Keeping Calm Amidst Volatility

Our investment approach is a bottom-up, fundamental research method that emphasizes the importance of individual stocks and companies, as opposed to a top-down approach, that focuses on larger, hard to predict themes such as the economy, politics, and market moving events. We believe this approach allows us to withstand short-term fluctuations, by avoiding the noise of short-term, volatility inducing events. Rather than begin with a theory about the direction of the economy, then develop expectations about which sectors will rise or fall, then choose a company within that sector, a process that layers broad assumption on top of broad assumption, we search out good companies across a wide swath of sectors and industries. From there we conduct due diligence on management teams and financial statements, comparing and assessing these companies based on very specific criteria. Our opinion of the economy and the stock market is then derived from our collective view of the companies we own and follow for our clients.

To be clear, we are constant students of what is happening on the domestic and world economic and political stages, but our analysis of these events plays a supplementary role. Take the election for instance. We can’t claim to know what the future holds, but there is always the potential for short-term volatility following an election. Like any other major event, we will watch eagerly, but will make our investment decisions for the long-term. In fact, history suggests, the short-term volatility following any election is a poor predictor of future stock market returns, especially for the subsequent 12-month period. According to Bloomberg, the S&P 500 index fluctuates an average of 1.5% the day after an election. While this is no small amount for a one day market move, gains and losses predict the market’s direction for the next 12 months less than 50% of the time. A few months down the road, we will likely add this presidential election to the list of recent over-hyped events which includes the Russian-Ukrainian Conflict, the Greek Debt Crisis, the Chinese GDP Slowdown, and Brexit. Following the election, stay tuned for the next big media sensation, the Fed’s December decision on interest rates.

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Social Security Cost of Living Adjustment

The Social Security Administration announced that the 2017 cost of living adjustment (COLA) for Social Security will be 0.3%. While this is nothing earth shattering, something is better than last year’s nothing! Regarding Medicare Part B payments, according to an article written by Mary Beth Frankel of Investment News:

“By law, the majority of beneficiaries are protected by a “hold harmless” rule that says their Social Security benefits cannot decrease from one year to the next due to an increase in Medicare Part B premiums. In other words, the increase in their monthly Medicare Part B premiums, which pays for doctors’ visits and outpatient services, cannot exceed the dollar amount increase in their Social Security benefits.”

Also, Social Security taxes will be paid on wages up to $127,200 for 2017 up from $118,500 for 2015 and 2016. As always there remains no wage limit for Medicare taxes withholding. If you have any questions regarding either Social Security or Medicare please do not hesitate to contact us.

Information Regarding Your Required Minimum Distribution (RMD)

Those clients with an IRA (non-Roth), SIMPLE IRA, SEP IRA, or retirement plan account must generally take a withdrawal upon reaching age 70½. The amount you must withdraw is called the required minimum distribution (RMD).

Beginning in January we reach out to our clients that will have an RMD within the year to help them through the process of taking their RMD. The amount you are required to take for the current tax year is listed on the last page of your monthly account statement under the “Distribution Summary” section. You will be able to view your required gross amount, any federal and state tax that was withheld, and the net amount of the distribution. To help you with your cash flow planning, this amount will be updated throughout the year depending on how and when you take your RMD. Your distribution may be taken in a lump sum payment, monthly, or quarterly installments.

If you have questions regarding your RMD, or if you aren’t sure if you have taken your RMD this year, please give us a call and we will be happy to help you.

 

Structured Certificates of Deposit (CDs)

As your investment advisor, we are held to a fiduciary standard.  Skipping the legalese and court cases which specifically define fiduciary, this means we act in your best interest in providing our investment advice.  This sounds obvious but many firms/brokers/insurance agents aren’t held to this tough standard.  They can, and will, sell you anything deemed suitable for you.  So, a lot of what we do with you is to get to know you, your financial situation, goals, and tolerance for risk when coming up with a financial plan and implementing that plan for you.  These are the proactive steps we take, the duty of care, in managing your investments.  And, this is an ongoing relationship as your financial situations changes throughout the years.  There is another aspect to how we manage money for you that you don’t see—and for good reason.  These are the investments you won’t see in your portfolio.  These investments might be entire asset classes, certain stocks, bonds, or funds, or insurance products.  Why? Banks, brokers, and insurance companies have invented all manner of suitable products which are either very expensive to you or seem too good to be true (e.g., upside to the stock market with no downside), or have hidden fees.  We hear these sales pitches often on your behalf.  So, we wanted to take this short blog post to highlight one of those products that was recently the subject of a page one article in the Wall Street Journal, the structured Certificate of Deposit (CD):

http://www.wsj.com/articles/wall-street-re-engineers-the-cdand-returns-suffer-1473180591

We will provide just a short summary here, but the article is worth the time to read.  With the bull market in stocks and lack of meaningful interest yields on low risk investments, Wall Street banks (i.e, Goldman, JP Morgan, Merrill Lynch, Barclays, etc.) have created structured Certificates of Deposit (CDs) to entice savers.  These are CDs linked to stocks or some other commodity, combining some limited upside and some limited downside, with guaranteed hefty fees for the salesperson and product creators. The CDs have very little liquidity if you need to sell before maturity, too.  The Journal’s analysis of 118 market-linked CDs issued at least three years ago by Barclays showed only a small number exceeding the returns an investor would have earned on a conventional FDIC-insured (risk free) CD.  If the product being sold to you has a long fancy name like “GS Momentum Builder Multi-Asset 5 ER Index-Linked Certificate of Deposit Due 2021,” a real structured CD, and disclosure documents which run hundreds of pages (most do), alarm bells should be ringing in your head.  You won’t see NWIC buying these in your portfolio.

NWIC ranked #7 for AUM in Oregon

Northwest Investment Counselors is pleased to share that we are #7 on the list of Oregon’s top Registered Investment Advisory firms as ranked by assets under management by Investment News.* “We are pleased to have made Investment News’ list,” said Mark Scarlett, Principal and Co-founder of Northwest. “I want to thank our clients for the trust they have placed in us and the hard work and dedication of our employees. As a result, we have grown by over $150 million in the last 10 years, ” he added.

Founded in 1998, Northwest now manages over $300 million for families and foundations, primarily in individual stocks and fixed income securities. Our financial guidance can be summed up by three key attributes that make Northwest’s wealth management distinct and valuable. We put our clients’ needs first rather than products or quotas. Our wealth management team draws upon a wide breadth of experience, education, and credentials to develop portfolios that fit the unique needs of our clients. And the in-house and rigorous nature of our investment process, which has produced tax-efficient investment results with below average volatility, is directed by a team of portfolio managers, all of whom have earned the Chartered Financial Analyst (CFA) designation.**

*Methodology: Investment News qualified over 1,600 firms headquartered in the United States based on data reported on Form ADV to the Securities and Exchange Commission as of May 1, 2015. To qualify, firms must have met the following criteria: (1) latest ADV filing date is either on or after January 1, 2015, (2) total AUM is at least $100M, (3) does not have employees who are registered representatives of a broker-dealer, (4) provided investment advisory services to clients during its most recently completed fiscal year, (5) no more than 50% of amount of regulatory assets under management is attributable to pooled investment vehicles (other than investment companies), (6) no more than 25% of amount of regulatory assets under management is attributable to pension and profit-sharing plans (but not the plan participants), (7) no more than 25% of amount of regulatory assets under management is attributable to corporations or other businesses, (8) does not receive commissions, (9) provides financial planning services, (10) is not actively engaged in business as a broker-dealer (registered or unregistered), (11) is not actively engaged in business as a registered representative of a broker-dealer, (12) has neither a related person who is a broker-dealer/municipal securities dealer/government securities broker or dealer (registered or unregistered) nor one who is an insurance company or agency.

**To learn more about the CFA charter, visit CFA Institute.

NWIC Announces AUM Exceeds $300 Million & Celebrates 18 Years in Business

We founded Northwest eighteen years ago to provide personalized, institutional quality investment management to AUMfamilies.  Because of the trust clients have placed in us and the hard work and dedication of our employees to our clients, we have grown by over $160 million in the last ten years to over $300 million in assets under management (AUM).  We continue to look forward to prudently serving the investment needs of our clients so they can live well and retire better.

Thank you clients, employees, and partners for making Northwest a success.

 

An Important 2015 Tax TIP from Northwest

Contributions to Individual Retirement Accounts (IRAs)

When Can Contributions Be Made?

Contributions can be made to your traditional IRA for each year that you receive compensation and have not reached age 70 ½. For any year in which you do not work, contributions cannot be made to your IRA unless you receive alimony, nontaxable combat pay, military differential pay, or file a joint return with a spouse who has compensation. Even if contributions cannot be made for the current year, the amounts contributed for years in which you did qualify can remain in your IRA. Contributions can resume for any years that you qualify. Contributions must be made by the due date. Contributions can be made to your traditional IRA for a year at any time during the year or by the due date for filing your return for that year, not including extensions. For most people, this means that contributions for 2015 must be made by April 18, 2016. [1]

The contribution limits for Traditional and Roth IRAs for 2015 is $5,500. The age 50 catch up is fixed at $1,000. Income limits do apply to Roth IRA contributions. For further information on contributions to Roth and Traditional IRA’s please visit the IRS Retirement Plan page detailing differences between traditional and Roth IRAs at https://www.irs.gov/Retirement-Plans/Traditional-and-Roth-IRAs.

As a reminder if you would like for Northwest Investment Counselors to help you with your 2015 IRA Contribution please keep this important information and time frame in mind. If you will be using funds from existing accounts with Northwest to make your contribution, we ask that you provide us with a weeks notice prior to the deadline.

If you have any questions please contact your Wealth Manager.

[1] Department of Treasury, Internal Revenue Service Publication 590-A 2015 Returns

Stock markets around the world have sold off and volatility has spiked

While you should receive our detailed year end newsletter soon, we wanted to quickly reach out to you to provide our thoughts and action plan.

First off, up until last summer US stock markets have been rather subdued with no correction (more than 10% down) in a few years. Even the dramatic decline in the price of oil which began mid 2014 had been orderly up to late last year.

WHAT’S CHANGED THEN?

China is probably the best explanation with the strong Dollar a contributor too. We have written about both of these before as well as covering the drop in oil in one of our quarterly economic updates at the beginning of 2015. We said you should expect the price of oil to stay low for a while, and that consumers would benefit and eventually spend some of the windfall.

We would boil this market correction down to changing expectations for corporate earnings this year. We don’t see a recession in the US or anything approaching 2008-2009. So take comfort from that. The US only exports something like $120 billion in goods directly to China. Also, interest rates are not increasing to any degree such that this would change how investors capitalize earnings or pose competition for investor dollars. Inflation, too, is still on hiatus. The drop in the price of oil is far from being a negative for our economy. The drop in gasoline prices alone added $134 billion to consumers’ pockets (more than total exports to China) in 2015 versus 2014. So, no recession here unless you live in oil country.

Even without a US recession global companies are exposed to slowing conditions abroad. For example, around half of the sales of companies in the S&P 500 index are from international markets. So Investors are concerned that corporate earnings will not measure up to what was expected in 2016 with the world economy slowing. They’re probably right. With the Dollar up, US firms can become less competitive and earnings abroad translated back into Dollars will be lower than expected just last year. And as we wrote in our year end newsletter, stocks are expensive and probably priced for perfection.

NOW FOR THE GOOD NEWS.

Take a close look at the chart below of S&P 500 profits per share since 1960 and the S&P 500 index value. (The red line shows earnings, and the blue line represents price.) Through war, recession, whatever, never before has the S&P 500 price and earnings failed to find a bottom and recover. This time will be no different–be patient.

Sp500WHAT ARE WE DOING?

The sell off has made some of the companies we own buys again. Many have been holds to use Wall Street jargon. And we have been able to add a couple new names in the industrial sector that we think are high quality and now good values –MSC Industrial Direct in the Smaller Companies portfolio and Rockwell Automation in Equity Income. We are looking for more. You can read more about those additions in our year end newsletter. Most of you, too, have a large portion of your portfolio in bonds. Bonds are up over this period of volatility as investors seek safety.  That’s the benefit of diversification.

So again, please be patient but don’t hesitate to call or come in if you have questions, concerns, or your circumstances have changed that may impact your tolerance for risk in your portfolio. 

The securities mentioned are not the only securities we have purchased in the last year for our clients. If you would like a list of all securities purchased in the last year, please contact us. Additionally, it should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities mentioned.