Happy New Year! As we welcome 2025, we are excited to share some incredible news. Our firm has officially acquired Rodman & Associates, LLC, a highly respected CPA firm in Spokane, WA. This partnership allows us to expand the range of services we offer, bringing even greater value to you through integrated financial planning and tax expertise. We are thrilled about this opportunity to serve you even better in the year(s) ahead!

In addition, we are in the process of rebranding to better reflect our combined vision and expanded services. In the coming months, you will notice updates to our logo, colors, and overall brand identity across printed materials like this newsletter, as well as online through our website and client portal. We’re excited for you to experience this fresh new chapter with us!

2025 Market Outlook: A Year of Volatile Opportunity?

As we look ahead to 2025, we can’t help but reflect on the unique market dynamics of 2024. While many streams typically contribute to overall market returns, this past year, one (or perhaps two) streams dominated. The so-called Magnificent 7 tech companies delivered incredible gains of over 48%, while the remaining 493 companies in the S&P 500 posted a more modest 15%. Smaller stocks, unfortunately, saw even less exciting returns.

Today, these seven companies make up less than 2% of the S&P 500 index by name but hold a staggering $1 of every $3 invested in it—a testament to their outsized influence. Gold also had a strong year, climbing more than 20%, though it plateaued following the November elections as the Fed hinted at pausing rate cuts. In contrast, many global markets struggled, with Europe, China, and emerging markets facing headwinds. Even fixed income saw only modest gains, and energy trended lower.

Looking ahead, could 2025 bring a shift in these trends? As always, there are reasons to be optimistic (the Bulls) and areas to remain cautious (the Bears). Here’s a snapshot of both sides:

Reasons for Optimism (Bulls)

1. AI Investments Continue: Big tech’s spending on AI shows no signs of slowing. The question remains to what extent a broader range of companies actually adopt AI for profitable growth.
2. New Leadership in DC: A fresh administration promises deregulation, lower inflation, and reduced interest rates. Will these changes create meaningful growth despite political challenges?
3. Potential for Peace: Cooling geopolitical tensions in regions like Ukraine and the Middle East might foster global growth, though pressures in areas such as China and Taiwan remain.

Points of Caution (Bears)

1. Valuation Concerns: At over 21 times earnings, the S&P 500 is priced at the higher end of its historical range. Future returns might depend more on earnings growth rather than simply higher prices for the same amount of earnings.
2. Consumer Pressures: High inflation and interest rates put a strain on many consumers. Cracks are appearing in housing, credit, and auto loans. Risk of a weaker labor market might amplify these challenges.
3. Lingering High Rates: Despite the Fed’s pause on cuts, mortgage rates remain elevated. Government borrowing continues to fuel inflationary pressures.

While we approach 2025 with caution, we also see opportunities within this complex environment. Your portfolios remain prudently diversified. They balance traditional investments such as short-duration US Treasury fixed income and US large cap equities with themes such as robotics and India. Additionally, alternative strategies, including equity long-short, commodities, and merger arbitrage, potentially account for a range of possible market scenarios.

Stay Safe: How to Spot Smishing Scams

We want to pass onto you another heads up for protecting your personal data. While we have heard nothing from our clients, Schwab has informed us that hackers are using another scam to target people.

The newest scam attempting to steal client data is called “smishing.” Hackers send clients text messages from international numbers claiming that a large disbursement has been made from their Schwab account. The message asks you to click on a link to verify or cancel the transaction.

Just to be clear: neither we nor Schwab will ever contact you by text related to your money. We would only give you a personal phone call to confirm your identity and permission on any disbursement.

Here’s how you can spot these phishing attempts:

Red Flags:

• International numbers: The texts come from foreign phone numbers.
• Large transactions: They claim an ACH was debited, often in the thousands of dollars.
• Suspicious links: The link leads to a fake Schwab website with a misspelled URL.
• Urgency: The message asks you to reply “Y” and click the link to cancel.

What to Do:

• Don’t click any links: Always go directly to the Schwab website to check your account.
• Report it: Forward the text to phishing@schwab.com and delete the message.
• Add extra security: Enable two-factor authentication and a verbal password on your Schwab account.

Stay alert and don’t fall for smishing scams—Schwab will never send account updates via text from international numbers!

Don’t Overlook Beneficiaries

Life brings change—marriage, divorce, the birth of children, or the passing of a loved one. Keeping your beneficiary forms current ensures your assets go where you intend.

It’s important to remember that beneficiary designations often override the instructions in your will. If these forms are outdated, it can create conflicts and complications. By maintaining accurate beneficiary designations, you can help reduce legal disputes and delays, ensuring assets transfer smoothly without the expense and complexity of probate.

Additionally, specific accounts like IRAs, 401(k)s, and other retirement plans may have tax implications when passed to beneficiaries. Without proper planning, they can create unintended tax burdens. Reviewing and updating these forms regularly can help protect your legacy and provide peace of mind.

Sincerely,

Petr Burunov, CFP®
President / Wealth Strategist

The post Client Newsletter 1Q25 appeared first on AWM.

I hope you are staying cool in our July heat. The second half of 2024 promises to be eventful with the upcoming presidential election. Let’s dive into our updates and thoughts.

Market Outlook: Don’t Get Carried Away with Last 9 Months, Clouds Are Gathering

The market’s rally over the last 9 months has far exceeded expectations.  Yet, most stocks have not participated in this rally.  (For instance, until this week, small cap was flat for the year and well below its peak.)

Some other assets like precious metals have done well due to hopes of interest rate cuts and concern over economic and geopolitical stability.  Traditional fixed income, small cap stocks, and base commodities have not performed as well.

The relevant question is not simply looking at the past, but rather considering what to do now and in the near future?

Particularly for those of you in or about to enter retirement, you cannot afford to simply chase the herd.  Potential red signs are flashing.  As much as we seek returns, we also must guard against risks that could hurt your nest egg.

Concerns we see include:

• Potential turning point on the US economy (US consumer health deteriorating, jobs sputtering, commercial real estate declining)
• The Fed still has not cut interest rates (unclear if inflation is actually improving that much)
• Bubbly market behavior (bloated concentration of market performance in less than a dozen names, speculation in limited areas at the neglect of others, “everyone is in the pool” technicals, valuations extreme for the winners relative to history, though the losers appear much less overvalued)
• Geopolitical tension (US November elections, EU elections portend change)

AI is the one thing powering the market – but there exist some similarities to the Internet rage leading up to the year 2000.  (Does anyone remember AOL or Yahoo?  They were some of the darlings in 1999, but we hardly hear of them today.  That is because new winners emerged.)

As a reminder, after NASDAQ peaked in 2000, it sold off and did not recover for nearly 14 years.  Most of you in retirement (and many approaching retirement) simply do not have that much time for your savings to recover from such a potential drawdown if it were to happen again.

Questions exist as to the ultimate economic returns that most companies would actually get on current AI development.  Cost synergies appear feasible, but revenue growth less so.  Undoubtedly, there are many menial, mental processes that could be automated.  Yet, replacing a human worker with a humanoid robot powered by the state of the art chips is nearly double current employee cost.  Robo taxis are the rage, but the reality is that other players in the auto industry rely on the same data and, thus, over time, competitive advantage gets whittled away.

We maintain a defensive stance while looking for opportunities to grow your portfolio even with risks out there.  Your accounts continue to be invested in a variety of sleeves, including growth, income, and diversification.

What Do I Own in the Income Bucket?

“Why do I need anything but NASDAQ stocks?”  Today they rise, but that is no guarantee in the future they will keep rising.  In fact, especially if stocks become overvalued and/or earnings disappoint expectations, the stocks possibly might even fall.  Just remember the year 2000 followed 1999.  After the decline, it took over a decade for investors to recoup losses.

Except for those with the longest time horizons and most aggressive risk appetite, most of you own investments in the “income” bucket.  (Recall in the last newsletter that we discussed the “diversification” bucket.)

The Income bucket is designed to allow you to clip coupons by being paid interest, yet with potentially limited (up or down) appreciation on your principal.  The Income bucket functions to fund short-term needs for cash and potentially stabilizes the total portfolio when volatility rises and risk markets decline.

US Government T-Bills are the primary exposure in those of you with the Income bucket.  Low duration (less than 2-year maturity) and minimal credit risk (US government) along with a mid-single-digit coupon offer potentially attractive risk-adjusted returns.  The greatest risk to returns on T-Bills is the possibility and extent to which the Fed decides to reduce interest rates in response to a weaker economy.  Lower interest rates mean lower (but not negative) returns on T-Bills.  In fact, a cut in interest rates near-term benefits the value of your principal.  However, the bad news is that future yield on new T-bills is lower.

Our hunch is that the Fed might make a moderate cut in rates over the next 18-24 months if and as the economy continues to weaken.  However, we doubt it brings us back to the near zero rates of pre COVID; fiscal spending and debt are at much higher levels.  Lower interest rates might also add gasoline to the fuel of a possible resumption in inflation.

For the most part, we have avoided buying bonds with high duration or credit risk.  (A few accounts with high cash needs might own some highly rated corporate bonds in limited amounts.)  Risk of inflation and economic weakness coupled with low rates relative to the risk one takes in owning the bonds keeps us cautious.

While not officially part of the Income bucket, one mutual fund strategy might provide slightly higher returns with a risk profile similar to fixed income.  This fund utilizes an event driven strategy (officially classified in the Diversified bucket).  We described it briefly in our last newsletter, but here is a brief description.  Roughly 2/3 of the strategy is merger arb, where the fund buys the securities (equities or bonds) of a company that has announced it will be acquired.  The fund hedges its exposure by selling short the equity of the buying company.  These trades tend to be low return but low risk and mostly short term (3-6 months).  The other 1/3 of the strategy is classic event driven, where the fund conducts a variety of short-term strategies around corporate events (one example might be announcements on investor days, where the fund might purchase both calls and puts to anticipate a strong stock reaction positive or negative).  The fund does not generate income in the literal sense.  Yet the fund’s strategies potentially result in low volatility similar to traditional fixed income with the potential for higher returns (and lower correlation to the direction of interest rates).

Keep Your IRA Beneficiaries Up to Date

Why Beneficiary Forms Matter

You’ve spent years building up your IRA, watching it grow, and perhaps even rolling over funds from a company plan. But have you thought about what happens to your IRA after you die? Many people mistakenly believe their will controls who inherits their IRA. In reality, the beneficiary designation form you filled out with your IRA custodian determines who receives your IRA funds.

Completing and Updating Your Beneficiary Form

When you set up your IRA, you named primary and contingent beneficiaries on a beneficiary designation form. This form decides who gets your IRA if something happens to you. It’s crucial to update this form after major life changes, like marriage, divorce, or the birth of a child, to ensure it reflects your current wishes.

Regular Reviews Are Essential

Regularly check your beneficiary form to make sure it’s accurate. Clear identification of all beneficiaries and their shares is vital. If the form is missing or outdated, update it immediately. Problems can arise if the form is lost due to bank mergers or other issues. Completing a new form now can prevent complications later.

Take Action Now

To protect your hard-earned IRA funds and ensure they go to your intended heirs, keep your beneficiary designation form updated and accurate. Regular reviews and updates can prevent legal battles and ensure a smooth transfer of assets to your loved ones.

Sincerely,

Petr Burunov, CFP®
President / Wealth Strategist

The post Client Newsletter 3Q24 appeared first on AWM.

“Sudden wealth” (inheritance) is when a person receives a large sum of money quickly.  Examples of “sudden wealth” include:

• Being named a beneficiary in a trust
• Winning money from litigation (such as a class action lawsuit)
• Insurance payoff (such as life insurance upon the death of a spouse)
• Hitting it big with a winning lottery ticket

You might think “sudden wealth” should make your heirs’ life easy.  It actually might introduce a new world of complexity.

An article in Business Insider relates 20 tragic tales of peoples’ lives being ruined – just because they won the lottery.[1] The US Bureau of Labor Statistics estimates that one out of three heirs will have blown their money within two years![2]

The chances of financial damage rise if the heirs have problems related to bad credit, gambling, or substance addiction.

The good news for you is that possible solutions exist to raising the odds that your inheritance can truly help your heirs.  Trusts feature several potential options that might empower you to bless your heirs:

1. Consider opening a trust. A trust involves conveying your property to an heir but with control over how much, when, and for what purposes the property will benefit the heir.  Finding a trustworthy person, whether a relative or a third party, to administer the trust is a key consideration.
2. Define the conditions of the trust. Did you know that you can define as narrowly or broadly as you want how you want the beneficiary to use your inheritance?  You can also reward the heirs for good behavior.  For instance, if you want the heirs to finish a college education, you could specify a certain payout only after they show proof of graduating college.
3. Bypass the heir and pay for their service providers instead. For example, you might consider including monthly rent payment directly to the landlord or mortgage company of the heirs (instead of paying money to the heirs – and hope they use it responsibly).

Naturally, your situation has its own complexities.  It’s likely you would need professional advice to explore and perhaps create a robust trust.

We have worked with many clients considering wise ways to pass on their legacy to the next generation.

Let us help you to explore the best potential options for your needs.

Schedule appointment

[1] Mandi Woodruff and Michael B. Kelley, “20 Lottery Winners Who Blew It All”, Business Insider, December 14, 2013, on http://www.businessinsider.com/lottery-winners-who-lost-everything-2013-12  accessed on June 13, 2018.

[2] Cited in Juliette Fairley, “The Downside of Sudden Wealth”, Private Wealth, June 16, 2016, on https://www.fa-mag.com/news/the-down-side-of-sudden-wealth-27518.html  accessed on June 13, 2018.

The post 3 Ways You Can Protect Your Heirs and Yourself appeared first on AWM.