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.

Happy New Year! I hope you had a wonderful Christmas season.

Our Strategy Remains Defensive

We have been fairly conservative since late 2021. It served portfolios well in 2022 and entering into last November, it also helped.

Market valuation was high, and earnings estimates outside of a few names (AI) were flat to declining. Inflation was declining but nowhere close to dead. The economy was being heated by fiscal spending, but other signs (declining financial stocks, consumer, small cap) pointed to a weaker economy. The Fed had been tightening consistently through the fall.

And then, the Fed cried, “Uncle!”

Fed Chairman Jerome Powell trumpeted the end of Fed hikes (at least for a while), which markets interpreted as the beginning of rate cuts.

Other stocks started to wake up. Bond yields turned lower. Commodities got a bid.

Does this now mean “the Fed is our friend” and the bulls keep running into 2024? Will the AI gold rush continue? Will it automatically spread to the other 493 (or 1993) stocks? What about international stocks?

Part of our job is not simply to make a forecast, but also to weigh risks (up and down). Some of the factors we analyze across different assets include:

• Fundamentals (Are earnings estimates believable? How much can earnings actually grow? How much are we paying for those earnings/growth? What is supply/demand for the asset class?)
• Technicals (What value do past prices and volumes tell about the future? What is their current message? Where are major players such as large institutions, retail, quantitative strategies positioned?)
• Macro (economics mainly, politics secondary).

Not to play the Grinch or Scrooge, but we remain skeptical.

How much will the Fed cut rates?

We don’t know. What we do know is this: if the Fed cuts rates too much, the inflation genie potentially might get new life. Supply constraints in a number of commodities along with robust government spending provide a potentially potent cocktail to revive inflation. (For this reason, it would surprise us to see rates go back to the lows of a decade ago, unless we are in a far worse crisis than what markets discount now.)

If the Fed cuts more slowly (or does not cut), risk assets might not be pleased especially coming off the strong “Santa Claus” rally we have just seen.

Additional potential risks include catch-up effects of higher interest rates on a weakening economy. The Fed continues to provide extraordinary amounts of short-term liquidity to regional banks (which is scheduled to run out in March 2024 – will it be renewed?). Jobs and industrial activity have clearly lost momentum. The housing market is mixed with new homes edging along, but existing home sales are stagnant.

Potential political volatility might come from geopolitical tensions (Mideast, Taiwan) or the election cycle (though many presidential elections have brought good returns to markets, tensions around 2024 might unveil unexpected surprises and volatility).

Overseas, Europe continues its stagnant path. While many emerging markets were early to hike rates and might seek to cut them, much depends on what the Fed does in the US. China still faces severe challenges in its overbuilt and leveraged real estate market.

Regarding the AI theme, no doubt it has validity. The question is how sustainable the cycle is (and who are the beneficiaries). Remember the Y2K cycle, which helped stoke a boom in technology capex and a roaring market in 1999, only to come crashing down the next couple of years. Additionally, will today’s winners be tomorrow’s winners? It might take more than just a year to sort the issues out.

Your portfolios generally remain defensively positioned. (Accounts with longer time horizons and less need for liquidity are invested more aggressively in the event this rally is more sustainable than what we expect.) They include cash-equivalents with meaningful yield and minimal credit and interest rate risk (T-Bills), alternative strategies less reliant on market direction, and a light allocation to traditional equities (mainly large cap US and modest exposure to emerging markets) and commodities.

It’s Up to You to Protect Your Family

Each of you is in a unique situation. Depending on where you fall on the retirement timeline, we can offer some recommendations to potentially help you preserve your assets, grow your investments, and keep up with inflation.

1. Retirement: You Are Retired. Set aside time to review your Trust documents. In seasons of high inflation and rising prices, you potentially might position your assets to mitigate estate taxes that your heirs might otherwise pay more of. The key in this stage is income, tax & estate planning.
2. Preparation: You Are Getting Ready to Retire. As you prepare for your upcoming retirement, ask yourself if your investment accounts are working for you and if your business or real estate holdings are positioned to prepare you for retirement. The key in this stage is income & tax planning.
3. Accumulation: You Are Establishing a Career. Establish a good, working budget to understand where your money is going. Think about ways to increase your savings, maximize retirement account contributions, invest in real estate, and/or work on paying down debts. The key in this stage is budgeting & saving.

We have and will continue to keep you informed about what we are doing with your portfolios to prepare for these challenging times ahead.

TD Ameritrade to Schwab Transition: Dual From 1099s

Those who transitioned from TD Ameritrade to Charles Schwab in 2023 will be receiving two Form 1099s:

• One from TD Ameritrade—for pre-conversion reportable activity
• One from Schwab—for post-conversion reportable activity

Delivery will be based on your paperless preferences for Form 1099s. If you are enrolled for paperless delivery, you will receive a notification when your tax forms are available on SchwabAlliance.com, or you will receive tax forms via mail if you have selected to receive paper statements.

If you have any questions about your tax forms, please let us know!

Maximizing & Reporting Roth IRA Benefits

If you missed your 2023 Roth IRA contribution, you still have time. The deadline to contribute for 2023 is April 15, 2024.

Surprisingly, there’s no need to report Roth IRA contributions on Form 1040; the custodian handles it on Form 5498. Though not required, tracking contributions is wise for future distributions.

Contributions are tax- and penalty-free, but using converted funds may incur penalties. Use your tax preparer or software to monitor contributions, aligning distributions with tax-year contributions to maintain their status. Ideally, wait until retirement age for qualified distributions, maximizing the tax- and penalty-free benefits of a Roth IRA.

Sincerely,

Petr Burunov, CFP®
President / Wealth Strategist

The post Client Newsletter 1Q24 appeared first on AWM.

It’s the season of change! We have officially welcomed Fall and completed our merger with Charles Schwab. My team appreciates your patience as we continue to make sure everything is in good order.

You are now able to log in and view your accounts through Schwab Alliance. If you have not already set up your credentials, I encourage you to do so. Visit schwaballiance.com, select New User, and then follow the prompts.

Investment Update

Since the last quarter, our stance on your investments has remained essentially the same: defensive.  After posting a strong rally in the first half, equity markets stalled in the summer and have fallen in September.  High valuations, bubbly technical factors, and questionable earnings prospects in a slowing economy hurt stocks. Higher interest rates and risk of rising inflation also provide headwinds.  Your investments are positioned in a large chunk of T-Bills (minimal credit and low interest rate risk), liquid alternatives (equity long/short, merger arb) with smaller amounts of commodities and equities (mainly US, small emerging market).

Not All Coupons Are Created Equal

A major change over the last year has been an increase in interest rates offered on different investments.  Our newsletter from a year ago highlighted emerging opportunities in select high coupon, low credit risk fixed income that we had not seen in previous years.  Since then, yields on corporate bonds, preferred stock, bank CDs, and annuities have also risen.

The question remains: does all that glitters equate to gold?  We have written an extensive guide that explains why all that glitters is not gold.

We would caution investors not to chase investments simply because they advertise a high yield.  Credit risk (“Will they actually pay you back?  Are they paying you a competitive rate relative to similar borrowers?”) and interest rate risk (“How will this investment look if markets raise/lower overall rates?” are key factors to consider.

Liquidity is another factor.  If you need your principal sooner, how long would it take for you to get it out?

Each investment has specific risks.  Bank deposits insure up to $250,000 in FDIC insurance per depositor.  But what if you have more money to invest?  CDs penalize you on interest earned for early withdrawal before maturity.

Annuities advertise the opportunity to lock in rates for a longer time.  Yet, they come with high costs and limited liquidity (surrender charges, minimum withdrawals) over many years.  What if you need your money sooner?

T-Bills have minimal credit and interest rate risk.  The main risk is if the Fed were to begin cutting interest rates; yields then might fall.

Preferred stocks offer high yields, but they face price risks depending on what both stock and bond markets do.  Additionally, if the issuing company faced bankruptcy risk, bondholders would get paid before preferred share investors.

The Myth of Compound Market Returns and the Reality of Why Timing Matters

When the stock market is doing well, you are likely to hear about “compound market returns.” This concept is often used to convince regular investors to put their money into Wall Street’s hands. But what exactly is it, and is it as great as it sounds?

The idea of compound market returns is based on the belief that the stock market always goes up, making it a good time to invest no matter when. You might have seen charts that suggest if you had invested 120 years ago, you would have earned a consistent 10% annual return (8% after inflation).

However, the problem with this rosy picture is that most people don’t have 123 years to invest. We need to focus on the time we actually have.

For most of us, retirement is not so far away. Many people I know say they have at most around 15 years. This is quite different from the 30 or 40 years often suggested by financial advisors.

Many people don’t start saving seriously for retirement until their mid-40s. By that time, they’d graduated, found a job, gotten married, had kids, and sent them off to college. So, they only have about 20 to 25 productive working years before retirement.

Another factor is Stock market valuations, which go through cycles of highs and lows.  When valuations were high in the past, the market didn’t perform well until those high valuations came back down.

The key point here is that when you start investing is critical to your financial future.

Now, let’s address the second myth: “Compound Market Returns.” Albert Einstein famously said, “Compound interest is the eighth wonder of the world.” But he was talking about interest, not stock market returns.

Popular sources have used this quote to encourage people to keep putting money into the stock market consistently, assuming an 8% annual return. They claim compounding will make your money grow.

However, there’s a big difference between actual returns from the stock market and an average or compound market return. Stock market returns are unpredictable and can vary widely from year to year.

In reality, compound market returns are a myth. Market downturns can have a severe impact on your investments, especially if they happen when you’re close to retirement. You might be able to recover lost money over time, but you can never recover lost time.

With current high valuations and interest rates, there’s a real risk of another market downturn. Investors need to be realistic about their future returns and the time it takes to reach their financial goals.

Beware of Smishing: A Sneaky Cyber Threat

Smishing, a blend of “SMS” and “phishing,” is a real cybersecurity risk. It can happen through text messages, WhatsApp, or other social media chats. Attackers send mass messages with a sense of urgency, aiming to trick recipients into clicking malicious links. Once lured in, victims may end up on fake websites where their personal information is stolen. Be aware of bogus messages posing as trusted banks or financial institutions

Sincerely,

Petr Burunov, CFP®
President / Wealth Strategist

The post Client Newsletter 4Q23 appeared first on AWM.

I hope you enjoyed a Merry Christmas and a wonderful New Year!

Let’s dive right in and look at the first quarter of 2023.

Our Strategy is Defensive 

As we enter 2023, for now we continue with a cautious bent. The bulls believe the Fed will relent on hiking interest rates in a weaker economy with declining inflation. They also hope either for a mild recession or even a Goldilocks scenario of a Fed cutting interest rates and an economy that has softened, not collapsed, leading way to recovery.

We see problems with this optimistic thesis.

First problem is market valuation. As measured by the S&P 500, investors are paying nearly $20 for every $1 of earnings. We worry they are paying too much: as high as a 35% premium to what it should be worth.

Secondly, the economy is weakening, but not (yet) enough for the Fed to cut rates. It is clear the Fed is closer to the end than the beginning of rate hikes. How many more is an open question. However, if history is a judge, even if the Fed were to cut rates, that does not necessarily mean risk assets should rally immediately.

Third, the rate of inflation is declining – for now. But supply constraints remain in many commodities (metals, agriculture, energy). China stopping COVID lockdowns in the near term means stronger international demand.  Wage growth is also high.  The Fed knows that if it lets up too soon, the inflation genie might return yet again.

Finally, earnings estimates for companies appear optimistic. Many Wall Street experts predict growth in 23 vs. 22. However, slower economic growth (even if it does not turn negative, which we think is debatable) and falling inflation puts pressure on top line (lower sales volumes) and bottom line (fixed costs, companies slow to lay off headcount). Market valuations on lower earnings might need to reset lower.

Your portfolios are positioned with a healthy level of T-bills with minimal interest rate risk, meaningful coupons, and virtually zero credit risk (US Government). Liquid alternative investments with return/risk profiles less dependent upon market direction are also key components. Equities remain at fairly low exposure. Cash is modest as T-bills offer meaningful yield and ample liquidity if and when it is prudent to rotate into other assets.

Your Strategy Should Be Emotional Clarity

2022 was truly a volatile year.

It was the first year in several when equities declined. 2022 was also the first in many years that both bonds and equities declined together. Investors with portfolios diversified beyond traditional stocks and bonds might have seen benefits to preserve capital for potential future market rallies. They lived to fight another day.

Yet people investing on emotion, not with a disciplined plan, lost.

Some people spent too much time watching screens (television, computer, or iPhone). They got hooked on the latest scheme advertised. They obsessed over greed. That is, until last year.

Once the bear market of 2022 arrived, they went from greed to panic mode. Most of these people lacked long term vision for their nest egg and a prudent Fiduciary advisor to guide them through the storm. Their emotion blinded them, and they sold out at bottoms. They seek short-term market timing rather than long-term planning. Time is their enemy along with their feelings of the day.

Other people forgot about avoiding the trap of “putting all your eggs in one basket.” They pulled their money out not because of lack of opportunity. Rather, they heard about the latest “hot” investment deal (real estate that allegedly “never” goes down?) and plowed their retirement savings into it.

They forgot about 2008-9 (even real estate can go down in value).

Clients who understand and work with us are resilient to the peaks and valleys of the market, popular television pundits, and the temptation to follow emotion. Instead, you have sought out expertise to reflect your own family’s long-term needs and risk tolerance. You have been wise to let us help you in broadening the net of investment opportunities to seek to help you accomplish your goals.

Because of your commitment, your portfolios will do more than just “live to fight another day”.

Tax Changes Are Keeping Us Busy

D.C. always keeps us busy. Of the 2 sure things in life, taxes constantly evolve. Your federal government yet again delivered on that promise.

Congress passed SECURE 2.0, a huge 300 piece of tax legislation. Here are some of the provisions that potentially might impact you the most:

1. RMD age for new retirees is delayed to 2023. That means new retirees only have to start taking Required Minimum Distributions when they turn 73. You get to delay when you start paying taxes on your retirement savings if you are a new retiree who does not need the distributions. Lower taxes and more time for your money to potentially grow might benefit you.However, if you are already currently subject to RMDs, you still need to continue taking RMDs.
2. SEP and SIMPLE plans now have a Roth option. This means your employer can offer you after-tax contributions to your plan. Contribution limits were increased for most retirement accounts.
3. More exceptions to the 10% penalty on early distributions. People who are terminally ill or disaster victims can withdraw money from their retirement assets without paying the extra penalty. However, keep in mind that taking money early from your retirement now might leave you less money for when you actually stop working later. Withdrawals are not tax exempt, plan careful for the amount taken from your retirement accounts.
4. Other provisions: lower RMD penalties (10% if IRS deems you forgot to take RMD and corrected in a timely manner) and allowance of rollovers from 529 plans to Roth IRAs.

Come talk to us if you or someone you know needs help in navigating the complexities of taxes.

We Prefer Liquid US Treasuries to Illiquid Bank CD’s

We have fielded a number of questions to the effect of “If the stock market is so bad, why don’t I just stick my money in the bank?”

I always tell my clients to have some money in the bank for current spending needs and a liquidity cushion in case life surprises with unexpected expenses (aka an emergency fund).

However, it’s the money beyond that level which becomes tricky.

To quote from our last newsletter 3 months ago: “For the first time in over a decade, US T-Bills might offer sufficient yield with minimal risk. They now offer a potential tool to diversify investors’ nest eggs.”

We have been investing quite a bit of your investments in short-term US Government T-Bills. This is because we have been cautious about most investments. Additionally, yields at roughly 4.5% are the highest they have been in over a decade.

Why not put it into, say, a bank CD? Well, in many cases, you might have a hard time finding as good a yield (with possible exception of certain “special” CD deals, but buyer beware and read below).

Once you put your money into a bank CD, you have 1 of 2 options. Either keep your money parked there (typically at least 1 year, if not more) if you want to get that interest. Otherwise, if you take it out sooner, you will be assessed a penalty. You might forfeit quite a bit of that interest.

Many annuities are even worse.  Not only do they lock your money up for years, but one also has to consider all the fees you pay to get in, stay in, and get out.

On the other hand, T-bills are liquid. If you have a cash need (or if we see better investment opportunity), we can sell out in a matter of minutes. You potentially earn the best of both worlds. If the bear market were to persist, we can continue investing in T-Bills. (Understand that rates are higher now, but that does not guarantee they will stay that way in the future. However, this is also true for banks and annuities.)  One potential upside from which you might benefit with us is the opportunity to switch to investments with higher returns without adding excess risk.

Sincerely,

Petr Burunov, CFP®
President / Wealth Strategist

The post Client Newsletter 1Q23 appeared first on AWM.

2022 has been a momentous year!  It has reminded us that investments do not just travel in one upward direction.

We will discuss how we see things near and longer term.  In short, we still lean toward playing defense, though we could see temporary reprieve in the markets.

We have emphasized defense, especially this year, because this is not just your money.  Your nest egg is a source of funding your retirement income, future dreams, and health care costs in retirement.  While we seek ways to grow your assets and find income, we also keep an umbrella on hand for rainy days – like 2022, maybe a little longer.

If you have other investments that might benefit from this approach, please come talk to us.  If you know someone who feels a little beat up after 2022 and needs some help, have them give us a call.

We are here to help.

Enjoy the Bear Market Rally While It Lasts…

Near term, we could see a mild bounce in the markets.  Markets experienced a sharp -15% decline from mid-August to mid-October. Markets since then have shown mild resilience.

Seasonality, hopes for an end to Fed rate hikes, and options speculation might allow for a temporary bounce.  3^rd quarter earnings and macroeconomic data are a wild card.

While we have modestly taken up risk, we see it only as a tactical bounce over which major headwinds remain.  We would expect to take it off at higher levels perhaps toward the end of the year.

…But Serious Risks Still Remain.

Our medium-term concerns about risk assets remain:

1. Inflation continues to remain an issue.
   • Commodity scarcity: in spite of higher prices, supply in most commodities is not rising. OPEC+ is cutting 2 million barrels of production, the US Strategic Petroleum Reserve will soon run out of barrels, and diesel inventories in the US are less than 30 days of supply, near all-time low.  Food harvests and rare earth (used in renewable energy) are also supply-constrained.
   • Labor wage hikes are passing through the system. This in past cycles has been the real driver in times of stubbornly high inflation.  Railroad engineers, airline pilots, and other industries have received double-digit wage increases.
   • The question is not necessarily whether inflation near-term has peaked, but rather where will inflation plateau. Consensus expectations call for inflation to drop only to 5% next spring from over 8% currently. (Bulls need inflation to fall to 2%.  Given supply shortages and government spending, we are concerned that hope might be too optimistic.)
2. Interest rates remain an overhang:
   • Short and long-term interest rates hover at +/-4%, the highest in over a decade. In the meantime, the Fed is still catching up.
3. The bulls expect the Fed to “cry uncle” similar in 2018-9. In a matter of months, the Fed shifted from raising to cutting rates due to fears of economic recession.  The stock markets rallied.
4. What is different today 2018 is that inflation and fiscal spending are both much more serious issues.
5. If the Fed stops raising or even cuts rates, it runs the risk of a new inflation surge. Markets might like it initially, but at some point, we fear the rally would end as investors realize the inflation genie is out of the bottle.
6. If the Fed keeps on going, we risk seeing deflation in the form of price declines in financial markets.

Other Issues Include:

• Retail investor sentiment (what they really do, not what they say) is still elevated. BofA investors still maintain high allocations to stocks versus history (and well above pre-pandemic).
• Corporate earnings are subject to disappointment and reduction (margin pressure, demand weakness). Transport companies, a barometer for the overall economy, have warned about declines in volumes entering the holiday season (and the stocks have suffered).  Wall Street still expects earnings growth in 2023 despite signs of a weaker economy.  We believe this is overly optimistic.
• The surging US Dollar has not only driven debt costs higher for emerging markets, but also has pressured large developed market currencies (UK, Japan). Markets fear a violent spiral in devaluation might also take their toll on assets held in the US.
• Geopolitical risk (Ukraine, Taiwan) is another wild card.

How We Intend to Navigate This Landscape

Exiting the bull market of last year, we believe a prudent investment posture consists of 2 stages in the current environment.

Stage 1: “Play Defense.”

For 2022, we have focused on reducing downside risk.  We had entered the year moderately cautious on equities, and extremely cautious on fixed income (down over -15%, the worse year in decades).   Cash, large cap equities, and diversified strategies have been our main focus.

Stage 2: “Go Back on Offense, But Be Careful.” 

Timing is uncertain (it might take months or even years).  Markets and economic fundamentals will show true signs of bottoming.  The Fed might finally be able to cut interest rates.  Perhaps a systemic failure (a major bank or country) is needed to wash out markets.  At that point, we would begin to see some true value, especially in traditional assets.  Perhaps we might invest again in foreign markets (which have been major underperformers this decade).

The Newest Investment Is Not the Sexiest

For the first time in over a decade, US T-Bills might offer sufficient yield with minimal risk.  They now offer a potential tool to diversify investors’ nest eggs.

Opportunities:

• Meaningful interest rates are nearly 4% on a 1-year bill.
• High liquidity – you can get in and get out with minimal friction.
• Short-duration (< 1 year) cushions interest rate risk – if rates rise further, your T-Bill matures soon and can potentially be reinvested at higher rates.
• Credit risk is minimal – thank you, US Government.

Risks:

• Opportunity cost – other bonds have higher yields, but the risks are often much higher.
• Reinvestment risk – if rates were to fall, maturing debt would likely be reinvested at a lower coupon.

Do You Have Excess Cash Earning Next to Nothing?

If you have extra cash sitting in your bank account, chances are it’s earning yields next to nothing.

You might be able to allow more of your money to take advantage of higher interest rates with modest risk. Come talk to us to explore if this might help you.

Tips From a Pro

Do you want to avoid the slaughterhouse during this bad market environment? Here are a few tips:

• Pay intention to what you are invested in, especially in your retirement plans. Get Active!
• Actively manage your accounts and understand that buying index funds (today) might actually harm you.
• Avoid being invested in target-date funds.
• Prioritize quality and value over fads and trends.

Conclusion

As you set your New Year’s resolutions, I encourage you to be proactive with your financial planning.  You can control your future, but it’s up to you to make it happen.

2023 will likely be a difficult year. If you prepare, be proactive, and plan ahead you will be able to look to the future with confidence, even in times of uncertainty.

I’m here to cheer you on along the way.

Sincerely,

Petr Burunov, CFP®
President / Wealth Strategist

The post Client Newsletter 4Q22 appeared first on AWM.

I hope you are enjoying a wonderful summer so far!

In my April newsletter, I shared my thoughts and predictions that 2022 would be a difficult year. Let’s jump in and see what’s changed since the second quarter.

Let’s Recap 2022 Thus Far

2022 has been a challenging year (and we are barely past the halfway mark).

But it could have been worse.

If you were only in stocks, you might have been down over -21%. This ranks as the worst start to a year in nearly 60 years.  (If you were only in growth stocks, you might have seen even bigger declines.)

If you were in a 60/40 portfolio, your accounts might still be down -16%, the second worse performance for such a “diversified” portfolio since 2008.

Now imagine if you were in crypto?  Bitcoin, the largest cryptocurrency by market cap, is down nearly -60% this year.  (Disclosure: no client portfolios managed by AWM have any crypto exposure.)

The first half of this year seemed like a game of “keep away” or “hot potato”.  We have spent the last six months really focusing on making sure your portfolios are not exposed to investments at risk from higher interest rates, inflation, and/or risk of recession.

Consequently, we pared down exposure in your growth bucket to equities, particularly in sector ETF’s and Japan.

Even though we entered the year quite cautious on fixed income, we don’t want to buy things because they are on sale. We want to buy quality.  (Coincidentally, you might see a higher balance of cash than usual.  You might expect to see some of it invested in the coming months, though we continue to be cautious with a lot of patience.)

What Are We Hoping to See in the Second Half of 2022?

One question that we wrestle with is this: what do we want to see for an “all clear” to buy risk assets?

Some observers allege that the Fed will “cry uncle” and stop raising rates soon.  They hope that by doing that, inflation will have stopped, interest rates plunge, and risk assets will resume their bull market surge.

History of past 1H corrections in recent years might indicate this is a possibility.  However, we are less optimistic near term.

What conditions would we like to see to become more optimistic? (It does not mean everything will line up.)

• Inflation is truly tamed (supplies in commodities grow and consumers are able to spend without borrowing)
• Stable interest rates (preferably with the 10-year Treasury yield starting at a 4% or 5% handle, thus returning to historically average rates and also providing a real positive return relative to potential future inflation of 3 or 4%)
• Economic growth and corporate earnings estimates reset downward once a recession is acknowledged (but be careful of what you wish for – that might also imply a lower price for stocks to begin with)
• Government policies less hostile to private enterprise (you might see a minor reprieve depending on outcome of midterm elections, real focus though comes in 2024)
• Geopolitical tensions stabilize or ease (détente with Russia, China does not commit incursion into Taiwan).

Addressing Risk in Your Investments

Let’s talk about one way we look at whether to add or reduce risk in your investments.  (We cannot eliminate risk completely.  Even cash has risk as do stocks.)

Over the long term, stocks in most time periods tend to provide the highest returns.  However, there are moments when they don’t (and in fact can decline, such as now).  The reason is that they are valued at a price which drives most of the return of a stock (in many cases, the dividend a stock pays can also be an important source of return). If the price of a stock is higher in the future than now, then you earn a positive return (and vice versa).

Think of this: a stock’s price can be considered as two components:

1. The profits (or cash flow) that the underlying company can deliver, and
2. The multiple (how many times one year’s worth of profits or cash flow) the market is willing to pay for that stock.
   • Higher multiples tend to be associated with companies with strong growth prospects, market share, and/or stability.
   • Lower multiples often come with lower confidence in those metrics.

One can consider a broad-based stock index (such as the S&P 500) as simply a group of many individual stocks.  Thus, the same components that drive the price of a stock also drive the price of an index.

In a year such as 2021, confidence was high and earnings were expected to grow nicely.  Consequently, investors were willing to pay a higher multiple on growing earnings, resulting in a strong price performance in 2021.

However, investors risk becoming complacent in bull markets.  Multiples can (and did in 2021) surge to above normal levels, even though earnings prospects might not have changed nearly as much.

Switch to 2022, and we face a different environment.  Indeed, the bulk of the correction in prices in 2022 resulted from the market assigning a lower multiple to a relatively flat level of earnings (for the broad stock market).  However, changes in earnings prospects within sectors masked the earnings.

Reasons for investors paying a lower multiple for earnings might include:

• The Fed announcing it would raise rates and cease from buying more debt (ending “Quantitative Easing”) in order to try to lower inflation.
• Inflation starting with higher commodity prices (such as food and energy) has extended into other goods and services (airline prices, taxes). The war in Ukraine and China Covid lockdown policies have exacerbated a situation that began in 2020.
• Rising interest rates would dent future economic growth prospects. The Fed seeking to tighten interest rates might send the US into recession.  Europe and emerging markets also are teetering on recession.
• Geopolitical volatility (Ukraine the latest example) also dampened investors’ willingness to pay a higher multiple for stocks.

If the US has truly entered into recession (which we believe is likely either in 2022 or 2023), then earning estimates likely go lower.  In past recessions, earnings on the S&P 500 have been cut anywhere from -15% to -30% or more (such as in 2008).

A number of Wall Street banks estimate earnings on the S&P 500 to total around $240 per share in 2022.  Taking even a mild -17% cut in a recession would drop them to $200.

In the good old days of last year, multiples reached as high as 21.  Prior to 2021, multiples on market earnings have ranged between 13 to 18 times earnings.

In an environment of high confidence, fair value for the market might be around $3600 (18 times $200 in earnings).  If confidence were to ebb somewhat (but not collapse), we could see the market sell down further to $3000 (15 times $200 earnings).  As of June 30, the market closed roughly at $3800.

In a word, we believe the markets could still decline this year.  It is possible to see near-term rallies (indeed, we have had 3 of them this year).  However, at least thus far, the market has not gone to new highs.

Closing Thoughts

We encourage all of our clients to have a financial plan in place. This will help with navigating uncertain times, preparing for retirement, understanding what income can be taken without depleting principal, strategizing tax implications, and help you avoid pitfalls.

My most successful clients always know where they are going and what their options are. Let us help to prepare you for retirement by properly adjusting risk in your portfolio, implementing strategies to save on taxes, and protecting your principal while not giving up your standard of living.

Please remember, it’s not about how much you make, but in the end, how much you keep that really matters.

Sincerely,

Petr Burunov, CFP®
President / Wealth Strategist

The post Client Newsletter 3Q22 appeared first on AWM.

Happy Spring! We have a lot to talk about this quarter. Let’s jump right in!

2022 Will Be a Difficult Year

Over the next couple of years, we expect the economy to struggle. We are taking proactive steps to ensure that, as the economy rotates and challenges come and go, each client’s positions are adjusted to fit their individual needs and goals.

If you anticipate any changes to your circumstances in the coming months, please let us know. The better we understand you and your situation, the more appropriately we can adjust your investments.

It’s Up to You to Protect Your Family

Each of you is in a unique situation. Depending on where you fall on the retirement timeline, we can offer some recommendations to potentially help you preserve your assets, grow your investments, and keep up with inflation.

1. Retirement: You Are Retired.

Set aside time to review your Trust documents. In seasons of high inflation and rising prices, you potentially might position your assets to mitigate estate taxes that your heirs might otherwise pay more of.

The key in this stage is income, tax & estate planning.

2. Preparation: You Are Getting Ready to Retire.

As you prepare for your upcoming retirement, ask yourself if your investment accounts are working for you and if your business or real estate holdings are positioned to prepare you for retirement.

The key in this stage is income & tax planning.

3. Accumulation: You Are Establishing a Career.

Establish a good, working budget to understand where your money is going. Think about ways to increase your savings, maximize retirement account contributions, invest in real estate, and/or work on paying down debts.

The key in this stage is budgeting & saving.

Due to higher energy costs, geopolitical turmoil around the world, shortages of fertilizer, and various restrictions on trade between nations, we expect food costs will continue to rise. Some parts of the world might even suffer more supply chain shortages.

We have kept you informed about what we are doing with your portfolios to prepare for these challenging times ahead. Check out this sidebar for ideas everyone should consider to help their family in these inflationary times.

Investment Thoughts (by Petr Burunov & Stuart Quint)

In our last newsletter, I told you that 2022 was likely to be quite different than 2021.  So far, it has.

Both stocks and bonds have declined moderately.  (In fact, bonds have declined slightly more.)

While the economy is cooling off, prices are not.  As a consequence, the Fed for the first time in 3 years started to raise interest rates.  Though we are near historically low-interest rates, the fact remains that bond yields, which used to be notably above inflation, are significantly below.  Controversy exists as to how far the Fed can raise rates without putting the economy into recession.  Yet, inflation has now resurfaced for the first time in decades as a serious potential problem to people’s purchasing power.

Consider the recent news in Germany, Europe’s largest economy.  Supermarkets just announced price increases from 20 to 50% on over 300 products.  While the official excuse is the war in Ukraine, remember that supply chain issues and commodity price hikes had begun well before the end of February. In fact, prices started to go up in the first half of 2021

Closer to home, many of you have noticed higher gasoline prices.  Not only are commodity costs rising, but prices for homes, appliances and even wages are also moving up.  After several decades of modest inflation, we are experiencing an environment more similar to the 1970s.

As mentioned in our previous newsletter, we entered the year moderately cautious about risk.  Stocks looked richly valued, and bonds even more so.  Traditional stocks and bonds might face further headwinds to posting compelling returns while inflation and higher interest rates loom.

Part of your portfolios has been invested in what we call a “diversified” bucket. This “diversified” bucket consists of select alternative investments that are less reliant on traditional stocks and bonds. Their purpose is to add potential stabilization to your portfolio while seeking positive returns.

Examples include precious metals, commodities, and long/short strategies. Precious metals might serve as a hedge either against higher inflation and/or recession.  Base commodities such as energy, agriculture, and metals face supply shortages and have the potential to appreciate in US Dollar terms.  Your long/short manager has the potential to benefit from price dislocations in companies in both rising and falling markets.

Though markets have recovered tremendously from the trough last month, it appears early to declare the coast is clear.  First-quarter earnings could introduce near-term volatility.  Economic data appears to be slowing (jobs, housing market, consumer confidence).  Add in uncertainty surrounding further Fed rate hikes and geopolitics.  We would not be surprised to see further choppiness in markets in the coming months.  Furthermore, you should not be surprised to see further traditional risk being reduced in your portfolios in the coming weeks and months.

Upcoming Changes

Every year there seems to be some form of adjustment made by Congress to impact your retirement. This year is no exception.

Congress already passed several rules to defer RMDs (required minimum distributions) and increase annual contribution limits. Pending a Senate vote, more changes are coming. Stay tuned for future updates.

Final Thoughts

It’s great to have money, but at the end of the day, your bottom line is what counts. Remember: it’s not about how much you make, it’s about how much you keep. This is where planning, savings, and budgeting is crucial.

Plan for the taxes and unexpected circumstances. I want to see you thrive.

Sincerely,

Petr Burunov, CFP®
President / Wealth Strategist

The post Client Newsletter 2Q22 appeared first on AWM.

Tempered Outlook on the New Year

Investments at times decline even if bull markets were to continue.

Most of you know and expect this.  However, this reality particularly hits hard for those who spend too much time watching screens or expect to live off their money, in vain hoping that it keeps growing in a straight, uninterrupted line.

We have enjoyed another good year in the markets in 2021.  2022 might be different.

Unlike 2020, not everything in the market rose.  6 stocks drove the majority of returns in the S&P 500.  Commodities in general rose, but precious metals declined.  Cash and fixed income posted flat to slightly negative returns.

However, small-cap and international developed equities lagged large-cap US equities.  Emerging markets actually finished down in 2021.  Fortunately, you had very limited exposure to these assets.

We believe 2022 will bring more volatility and lower returns.  Valuations are high, inflation also remains high, and the Fed is about to raise interest rates and further tighten liquidity.  Additionally, government stimulus is decelerating, companies have loaded up on a lot of debt, and geopolitics (China/Taiwan, Mideast, Russia/Ukraine) overhang the markets.

Not everything has to be bleak. 

In our view, 2022 might end up being less positive compared to last year.  Even with a rate increase, though, interest rates adjusted for inflation are likely to remain negative for a while.  Though indices remain near historical highs, many companies have traded closer to the lows of the year.

Your investments are positioned modestly cautiously relative to risk.  “Vanilla” is an apt description of current positioning.

Staples in your portfolio include large-cap (mostly US) equities, commodities, gold, and hedged equity manager anchored by fixed income with low-interest rates and credit risk.  While we monitor many markets for other opportunities, high valuations and deteriorating fundamentals deter us for now from investing in most other asset classes.

How We Invest: Heed the Sages of Ages Past

Some of you might get tired of my reminders about prudence both in how we work with you and monitor your investments.

Rather than hearing from me, here are some nuggets of wisdom from “smart money” investors of decades past.

1. Protect your downside.

   “RULE 2: DON’T LOSE MONEY: This may seem naïve, but believe me, it isn’t. If you want to be wealthy, you must not lose money, or I should say you should not lose BIG money.  Absurd rule, silly rule?  Maybe, but MOST PEOPLE LOSE MONEY on disastrous investments, gambling, rotten business deals, greed, poor timing.  Yes, after almost five decades of investing and talking to investors, I can tell you that most people definitely DO lose money, lose big time – in the stock market, in options and futures, in real estate, in bad loans, in mindless gambling, and in their own business.”[1]

2. Don’t invest just because you have to. Invest because you see opportunity.

   “RULE 3: RICH MAN, POOR MAN: In the investment world the wealthy investor has one major advantage over the little guy, the stock market amateur and the neophyte trader.  The arbitrage that the wealthy investor enjoys is that HE DOESN’T NEED THE MARKETS.  I can’t begin to tell you what a difference that makes, both in one’s mental attitude and in the way one actually handles one’s money.

   ‘He who doesn’t understand interest pays it.’  The little guy is the typical American, and he’s deeply in debt.

   The little guy is in hock up to his ears.  As a result, he’s always sweating – sweating to make payments on his house, his refrigerator, his car or his lawn mower.  He’s impatient, and he feels perpetually put upon.  He tells himself that he has to make money – fast.  And he dreams of those big juicy mega-bucks.  In the end, the little guy wastes his money in the market, or he loses his money gambling, or he dribbles his money away on senseless schemes.  In short, this “money-nerd” dashing up his financial down-escalator.

   But here’s the ironic part of it.  If, from the beginning, the little guy had adopted a strict policy of never spending more than he had made, if he had taken his extra savings and compounded it in intelligent, income-producing securities, then in that time he’d have money coming in daily, weekly, monthly just like the rich man.  The little guy would have become a financial winner, instead of a pathetic loser.”[2]

3. Don’t overstay your welcome.

“Bulls make money, bears make money.  Pigs get slaughtered.”[3]

Summary

As you set your New Year’s resolutions, I encourage you to be proactive with your financial planning.  You can control your future, but it’s up to you to make it happen.

Now is the time to set new goals and dreams for the year. I am here to cheer you on along the way.

Let’s make 2022 a great one!

Sincerely,

Petr Burunov, CFP®
President / Wealth Strategist

[1] Richard Russell, Dow Theory Newsletters, July 17, 1996 on http://dowtheoryletters.com cited in Jane A. Williams, A Bluestocking Guide: Economics based on What Ever Happened to Penny Candy?, (Eagle, ID: Bluestocking Press, 2015).

[2] Richard Russell, Dow Theory Newsletters, July 17, 1996 on http://dowtheoryletters.com cited in Jane A. Williams, A Bluestocking Guide: Economics based on What Ever Happened to Penny Candy?, (Eagle, ID: Bluestocking Press, 2015).

[3] J. Robert Bloom, commentator on MSNBC, President and Chief Market Strategist in the early 2000’s, FIS Asset Management North America.

The post Client Newsletter 1Q22 appeared first on AWM.

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.