Mitigate Tax Ramifications by Owning a Globally Diversified Portfolio

Jonathan Satovsky
Jonathan Satovsky, CFP®, ChFC®, CIMA®, CPWA®

Jonathan talks about 1st Quarter 2019 market performance and the persistency of factors in the markets. He further explains how owning a globally diversified portfolio tilting toward small, cheap, and profitable businesses should minimize long-term tax ramifications and benefit investors over time.

Good afternoon. This is Jonathan Satovsky of Satovsky Asset Management. April 2019 with a video blog update.

And today I wanted to talk about taxes, first quarter of 2019, and the persistency of factors in the market.

So, we’ll start with taxes because April 15th is coming upon us and people are getting a bit surprised by the magnitude of tax obligations from their portfolios and they’re curious as to why would that be.

Well, 2018 was an extraordinarily volatile year and because of that volatility there was a lot of re-balancing to keep people within their risk tolerance or risk bands; and that re-balancing trigger for many portfolios have created a larger tax gain than at mostly any time in the last decade for many investors.

So with that in mind, we’re mindful of system design architecture of trying to think going forward carefully about each perpetual decision of the tax ramifications, not just in short period of time but over a long period of time, of how to design something to minimize that tax obligation.

So, first quarter of 2019 was a tremendous quarter for asset classes all around the world. You can take the six broad asset classes and work toward cleaning up the clutter; this also will help in taxes over a long period of time, people own a lot of positions someone with major capital gains but if you work toward cleaning up the clutter and working toward minimizing the number of positions that are held, we can work toward six asset classes:

U.S. stocks up 14% for the first quarter, International stocks up 10%, emerging markets up 9%, global real estate up 14%, and bonds globally and in the U.S. up 3%.

So it was a great quarter for owning assets.

The only hesitation I share with that is because the fourth quarter was so challenging, it was like pulling teeth trying to convince investors to save and invest going forward. People have been a little hesitant saying, ‘well why would I invest now it’s obviously not a good time.’

You know you can see headlines over the last year, I mean there’s headlines every day that, you know will scare people, but if you zoom out over a longer stretch of time, just broadly speaking, you can see that by taking a 5 or 10 year view you increase and stack the odds materially in your favor of just owning assets.

So now I’m thinking about that, you know, how do we keep it really simple, how do we clean up the clutter, how do we work toward making it a little bit easier for people?

I just showed you six broad asset classes which we can work toward you know in simple fashion, even though it’s not as sexy to work toward a six 60/40 portfolio or 70/30 or 80/20. Just the idea of having a globally diversified portfolio at a speed limit actually makes it easier for people to mentally understand the logic of how fast they want to go.

70 miles an hour, 80 miles an hour, 90 miles an hour.

But digging one layer deeper, clearly if you own businesses over time you should benefit. So, the percentage ownership and equities should inure to your benefit.

Not all the time – you can see 1, 5, and 10 year performance of owning assets, owning equities over bonds has inured to people’s benefit about 85% of time over 10 years.

Leaning a little bit towards smaller companies has about a 73% probability of out performing larger companies.

Value has about an 84% probability of outperforming growth stocks, which actually has not been the case the last 10 years in the U.S., and profitability has a 99% probability of outperforming unprofitable businesses over a 10 year period of time.

So, if you’re designing a portfolio, at least what we’re working toward is trying to simplify, trying to clean up the clutter, trying to minimize the exposure to too much clutter and focusing predominantly on these small cheap and profitable businesses. And over time if we get that right and are mindful about taxes, then April showers of the tax bill will lead to May flowers of robustness ahead.

Be well.

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Video Recorded April 12th, 2019
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Disclosures

This video is not intended to be, nor should it be construed or used as, an offer to sell, or a solicitation or offer to buy any securities or interests in any strategy offered by SAM. Please remember that different types of investments involve varying degrees of risk, and that past performance is not indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy (including the strategies recommended or undertaken by SAM) will be profitable. Market index information shown herein is included to show relative market performance for the periods indicated and not as standards of comparison. The market volatility, liquidity and other characteristics of SAM’s portfolio composition are materially different from the securities listed on public market indices. Market index information was compiled from sources that SAM believes to be reliable. No representation of guarantee is made hereby with respect of the accuracy or completeness or such data. Opinions are as of date of video and are subject to change. A copy of SAM’s current written disclosure statement discussing our advisory services and fees continues to remain available for your review upon request. SAM undertakes no duty to update information presented herein.

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