Mid Quarter Newsletter June 2018

Why You Should Care About Rising Interest Rates

Recently, you’ve likely been seeing headlines that breathlessly wonder whether the Federal Reserve will increase interest rates at their next meeting. With what many consider a relatively strong economic environment and higher inflationary expectations, most agree that the Fed will raise rates at least another two times in 2018.

While there are countless ways higher rates may impact the broader economy, individuals will start to feel the impact as well. As a consumer, if you go to buy a car or use any other form of credit, higher rates will affect any loans you take out. If you have an adjustable rate mortgage (ARM), rising interest rates could cause your monthly payments to increase meaningfully.

Individual investors, especially those with more traditional allocations, will also feel the impact in their investment portfolios. Simple bond math states that interest rates and bond prices move in opposite directions. So a holder of a “risk-free” 10-year Treasury bond has lost 2.8% in value in five short months since the beginning of the year . . . not so “risk-free” after all!

Over the last several years at Morton Capital, we’ve consistently reduced our weightings to fixed income strategies that have exposure to rising interest rates, so our bond portfolios look VERY different from those of other traditional wealth managers. When investing in bonds, others point to the fact that traditional bonds have posted positive and predictable returns for decades on end. After all, what has worked in the past should work going forward, right? However, interest rates have been in a steady decline since 1981, so many investment professionals were still napping in their cribs when rates last rose and have little idea of the potential risk lurking in many bond strategies. When considering this risk to traditional bonds, we think it’s crucial to spend the time searching for alternative bond substitutes that can generate predictable returns, even in a rising rate environment. Just because we haven’t seen rising rates for 30+ years, doesn’t mean the next 30 years will look the same.

Welcome Dan and Leah

Dan Charoenrath
Director of Client Operations

As the Director of Client Operations, Dan manages our Account Servicing Team. Prior to joining Morton Capital, he spent five years managing multiple units for Peets Coffee and Tea, overseeing all locations from San Luis Obispo County through Ventura County. He earned his Bachelor of Arts degree in philosophy from the University of California, Santa Barbara, in 2004.

 

 

Leah Loewenthal
Portfolio Analyst

Leah began her career in the financial industry in 2013 after graduating from California Polytechnic State University, San Luis Obispo, with a Bachelor of Science degree in animal science. As a portfolio analyst, she provides excellent operational, administrative and client support. She enjoys traveling, being outdoors and coaching youth basketball. She holds Series 7 and Series 66 licenses.

Planning for Incapacity

If you have parents of a certain age, you’ve likely had to start having those uncomfortable conversations about how they and the rest of the family will handle their affairs as they age. At what point should they stop driving? Should they consider downsizing to a more manageable home? What are their preferences if they need help with their personal care? While thinking about these issues regarding your parents is uncomfortable enough, have you also started thinking about your own incapacity plan? No one wants to think about the day they no longer have the ability to make rational, coherent choices, but being proactive will ensure you have a say in your lifestyle even if you can no longer make day-to-day decisions.

According to the Alzheimer’s Association, Alzheimer’s accounts for most cases of dementia and affects an estimated 5.5 million people age 65 and older. Other common causes of dementia include strokes, abnormal brain chemistry, and Parkinson’s disease. Some of the warning signs of dementia include memory loss that disrupts daily life, difficulty completing familiar tasks at home or work, confusion with time or place, new problems with words in speaking or writing, and changes in mood or personality.

So how can you plan for the possibility of dementia or other incapacitating disability? Be proactive by identifying someone you trust to make decisions for you when you can’t, and to serve as a resource for your advisors and other professionals. You can use the following form to add a “trusted contact” to your Schwab or Fidelity accounts – simply complete and sign the form and return it to Morton Capital. Encourage your parents to do this as well. Take the time now to make sure you have a durable power of attorney for your financial affairs and an advance health care directive, and revisit any directives you have already to ensure they are still consistent with your wishes.

If there’s someone you would like us to contact in case you begin showing signs of incapacity, reach out to your advisory team and let us know. Introduce this person to other trusted professionals in your life as well. Unfortunately, if you don’t make your incapacity choices yourself, someone else will get to decide who will make those choices for you.

Mid Quarter Newsletter Q2 2017

Our Legacy of Stewardship

In reflecting on Lon’s rich legacy, no part of his work was more important to him than being the trusted steward of his clients’ financial futures. Stewardship is defined as the responsible management of something entrusted to one’s care. It is a position we hold in the highest regard. Beyond our charge of helping clients with financial planning and investments, our most important role is to be a trusted partner available to you and your family for any questions or needs.

Prior to Lon’s passing, he shared with clients that he was excited to unveil the updated brand and image for Morton Capital. Over the next few months we will be completing the project we started with Lon, including the below video on our stewardship philosophy. This is one of a series of five videos and outlines how we see our role as your trusted steward.

How Is Your Financial Professional Getting Paid?

Back in 1983, when Lon founded Morton Capital, the financial investment landscape largely revolved around selling products. The more products financial professionals sold you, the more commissions (read: money) they made. Charging only a single fee based on a client’s assets under management (AUM) was extremely rare, if unheard of. However, Lon saw early on that the only way to truly align himself with clients’ best interests was to be paid for his objective advice and not based upon how many products he was able to sell to them.

Today, it is much more common for advisors to be “fee-only” as opposed to charging commissions.  The challenge with the “fee-only” title, though, is that it may not tell the full story. For instance, an advisor at a brokerage firm may not directly receive commissions, but that individual may still be incentivized to make money for the firm as opposed to their clients. Brokerage firms are notorious for making fees in a myriad of ways, and in many instances, clients can’t see these fees anywhere on their statements. In a Wall Street Journal article published in 2014, it was found that individual investors trading $100,000 in municipal bonds over the course of one month paid brokers an average “spread,” or markup, of 1.73%, or $1,730. In today’s low-interest-rate environment, this could amount to an entire year’s worth of interest. Brokers could also be getting kickbacks from mutual fund companies to recommend their funds to clients. Again, these incentives don’t show up anywhere on client statements, but the concern is that those funds were selected based on the broker’s compensation rather than solely on their appropriateness for clients.

It’s essential to understand how financial professionals are paid in order to find out what factors could be guiding their decision-making. At Morton, we don’t get paid incentives for recommending any of our investments to you. Paramount to our process is getting to know you and your needs and goals first, then making recommendations based solely on what we believe is best for you. Just as Lon envisioned when he decided to create an advisory firm all those years ago, this approach puts the focus back where it belongs: on the best interests of the client.

ETFs and the Illusion of Diversification

With the recent proliferation of ETFs (exchange-traded funds, or vehicles that track indices or a basket of assets), investors are better able to get instant diversification and cost effectively purchase hundreds of stocks in one fell swoop. However, as ETFs have grown as a percentage of total stock market ownership, an unexpected result has emerged; namely, a positive feedback loop has developed as individual stocks now move up and down in lockstep fashion. This makes sense-when you buy an ETF that tracks the S&P 500, you are effectively purchasing all 500 stocks in the S&P index instantaneously, pushing all of their prices up at the same time. Similarly, when you sell that ETF, you are selling all 500 stocks simultaneously, pushing all stock prices down. No surprise that the correlation amongst stocks has moved up meaningfully in recent years. Just when you thought you “won” the diversification game by buying that ETF, you now simply own a bunch of stocks that move up and down together. This behavior will be further exacerbated in a nasty market environment (think 2008) as investors at large will sell their ETFs at a push of a keyboard button, thereby selling thousands of individual stocks in unison.

The age-old solution to diversifying beyond stocks is to add bonds to your portfolio mix. After all, bonds typically behave well during periods of stock market volatility. However, while the last 30+ years have seen falling interest rates and rising bond prices, our concern is that the next 30 years may be a mirror image, with rising rates and poor bond performance. In future stock market dislocations, we believe bonds may not act as the ballast in the portfolio that they were in the past.

Given the heightened political uncertainty in the developed world, coupled with extremely high valuations across most asset classes, we strongly believe an alternative approach toward diversification is essential. Morton Capital is a thought leader in this realm, having taken a unique approach toward diversification for decades. Fundamentally, most traditional asset classes are exposed to three main factors: 1) valuations (we live in a world of expensive valuations); 2) GDP growth (growth around the world is stagnant); and 3) interest rates (trading at all-time historical lows). It may sound counterintuitive, but we seek (rather than avoid) risk exposure to other areas of the economy to curate a well-diversified portfolio. In other words, we crave exposure to asset classes that will behave differently than stocks and bonds in a variety of market environments. Examples include exposure to reinsurance (natural disasters), alternative lending, and gold. Additional examples, where applicable for clients who can access illiquid vehicles, are private lending, real estate, and royalty streams. While investors at large are extremely complacent, as evidenced by very low volatility levels in the global markets, complacency is one risk that we aggressively seek to avoid as we are never satisfied in our search for truly alternative sources of return.

Information contained herein is for educational purposes only and does not constitute an offer to sell or solicitation to buy any security. Some alternative investment opportunities discussed may only be available to eligible clients and involve a high degree of risk. Additionally, the fees and expenses charged on these investments may be higher than those of other investments. Any investment strategy involves the risk of loss of capital. Past performance does not guarantee future results.