Financial Bites – Tax Planning for Individuals Video and Update

Tax Planning for Individuals, the third event in our new Financial Bites lunch series, was a huge hit. In this session, our advisors explained why tax planning is vital to a healthy financial life and how to put money back in your own wallet. Thank you to all our attendees as well as our outstanding wealth advisors, Bryce Snell and Wade Calvert, who presented.

Click on the above image or visit this link to watch our tax planning session: https://vimeo.com/mortoncapital/fbtaxplanning

We hope you find this video valuable. Please feel free to share this link with family and friends and on your social media channels. Any feedback you have would be extremely valuable to our team, including any recommendations of topics you would like us to present on in the future. Financial Bites is a complimentary series and our upcoming sessions are filling up fast, so we encourage you to RSVP soon. Click on the link below to view all sessions and RSVP today!

https://mortoncapital.com/financialbites

We hope to see you soon and thank you for your continued support of Morton Capital.

The MC Team

Financial Bites – Budgeting Session Video and Update

The second event in our new Financial Bites lunch series, Budgeting, went off without a hitch. In this session, our advisors honed in on the keys to a successful budget and how to get your financial footing. Thank you to all our attendees as well as our phenomenal wealth advisors, Joe Seetoo and Celia Meagher, who presented.

Our goal is to make this information clear and accessible to everyone. This session focuses on the importance of checking your financial pulse – everything from what savings/spending strategies you should use to the importance of maintaining a good credit score.

Click on the above image or visit this link to watch our budgeting session: https://vimeo.com/mortoncapital/fbbudgeting

We hope you find this video valuable. Please feel free to share this link with family and friends and on your social media channels. Any feedback you have would be extremely valuable to our team, including any recommendations of topics you would like us to present on in the future. Financial Bites is a complimentary series and our upcoming sessions are filling up fast, so we encourage you to RSVP soon. Click on the link below to view all sessions and RSVP today!

https://mortoncapital.com/financialbites

We hope to see you soon and thank you for your continued support of Morton Capital.

The MC Team

Financial Bites – Retirement Planning Session Video and Update

Recently we hosted the first event in our new Financial Bites lunch series. The session focused on retirement planning and was an incredible success. We are grateful to everyone who attended and to our outstanding wealth advisors, Chris Galeski and Chelsea Watson, who presented.

Clients often come to us asking, “How much do I need to save for retirement?” This session addressed this question by focusing on smarter ways to save, how to more efficiently invest those savings, and how to balance your normal expenses with future costs.

Click on the above image or visit this link to watch our retirement planning session: https://vimeo.com/mortoncapital/fbretirementplanning

We hope you enjoy this video of the event. Please feel free to share this link with family and friends and on your social media channels. Any feedback you have would be extremely valuable to our team, including any recommendations of topics you would like us to present on in the future. Financial Bites is a complimentary series and our upcoming sessions are filling up fast, so we encourage you to RSVP soon. Click on the link below to view all sessions and RSVP today!

https://mortoncapital.com/financialbites

We hope to see you soon and thank you for your continued support of Morton Capital.

The MC Team

Quarterly Commentary – Q2 2019

One for the Record Books

The current U.S. economic expansion is now officially the longest in history, having just entered its 121st month. Shortly after the end of the second quarter, stock markets also hit all-time record highs. These milestones are juxtaposed against another less thrilling record: the current economic expansion has also been the weakest recovery since World War II.

While it is impossible to know how long the current expansion will last, economic data is flashing warning signs. Growth was already on course to slow this year as the fiscal stimulus boost associated with last year’s tax cuts has faded. The bigger drag, however, is stemming from the U.S. administration’s erratic trade policies, which has introduced further uncertainty in business investments.

History of U.S. Economic Expansions

Source:  National Bureau of Economic Research & Bloomberg

Synchronized Asset Class Appreciation

All asset classes, both risky and more conservative, surprisingly, have rallied strongly in the first half of the year.  This rally has occurred against a backdrop where global economic growth has slowed, trade tensions have persisted, large tech companies have faced regulatory scrutiny, and financial market distortions have deepened.  As we pointed out in our first-quarter client commentary, the most obvious explanation for the appreciation of asset classes across-the-board has to do with central banks’ renewed willingness to cut interest rates, thus raising virtually all asset class valuations.

The first half of the year saw a historic policy U-turn from a well-advertised “policy normalization” to a significantly more dovish stance by the U.S. Federal Reserve, which has also been adopted by the other three major central banks (European Central Bank, Bank of Japan and People’s Bank of China).  While history will tell the tale of the record-breaking U.S. economy and stock markets, it may fail to show how reliant financial markets have become on extraordinary accommodative monetary policies (i.e., zero or negative interest rates and multiple rounds of quantitative easing, or money printing) from the central banks.  The table below summarizes the second-quarter and year-to-date (YTD) performance for selected indices.

Source: Bloomberg. Please see important disclosures at the end of this commentary.

“History May Not Repeat Itself, But It Often Rhymes”1

Over the past decade, financial market participants have become conditioned to associate extraordinary monetary policies and central bank liquidity with higher asset prices.  This has in turn led to heightened speculation, as reflected in the surge of recent IPOs with negative earnings and the increasing number of “zombie companies” (companies whose interest expenses are larger than their earnings) in the market.  The result has been tremendous asset price inflation and steep valuations as prices have well outpaced the fundamentals.

Most investors are familiar with the concept of P/E (price-to-earnings) ratios as a reflection of stock market valuations.  When a stock goes up in price, it either does so as a result of improving fundamentals (i.e., increasing earnings) or based upon investor sentiment or expectations.  If the latter is the case, that stock is said to appreciate because of multiple, or P/E, expansion.  As illustrated in the chart below, in the current stagnant earnings growth environment, P/E ratio expansion has accounted for 92% of the year-to-date rally in the U.S. equity market.  Goldman Sachs research indicates that P/E expansion has also been responsible for nearly 30% of the bull market return since March of 2009.

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1 Attributed to Mark Twain

S&P 500 Price Return Attribution

Source:  FactSet, Goldman Sachs Investment Research

Given the headwinds mentioned above, it is unreasonable to expect either earnings growth or multiple expansion to continue at such a pace, which suggests that investors cannot expect such strong returns over the next several years. In our opinion, central bank liquidity, low interest rates and passive investing in mega-cap U.S. growth stocks have pulled forward future investment returns.  We concede that no one can accurately predict the timing of an economic recession or stock market decline.  What we can do, however, is identify environments where investors face heightened risks and adjust our portfolios accordingly.  If equity market valuations revert to historical norms, investors who are only relying on traditional assets to meet their goals may face a very challenging path forward.  Our approach is to mix in strategies that exhibit less dependence on global economic growth in an attempt to provide more consistent returns for our clients in an otherwise uncertain world.

Please do not hesitate to contact your Morton Capital wealth advisory team if you have any questions or would like to review your portfolio or financial plan in more detail.  As always, we appreciate your continued confidence and trust.

Morton Capital Investment Team

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Disclosure Update

MCM recently filed an amendment to its Form ADV Brochure with the Securities and Exchange Commission to reflect some material changes since our last filing in March. Please click the link for a full copy of the amended ADV Brochure:
https://mortoncapital.egnyte.com/dl/vn7uYGXjaY.

This commentary is mailed quarterly to our clients and friends and is for information purposes only.  This document should not be taken as a recommendation, offer or solicitation to buy or sell any individual security or asset class, and should not be considered investment advice. This memorandum expresses the views of the author and are subject to change without notice. All information contained herein is current only as of the earlier of the date hereof and the date on which it is delivered by Morton Capital (MC) to the intended recipient, or such other date indicated with respect to specific information. Certain information contained herein is based on or derived from information provided by independent third-party sources. The author believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information. Any performance information contained herein is for illustrative purposes only.

Certain private investment opportunities discussed herein may only be available to eligible clients and can only be made after careful review and completion of applicable offering documents. Private investments are speculative and involve a high degree of risk.

The indices referenced in this document are provided to allow for comparison to well-known and widely recognized asset classes and asset class categories. Q2 returns shown are from 03-31-2019 through 06-28-2019 and the year-to-date returns are from 12/31/2018 through 06-28-2018.  Index returns shown do not reflect the deduction of any fees or expenses. The volatility of the benchmarks may be materially different from the performance of MC.  In addition, MC’s recommendations may differ significantly from the securities that comprise the benchmarks.  Indices are unmanaged, and an investment cannot be made directly in an index.

Indices:

Past performance is not indicative of future results.  All investments involve risk including the loss of principal. Details on MC’s advisory services, fees and investment strategies, including a summary of risks surrounding the strategies, can be found in our Form ADV Part 2A. A copy may be obtained at www.adviserinfo.sec.gov.

Mid Quarter Newsletter May 2019

The Return of Trade Tensions

It’s hard to believe that it’s been over a year since President Trump launched us into a trade war with China. (We first delved into this issue in our second quarter 2018 client letter here.) While it appeared that progress was being made in negotiations toward the end of 2018, the recent breakdown in trade talks and escalation in tensions once again has this topic dominating news cycles.

As a quick reminder, a tariff is a tax specifically related to imports and exports that encourages consumers to buy less of the taxed good (whose price has now risen) and more of a cheaper, untaxed alternative. Effectively, a government imposes tariffs to try and benefit domestic producers by making imported goods relatively more expensive. There is much debate, however, regarding whether or not domestic producers truly benefit—for example,  U.S. farmers are actually among those most likely to suffer from the tariffs imposed to date.

Why are tariffs and the ominous-sounding trade war such big news? From all the hubbub, you might expect this to be a disaster for economic growth. The reality, however, is that the broad economy isn’t expected to take a big hit, even if the situation continues to escalate. Capital Economics estimates that the drag on the U.S. and China’s gross domestic product (GDP) will be minimal: around 0.4% for China, and 0.1-0.2% for the U.S. The effects, however, may be harsher on confidence and on financial markets. The uncertainty surrounding the tariffs and the lack of visibility regarding future escalations may cause businesses worldwide to limit investments and encourage consumers to become more cautious with their spending.

Free trade has been a major boost to global growth over the last several decades, with exports accounting for roughly 23% of the global GDP. Protectionist policies in the U.S. and abroad may threaten global growth going forward. Still, as precarious as the situation sounds, it’s only one of many uncertainties facing markets going forward. It’s important for investors to remain disciplined in their approach and stick to their financial plans, even when news cycles get a little feisty.

Welcome Olivia and Elana

Olivia Payne, Client Service Administrator

Olivia joined Morton Capital in April 2019. She brings with her 7 years of customer service experience in retail and social services. Olivia is originally from Georgia, where she attended the University of Georgia and obtained her degree in human development and family science. She is passionate about helping people make choices to improve their lives and learning as much as she can along the way. Olivia enjoys traveling and experiencing the different ways in which other cultures choose to enjoy life.

Elana Yaffe, Paraplanner

Elana Yaffe joined Morton Capital in February 2019 as a Paraplanner, where she collaborates with the advisory team to analyze and prepare financial plans. Prior to Morton Capital, she worked at Merrill Lynch as a seasonal client associate and at American Financial Network as a Paraplanner. Elana graduated with a degree in retailing and consumer sciences from the University of Arizona. She loves to travel, watch sports, and play with animals, especially with her shihtzu, Brandy, and boxer, Sunshine.

Meet the MC Team

Say Hello to Audriana Rex!

Kevin Rex, one of our Lead Wealth Advisors, and his wife, Nicole, welcomed their third child, Audriana, on April 12, a beautiful and healthy baby girl. A big congratulations to their growing family!

Best Places to Work for Financial Advisors Award

We are proud to announce we were named one of the Best Places to Work for Financial Advisors by InvestmentNews. This list highlights the top 75 firms nationwide in the financial advice industry. We were chosen 2nd among firms our size and 16th overall for our commitment to creating a firm culture that encourages idea-sharing and empowers employees to get the most life out of their career. Thank you to our amazing team for making Morton Capital a great place to work every day.

Read the full article by Investment News here

Be Careful Out There: Cybersecurity Tips

By Eric Selter, Chief Compliance Officer

As Elmer Fudd would say: “You should be vewy, vewy afwaid.”

Cybersecurity is a huge topic today. And it should be. The fraudsters are smart and persistent. If they put half as much time into doing good things as they do thinking up ways to steal your information, the world would be a much better place.

Recently, the Morton Capital team sat in on a cybersecurity seminar. Here are some important takeaways that we wanted to share:

* Your data is out there. Don’t think it’s not! Fraudsters can easily buy your personal data on the dark web. Have you ever used Yelp? Believe it or not, there are Yelp ratings for fraudsters on the dark web—that’s how prevalent it has become. Features like two-factor authentication, DocuSign, secure email links and other advanced security tools are useful in helping to prevent some of the more basic security breaches.

* It’s not just you they’re after. While individuals continue to be targets, the fraudsters are now coming after businesses too in order to mine the data they collect from their clients. Have you heard the financial expression, “Cash is king?” Now, data is KING!

* Prevention is key! Some debate the value of credit protection and monitoring services, but any potential alert that someone has opened an account in your name could help you nip fraud in the bud. One example of how to protect yourself: go to your mobile carrier’s website and change your settings so that any call forwarding must be done from your phone and not via their website, which can be hacked.A typical scheme that cybersecurity firms often see, which illustrates the depth of the potential fraud, goes like this: Fraudsters hack your email and see you’re in the process of buying a house (who doesn’t have dozens of emails back and forth with their realtor or escrow officer?). Since they can tell you’ve already warned us that you’ll need some cash for the closing, they send us an email that provides wire instructions to a fake account. Without verbal verification on both sides (you verbally verifying the escrow wire instructions with a trusted escrow officer; us verbally confirming the information with you), money can easily be lost forever.

To safeguard our clients against this common type of fraud, Morton Capital will continue to verbally verify and confirm all new money transfer requests. We know this extra step may be a hassle, but it’s for all of our protection. It’s better to spend some time up front preventing transfer fraud than trying to recover funds after they’ve transferred out. At the risk of dating myself, I’ll end with the line that Captain Esterhaus from Hill Street Blues would say at the start of every shift: LET’S BE CAREFUL OUT THERE!

 

GET THE MOST LIFE OUT OF YOUR WEALTH (SM)

 

Quarterly Insights – Q1 2019

Federal Reserve to the Rescue

How would you expect the stock market to perform in a country experiencing slowing GDP growth, disappointing retail sales and a negative corporate earnings outlook?  There is a wide range of possible answers, but the most obvious choice certainly would not be that stocks would experience their best quarterly performance in a decade.  Yet that is exactly what occurred with the U.S. stock market (S&P 500 Index), up 13.7% in the first quarter.  To add to the perplexity, this stellar performance comes on the heels of a fourth-quarter rout in stocks, where major indices declined almost 20% from their peaks.  When looking to the economic fundamentals for answers, they do not appear to be either weak or strong enough to warrant these kinds of drastic moves.

So if the economic data was neither bad nor good enough to result in such sharp swings, what was the culprit?  The below chart shows the stock market’s recent performance against the backdrop of the Federal Reserve’s (“Fed”) drastic change in interest rate policy:

Based on how the stock market reacted to comments made by the Fed, the clear conclusion is that the stock market has become dependent upon low interest rates (i.e., low borrowing costs) to drive it higher.  When rates rose sharply in the fourth quarter, the market swooned, only to recover when the Fed made a U-turn on policy following weaker than expected

economic data.  Instead of the planned, steady increases in interest rates, the Fed is now promising to be more “patient” with interest rate increases.  While it seems counterintuitive, we are in an environment where bad economic news is perceived as a positive sign for stocks since

it will give Fed policymakers an excuse to keep interest rates lower for longer.  Lower interest rates mean cheaper borrowing costs for companies and consequently higher profits.

Investor Whipsaw

While we normally summarize index performance in a table format, we feel that the below bar chart comparing the performance in Q4 2018 to Q1 2019 better illustrates the recent whipsaw that investors have experienced across most major asset classes:

This information is for illustrative purposes only and not indicative of any investment.  Past performance is no guarantee of future results.  All indexes are unmanaged, and an investment cannot be made directly in an index. Index returns do not include fees and expenses. Please see disclosures at end of this commentary for general definitions of indices.

Given the strong recovery in stocks in the first quarter, stock valuations have skyrocketed back up to near all-time highs.  The below chart looks at the average price-to-sales ratio, which compares a company’s stock price to its revenue, for stocks in the S&P 500 Index. It clearly indicates how expensive stocks have become.

Source: Bloomberg. P/S Ratio: Market Value per Share / Sales per Share

Yield Environment

With stock valuations disconnected from the fundamentals and bond yields back down in the basement, where can investors find returns with reasonable levels of risk?  In our fourth quarter client communication, we discussed our core beliefs as they pertain to managing our clients’ portfolios.  When evaluating a new opportunity, these beliefs revolve around risk management (properly evaluating the risk/return tradeoff), true diversification (finding drivers of return that are significantly different than what we already own), and adequate cash flow, especially in the current low-interest-rate environment.  These tenets hold firm not only during the market volatility of the fourth-quarter, but even in strong recovery periods like early 2019, when investor “FOMO” (fear of missing out) is naturally at its strongest.

In recent years, these beliefs have steered us toward opportunities in the private lending space, specifically in cash-flow-focused assets with adequate collateral.  We recently approved a new strategy in this space that looks to provide capital for social infrastructure projects related to private nonprofits, 501(c)(3) organizations and other entities authorized to issue private activity and tax-exempt bonds.  Consistent with our thesis in other private lending strategies, this strategy takes advantage of the supply/demand imbalance in the marketplace for creditworthy loans.  The regulatory and market changes in the aftermath of the financial crisis have created a capital shortage in these segments of the market, and, consequently, those willing to lend in the space can command higher yields and stronger collateral and controls.  Examples of these market segments include:

 Source:  Tortoise

There are meaningful demographic trends supporting growth in these segments, which disconnects them somewhat from the performance of the broader economy.  Therefore, we believe these segments of the market are relatively recession-proof and unaffected by stock and bond market dynamics, making them particularly attractive in the current environment.  The social nature of the projects also allows them to qualify for tax-exempt status in most cases, and the fund manager expects the majority of the income generated to be federally tax-free.

While the majority of funds in the private lending space are private vehicles, this strategy will be offered in a mutual fund structure where there are quarterly liquidity windows as opposed to daily liquidity.  The less liquid nature of the strategy is what allows investors to capture the illiquidity premium associated with investing in these private securities.  Investors are essentially trading market exposure and risk for illiquidity risk.  We find this tradeoff to be attractive in the current market environment and feel that it makes a lot of sense for certain client portfolios where some level of illiquidity is appropriate for long-term investing.

Please do not hesitate to contact your Morton Capital wealth advisory team if you have any questions or would like to review your portfolio or financial plan in more detail.  As always, we appreciate your continued confidence and trust.

 

Morton Capital Investment Team

_________________________________________________________________

Disclosures:  This commentary is mailed quarterly to our clients and friends and is for information purposes only.  This document should not be taken as a recommendation, offer or solicitation to buy or sell any individual security or asset class, and should not be considered investment advice. This memorandum expresses the views of the author and are subject to change without notice. All information contained herein is current only as of the earlier of the date hereof and the date on which it is delivered by Morton Capital (MC) to the intended recipient, or such other date indicated with respect to specific information. Certain information contained herein is based on or derived from information provided by independent third-party sources. The author believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information. Any performance information contained herein is for illustrative purposes only.

Certain private investment opportunities discussed herein may only be available to eligible clients and can only be made after careful review and completion of applicable offering documents. Private investments are speculative and involve a high degree of risk.

The indices referenced in this document are provided to allow for comparison to well-known and widely recognized asset classes and asset class categories. Q1 returns shown are from 12-31-2018 through 03-31-2019 and the Q4 2018 returns are from 09/28/2018 through 12-31-2018.  Index returns shown do not reflect the deduction of any fees or expenses. The volatility of the benchmarks may be materially different from the performance of MCM.  In addition, MCM’s recommendations may differ significantly from the securities that comprise the benchmarks.  Indices are unmanaged, and an investment cannot be made directly in an index.

  Indices:

U.S Large Co Stocks: S&P 500 Index                                              U.S. Gov’t 1-3 Yr Bond: Barclays U.S. 1-3 Yr Treasury Bond Index

U.S. Small Co. Stocks: Russell 2000 Index                                    Commodities: Bloomberg Commodity Index

Developed Int’l Stocks: MSCI EAFE Index                                     Emerging Market Int’l Stocks MSCI EM Index

U.S. Bonds: Barclays U.S. Aggregate Bond Index                        US Large Value: Russell 1000 Value Index

U.S. Large Growth: Russell 1000 Growth Index

Past performance is not indicative of future results.  All investments involve risk including the loss of principal. Details on MCM’s advisory services, fees and investment strategies, including a summary of risks surrounding the strategies, can be found in our Form ADV Part 2A. A copy may be obtained at www.adviserinfo.sec.gov.

InvestmentNews Awards Morton Capital ‘Best Places to Work for Financial Advisors’

We are proud to announce we were named in the Best Places to Work for Financial Advisors by InvestmentNews. The Best Places to Work for Financial Advisers program recognizes financial advisory firms that provide employees with the personal satisfaction and tools to grow professionally and to provide clients with the best possible investment and financial planning advice.

In its second annual list, InvestmentNews recognized 75 companies in 2019, as deserving this special honor, which highlights firms’ outstanding human resources practices and policies. Morton Capital was awarded 2nd among firms our size and 16th overall for our commitment to creating a firm culture that encourages idea-sharing and empowers employees to get the most life out of their career.

Thank you to our amazing team for making Morton Capital a great place to work every day.

______________________________

View the complete list of firms.

 

Mid Quarter Newsletter March 2019

Why Cash Flow Planning Is Important for Everyone

According to a Fidelity eAdvisor study, clients who have a formal financial plan are 7 times happier than those without one. Yes, you read that right—7 times happier! But, according to Charles Schwab’s 2018 Modern Wealth Index study, only one in four Americans actually has a written financial plan. If having a formal, written financial plan could make you 7 times happier, why is it that only a quarter of Americans have one?

People may think that either they don’t have enough money for a cash flow plan or they have more than enough to retire so they don’t need to do one. However, a cash flow plan is not about how much money you have—it’s about providing you with clarity and context when it comes to your finances.

Clarity

At its heart, a financial plan is about helping you use your resources to achieve your goals. But in order to achieve your goals, you need to spend some time clearly defining what they are. Understanding what is important to you can help you make decisions about what you want to do with your money, especially if you need to prioritize your goals. Defining your goals as part of the cash flow planning process will also help your financial professional identify the possible risks to those goals and help you plan for them. The sense of organization and control that a plan can give you has an enormous impact not just on how you feel about your financial life, but about your overall life as well.

Context

Rather than making financial decisions in a vacuum, a cash flow plan provides context for those decisions. Do you need to save more in order to retire when you want to? Should you hold off on selling your business to lessen your tax bill in a high-income year? How will refinancing your mortgage affect your budget? Having a cash flow plan will allow you to see the impact of your decisions before you make them and whether there’s a better alternative that is more in line with your goals.

A plan that provides clarity and context for your financial future is something from which everyone can benefit, regardless of net worth. Going through the process of creating a cash flow plan can seem like an arduous task, but what you’re ultimately working toward is peace of mind.

_______________________________________________________

Welcome Patrice and Moriah

Patrice Bening started her career in banking at Bank of America while earning her degree in business administration and finance at California State University, Northridge. During the 10 years she spent at Bank of America, she held a variety of positions – from business banker, to relationship client manager, to branch manager, working in diverse markets across the Westside, beach communities and Conejo Valley. Patrice’s latest role was as the Vice President and Branch Manager of the Santa Monica branch for OneWest Bank, a locally based California bank. Patrice is an avid runner and hiker, and last year summited Mt. Whitney and completed her first marathon. Patrice and her husband have two boys and a mischievous border collie named Loki.

Moriah Twombley graduated with a degree in patisserie and baking from Le Cordon Bleu in 2011. After graduating, she worked in retail management before joining Morton Capital in November 2018. As an Account Servicing Associate, Moriah plays an integral role in our operations team by providing administrative support between our client service team and Morton Capital’s various custodians. She still enjoys baking for friends and family.

_______________________________________________________

FOMO and the Market

Fear of missing out, or FOMO, was the dominant theme for the first nine months of last year and has become an increasingly influential emotion in our daily lives. According to Wikipedia, FOMO is defined as “a pervasive apprehension that others might be having rewarding experiences from which one is absent.” A fear of missing out has always been a part of life, but it has become even more prevalent with the advent of technology and the emergence of social media. The impact on investment strategies has been especially pronounced. For most of 2018, we were constantly reminded how well FAANG (Facebook, Apple, Amazon, Netflix, Google) or other mega-cap growth stocks—which dominate the S&P 500 Index—were doing and why everyone needed to abandon their diversified portfolios and get more exposure to those stocks. Unfortunately, FOMO is frequently a counterproductive emotion that leads to bad decision-making, as it became apparent with the sharp drawdown in the equity markets in the fourth quarter of 2018.

Investment fads are nothing new. A look back over the past few decades can demonstrate how many of these investment strategies have come and gone. In the late 1990s, growing belief in the emergence of a “new economy” led to the rise of the information technology sector and the ensuing speculation in “dot-com” stocks. In the 2000s, much was made about the potential growth opportunities in the emerging economies and the importance of the so-called “BRIC” countries of Brazil, Russia, India, and China. The meteoric rise and subsequent crash of Bitcoin and other so-called cryptocurrencies was the most recent example of irrational FOMO behavior that punished many investors and speculators. While some of these ideas had merit at the time, over-allocating to the hottest and newest investment strategy has rarely paid off in the long run. At Morton Capital, we take a different path when evaluating new investment strategies. Rather than following the crowd, we try to stay disciplined and adhere to our three core beliefs of risk management, true diversification and cash flow. After all, if our clients can sleep peacefully at night knowing their portfolio is working towards their financial goals, while others may take unnecessary risks to participate in a hot trend, who’s really missing out?

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Important Reports for Tax Planning

It’s that time of the year again – tax planning season! To help you and your CPA get the information you need in a timely manner, we’ve created a few tax planning reports on the portal:

  • Realized Gain/Losses – for this year and last year
  • K-1 estimated timing document
  • Estimated income report (under “Transactions”)

We will upload your Schwab or Fidelity 1099 reports in mid-March as well. Please reach out to your MC wealth advisory team for any questions about our portal or to set up your CPA with their own.

 

GET THE MOST LIFE OUT OF YOUR WEALTH (SM)

Fourth Quarter 2018 Commentary

What a Difference a Year Makes

While the stock market correction in the fourth quarter dominated headlines, the real news in 2018 was that the vast majority of asset classes produced negative returns. According to a Deutsche Bank study, 90% of the 70 asset classes they track delivered negative returns for 2018—the highest percentage as far back as 1901, when they began tracking the data. This is in stark contrast to the prior year when almost all asset classes had positive returns.

While these extremes in performance are dramatic, the most important takeaway, in our opinion, is that most traditional asset classes moved in the same direction in both years. We have often talked about the ineffective diversification that traditional (i.e., stock and bond only) portfolios have provided in recent years and may potentially provide going forward. This lack of diversification benefit is welcomed by investors in years like 2017, when everything is up, but less so in years like 2018, where everything is down without there really being anywhere to hide.

The Dual Narratives of 2018

Looking more closely at 2018’s performance, two polar opposite narratives dominated the beginning and the end of the year. The U.S. markets began 2018 with high hopes that tax reform and deregulation would drive an acceleration in the rate of capital investment, thus improving productivity and bolstering economic growth and corporate earnings outlooks. According to Bloomberg, while tax reform has been positive on the margin for capital spending, a large share of the tax windfall has been allocated to corporate share repurchases (i.e., financial engineering). While tax cuts contributed to the rally in the first nine months of the year, it was short-lived as earnings slowed as a result of the lack of investment in productivity. Most indices severely corrected in the fourth quarter and ended the year down or flat. The one bright spot for in the quarter was gold, which acted as an effective hedge during this period of market stress. The table below summarizes the fourth quarter and year-to-date (YTD) performance for selected indices.

We have frequently been asked to comment on what caused the U.S. market’s swoon in the fourth quarter. There was certainly no shortage of potential problem areas: the Fed raised interest rates by 25 basis points (0.25%) for the fourth time in the year, trade tensions with China continued, global economies started showing signs of slowing down, the Democrats took control of the House but the Republicans maintained their majority in the Senate, the White House experienced continued personnel turnover, and there was even a partial government shutdown late in December. None of these events, in our opinion, were significant enough to be considered a catalyst for the market downturn, however. Interest rates have been on the rise for the better part of three years, trade tensions dominated headlines for much of the year, and political uncertainty has been evident almost on a daily basis. Rather than pointing to any one event as the cause of the downturn, it seems most likely to us that markets simply got ahead of themselves in 2017 and the first nine months of 2018. Looking forward, we anticipate that there could be further volatility as the stimulus from tax cuts and government spending wanes and both economic and corporate profit growth rates decelerate.

Morton Capital’s Approach

In our year-end communication regarding the recent market volatility, we emphasized our core beliefs as it pertains to developing long-term plans and managing our clients’ portfolios. Undoubtedly, the markets become more difficult to navigate late in the business cycle, as markets search for new equilibrium and more rational valuation levels. Our core beliefs have helped guide us through challenging markets in the past, and we believe will do so again going forward. Our core beliefs encompass the following:

    • Risk Management

    Investors have to take risk to make money, but deciding what type of risk and how much to take given certain environments can be key to long-term success. In the current environment, where we believe valuations are elevated, the key is finding investments where we have conviction that the return potential justifies the risk being taken. Over the last few years, we have been reducing our exposure to traditional asset classes as euphoric investors have bid up prices and chased yields. These allocations have typically gone to more lending-related strategies, where we believe investors can make relatively attractive returns without having to suffer through stock-like volatility. Where appropriate, we have also increased our allocations to private alternative investments, where there can be a premium for taking on illiquidity.

    • True Diversification

    We define a truly diversified portfolio as one with multiple drivers of return. If stocks and bonds have the potential to move in lockstep during a downturn, then a broader and more dynamic alternative approach to diversification is necessary to be effective. While lack of access and due diligence expertise may keep other firms from investing in alternatives, Morton Capital has been at the forefront of incorporating innovative asset classes such as real estate equity, private lending and reinsurance into our clients’ portfolios. These asset classes should not move in lockstep with the market and should better manage risk if we encounter a sustained correction.

    • Cash Flow

    In designing our client portfolios, we have always shown a preference for investments that can generate immediate or reasonably fast cash flow. While long-term buy-and-hold strategies can be successful, we prefer to be paid while we wait. In the current low-interest-rate environment, we have tilted our public stock portfolio to more dividend-paying stocks and have sought higher levels of cash flow in the private lending space as a replacement for traditional low-yielding bonds. We believe these cash flow-focused assets, especially in the private lending space, will generate more attractive and consistent outcomes for our clients while simultaneously supporting their lifestyles.

Follow Your Plan—Reacting Can Hurt Performance

At some point or another, we have all experienced the frustrating gridlock on the 405 or 101 freeways during rush hour. While traffic is slow for everyone, some drivers keep changing lanes hoping to get ahead. We, on the other hand, stay in our lane and end up passing them a little down the road. Given the heightened levels of volatility and the associated uncertainty, it is understandable that emotions may run high, causing investors to make changes to their portfolios. It is widely studied that one of the costliest mistakes investors make is to sell some of their riskier holdings and hope to buy them back later when things get “better.” Dimensional Fund Advisors has performed a study on the returns of the S&P 500 Index from 1990 to the end of 2017 to prove that market timing is a futile practice. As illustrated in the graph below, if investors missed the 25 single best days in the market during this timeframe, their annualized return would have dropped from 9.81% to 4.53%. Such underperformance will undoubtedly have a major adverse impact on an investor’s financial plan.

Forecasting the future path of the markets or the economy is never easy, and we are not in the business of predictions. As your partner and advisor, we can, however, encourage you to stay disciplined and not overreact to short-term volatility in the markets. In developing a plan to meet your financial goals, we have considered your objectives, income, cash flow requirements, and tolerance to assume risk. Maintaining a diversified portfolio and target asset allocations consistent with our philosophy is an important discipline. While there is an urge to want to be active and make changes, the reality is that every decision is an active decision, including a decision not to make changes.

Please do not hesitate to contact your Morton Capital wealth advisory team if you have any questions or would like to review your portfolio or plan in more detail. As always, we appreciate your continued confidence and trust.

Morton Capital Investment Team

 

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Disclosures: This commentary is mailed quarterly to our clients and friends and is for information purposes only. This document should not be taken as a recommendation, offer or solicitation to buy or sell any individual security or asset class, and should not be considered investment advice. This memorandum expresses the views of the author and are subject to change without notice. All information contained herein is current only as of the earlier of the date hereof and the date on which it is delivered by Morton Capital (MC) to the intended recipient, or such other date indicated with respect to specific information. Certain information contained herein is based on or derived from information provided by independent third-party sources. The author believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information. Any performance information contained herein is for illustrative purposes only.

Certain private investment opportunities discussed herein may only be available to eligible clients and can only be made after careful review and completion of applicable offering documents. Private investments are speculative and involve a high degree of risk.

The indices referenced in this document are provided to allow for comparison to well-known and widely recognized asset classes and asset class categories. Q4 returns shown are from 09-28-2018 through 12-31-2018 and the 2018 Year-To-Date returns are from 12-29-2017 through 12-31-2018. Index returns shown do not reflect the deduction of any fees or expenses. The volatility of the benchmarks may be materially different from the performance of MCM. In addition, MCM’s recommendations may differ significantly from the securities that comprise the benchmarks. Indices are unmanaged, and an investment cannot be made directly in an index.

Past performance is not indicative of future results. All investments involve risk including the loss of principal. Details on MCM’s advisory services, fees and investment strategies, including a summary of risks surrounding the strategies, can be found in our Form ADV Part 2A. A copy may be obtained at www.adviserinfo.sec.gov.

Morton Capital Perspective on Recent Market Volatility

“The stock market is a device for transferring money from the impatient to the patient.” – Warren Buffet

The markets have been on a roller coaster ride recently, but now is not the time to get off—it is time to be patient.  While we understand that fear is a natural result of uncertain times, it is important to remember that market corrections, and even recessions, are a natural part of the market cycle.  In this article we answer three key questions that we have been asked in recent weeks, including our thoughts on the economy, the markets and the recent volatility.

What is happening in the markets?

If you’re expecting more volatility, why not sell stocks now?

What is Morton Capital’s approach given this uncertainty?

READ OUR FULL ARTICLE HERE

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Disclosure: This communication is for informational purposes only. Any investment strategy involves the risk of loss of capital. Some alternative investment strategies discussed are limited to qualified eligible investors. Past performance does not guarantee future results.