Pacific Northwest Asset Management, LLC
Summer 2018 Thoughts – Invest in Wealth
As we approach year 10 of this economic recovery and stock market bull run, many financial services industry analysts and experts are cautioning about a market downturn in the near-term future. They’re in the press daily proclaiming we’re overdue for a significant correction. Michael and I constantly watch the capital markets and macro trends for insights about the likely direction of the markets, but we do not purport to have unique skills or wisdom when it comes to forecasting market movements. It stands to reasons that we’re closer to a correction today than we were a year or two ago, but this 10-year economic expansion is not your typical period of growth. Most post-recession recoveries begin with an early or mid-cycle spike in capital expenditures (cap ex). This one did not. Yet the 2017 Tax Cut and Jobs Act has served as a catalyst (because of allowance for accelerated depreciation) for a very odd late cycle spike in cap ex. For example, the Commerce Department’s measurement of Business Fixed Investments was up 11.5% in the 1st quarter of 2018 followed by 4.1% in the 2nd qtr. Non-residential construction grew at 14% and 13% in the 1st and 2nd quarters. These are huge numbers for a 10-year-old expansion, and they don’t exactly spell a pending downturn. Add this to the fact that corporations are now paying 21% instead of 35% in Federal taxes and the argument can be made that the expansion can continue for a protracted period of time. Fact is – nobody knows for sure. Consequently, we continue to advocate for using financial planning as a roadmap for your household. If your household’s Cashflow Fingerprint financial plan shows you’ll fare well in a wide variety of market conditions, then you should have confidence that over the long-term, you’re on the correct financial trajectory. With your cooperation, we’ll update your financial plan at least annually to make sure you remain on the right track.
At PNW Asset Management, we reject Wall Street orthodoxy that high-cost active management strategies outperform. Why? Because the evidence suggests otherwise! Ample, unbiased academic research is available to support our supposition, but here’s a great example. Recently, we received an unsolicited email from Buffalo Funds about better days for active management. When we looked at their funds, we were not surprised to find that their active funds are quite expensive. Their large cap fund, ticker BUFEX, has an expense ratio of .94% and the fund’s turnover is 40% with only 47 holdings. The fund also holds about 4% in cash. Compare these numbers to Schwab’s large cap fund that we use for our clients, ticker SCHX, with an expense ratio of .03%, 4% turnover with 758 holdings, and .1% in cash. And the Buffalo Funds 15-year performance versus the S&P 500 and Morningstar’s large-cap growth index? -.10% and -.34% respectively. As we see far too often, high costs and lots of trading (as measured by turnover) does NOT yield outperformance; they cause the fund to fail to even match the index to which it should be compared (large cap growth) over the long-term! A broadly diversified, low-cost portfolio comprised of a situationally appropriate asset allocation for you and your household is the way to go!
DON’T EVER BUY AN ANNUITY!!!
Lastly, you may have recently heard an advertisement on NPR about a newly formed organization called the Alliance for Lifetime Income. The organization is a non-profit with a dot ORG website. The Alliance boldly commits to help consumers better understand the role of annuities. “It’s time to take some risk out of your retirement with an annuity.” The member organizations (many of which you would recognize) clearly want you to use annuities to secure lifetime income because they benefit mightily at your expense! As I explain in my book, The Best Kept Secret on Wall Street, annuities are among the most deceptive insurance products ever created AND among the most lucrative for the shysters who sell them! You’ll hear annuity salespersons talk about never losing money with annuities. Well, these shysters clearly neglect to emphasize that you’ll lose money if you need your money back within about 7 or 8 years after being duped into buying one. Why? Because the insurance company needs those years to recover the 7.00% or 8.00% in up-front commissions they pay to the annuity salesperson! Deceptive terms like payout rate are purposefully designed to confuse you and to make you think a payout rate and the rate of return are similar. They are NOT! Many annuities are merely contracts and are not investment products at all. When an annuity is sold, there is a winner and a loser. If you purchase an annuity, guess which one you are! I could write another several thousand words about annuities and how horrible they are versus other alternatives. Instead, I invite you to call us at 206-259-0575 for a more in-depth discussion about what a poor choice annuities are!
Thanks very much and don’t forget we’re always available to you. Invest in Wealth
Pacific Northwest Asset Management, LLC
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Pacific Northwest Asset Management, LLC (hereinafter “PNW Asset Management”) is an investment adviser registered with Washington State. PNW Asset Management may not transact business in states where it is not appropriately registered, excluded or exempt from registration. Individualized responses to persons that involve either the effecting of transactions in securities, or the rendering of personalized investment advice for compensation, will not be made without registration or exemption.