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FourThought Private Wealth Launches as an Independent Registered Investment Advisor

William Mehserle named again to forbes’ list of top next-gen wealth advisors

FourSight

Considering Recent Events in the Middle East, What is Our Approach to Investments?
By Scott Pinkerton

To paraphrase Warren Buffett: It is not about predicting rain, it is about building arks.

Here is the paradox. If you stopped building your ark every time there was a rain shower, you wouldn’t have the ark built when the flood came. On the other hand, the flood will start with a rain shower, so you have to pay attention. The key is to know when a shower will turn into a flood.

And that, to we mere humans, is impossible to know.

We have a playbook. We call it road signs. You take a step back and visualize the positive and negative outcomes that could result from today’s headlines. Think of them as destinations. You then ask what the road signs would read if you were on the various roads. For example, what are some of the worst-case scenarios that could arise from the recent events in Iran and Iraq? Perhaps a global war, increased global tensions, regional conflicts, or even a civil war. What are some of the best-case scenarios? A reduction of Iran’s influence and their support of Hezbollah, Hamas and the Houthis who continually
terrorize and destabilize the Middle East.

It takes experience and discipline to override emotions and think carefully about events as they unfold. We have the road signs out and we are watching for both opportunities and exit ramps. As of this moment, the impact on global markets (trade, inflation, oil) could be minimal. The events that follow will be telling. Our best case is that this fades from the news, actions get delayed and behind the scenes negotiations go into high gear.

It is becoming apparent that the U.S. and Iran are on a collision course. Iran is lashing out and has lost one of its best military strategists. Will calmer, moderate heads in Iraq prevail? How will the Europeans and the Sunnis leading middle eastern countries react? Lots of road signs to put up.

For now, however, we are patiently waiting for opportunities to buy on the dips and adjust portfolios. Patient, disciplined investors benefit from the emotional reactions of others. The global economy has momentum, its oil supply is far more diversified than in the past and Iran, for now, does not have nuclear weapons.

Is Your Portfolio Aligned with Your Purpose?
By Scott Pinkerton

I remember the day a coworker showed up at the office with a brand new, two-seater, sports car. We all looked at him in disbelief, “Aren’t you and your wife about to have a baby?” He looked at us dumbfounded. He got distracted by the shiny thing and lost sight of his purpose. By the way, the marriage didn’t last.

Things you buy have a purpose. Align the purpose of the things you purchase with your objectives and goals. Pretty obvious.
However, the obvious can be difficult to execute. This is especially true in portfolio design. It is hard to know what you will need, when you will need it, the types of assets you’ll need and where to invest them for tax advantages. Putting the wrong asset type in the wrong account type has consequences, like a new dad buying a sports car.

A diverse portfolio should have large companies, small companies, international companies and various types of other instruments. Each one of these asset types has different tax consequences. For example if you own a qualified U.S. company and hold it for a year, the dividends are taxed at the preferred, “qualified” rate (which can be 10-20% for nearly all investors), whereas distributions for REITS and preferred stocks are taxed at ordinary income rates. In addition, investing in small cap stocks often requires more activity (trading,) which can generate taxable capital gains.

Tax efficient, holistic portfolio designs require one to zoom out and think about asset diversification and asset location simultaneously. That can mean using your IRAs and 401ks to invest in small cap stocks, high yield bonds, international stocks and REITS,which are tax inefficient, while focusing your taxable account on tax favored qualified stocks, low turnover ETFs and tax-free bonds.

Some account types are goal specific, like 529 plans for educational expenses. These should be optimized and have an allocation designed to meet the goal of the account.

It is easy to get so excited about an investment that in the rush to acquire it, you forget its purpose and location. Don’t buy the sports car when you should get the minivan.

At FourThought Private Wealth, we integrate tax managed portfolio design into every investment decision. Remember: it is not what you make but what you have to meet your goals that counts.