This makes August a stellar time to work on your finances. My advice? Don’t put it off until December.

Here are a few year-end planning items to check off your list:

1. Get Ready for Upcoming Education Costs

For students: this is a great time to start looking at college scholarships. Find 3 or 4 you would like to win and start working to make yourself the perfect candidate and apply early.

For the parents: take a look at some college calculators to get a sense of how much your expected family contribution (EFC) will be and the best tax-efficient way to pay for it.

Even if college is a few years out, planning now can help keep costs down later. Make sure everyone is on the same page and only look at schools that you can afford.

2. Do You Need to Rebalance Your Investments?

Consider the market. Is your current asset allocation up-to-date and working for you? This is a good time to review your portfolio with your financial planner.

Also, consider the tax consequences of reallocating your investments. This might be a good time for a tax planning session.

3. Revisit Your Budget and Goals

Do you have dreams of buying a home, paying for college expenses, or ramping up your retirement savings?

Take a look at your budget. How are you doing? It might be time to trim down some costs by eating out less and ditching subscriptions you no longer use.

Write down your goals and how you plan to reach them. This is the first step in making those dreams a reality.

4. (Bonus!) Plan for Your Next Tax Bill

August is usually a slow month for accountants and other tax experts. This means it’s a good time for tax planning.

Don’t wait until December. Estimate your upcoming take bill, and start preparing for it.

If you don’t already have a team of professionals ready to help you through this planning season, consider talking to a certified financial planner who offers hourly consulting—and keep the conversation limited to tax strategies.

A 2-hour planning session could help you keep more of your hard-earned money.

The post Don’t Wait to Start Your Year-End Financial Planning appeared first on AWM.

I mean, if we all knew the secret to investing, we’d be richer than Warren Buffet, am I right?

Jokes aside, the “secret” is often disappointing.

True investing success boils down to hard work and patience, or what I like to call discipline.

What do I mean? Let’s take a look at three types of discipline I work to develop with my clients:

1. The Discipline of Planning

Before you even think about investing, you have to plan. Do your homework.

What do you hope to accomplish? What do you dream about? What is most likely to happen? How long until you need this money? Are you prepared to weather out good and bad years?

Without a plan, it’s near impossible to reach your goals. Developing discipline is thinking about the future.

2. The Discipline of Commitment

You have to ask yourself, “Am I in this for the long haul?”

It’s easy to be swayed by our friends and family. Are you ready to commit to your plan even when it’s difficult?

I like to think of farmers in this situation. They keep sowing and cultivating their dirt to prepare for the eventual harvest of their hard work.

They don’t listen to their neighbors who are disgruntled and walk away from their work. Instead, wise farmers stick to their crops and earn yields even when others gave up long ago.

Thinking strategically can help curb your emotions.

3. The Discipline of Adapting

How will you hold up to the pressures that life throws your way?

Successful investors do not react to temporary situations on the flip of a coin. Rather, they periodically evaluate their strategy, seek out prudent consultation, and make adjustments when circumstances have truly changed.

These tend to be big changes like retirement, age, health, inheritance, marriage/family, etc.

Discipline means adapting to these changes.

There you have it. The secret is out. To find success with investing, discipline has to be your priority.

I strongly encourage each of you to seek out a Fiduciary Advisor. They can help keep you on track and develop discipline in your finances.

Let’s Chat

The post What’s the Secret to Investing? appeared first on AWM.

Real estate can be a great investment, but if you don’t fully understand your numbers, it can be a disaster.

A couple that I met with recently, loved getting their monthly rental checks and keeping close tabs on the fluctuations of the housing market.

When the market started to rise, they began to sell off their rental properties, not thinking about the tax implications. The IRS greeted them with a tax bill for the depreciation they had taken over the last several years.

Their actual return ended up much smaller than they originally anticipated.

This is why having a financial plan is so important.

In order to reach your goals, you need to fully understand your numbers and the actual impact and risks.

If you don’t want to get burned by a short-sighted investment decision, here are 3 things you should do:

1. First, think logically. We all know how emotions can cloud judgment, so be careful with your investments. Look at the big picture to determine what is best for you and your family.
2. Secondly, know your numbers. Especially with real estate. In order for real estate to be a good investment, you need to understand tax implications and the actual returns your properties are producing.
3. And lastly, work with professionals. Don’t rely on your own expertise when investing in your future. Talk to a fiduciary financial advisor to get a second opinion and advice on big financial decisions.

My goal is to help all my clients nurture and grow their nest eggs thoughtfully, and with the big picture in mind.

Visit my website and schedule a short phone call with me.

I would love to join you on your financial journey.

The post Is Real Estate Actually a Good Investment? appeared first on AWM.

“Dull” quarter?  Not really…

Dear Ambassador Family,

We have not changed much since the last letter – 3 on a scale of 1 to 5.  The strong rally in 1q19 is flattening out as corporate fundamentals are modest but solid.  Low interest rates thus far have limited downside.

Since the last newsletter, we have moved slightly more negative on the US Dollar.  This continues a trend from last year of adding gold and emerging markets (depending upon your family’s model and risk tolerance).  Slower growth, a potential cut in interest rates, and volatility from upcoming elections next year are the main reasons.

Over the last several months, we have been reviewing client portfolios and taking down risk to specific factors (trade war, exposure to negative yield curve, most cyclical commodities).

Gold and Treasury bonds have rallied in 2q19 as investors sense a more dovish Fed.  S&P 500 is holding onto a slight gain with solid corporate fundamentals continuing to be offset with high valuations.  Small cap and international markets are slightly down for the quarter.

Do not let the lack of big price moves fool you.  Cross-currents in the global economy remain:

• The US yield curve remains inverted – though, now, Fed has tipped its hand that it might lean a little dovish (e.g. likely to cut rates now rather than raise them).
• US economic growth has been steady but unexciting. Jobs gains are positive but well off the peaks.  Inflation is subdued.
• International growth continues to be weak in general.
• The US and China are now unlikely to come to a trade deal in the near term. Markets have been surprisingly resilient.
• Geopolitical tensions with Iran might be rearing their ugly head (though that has not boosted oil much)
• Markets have generally yawned about European elections (more populists in power, but not enough to get excited) and risk of a disorderly Brexit.
• It is early, but US presidential elections in 2020 might add some market volatility.

We continue to be hopeful for gradual gains.  Yet, we are also mindful that risks at current high valuations remain.

Please let us know of any questions.

Sincerely,

Stuart P. Quint, CFA

Managing Director / Investments and Compliance

The post Investment Newsletter 3Q19 appeared first on AWM.

Which elevator would you choose if you were riding to the top of the Empire State Building? 

One with a single, thin cable?  Or one with several strong cables?

Obviously, we all want the safest option.

When it comes to investments though, many families latch their nest egg to a single cable.

It’s called real estate.

Real estate can be a great investment, but I have seen my clients’ retirement savings fail because they put all their eggs in one basket.

I had a recent conversation with one of my clients, who is now widowed. Years ago, she and her husband decided to invest all of their savings into real estate. When the husband passed, my client needed money to live on, but she wasn’t able to maintain a large home of her own in addition to rental properties.

As you can imagine, she lost a lot of money very quickly.

Could this happen to you?

If real estate is your main investment and you want to get back on the right track, these three recommendations can help get you started:

1. First, don’t let emotions override logic. People often forget that real estate prices go up and down; the value of your home is changing and you might not even know it. Some homeowners also forget how costly and time-consuming it can be to liquidate their real estate assets.
2. Secondly, understand your numbers. In order to make informed decisions, you need to know what your property is actually producing or costing.
3. And third, talk to a professional. A real estate agent can help you assess the market, however, a competent financial advisor can help you look at your family’s picture holistically.

I help my clients find multiple ways to nurture their nest egg and plan for their future. If you are overwhelmed with real estate and hold all of your assets in a single investment, I would love to help you.

Come visit our website and schedule a free consultation with me.

Let’s Talk

The post Do You Own Too Much Real Estate? appeared first on AWM.

After one of the worst quarters in a couple of years, risk assets recovered strongly in 1q19.  Stocks, commodities, and bonds, for the most part, posted positive gains.  Possible reasons include:

• Continued strong corporate profits especially in the US
• Economic growth in US still positive though weaker (less so internationally)
• Declining bond yields
• Stabilization in oil prices owing to OPEC agreement to cut oil production
• Hope for China growth to turn around, including a potential truce in the trade war

So, are the good times back for good?  We think a healthy dose of skepticism might still be appropriate.

We have previously commented on the slope of the yield curve as an indicator of economic health.  When the line is moving up, historically that has often signaled economic expansion.  When the line moves down, one needs to be more cautious.  “But when the yield curve turns negative, all bets are off.”

Today, the difference between long term bond yields (10-year US Treasury) and short-term interest rates (3 Month T-Bills) is a -0.05%.  That might augur a cautious outlook for the economy and risk assets.

One potential mitigating factor is that comparable international bond yields are even lower.  For example, current 10-year yields in the US of 2.6% exceed yields of 0-1% in Japan, UK, and Germany for similar bonds.  Apparently, global bond managers might be to blame rather than a necessary weakening in US economic fundamentals.  Perhaps US bonds might be priced higher (and the slope more positive) were it not for low international bond yields?

Our read is somewhere in the middle between bull and bear.  While jobs and consumption continue to grow (mainly in the US, to a lesser degree in emerging markets), other areas of the global economy are stalling or even declining.  Corporate earnings growth is clearly decelerating.

When you factor in that markets now are also back toward the higher end of history (off both recent troughs and bubble peaks), we have a neutral tilt toward risk in portfolios.

How Are Your Portfolios Being Positioned?

Your portfolios are constructed based on 3 buckets.  Depending on your specific financial situation, you might have a greater weighting in a bucket versus the others.   Included are some brief updates:

• Income – goal is to clip coupons with low to moderate variation in price

Update: we added an active total return manager with expertise in consumer and muni bonds.  This might enhance yield with a modest increase in credit risk.

• Growth – goal is strong capital appreciation with high potential price variation

Update: we added exposure to an emerging market consumer goods ETF that might benefit from growth in the middle class in emerging markets.  We also took profits on US small cap, REIT’s, and Japan.

• Diversification – goal is moderate capital appreciation with moderate variation in price; some elements reflect hedging against macro events

Update: we added 2 new strategies to your portfolio: merger arbitrage and equity long/short.  Both strategies potentially offer positive returns with moderate exposure to traditional equity and fixed income risk.  The manager of the strategy had run another larger successful fund at another firm. 

Please let us know of any questions.  You can also find a lot of information on a variety of investment topics on our website.

Sincerely,

Stuart P. Quint, CFA
Managing Director, Investments and Compliance

The post Investment Newsletter 2Q19 appeared first on AWM.

You can read about our outlook for 2019 in the Investment Newsletter.  In the meantime, here are 3 facts that made the year 2018 truly unusual in recent market history.

Cash: The New Winning Asset Class for the First Time in a Decade

What is this chart?

• This chart ranks annual returns on different asset classes from equities to fixed income to alternatives.
• Assets on the top of the row indicate the best performers for a given year; assets on the bottom are the worst for a given year

Why does it matter?

• Cash and fixed income occupied the top 3 positions, which had not occurred since 2008.
• Cash was the best performing asset for the year. Returns were positive but below US core inflation of 2%.
• Foreign stocks and commodities occupied the bottom 3 positions. Economic growth in Europe and China greatly decelerated in 2018.  This is not an unusual event for them to be at the bottom in the last decade.
• US equities declined. The S&P 500 was the best performing major world equity market, but still negative.  (It had been up over +10% through September before coughing up its gains and then some in the fourth quarter.)

Earnings Growth Did Not Reward Investors

What is this chart?

• This table displays historical returns of the S&P 500 when annual corporate earnings growth is strong (above 17%).

Why does it matter?

• 2018 was only the fourth year in 45 years when earnings grew substantially – yet the market declined.
• One factor in play might be that roughly half of this earnings growth came from lower corporate tax rates – a factor that will not recur in 2019.
• Other macro worries pressured the S&P 500 (and most other world markets) in 2018.

Historical Trading Patterns Did Not Repeat Themselves in 2018

1. Rally after midterm elections did not recur in 2018.
2. Split Congress did not inspire stock markets in 2018.
3. Seasonal peak in 4q did not result in stock market rally in 2018.
4. December 2018 was the worst month for stocks since 1935 (midst of the Great Depression).

The post 2018 Was Truly an Unusual Year for Markets appeared first on AWM.

We had started 2018 being cautiously optimistic on prospects for asset returns in 2018.  We did not expect to see returns repeat as strongly for 2018 as in 2017.  Yet, we had a moderately positive bias due to:

1. Corporate profits remaining healthy
2. Accommodating, but tighter, monetary policy
3. Overseas economies continuing to recover

However, chinks in the armor sprung up in the summer.  Economic activity overseas was turning downward in Europe, China, and other emerging markets.  Coupled with hotter valuations in US markets, we chose to pull back on aggressive exposure.  However, we did not turn completely bearish as corporate profits remained strong.

An interesting item to note is the radical change in markets since September 20, the peak of the S&P 500 Index.  Although US markets were up double-digits for the year, international markets and fixed income were already down and lagged significantly.  Some questions we received included, “Why do I own anything apart from the S&P 500?” and “Why do I own fixed income at all?”

These trends changed abruptly from September to December.

Fixed income rallied and finished flat for the year as fears of recession spread overseas and even to the US.  Although it was in the red for much of the year, fixed income returns differed from what was occurring in most equity markets in the winter. We made another defensive adjustment in October.  The Fed appeared more aggressive on tightening interest rates than we and many observers had believed earlier in the year.  Additionally, credit spreads began to weaken.

Equity markets led by US markets declined (though the US still finished ahead of global markets for the year).  Particularly in the US, high-flying stocks that had led the market’s previous rise were among its worst performers.

How Are Your Portfolios Being Positioned?

Entering 2019, we view the world this way:

1. Corporate profits are slowing (maybe declining), though still strong, BUT
2. Monetary policy is tight (with some chance of pausing), and
3. Overseas economies are weak – the US remains relatively stronger but is diminishing, too.

Your portfolios are constructed based on 3 buckets.  Depending on your specific financial situation, you might have a greater weighting in a bucket versus the others.

1. Income – goal is to clip coupons with low to moderate variation in price
2. Growth – goal is strong capital appreciation with high potential price variation
3. Diversification – goal is moderate capital appreciation with moderate variation in price; some elements reflect hedging against macro events

1. Income – Playing More Defense

We chose in December to reduce or eliminate exposure to corporate credit, particularly high yield bonds, in your portfolios.  Given the risk of a slowing economy along with higher risk-free interest rates, we are concerned about potential rising corporate bond downgrades and defaults.

Consequently, we have added even more to US Treasury positions, using a mix of short and intermediate duration positions.  For the first time in over a decade, short-term Treasury rates of 2.5% exceed core inflation and provide meaningful, albeit not dramatic, return with limited downside.  Longer duration positions might benefit from appreciation if macro volatility were to persist.

2. Growth – Mainly Staying Home, but Selectively Looking at International

We remain focused mainly on the US and Japan while acknowledging that select emerging markets might also be attractive given price declines and changes in the inflation outlook due to lower commodity prices and a potentially weaker Dollar.  For now, we retain positions mostly in large US stocks, small cap, and REITs with a focus on the domestic economy.  Stay tuned for potential future changes.

3. Diversification – Refilling the Bucket

For conservative to moderate portfolios, we have initiated a position in gold.  The US Dollar has enjoyed a strong run in 2018 due to a more hawkish Fed and stronger economic growth relative to the rest of the world.  While both directionally might remain in 2019, we believe the gap will decline for one or both factors.  Gold might have the potential to rise, particularly if investors continue to worry about macro risk impacting economic growth.  Additionally, given that many major currencies outside of the US Dollar have their own issues (even lower interest rates, political tension within Europe), gold possibly might come into favor after many years of being moribund.

Please let us know of any questions.  You can also find a lot of information on a variety of investment topics on our website.

Sincerely,

Stuart P. Quint, CFA
Managing Director, Investments and Compliance

The post Investment Newsletter 1Q19 appeared first on AWM.

That is not true about income coming from investments. Many of your neighbors forget this fact to their detriment.

One of the major problems people often do not understand is taxes. You can reduce different types of income with different levels of taxation.

Be informed.

What are the issues?

Income comes in many forms. Wages and bonuses you earn, sales or income from hard assets, Social Security, and sudden wealth are examples.

For many people, especially those in or approaching retirement, income from their investments is a major way to fund their lifestyles.

Some people lump income into one big category. For those of us who pay taxes (hint: most people pay taxes!), this would be a mistake. The IRS and state tax authorities view income under several categories.

The table below illustrates the different categories of income from a tax perspective and typical sources of such income:

Introducing Different Tax Categories of Income

The table below sheds light on how tax laws might apply for each category of income. This includes both taxable and qualified accounts (typically IRA’s or other retirement accounts).

Different Tax Treatment for Sources of Income in Taxable and Qualified Accounts

Here is some additional color on the specific tax treatment of each of these categories:

1. Ordinary income

   1. Taxable accounts
      1. Income other than long-term capital gains. Wages, salaries, and dividends are examples.
      2. Ordinary income is taxed under the marginal tax bracket as defined by the IRS.
      3. A range of itemized deductions might be able to offset a portion of ordinary income.
   2. Taxes on ordinary income are not relevant when held in retirement accounts.

2. Qualified Dividends

   1. 1. Taxable accounts
         1. Taxed at the long-term capital gains tax rate (used for gains on the sale of investments held for greater than 1 year).
         2. No cost basis, but also favorable tax treatment due to (typically) lower long-term capital gains tax rate.
      2. Only offset on income tax returns is capital losses (selling assets below purchase price and writing off all or a portion of the difference).
      3. Taxes on qualified dividends are not relevant when held in retirement accounts.

3. K-1 Income Pass-through Income

   1. Tax considerations for taxable accounts

      1. Partnerships like LP’s and Master Limited Partnerships (MLP’s), both public and private, pay income that the IRS treats differently from ordinary income.

      2. Investors at the end of each year receive a form K-1. A good portion of your income should be tax-deferred. However, there are complexities:

         • Most income qualifies as “return of capital”, which is recorded for tax purposes not as income, but rather as a reduction of the cost basis of the shares the investor purchased.
         • If and when the investor sells the shares of the partnership, the investor will pay capital gains tax on the difference between the share price and the cost basis. Hence, the return of capital is considered “tax-deferred” into the future, not “tax-free”.
         • Unrelated business taxable income (UBTI) is “income regularly generated by a tax-exempt entity by means of taxable activities.” Not only is this income taxed, but it has the potential to bump up the investor’s marginal tax bracket if it causes the investor’s total income to exceed certain thresholds.
         • Taxable income from MLP’s might offer potential offset in the form of depreciation and other deductions. List these items on your K-1.

      3. You might have to file income tax forms in states where you do not live but where the MLP might do business.

         • According to the MLP Association: “Because of the pass-through structure of MLPs, unitholders in multistate MLPs may owe tax in each state in which the MLP earns income. The K-1 package provided to you by the MLP each year includes information on how much income has been allocated to you in each state.”
         • Apart from a couple of states, most states have low thresholds as to how much income triggers a state income tax filing.
         • You might want to discuss with your professional the need for additional state income tax filings, payments, and whether you want to put up with the burden going forward.
   2. Taxes could still be quite relevant even if held in retirement accounts (such as IRA’s).
      1. Retirement accounts (IRA’s) – if total UBTI on all your investments in an IRA exceeds $1,000 in a year, you must file a special form and pay tax on it.
      2. In addition, you will need to file a special form with your 1040 (Form 990-T).

    

One additional consideration specific to income generated from investments with a foreign domicile is withholding tax.

Some countries have tax treaties with the US and do not withhold additional tax from dividends. However, others do not. The situation varies by country.

The UK poses an interesting example for foreign investors. Sometimes, certain structures (such as UK corporations) are exempt from dividend withholding tax. Yet, other structures in the same country (such as UK REITs) are subject to dividend withholding tax.

How we can help you deal with the issues

We would be happy to schedule a free consultation so we can help you figure out the best ways to generate income after taxes.

Do not go broke by stretching for income! Read our white paper to learn the 3 common potholes you need to steer clear of.

Schedule Appointment

The post Not All Income Is Equal Because of Taxes: 3 Types of Income appeared first on AWM.

October 3, 2018

Dear Ambassador Family:

In August, we made some tweaks to many of your portfolios.  The net result is that they have become a little more defensively relative to the start of this year.  Here are three major themes:

1. More Cautious on Global Growth

   We have drastically reduced positions related to global growth (commodities, emerging markets) and reduced Japan in portfolios.  We have grown more cautious on global growth in recent months.  Economic data from Europe and China has peaked.  Emerging market currency volatility is reemerging.  Lower global growth also puts commodity demand growth at risk.

   While the fundamentals of many Japanese companies still remain attractive, the fact is that China is Japan’s number one export destination.  Japan will not escape international volatility, though it can outperform it.  As an offset, the Japanese Yen often strengthens in times of global volatility as a safe haven, given that Japan is still a net lender to the rest of the world.  Our active manager invests in companies more geared toward domestic economic activity as well.  We keep the active manager, but reduce exposure to reflect a deteriorating situation overall for international markets.

2. Play More Defense by Raising US Exposure

   We have reinvested into low beta areas of the US such as US REITs and fixed income. REITs consist of commercial property mainly in the US.  Rises in construction (material and labor) costs could restrict further supply growth.  Continued growth in US jobs helps demand for real estate.  Yields around 3% with moderate growth are reasonably attractive.

   While we are still cautious on much of traditional fixed income, we have narrowed our underweight position as a form of insurance against macroeconomic risk.  Macroeconomic risk potentially could arise from an upset either in Europe (weak growth, rising populism), China (weakening economic growth, fallout from US tariffs), or other emerging markets.

3. Conclusion: A Little More Caution, But Not Bearish

   Let us be clear that we do not foresee a major bear market around the corner.  Rather, we are acknowledging that the bull market is “long in the tooth”.  Risks have risen, particularly overseas.  (Let us also not forget US mid-term Congressional elections, which might provide some future noise with a change in control of at least one house of Congress.)  On the other hand, the US economy shows no signs of weakening, and corporate profits continue to impress in aggregate.  Hence, we stick with a cautiously optimistic bent, albeit a little more cautious compared to the start of the year.

Please let us know of any questions.  You can also find a lot of information on a variety of investment topics on our website.  Learn our thoughts on various types of investments as well as psychology (a major factor for building and maintaining successful financial health).  You can also find past investment newsletters in the Investment Management folder of our Resource page.

Sincerely,

Stuart P. Quint, CFA

Managing Director, Investments and Compliance

Schedule appointment

The post Investment Newsletter 4Q18 appeared first on AWM.