2014 Year End LetterSubmitted by Kaizen Financial Advisors, LLC on December 17th, 2014
I hope this blog post finds you in good health and enjoying the holiday season. I wanted to send out a quick note to give you my perspective on the markets, particularly regarding the performance of domestic large-cap stocks relative to other asset classes, and to discuss why you still want to maintain a diversified portfolio. Also, we’ve got a few Kaizen business updates for you from 2014.
The Market Discussion: History doesn’t repeat itself, but it rhymes.
Heading into the last few weeks of 2014, the S&P 500 is outpacing most other assets classes, and for good reason: US GDP continues growing, unemployment is declining, and consumer confidence is up, all at a time when other economies around the world are struggling. This disparity encourages inexperienced investors to concentrate their assets in US equities, but long-term investors know from experience that a balanced portfolio of mixed assets including domestic and foreign stocks, bonds, real estate, and commodities provides a less risky way to grow your wealth with potentially the same returns.
Personally, I am starting to feel like I did in 1999, 2005, and 2007. Remember back in 1999, when technology stocks were the no-lose proposition? Then in 2005 it was real estate, and in 2007 investors were so sure of equities. Each of those times, we found out again and again that having a balanced portfolio makes sense. What this means is that successful investors remain disciplined, holding portfolios that may not have the highest returns one year, because they know that running to the year’s best-performing asset is a short-term strategy that generally doesn’t pay off in the long-term.
In fact, right now we are seeing seasoned and respected investment managers paring back their exposure to US equities, which implies that there may be better opportunities outside the US in equities. Jeremy Grantham and his firm, GMO, which specializes in entities with long time horizons like endowments, pensions, and insurance companies, have pared their allocation to US equities. In his monthly forecast of asset classes, Grantham identified emerging markets and international stocks as likely to outperform the US market over the next seven years. This sentiment is mirrored when we look at equity valuations.
In addition, in the recent Barron’s article titled “US Stocks: Too Popular?”, author Ben Levisohn notes that in September investors piled $164.3 billion into US assets, a monthly record. The surge reflected inflows from non-US investors as well as domestic investors pulling money out of foreign markets. Generally, running against the herd makes sense in investing.
This does not mean that you should abandon US equities; it just means that over time US equities will likely balance out against other asset classes and there will be time when you are glad you have international equities and commodities in your portfolio, even if this year they didn’t perform as well as we’d like.
Kaizen Business News
Here are some additional administrative year end items I would like to make you aware of:
Tax Loss Harvesting
Tax loss harvesting is when I look to offset gains and losses in your non-retirement account to reduce your tax burden. Generally I only offset gains if you will be taxed at your marginal rate. I have reviewed any opportunities for tax loss harvesting from your accounts.
Rebalancing Your Account
Rebalancing is when I sell the top performing securities and purchase securities that didn’t perform as well in your account. This may seem counterintuitive to some: “Why would you sell what did well and buy what didn’t?!?!?!?” The reason is that by selling high and buying low you should get better returns over time, with less volatility I also reallocate to raise cash to meet your cash needs, for those of you taking draws from your portfolio.
I rebalance your accounts annually, or whenever you deposit a significant amount of cash. As of now, I have rebalanced some accounts, while others I’ll be rebalancing starting now through spring.
Changes in Securities
This year some funds have been underperforming or the manager has retired, and I will be changing securities as a result. Should you have any questions regarding specific changes, feel free to give me a call. I am happy to discuss these decisions more with you.
Schwab Tax Statements for 2014
Schwab will mail out your tax statements in early February. Everyone with a Schwab One (non-retirement) account will receive a paper copy to give to your CPA or file with your tax forms. You can also access this statement online, or we are happy to email it to you or upload to your Kaizen Portal.
Retirement accounts like IRAs, Roth IRAs, and 401ks are tax deferred, so you do not pay tax on those accounts until you take withdrawals. If you are taking a withdrawal like a required distribution from a retirement account, you will report the draw as income on your tax return. Schwab will send you a 1099 tax form if this is the case.
Your “kick off the holiday season” gift has been mailed, and I hope you have all received them by now. I toyed around with the idea of sending a different holiday gift this year, but the stunning beauty and delightful smell of these wreaths convinced me to stick with this tradition. It is hard for me to track whether or not you received your wreath, so if it hasn’t shown up on your doorstep yet, please let me know.
Starting in February and extending through November, we will be doing our usual annual client reviews. At this meeting we will review your net worth and investment results, progress towards your goals, and any new goals for the upcoming year. I will also update your Investment Policy Statement and check in on your risk tolerance.
I now have the ability to consolidate all of your investments, even ones managed elsewhere, in one statement. This means you can see everything, including your 401k, in your Kaizen statement. If I haven’t already done so, I will discuss whether you would like this capacity on your account.
Expect to hear from us to set up your appointment. If you have a specific need or time frame in mind let us know. We are happy to accommodate your schedule.
Most of you have had some kind on interaction with Debra and or Katie by now. They are available to serve you. Should you need anything – address change, cash from your account, etc. – feel free to contact any one of us.
New Kaizen Logo, Website, and Branding
Some of you may have noticed our new logo and tagline on the Kaizen Capsule emails we’ve been sending out. We worked extensively to come up with what kaizen means for our business, and how we work with clients to achieve results.
For us, kaizen means a partnership between my firm and you, helping you to take steps to not only grow your wealth, but also protect it. I see clients taking small steps to achieve real results, things like diversifying investments, saving more money, organizing finances, and protecting wealth.
In the logo, the mountain signifies nature and the Northwest, while the lines also look like a bar graph and a line graph, with the line a graph moving forward and upward like a mountain climber. It isn’t easy and requires perseverance, discipline, and patience to get to the top! In all, our new logo speaks to the peace of mind that comes from knowing that you have an advisor with the experience and knowledge to get you to the top. Keep your eyes peeled for a more detailed brand introduction letter, coming soon.
Lastly, I want to thank you for your support of Kaizen Financial Advisors, LLC. The firm continues to grow through your referrals of friends, family, and business associates. I see this as an acknowledgement of the service and results I provide to you. It is my great privilege to serve you and help you achieve your goals. If I am not meeting your expectations for any reason, please share this with me. I am eager to make sure you are completely satisfied with our wealth management and client services. My goal is to get you to your goals, one step at a time!
Happy Holidays and I am looking forward in sharing in your successes in 2015!