AWM Insights Financial and Investment News

“Shirtsleeves to shirtsleeves in three generations.” 

This is the expression commonly used to describe the reality that wealth is rarely sustained past the third generation. Building wealth is extremely difficult in the first place, and lack of planning for the next generation can destroy wealth in a hurry. 

The families that have conquered this trend and sustained wealth for 5+ generations understand the expertise of a team of dedicated individuals working together to achieve success. This allows families to create legacy and impact - generation after generation. 

Multi-generational wealth demands loyalty and independence from those advising them. It requires full customization and individualization. It must be integrated to be effective, because a family has only one Net Worth, and only one After-Tax Return.

EPISODE HIGHLIGHTS:

• (1:10) Market news: Alibaba has declined 344B in value recently. Tesla is the latest US company to achieve a $1 trillion valuation. Markets have hit new highs once again this year.   
• (2:14) UBS third quarter earnings driven higher by fees from wealthy clients. High fee products sold to their clients are great for UBS but bad for their clients.
• (2:50) Facebook has renamed itself to Meta. CEO Mark Zuckerberg created a new holding company called Meta Platforms, Inc which includes Facebook, Oculus, and Whatsapp.   
• (3:15) Elon Musk now has a net worth great enough to buy every NFL, MLB, NBA, and NHL team combined. This gives perspective on pro sports value relative to the wealth creation capabilities of the biggest companies. 
• (3:30) Mark Zuckerberg, to his credit, utilizes a family office which eliminates many conflicts of interest, customization, and integration issues that plague the big banks and wirehouses (think Goldman Sachs, Morgan Stanley, Merrill Lynch, UBS). 
• (5:15) The problem with risk tolerance questionnaires for investors. 
• (6:20) Individualization and customization matters when building a portfolio. Cookie cutter model portfolios do not treat people as unique. 
• (8:17) The business model of Wall Street is to serve the masses and plug and play investors into model portfolios while avoiding liability with risk tolerance questionnaires.
• (10:45) What a better solution looks like to maintain multi-generational wealth. Risk should be determined according to what success looks like for each client. Not a 5 minute survey.
• (12:25) Those investment advisors that are not held to the fiduciary standard are incentivized to take more risk because they are not legally obligated to do what is in the best interest of the client. They only have to recommend “suitable investments” which may or may not be the best for that client.     
• (13:35) True customization only takes place at family offices and multi-family offices. It is too expensive for anyone else to offer this kind of service.
• (13:50) Red Flag: Monte Carlo simulation. This is commonly used financial modeling that gives a false sense of security to whether you will run out of money with a given portfolio.   
• (15:10) Ignoring private investments like venture capital is a huge mistake not talked about by those new to wealth. This is money left on the table that the best endowments in the world allocate to.
• (17:10) Tailored investing according to your vision of success is elegantly simple but demands a higher level of service than any of the big banks could ever hope to provide.
• (18:06) A client being sold a portfolio to juice returns is reducing a client into an oversimplified portfolio. No investor, let alone, an ultra high net worth should accept this oversimplification.     
• (20:44) All listeners deserve fiduciary advice in their best interest that is customized and integrated across all parts of their life. Tax advice and tax awareness should never be ignored.   

The most important question when it comes to investing is the why? You cannot give good financial advice or make good investing decisions on your own without understanding what success looks like to you.   

Most financial advisors miss the most important question to ask their clients because they have too many clients to spend the necessary amount of time getting to know. They then invest them into one of their model portfolios that may or may not be what they need to achieve financial success.

Money is a powerful tool that can be invested to achieve priorities and create multi-generational wealth. The impact on families can live on for generations when wealth is properly stewarded. Answering the why of any investor makes for a better investing experience. Even if generational wealth is not the desired outcome.

EPISODE HIGHLIGHTS:

• (1:05) Market news: WeWork finally going public at a $9 billion valuation. Earnings season is in full swing and Netflix has created internal drama with the newest special by Dave Chappelle. Squid Game is also drawing huge amounts of interest in its first season. 
• (3:05) Bitcoin ETF (ticker: BITO) launched and doesn hold Bitcoin directly but rather holds futures contracts in the fund.
• (4:15) Why should you even invest in the first place?
• (5:15) Money is a tool to help you accomplish your priorities.
• (5:35) Anyone giving you advice how to invest without knowing what you're investing for is giving poor advice. 
• (6:20) Your why is incredibly important. Make your wealth work for you. 
• (7:17) Investing is not speculation. Speculation is gambling and should not be confused with investing.
• (8:00) Invest to at least keep up or beat inflation and this maintains or increases your purchasing power.
• (9:25) Two different people have their own unique wants and needs and should not have the same portfolio. This is why customized investing according to priorities and not age should be how a portfolio is constructed.
• (11:30) A longer time horizon allows for investing in assets that have even higher expected returns. This can lead to even greater impact over a lifetime.   
• (12:23) “Thinking of money as a tool in this framework should provide more comfort, understanding, appreciation, focus.” -Justin
• (13:25) Knowing your why and the impact you want to make with your money (the tool) then guides how the portfolio is built.
• (16:20) What does investing for impact mean to you?
• (17:10) There is a huge opportunity for change and impact that could be made if investors focused on achieving priorities versus chasing short term returns and fads. 
• (18:45) It is unfortunate the industry is still tied to a risk tolerance survey and many people aren’t given the opportunity to invest according to their priorities.
• (19:00) The family office model allows for true customization and the greatest chance to achieve success with your money. 

In the previous two episodes of AWM Insights, we covered when the best time to invest your money is and where to look for your investment advice. This week we continue by discussing how you should construct a portfolio to achieve the returns you deserve.  

Every investor deserves a portfolio tailored to the priorities they want to achieve. Very few are able to get that advice because they are stuck with biased and stale Wall Street solutions. 

Liability driven investing matches what you want to achieve in your life with the systematic based investment to best reach the outcome. Taking smart and compensated risk is necessary, but so is protecting essential needs with the highest quality assets. 

Systematic active investing gives you a real chance to outperform the indexes in a structured and repeatable way over the long-term. ETFs, Mutual Funds, and Separately Managed Accounts can all add customization that achieves the results that are in your best interest and designed to meet their priorities in the financial plan.

EPISODE HIGHLIGHTS:

• (1:45) Earnings have so far exceeded expectations. This is supportive of the market even with the volatility of unemployment claims and inflation data.
• (2:55) OECD countries have agreed to a global minimum tax. This is not a done deal quite yet but will have a big impact on global markets.
• (4:00) A crypto ETF has been approved by the SEC. It is not holding Bitcoin but instead futures. This means it will not track the underlying exactly.
• (7:20) Independent and integrated advice reduces conflicts of interest and does not encourage selling the products of the firm.
• (8:40) Indexes have very strict and established rules on what they can do. When the S&P 500 had to add Tesla, the move was telegraphed to the market. Just being a passive indexer forced you to be front-run by other investors.
• (10:00) Blending the world of active and passive can take the best of both worlds. It allows for smarter trading so that you don’t blindly follow an index.
• (11:00) Favoring factors that have outperformed over the long-term can create a superior portfolio that increases returns and reduces volatility over time.
• (11:30) Mutual funds vs ETFs and Separately Managed Accounts can all add customization that can achieve the results that are in the clients best interest to meet their priorities in their financial plan.
• (14:30) Private investments can be high-risk high-reward but staying consistent to taking smart risk wins over the long term.
• (16:09) Tilting the odds in your favor is the key to being a good investor. Having a plan and investing based on priorities in a structured way is simpler and more effective.
• (17:40) The odds of finding the next Tesla before they were popular are not in your favor. It's okay to buy individual stocks but you should not expect to outperform the market over the long-term. The data has proven this time and time again.
• (19:00) Not all private investments are created equal. Access to the best deals matters the most in private investments. This is not like the public markets where you can open a brokerage account and buy great companies.
• (19:40) Always ask why? Why am I seeing this deal? What value can I add? If I’m just there to write a check, probably not a good investment.
• (20:15) Keeping the odds in your favor is like being in the house in Vegas. The odds are in your favor.

Whenever you have the money, it is the best time to invest. The caveat is that you must have a customized, well thought out plan that you can stick with over the long term. The market will always give you an excuse to wait. The problem is that waiting has proven to cost investors sitting on the sidelines huge amounts every year.    

Markets are rallying this week on an agreement to raise the debt ceiling temporarily, the COVID delta variant is declining, and Russia is agreeing to pump more oil. 

Does this mean you should wait until markets go down? No, because without the structure and process to get invested, you will always find a way to put off investing until next week. When markets were going down aggressively as they did in March 2020, you would have said: “I’ll just wait until they go lower.” No one rings a bell for you that the market has bottomed. Calling market bottoms and tops is purely luck. Anyone telling you differently has something to sell you. 

Something to keep an eye on is the release of the Pandora Papers. This is a follow-up release to the Panama Papers by the International Consortium of Investigative Journalists. It is fascinating to see hugely influential world leaders and celebrities doing whatever they can to evade taxes. A key distinction here: tax avoidance is perfectly legal and should be implemented as part of tax planning for anyone paying large amounts of taxes. Tax evasion is never worth the risk, especially when you are high profile.

EPISODE HIGHLIGHTS:

• (4:19) Markets are rallying from the recent sell-off because some of the uncertainty over the debt ceiling has been removed. Republican and Democrat leadership have agreed to fund the government through December.
• (4:35) Is now a good time to invest? It’s always a good time to invest. Markets reward investors over the long term. 
• (6:10) Wall Street has a playbook of calling you when the brokers see markets decline. They then tell you to buy the dip like they alone can predict the future. This is salesman 101 trickery at its core. The reality is your investment plan should already be fully invested. Sitting on the sidelines is harmful to your financial priorities. 
• (8:00) Returns have been above average so far year to date. Volatility is elevated but at historically normal levels. Markets will always give you a reason to wait to get invested. They are very good at appearing like they can’t keep going up. All of the data that exists for long term investors tells us otherwise. 
• (9:30) March 2020 and the perfect time to invest. The problem is the entire world was shutting down and uncertainty of the future of the world economy was at its highest. It only now looks like it was a no brainer with the benefit of hindsight.
• (10:20) The real question is, when would you feel comfortable investing? Creating a financial plan and sticking to it with a long-term philosophy is how you achieve success in investing.
• (12:30) There will be another financial crisis. They have happened many times in history so they should be expected in the future. It is the price of admission for the returns of the market. The way to take advantage of it is to have a customized financial plan with a portfolio implemented to make you financially bulletproof through these periods. 
• (14:20) Volatility in the equity market should not be affecting your priorities. If it is, you do not have a good financial strategy/advisor.
• (15:20) Recognize your human capital as the asset it is. Converting your human capital to financial capital over time is what creates generational wealth.
• (16:35) Atomic Habits by James Clear, “Professional stick to the schedule, Amateurs let life get in the way.” 
• (17:45) Whenever you have the money, it is a good time to invest. But you must have a well thought out plan that is diversified across markets and a long term philosophy. Without it you are just a rudderless ship at the mercy of the wind.

There are millions of places to find mainstream investment advice across television, books, social media, newspapers, newsletters, and friends. The problem is that this advice is almost always inappropriate for you - and often objectively wrong or misinformed. 

The best in the world seek only customized financial advice specific to their own situation and free from conflicts that plague Wall Street.

With markets experiencing a pullback from all-time highs, it is a good time to ensure your advisor has the expertise, experience, and structure to grow and maintain your family's wealth for the long-term. 

EPISODE HIGHLIGHTS:

• (2:00) The S&P 500 is up 16% year to date, 31% over the last one-year period, and 120% total return over the last five years. Perspective matters on pullbacks and corrections.
• (3:30) The world’s wealthiest family, The Walton family, worth around 238 billion, owns ETFs in their top 10 holdings. You don’t have to own individual stocks to grow and sustain wealth.
• (3:53) Tom Brady launches his clothing line and his 21 year age gap with Mac Jones.
• (4:50) Credit Suisse dumping the debt of Evergrande, the Chinese real estate company in danger of defaulting on their obligations, to their private wealth clients.
• (6:00) The first step of investing like a pro, assembled an expert team doing what's in your best interest.
• (7:45) UBS and other brokers do not have the ability to give tax advice.
• (9:00) Conflicts of interest in financial advice and what you can do about it.
• (12:00) Warren Buffet and the game he is playing. When he passes he has publicly stated many times that his wealth is going into index funds. He understands how hard it is to beat the market.
• (13:55) The financial media does not have your best interest at heart. They know what sells advertising space and will exploit that to the fullest.
• (15:30) The problem with Rich Dad Poor Dad and listening to amateur advice.
• (17:45) What does the data tell us about expected returns at all time highs?
• (20:50) How do you evaluate your true risks in investing and what gives you true control and clarity in your plan?
• (22:15) Why we believe so strongly in doing what’s in our clients best interest.

Last week had the largest market down day of 2021, yet the markets finished slightly up on the week. What can and should you expect from the market?

Markets moving up and down is normal and should be expected. As an investor, you will live through many rough market days. You will experience many fear and greed cycles. 

The key to weathering these storms is creating an investment game plan and sticking to it. You shouldn’t panic when the market is down 2%. Patience pays off in sports and in investing - you don’t bench your best player because they strike out once or twice. 

Emotions cause bad decision making, but staying rational can be easier said than done. It is why the plan is so important, because reacting can destroy your returns.

EPISODE HIGHLIGHTS:

• 1:18 The news you should know: US households' net worth hit record highs and the largest increase in real estate holdings ever.
• 1:54 Congress looks primed to pass tax increases on corporations, individuals, and estates. The capital gains rate is slated to move higher and also the top tax rate. Tax minimization strategies are also being targeted for removal including the backdoor Roth IRA.
• 3:35 Evergrande, a real estate company in China, is in danger of defaulting on their debt. This creates uncertainty which causes volatility in the markets. When a company as large as Evergrande defaults it can cause shockwaves that impact other companies and markets. 
• 5:30 Market volatility is a normal and healthy part of financial markets. If markets only went up and there was little to no risk then you would not be rewarded in the form of higher expected returns. Risk and return are always related. It is a basic foundation of investing.
• 11:00 No one is surprised when a hitter strikes out. It's a natural part of baseball and no one panics when it happens. This is no different than markets and the selloffs, corrections, and recoveries that occur every year. 
• 17:00 Risk aversion is an investor bias of losses hurting more than gains. Sticking to your investment plan and controlling emotions allows you to capture the returns you deserve. 
• 18:00 Herd mentality and why it feels good to be doing what everyone else is doing. If you follow the herd instead of your own investment plan, you will damage your wealth.
• 21:00 Be careful where you get your advice. There is no need to feel insecure like you should know how to invest. CNBC and other financial media are preying on your emotions to drive their advertising revenue. Professionals that give advice only in your best interest would be able to help you focus on what matters for only you. 
• 23:25 Brandon’s book recommendation: Get Wise to your Advisor. A great resource when it comes to finding an advisor.

With recent market dips, a common question that arises is: what causes market volatility?

The answer is a complex set of circumstances determined by many market decisions, but the real question lies in what you as an investor should do in times of market volatility.

Many headlines will prod a doom and fearful response, but what does the evidence show?

In this week’s episode, Brandon and Justin discuss the many different factors that can cause market volatility and the best approach to getting the returns you deserve, tuning out the noise in temporary market downturns, and investing for decades with a portfolio structure built to meet your priorities.

EPISODE HIGHLIGHTS

• (00:33) The news you should know: mixed economic signals before next Fed meeting, Biden’s proposed tax plan, Microsoft’s share buyback program, Federer’s IPO, Amazon offers college tuition at select schools for employees.
• (5:59) What’s going on in the market today?
• (7:29) Complexities of market volatility?
• (9:58) Guessing how many jellybeans are in the jar
• (11:46) The perils of market timing
• (14:23) You might get it right once or twice, but is it a repeatable process?
• (16:16) The good news is that you can participate in the greatest wealth building tool ever created
• (17:54) Measuring success in decades

Is picking individual stocks a good investment strategy? 

Yes, if you like not being compensated for a lot of risk…No, if you want to have an actual investment strategy. 

While a case could be made for individual stock selection 50 years ago, in today’s information age, any edge investors may have had decades ago has been eliminated. 

In this episode, Erik, Justin, and Brandon highlight the fallacies around having “diamond hands,” and being able to consistently pick the best performing stocks. 

EPISODE HIGHLIGHTS 

• 1:02: The news you should know: El Salvador now recognizes Bitcoin as legal tender, but Bitcoin has not performed as well as expected since then.
• 02:25: Markets have been a bit rocky as many investors get cautious around additional market highs. The surge in the Delta variant could also be priced into investor hesitation.
• 03:02: It’s not out of the ordinary for markets to see corrections – it’s actually healthy. What is abnormal is perpetual all-time highs.
• 04:28: It’s still commonplace for investors to pursue finding the best individual companies to invest in. Wall Street has made a killing off selling which company stock is “hot.”
• 05:25: While individual stock selection has cemented itself as the default investment strategy for most investors, it is a horrible strategy when looking at the risk you’re taking.
• 06:16: Individual stock selection was easier 50 years ago when investors could gain an edge by digging through financial statements that were not as easily available to all participants.
• 08:40: Everyone wants to pick a home run, and the lottery fallacy says that if I get one selection right, I’ll be compensated for the losses I incurred waiting on my “home-run pitch.”
• 12:28: If I play the individual stock selection game, what I’m really saying is I know something about this one company that no one else knows.
• 14:48: There’s no real information advantage in the public markets, but there is certainly an edge to be had in the private markets.
• 18:39: Even with private investments, we still need to stick to the fundamentals.
• 20:06: If we can’t predict the future, then having a strategy that’s not predicated on predicting the future (individual stock selection) is essential. I have to be confident in my decision-making philosophy and stick to it. 

Following our deep dive into risk on last week’s episode, we received a listener question asking if risk and return are always perfectly related.

Absolutely not.

Simply taking on more risk doesn’t lead to more success. There are different types of risks that are important to understand before introducing added risk into your portfolio.

Erik and Justin continue the conversation this week to explain the differences in risk and the importance of making sure you’re compensated for the type of risk that you take on.

EPISODE HIGHLIGHTS

• (1:30) The news you should know: Federal Reserve meeting, Rivian is going public, and social media stars who move markets.
• (6:24) While risk and return are related, not all risks are well compensated
• (7:50) You can never know 100% of the risk
• (8:56) The two important questions to ask
• (10:44) Taking calculated risk
• (12:45) Participating in owning companies over the long-term to capture the market premium
• (14:23) Why smaller companies generally outperform versus large companies
• (16:49) The evidence of well compensated risk

Risk might be the most used word in finance. We hear it all the time, but many have no idea how to define or quantify it. 

The reality is that “risk” is an umbrella term with different types of risk folded underneath it. Though many will define risk in terms of tolerance, looking at it this way can stifle your long-term growth opportunities. Instead, it can be better to view risk as the permanent loss of money.

How should you view risk in the framework of this definition?

In this episode, Erik and Justin define risk, and more importantly discuss how you should view it within the context of your life priorities. 

EPISODE HIGHLIGHTS

• 1:04 News you should know: China purchases a 1% stake in TikTok’s parent company, and TikTok was the most downloaded app last year. Adidas sells Reebok to Authentic Brands, which owns Sports Illustrated and the licensing rights to Shaq’s name, image, and likeness.
• 3:03 Amazon continues to disrupt the market by opening good old fashioned department stores.
• 4:26 True risk is the permanent loss of money that you can’t use in the future to achieve your life priorities. This definition is different from how risk is traditionally defined by advisors.
• 5:06 Most of the financial world will define risk in terms of tolerance; can you sleep at night when markets go down? This measure of risk can stifle performance by keeping people from investing in assets that have higher growth over the long-term.
• 6:29 Risk and return are related. If I expect to earn more, I should also expect to take on more risk.
• 8:43 Risk also encompasses regulatory decisions. Governments can make decisions that permanently affect industries; cryptocurrency being a great example.
• 10:38 If you’re taking a concentrated risk in an individual stock or cryptocurrency, you better get compensated for it. Does my return justify my risk? 
• 13:00 You can cherry-pick examples of individual stocks that have performed very well over the past decade, but what are the true odds of you finding the needle in the haystack? What’s the cost of picking the wrong one?
• 16:39 Your life priorities should inform your investment allocation. Essential needs should be invested conservatively, while long-term priorities can be invested more aggressively.
• 19:45 Liquidity risk is a measure of how easily you can have access to your money. You should demand a premium or higher return on investments that are less liquid. Investments that are less liquid pose an additional risk, which you should be compensated for.
• 22:14 Risk is unpredictable, we know events like 2008 can happen, but we certainly don’t know when they will happen. Having a protective reserve that includes your spending needs is essential. This is how you prepare for risk. 
• 22:42 Sitting on the sidelines and not participating in the stock market is also a risk. You risk not capturing returns that will outpace inflation.