using the Dragon Portfolio Strategy generally results in an average 14.4% Compound Annual Growth Rate from 1928 until today as Mr. Cole explains. Instead of adjusting your typical mix of stocks and bonds, or moving assets into more protective classes only after the alarm is out, this theory suggests the following: If you balance your portfolio somewhat roughly into equal components of Domestic Equity, Fixed Income, Long Volatility, Trend Following Commodities and Physical Gold, you will be better positioned for long-term and even generational growth than you would following modern portfolio theory.
Which One is Best?
Both strategies have a sound basis and a strong, diverse following among investment professionals. Neither one alone is the best approach for everyone. Like anyone, you should do your homework and probably work with an experienced investment advisor who is knowledgeable and practiced in matching your goals and objectives with the right strategy.
As you might expect, developing a Modern Portfolio or Dragon Portfolio Strategy geared to your specific investment goals and objectives is not something that every traditional broker has the experience to evaluate for you. In today’s complex world of investing it is even harder for inexperienced investors to successfully navigate their own DIY strategy.
Our first goal, of course is to help you defer taxes on the sale of your appreciated asset. That, in and of itself is a form of minimizing risk, because you will be investing in part, with the “house’s money” to use a Las Vegas style analogy. In that vein, try not to be the person who simply gives 30% to 40% of their bank roll to the attendant when they walk in the door. In the meantime, while investing your money always carries risk, your DST Approved Trustee and Registered Investment Advisor have the skills and training to advise you on the use of strategies suited to achieve the outcome you desire.
Want to Know More?
To learn more about how a DST can work for you when you sell one of your substantially appreciated assets, such as investment real estate, a business or even your personal residence, contact Reef Point today. We’ll be happy to give you all the information you need and want concerning DST’s, and our team of experienced and trained investment advisors can help you understand and evaluate a Modern Portfolio or Dragon Portfolio Strategy you can use to both build and maintain your family wealth.