2021 has been a bumpy ride, and I shared why in my last newsletter. As we head into the fourth quarter, I want to give you access to new strategies, address inflation, and speculate what’s to come after the holiday season. Let’s dive in.

Are You Looking for a Unique Strategy?

You know my heart and approach to developing holistic relationships with each of my clients.

In the same way, we look at managers with unique strategies that can increase prospects to help our clients meet their goals. We believe many of you might benefit from owning strategies outside of traditional US stocks and bonds.

Over the years, we have been building relationships and allocating portions of client assets into managers with strong niches. Examples include Japanese stocks, long-short equities, commodities, and managed futures.

One of our managers closed their strategy to new, outside investors. However, all existing and future clients of AWM still have access to these strategies because of our long-term relationship with the manager.

If this sounds intriguing to you, come talk with us to see if it’s a good fit for you and your family.

Inflation Will Impact Your Family

Unfortunately, your investments are not the only thing going up. Anyone who has recently gone for a drive, enjoyed a meal out, vacationed, or bought a house knows that things don’t cost what they used to, especially in the Pacific Northwest.

Filling up your gas tank is 40% more expensive compared to a year ago. Food prices are up over 4%. Restaurant prices are up 7%. Some companies are even charging higher prices for smaller portions of food. No one is likely to forget that home prices have risen over 13% in the last year.

These are all examples of inflation. As you can imagine, inflation can take a real bite out of your standard of living.

Inflation Might Be Here to Stay

We’ve heard some say, “Well, this is transitory. Gas prices won’t rise 40% again! They should eventually go back down as they pump more oil.” This news can be difficult to hear, but we think many of the gains are here to stay and might even continue to rise in other areas.

What’s our reasoning? Here are a few things to consider:

1. Many commodity companies are cautious on spending capital expenditure to produce more goods even with higher prices. (The oil company Chevron recently forecasted minimal high spending on boosting oil production even with higher prices. Farmers in many parts of the world have had poor harvests, which will limit supply again in 2022.)

2. There is a global shortage of computer chips. Have you wondered why it is so hard to buy 2021 car models? It’s because they have many chassis, but unfinished interiors or engines because they lack the electronics! Several observers fear the shortage will last well into next year.

3. Labor shortages in a number of industries have caused supply bottlenecks and price spikes. For example, railroads and truckers have seen an exodus of workers, some due to retirements without sufficient hiring of young workers. Notice the plethora of “Help Wanted” signs, particularly at restaurants.

4. The shortage of shipping containers is an issue for global trade, especially for economies like the US that heavily rely on cheaper imports from Asia. Just look at the record-high backlog of container ships that create delays to unload for West Coast ports.

5. Remember, taxes might also rise due to either changes in tax laws that we have highlighted in past letters or simple inflating asset values. For example, higher home values lead to higher property tax assessments.

You Can Fight Back Against Inflation

You can’t avoid inflation, but there are some steps you can take to help alleviate it.

First, budget. Focus on the expense side. Do you know how much you are spending on gas, food, and going out?  When you understand where your money is going, how much you are spending, it’s easier to prioritize non-discretionary expenses (needs) over discretionary expenses (wants).

Next, prioritize. When staring in the face of inflation, you must decide what is most important to you and your family.

1. You can maintain your current lifestyle and spending habits (which will rise so long as we remain in an inflationary environment) but at the expense of future income generated by savings and investments. Or,
2. You can look for ways to control your spending by adapting your lifestyle, maintaining your current savings and investment strategies, and recognizing that taxes might be a bigger concern for your family.

It’s also important to understand that your investments and assets are working for you and have the potential to keep up with inflation.

Lastly, take action. Work with your team of trusted professionals to collaborate with you on a game plan and carry it out. Your plan does nothing for you unless it’s put into action. Also, remember to check in from time to time to review and make necessary adjustments to your plan.

The Bottom Line: Now Is the Time to Prepare for 2022

Start this last quarter of 2021 with a fresh perspective on your investment strategies and financial planning.

I hope the tools in this letter will help you as we continue to navigate through these challenging months. Know that I and my team are a resource for you and your family. Please let us know how we can help.

Sincerely,

Petr Burunov, CFP®
President / Wealth Strategist

The post Client Newsletter 4Q21 appeared first on AWM.

Happy Spring!  It’s time to talk about a subject most of us would rather avoid (but can’t):

Taxes!

“It’s not what you earn that matters, but it’s what you keep.” 

You have heard me repeat this saying over the years.  But I want you to take this to heart.

I’ll share a quick investment update, then we’ll talk about why taxes matter, what we are doing to help clients like you, and what steps you might consider to alleviate taxes.

Investment Update

It was only a year ago when we were talking about the big decline in the markets.

Since then, we have had an amazing roller coaster ride.  COVID19 nearly shut down the economy.  Then, the Fed intervened with massive amounts of money to keep things open and avert economic disaster.  Multiple stimulus bills were passed.  Cash was printed, and interest rates were slashed to nearly zero.  The whole world was in the same boat.

The economy responded, as did your investments.

Since the start of 2021, the economy has started to reopen.  With this, more shifts will occur.  Headed into the year, we recognized opportunities in areas that could benefit from supply shortages.  While a reopening economy is positive, challenges also accompany it: potential inflation, higher taxes, and a weaker dollar.

Inflation could be a problem for those seeking to preserve their standard of living.  We have taken action across portfolios to preserve and grow purchasing power.  This is especially critical for those of you who are living off your money.  After many years of falling prices, however, the trend might be changing.  Consequently, we have invested some of your money into areas that benefit from rising demand and limited supply

Some examples that might point to higher inflation include higher prices in commodities such as gas, food, and lumber, wage hikes for small businesses unable to hire lower-level employees, and the continued decline in the US Dollar versus other foreign currencies.

We currently see a balance of risks and opportunities in markets.  While fundamentals are fairly robust and liquidity is more than ample, valuations are quite high and leave little room for negative event risk.

Why Taxes Could Be a Growing Problem for You in 2021 (and Beyond)?

Okay, let’s talk taxes. Taxes are your biggest expense.  Managing your taxes shrewdly can help maintain your lifestyle.  If you choose to ignore them, taxes can take a bite out of your wallet and your freedom to live as you want.

We need to be even more vigilant on taxes in 2021 (and beyond).  Here’s why:

1. There are clear signs that tax rates both federal and state will be going up.

2. New types of taxes, particularly state(s), are being considered. For instance, Washington State has passed a new capital gains tax for high earners.  New and higher sales, gas, carbon, and income taxes are also on the table in several states.

3. Clients who procrastinate and fail to plan could be stuck with a nasty surprise of higher tax bills.

4. Clients entering retirement often fail to realize that their taxes might still go up. People think they can enter retirement with a good nest egg and expect lower taxes on lower income.  However, they also lose tax deductions (dependents move away, paying off the mortgage eliminates interest deductions). At age 72, they must start taking distributions on traditional IRA(s) at their ordinary income tax rate. All this income might even make your Social Security benefits taxable, leading to higher Medicare premiums.

5. Investments for many clients have grown substantially in recent years with the bull market. At some point, they will realize taxable gains, either because of the need to reduce investment risk or else the simple need for money to live on.

6. Taxable accounts are unlikely to benefit from tax-loss harvesting in 2021 as they did in 2020. When the markets corrected this time last year, many clients benefited from our actions to realize taxable losses while keeping them invested.  For instance, we sold one fund to realize the loss to write off against taxes (or other gains), and then we reinvested the money into different investments with similar characteristics. Once markets recovered, their investments grew. Yet, their taxes were reduced because of realizing the losses. Given strong markets thus far in 2021, taxable accounts may have to deal with higher capital gains taxes on realized gains.

“How Is AWM Seeking to Shield Clients from Taxes?”

We cannot promise you zero taxes.  However, there are many things we can do to help reduce taxes as much as possible.  Here are some examples:

1. We seek to invest in tax-friendly vehicles for capital growth. For instance, we try to avoid mutual funds that pay high capital gains even if their value declined during the year (such as what happened to some funds in 2008).  While other investments do not have this issue.  Occasionally, we have found mutual funds that can generate minimal capital gains even if they have a strong year.

2. We also seek investments with tax-efficient income. One example is ordinary income.  In most cases, we avoid ordinary income generated by REITs and annuities because it is taxed as regular income, not capital gains tax.  We also steer clear of partnerships in part because income generates K-1’s that can complicate your tax returns.  We gravitate toward qualified income taxed at lower long-term capital gains rates.

3. Tax-loss harvesting is a strategy we employ to try to smooth taxes. Taxable accounts with realized gains can benefit when we realize losses on investments.  These realized losses reduce the gains that clients have to report on their taxes. Typically, market opportunities abound by selling one security at a loss and buying another similar security.  Your money remains invested, but you benefit from taking a loss.

4. Investments with tax-free income might prove attractive. Municipal bonds might become more attractive in an environment of rising interest rates, income, and capital gains tax rates.  While certain partnerships, such as MLP’s, also could entice taxable investors, they also come with price volatility and potential complications in tax filing.

5. Consider Roth Conversions and charitable giving. This can help people in retirement to offset taxes and save more money.

6. We are constantly educating ourselves on new tax laws so we can better advise you.

What Should You Be Doing Now to Ward Off Taxes?

1. Plan for the future. (I cannot emphasize this enough.) Tax planning is more important than ever.  Expect higher taxes in the future.  Realize that tax laws will become more complex, not less.  Seek our help to find ways to reduce the pinch of higher taxes.

2. Work with a tax professional if you don’t have one already. For those of you who work with a tax professional outside of our office, have them work with us.  We can collaborate to understand better when and how much to capture capital gains, explore Roth conversions, and realize extra income without bumping you up to the next tax bracket.

3. Be aware of potential tax law changes in your state currently in discussion in state legislatures.

4. Talk to us about how we can help with your taxes. Tax planning is much more than simply filling out the annual tax returns.  Ask us how we can help you with strategies to save on taxes: tax harvesting, charitable giving, retirement account conversions, and other specialized strategies.

Special message to business owners:

Taxes will become even more complicated for you.   Owning a business introduces another layer of complexity.  I urge you to talk to someone because higher and more complicated taxes potentially add even more of a burden to your lives or can take a bigger bite out of your income or savings.

Sincerely,

Petr Burunov, CFP®
President / Wealth Strategist

The post Client Newsletter 2Q21 appeared first on AWM.

What a whirlwind 2020 turned out to be.

We just experienced a six-month sprint through a global pandemic, new laws, record-breaking unemployment, the loss of loved ones, and the disruption of everyone’s personal and professional lives. (For a quick recap of 2020, read through the box on the below.)

Six months of absolute crazy. It felt like forever. And, unfortunately, the ride is far from over.

What we predicted.

There is still much uncertainty. Back in March, we predicted:

• Coronavirus quarantines would put economic activity on hold for much of the spring, or longer.
• Low oil prices would pressure US energy producers for months to come.
• Earnings would likely decline in 2020.
• Persistently stubborn high unemployment

What have we been doing?

The Ambassador team is very grateful for your trust and partnership. We take our job extremely seriously and want to remind you of what we’ve done.

Towards the end of 2019, we took a lot of risk off the table. A lot of our clients were well-positioned going into the coronavirus recession.

In April, we started to see opportunities in the market and signs of a new economy emerging. We have designed a sleeve to fit these new trends, which has been added to most of your portfolios. This new model takes advantage of companies who are benefiting from: employees working remotely, technological and cybersecurity advances, online payments and shopping, pharmacy and biotech renewals, and vaccine development.

While this has been working for our clients, there are still a few potential risks that we’re facing going into the second half of this year.

• Resurfacing of Coronavirus
• Earnings impacted from the shutdowns
• International uncertainty (especially trades with China)
• Federal reserve stimulating the economy
• November Elections of 2020

We have been communicating often and extensively with you. I want to make sure you understand what is happening. If you have not read our previous newsletters, please take the time to do so. We have talked a lot about the uncertainty around COVID-19 and its impact on you.

Online Portal

Are you taking full advantage of your online portal? It’s a special tool you have access to. Some features include:

• You can link outside assets/liabilities – view all of your finances in one easy-to-use platform
• Personal Planning Tools
• Various reports on your AWM accounts
• Info gathering tools for Financial Planning
• Vault – locate your AWM reports, upload documents you wish to share, and your private documents folder

If you need assistance accessing your online portal, please reach out to Debbie.

Taxes

This is a big one. There have been so many changes since December 2019. Many of them are still being updated and clarified with new rules and laws, often if not daily.

Retirement account rules and exceptions are very complicated. With many changes, we encourage all of you to check with us before you make any decisions. I don’t want you to find yourself dealing with tax consequences. In other words, don’t do it yourself.

Things are still changing, being interpreted, and worked on. We encourage you to be careful in decisions you make or have us research on your behalf to see if there is a tax-advantageous way to do it.

Investment Update

Currently, we are neutral to slightly cautious with risk.  While we are favorable on liquidity and market technicals, we are quite concerned about valuation and see risks stemming from an uneven pace of economic recovery and an adverse November election outcome.

1. Economic fundamentals are improving but fragile. On the plus side, housing benefits from low rates and limited inventory.  Technology continues to be a strong secular theme as companies looking to grow and contain costs are likely to replace labor with capital.  Banks have much stronger capital than the previous recession, but they might face stronger economic headwinds from low rates and rising bad loans.
2. On the negative side, many companies have lots of debt and little visibility into the top line (at least for 2020). Unemployment is improving but remains stubbornly high.  Government stimulus might be peaking.  While the Federal government expands its programs, states and local municipalities face huge revenue shortfalls.  They will still have to cut back on spending.  Net exports are a mixed bag as the rest of the world also suffers from the hangover of the COVID downturn.
3. Potential exists for near-term improvements with lockdowns winding down, but the risk of a second wave of COVID and corporate layoffs might make it an uneven recovery.
4. Valuations are unfavorable given most stocks and bonds appear expensive, and signs of a bubble (NASDAQ vs. the rest of the market are back to highs in 1999) are visible. The one saving grace is that on a relative basis, stocks are not as overvalued when compared to the ultra-low level of interest rates.
5. Liquidity is a favorable factor going for the market right now. So long as the Feds continue to keep rates low and pump up liquidity, it is hard to argue for a sustained near-term decline.  However, liquidity does not solve the problems of weak consumer demand, high unemployment, and growing fiscal deficits.
6. Technicals for many parts of the market are strong and might indicate potential for solid returns. Price momentum is robust.   That does not apply to many pockets of the market, such as bank, energy, and many small-cap stocks as well as the US Dollar.
   Parts of sentiment feel bubbly but are not quite at maximum euphoria.  (This indicator is our least favorite, but we would be remiss not to acknowledge its potential to keep working.  It is one of those things that keeps working, until it no longer does, often before a tangible turn in fundamentals or news flow.)

Political risk appears skewed to the negative side.

Presidential and congressional elections in November might be one of the most momentous in years.  If Democrats manage a clean sweep, risk exists for slower growth and rising spending and regulation, factors that the market might not favor.  Another scenario of a President and Congress split by party might add to deadlock, but perhaps a more favorable (less unfavorable?) market scenario.  At this point, we think either scenario is a coin flip (50/50).

Our strategy going forward:

Since the spring, markets have been creeping higher as the Federal Reserve has pumped liquidity to support the economy.  While we are mindful of opportunities, we are also sensitive to try to mitigate the potential downside from the risks mentioned earlier.

In short, we are:

• Watching your money
• Being careful
• Looking for ways to improve
• Keeping you in the loop

So much has happened since January. Even though we have communicated a lot with you in writing, we still want to hear how your situations have changed. Understanding your situations will help us serve you better.

Sincerely,

Petr Burunov, CFP®
President / Wealth Strategist

The post Client Newsletter 3Q20 appeared first on AWM.

Businesses have closed, people have lost jobs, and others are required to take unpaid time off.

How on earth can you afford a fun summer for the family? Here are our best staycation ideas:

1. Pitch a tent.

Not everyone can make it to a national park, but don’t let that stop you from camping! Pitch a tent in your backyard and use a portable grill or fire pit to cook up some hot dogs and s’ mores. Don’t forget your favorite singalongs and/or ghost stories!

If you don’t have camping equipment, someone you know is sure to let you borrow what you need.

2. Be a local tourist.

Vacation and hometown don’t usually end up in the same sentence. But, have you ever considered exploring your hometown like a tourist?

Book a night or two in a local hotel and pretend you’re visiting from out of town. Maybe your town has a local museum or festival. Take a guided city tour and learn something new about your town. You could also see a matinee movie or try the local cuisine you’ve been eyeing.

3. Take a day trip.

In the Pacific Northwest, most scenic destinations are within a few minutes or hours. Pack a picnic and visit your beach, the mountains, or even a small town you’ve never been to before.

4. DIY your favorite excursion

Who says you have to pay a professional to enjoy your favorite activities?

Set up a DIY spa day or get the whole family together to make your favorite five-star dinner. Be creative or looks up new ideas on the internet.

5. Volunteer.

Why not use some of your downtime to make a difference in your community?

There are countless local volunteer opportunities. From tidying up a local park, preparing and/or serving meals at a shelter, to working on a house with Habitat for Humanity, among others.

What might seem like work at first could be the most gratifying thing to do during your staycation.

With a little creativity, you can fill your summer with fun, local activities the whole family will love. Don’t let finances get in the way of making memories with your loved ones.

The post Do We Stay or Do We Go? appeared first on AWM.

We’re encouraging everyone: don’t let fear rule your finances.

Many of you have developed a financial plan to achieve successful retirements and we’re very thankful that during these times, those plans have helped to mitigate uncertainty.

If you don’t have a plan, we encourage you to think about developing one and putting it in place. Knowing where you are going can help give you peace of mind and confidence, especially in the midst of economic and social uncertainty.

During seasons like this, our focus is to continue reviewing risks and looking for opportunities.

What have we been doing?

1. Continue to Further Reduce Risk.
   

   After such a strong market in 2019, we suspected we were due for some sort of correction. That said, we did not expect the coronavirus or a crash in oil prices to move the market to such an extent.

   In January, we started reducing risks in your portfolios. Specifically, we reduced positions in emerging markets, small-cap equities, and intermediate high yield debt in favor of cash and gold.  We had concerns over international growth, especially from China, causing us to cut emerging markets. High leverage and higher credit risk (in part due to the collapse in oil prices first on lower China and air travel, then recently the collapse in OPEC talks with Russia) made us cut positions in small-cap and high yield.

2. Roth Conversions.

   This might be a good opportunity for some to think about doing Roth Conversions. Converting more shares at lower prices can potentially reduce your future RMD’s once the market starts to recovers.

   As a result, these conversions could reduce your taxable income in the future.

3. Tax Harvesting.

   Taking down risk in portfolios followed by the market’s subsequent decline has also created opportunities for tax harvesting in taxable accounts.

   This might be a good opportunity to start taking gains off the table and offsetting them with more current losses to minimize or even reduce future tax liabilities in taxable accounts.

4. Looking for Opportunities.

   This week we are slowly beginning to selectively re-enter the market when the opportunity presents itself and aligns with your goals. We are being patient and not jumping in too quickly.

   We are also seeking to enhance client portfolios in the process. For instance, one shift is to remove individual companies with more exposure to economic downturn and add more diversified investments (individual companies or broader equity baskets).

What might lie ahead?

Much uncertainty remains.

• Coronavirus quarantines will put economic activity on hold for much of the spring, if not longer.
• Low oil prices will pressure US energy producers for a while longer.
• Earnings are likely to decline in 2020.

However, US Treasury yields have collapsed below inflation. Relative valuation for equities, particularly those with sustainable dividend yields, have improved immensely. While their stock prices have cratered, US banks appear to be better capitalized than in 2008.

Valuation has not yet been enough of a compelling argument to boost risk-on assets like stocks and commodities. Yet, when the US economy eventually starts to resume operating at normal capacity with a peaking in Coronavirus cases, we think the market might start to recover on less bad news.

It’s impossible to know when the chaos will end. That said, we are proactive and vigilant.

What can you do?

1. Stay calm and don’t panic. Stay true to yourself and don’t let your emotions run your financial decisions
2. Have a plan. If you have a financial plan, lean into it and let it do its job. If you don’t have a plan, now is the time to get one.
3. Let’s look for opportunities. Tax season is upon us and we are encouraging you to look for opportunities to utilize the new tax code to save on tax liabilities.
   Now might also be the time to think about slowly re-entering the market in small increments.

Thank you for your trust in us as we partner on your financial journey with you.

The post Separating Emotions from Investing is Key to Surviving Coronavirus. appeared first on AWM.

First and foremost, we hope for good health and wellness for you and your families.

Our Perspective:

As I mentioned in our last update, we anticipated some sort of market correction in 2020.

What we did not expect, was the Coronavirus striking this much fear into our communities and economy. No one knows when the madness will end.

Despite the volatility in the market, we are starting to see opportunities. Instead of continuing to reduce risk, we might be encouraging our clients to take on a little more in the coming weeks.

This is not my first time saying this. It’s crucial to have a strategic Financial Plan. Not only will a plan give you peace of mind, but it will also provide discipline to weather the ups and downs for the market.

During these uncertain times, I can only suggest that you be careful how much the media and noise of every day affect your decision making.

Remember, the stock market also tends to overreact to the various noises in the world:

1. We saw the market turn overly euphoric in January 2020, with little to no justification.
2. What we see now is the market turning overly depressed due to recent corrections and the abundance of negative news headlines regarding the Coronavirus.

In the midst of chaos and havoc, I encourage you to stick with your long-term goals. Don’t let emotions run your life.

In this update, I want to cover a few areas that could suggest stabilization in the market and also a few caution signs we are carefully watching.

Signs of Hope:

1. A good portion of the stock market advertises yields above those of the 10-year US Treasury:

   

2. Perspective on the recent decline: we just went from euphoria to summer 2019 levels on the S&
3. Central banks are still providing “punch to the party” by cutting interest rates.

   

Signs of Concern:

1. The bond market is worried about growth (U.S., not just international).

However, current low rates might keep on stimulating the housing market via cheap mortgages (refinancing, too).

2. Airline traffic in the US might be an indicator of consumer fears.
3. Lead indicators for global activity are weak.

Summary:

As we continue to see volatility in the markets, here are a few things you can do:

1. Don’t let the news control your emotions.
2. Stay focused on your long-term goals.
3. And don’t forget that if you have a plan in place, it will give you confidence for your success.

Thank you for your trust in us as we partner on your financial journey with you.

The post Investment Update: Did the Market Just Catch a Cold, or Is It Terminally Ill? appeared first on AWM.