In the gem world, garnets are known for their luminosity — especially relative to their size. According to legend, the stone is associated with prosperity, consistency and perseverance. In this and every issue, we will bring you information and news about that which touches your financial life.
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We hope you enjoy this edition of our newsletter.
The Garnet Group Team
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Market Outlook
Cautious Optimism
Following a rough period in February, equities rebounded in March, putting returns back on positive ground year to date. The large company S&P 500 index was up 0.6% in the first quarter, while the small company Russell 2000 index gained 1.9%. Foreign equities continued their momentum, posting a first-quarter return of almost 4%. On the fixed-income side, bonds had a slight positive return for the quarter.
What spooked investors in the first quarter? After enjoying a seven-month run of mostly climbing stock prices, U.S. stocks fell sharply in the wake of an even bigger drop in the Chinese stock market in late February. Investors are concerned that a slowing Chinese economy could foreshadow a slowdown in global growth. Another concern for investors is the housing market and associated problems in the lower credit (sub-prime) lending market. There is increasing concern among investors that rising defaults could trigger weakness throughout the rest of the housing market, which in turn could dampen consumer spending, an important driver of the economy.
As we mentioned in our client bulletin last month we are not overly concerned about market volatility. True, an eventual slowdown in economic growth will probably occur. However, many experts believe that stocks are mildly undervalued, and that much of that future risk has already been factored into current valuations. In scenarios forecast by these market experts, earnings growth could slow moderately but stocks would still potentially generate returns in the high single-digit range.
What this tells us is that although stock market valuations may not fully price in a major slowdown in earnings over the next five years, they are probably in the right ballpark. Given this backdrop in combination with low yields on fixed income, we continue to expect a well-diversified equity portfolio to outperform bonds over the next five years. In addition, it is likely that larger company stocks that have done so poorly in the past 6 years will turn in a better relative performance. Will volatility continue? Yes, as the old adage states, “stocks love to climb a wall of worry”, and investors are the ones to provide the worry. As always, we believe that you should choose an asset allocation that is appropriate from a planning and risk preference perspective and stick to it for the long-term.
Learn more about Garnet Group’s Investment Approach.
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Tax Planning
It's Not Just About Avoidance
The arrival of the annual tax filing deadline often heightens awareness of the tax implications of investing. Tax-efficient investing is an important part of financial planning and investment management. A common misconception, though, is that this means paying the least tax possible on your investments.
In fact, the important thing is not to minimize taxes, but to maximize risk-appropriate returns on an after-tax basis. It is better to receive $100 and pay $20 in taxes, than to receive $60 and pay no tax. This is important since after-tax returns are ultimately what increases wealth and provides resources to meet your goals.
Making investment decisions in light of tax consequences is often as much of an art as a science. Tax-sensitive investing must be done in the context of the risk profile of the client, the target asset allocation of the portfolio, as well as tax considerations.
There are many strategies that we employ to seek to maximize after-tax returns. They include: paying attention to holding period in order to take advantage of long-term capital gain rates (15%) vs. ordinary income rates on short-term capital gains (as high as 35%), the appropriate placement of investments in taxable vs. tax-deferred accounts, tax-loss harvesting, awareness of planned distributions from mutual funds, and analysis of the tax-efficiency and prior tax-adjusted performance of underlying investments.
Other strategies involve comparing what is known with certainty (the tax consequences under current law) vs. our best guess of relative future returns and the future tax environment. In low tax-rate environments, like the one we have experienced in recent years, it often makes sense to recognize gains on low-cost, highly concentrated, positions and implement a diversified, long-term investment plan. Though there are taxes to be paid, the investment risk is significantly reduced in the resulting diversified portfolio, which should lead to improved long-term tax-adjusted returns.
While there are clear strategies available, investors should be careful not to overestimate the abilities of tax-sensitive investing. Even a portfolio that successfully maximizes after-tax returns will result in the payment of taxes. It is an inevitable part of successful investing.
Learn more about Garnet’s Services.
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Garnet in the News
Our merger has been the topic of two major stories in widely read industry journals:
Financial Planning Magazine — March 2007
All Garnet principals were featured in this cover story written by industry expert Bob Veres. In the article Bob discusses the on-going consolidation within the financial advisory industry.
Financial Advisor Magazine — April 2007
This article discusses our recent merger and the unique aspects of Garnet Group, including the retainer fee model that Garnet uses.
Visit Garnet in the News and link to the complete articles.
Congratulations to Veena! One of our custodians, T.D. Ameritrade, has selected Veena to serve a two year term as a member of their executive advisory panel.
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Garnet Group is a Registered Investment Advisor with the Securities and Exchange Commission.
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