Working in finance, it’s become clear to me that decisions surrounding money are commonly influenced by feelings. Those feelings can range from happiness and comfort to fear and greed—the list goes on and on. A natural result of these varied emotions is that people are often hesitant to use one advisor because they are concerned about “putting all of their eggs in one basket.” The choice to have one advisor or multiple advisors is very personal, but it shouldn’t be emotional.
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.
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.
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?
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)
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
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.
“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?
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.
Congratulations to Senior Vice President Joseph Seetoo, on his becoming a finalist for the San Fernando Valley Business Journal’s Trusted Advisors Awards. This annual event honors attorneys, accountants, business bankers, insurance professionals and wealth managers in the greater San Fernando Valley region for their commitment to high quality client service and overall excellence.
At the award ceremony, hosted on August 9th, publisher Charles Crumpley commented “This event helps to recognize the importance of the relationships they have developed with their clients as they guide them through this complex business environment,” Crumpley said in his opening remarks. “Everyone understands that in these industries, professionals have to help their clients comply with rules and regulations. But it is those rare individuals who do that but also combine market knowledge with superior service to help their clients thrive and achieve. And many of them go way above and make significant contributions to our community.”
We are incredibly proud of Joseph and his relentless pursuit of excellence in both client service, and as a leader within our team. In 2017 Joseph was also awarded the Wealth Management – Trail Blazer Award by the San Fernando Valley Business Journal.
San Fernando Valley Business Journal (“SFVBJ”) Trusted Advisors is an independent listing produced annually by the SFVBJ. The award is based on data provided by individual advisors and their firms. Only advisors who submitted information are included for consideration, and investment returns are not a component of the rankings. The award is based upon a recipient’s application and not upon any qualitative and quantitative criteria relating specifically to one’s position as an investment advisor. As such, the award is not representative of any one client’s experience. This award does not evaluate the quality of services provided to clients and is not indicative of the investment advisor’s future performance. Neither the RIA firms nor their employees pay a fee to the SFVBJ in exchange for inclusion in the Trusted Advisors awards.
Morton Capital Management ($1.6 billion in assets under management (“AUM”) as of June 30, 2016) is registered with the SEC under the Investment Advisers Act of 1940. SEC registration should not be interpreted to mean that Morton Capital or its personnel has been sponsored, recommended or approved, or that Morton Capital’s or its personnel’s abilities or qualifications have been passed upon, by the United States or any agency or office thereof.
The alternative investment opportunities discussed may only be available to eligible clients and involve a high degree of risk. Opportunities for withdrawal/redemption and transferability of interests/shares will be limited, so investors may not have access to capital when it is needed. Additionally, the fees and expenses charged on these investments may be higher than those of other investments.
Barron’s rankings are based on data provided by individual advisors and their firms. The ranking reflects the volume of assets overseen by the advisors and their teams, revenues generated for the firms and the quality of the advisors’ practices. Only firms that submit information are considered.
Past results are no guarantee of future results. Inherent in all investments is the possibility of a loss.
By Dana Anspach, Money Over 55 Expert
Updated March 16, 2016.
Morton Capital, a registered investment advisor in California, specializes in bringing hand-picked alternative investments to their high net worth clients. They receive no compensation from the underlying investments which puts them in the perfect position to offer an objective opinion and do the research and due diligence that needs to be done before venturing into the alternative asset class world.
In our Q4 Investment Newsletter, we take a look at the following stories.
- IRS Zeros In On Dirty Dozen Tax Scams In 2015
- 401K – Take Early Withdrawals Penalty-Free
- Federal Reserve Holds Interest Rates Steady For Now
- Bigger Retirement Plan Benefits For Elders
- Here’s What You Can’t Do In An IRA
September’s stock market sell off either created tremendous opportunities to put money to work at lower prices or alerted active investors to position their portfolios defensively for a deeper correction. To find out how you should invest your money in the fourth quarter, I assembled a panel of Barron’s-ranked financial advisors to share their best mutual fund or exchange-traded fund picks. This elite group is hailed as the top 1% in their field. Barron’s evaluates financial advisors based on their assets under management, annual revenues, years of experience, client retention, charitable contributions and regulatory records.
5. Tocqueville Gold Fund (TGLDX)
by Jeffrey Sarti
The recent bout of stock market volatility across the globe was just the excuse the Federal Reserve needed to refrain from raising interest rates. However, we believe the collective “wisdom” to agonize over a meager quarter-point hike is typical of the short-term mindset of the investing public.