If you have more than $5 million in liquid investments, chances are the people handling your wealth are overcharging for investments that carry far more risk than you realize, leaving you unnecessarily exposed to serious potential drawdowns. Moreover, there are tax strategies that most advisors and CPAs either aren’t using or don’t know exist that could literally save you hundreds of thousands of dollars every year.
As an advisor for more than 30 years, I have come to see clearly that many professional asset managers produce results that barely, if at all, justify their fees. I have the luxury of being independent, and because I don’t personally manage investments, I have a completely unbiased and objective perspective. Our clients don’t hire Sawchuk Wealth to manage their money, they hire us to improve the quality of their lives by improving investment performance, saving taxes and making sure they not only protect their wealth, but continue to live well in all market conditions. Our approach is as simple as it gets, we find the best experts in every aspect of finance to deliver value that far exceeds the fees we earn. Let me tell you what we don’t do. We don’t use big Wall Street banks or investment firms, the ones who have repeatedly abused their privilege by over-leveraging to create systemic financial risk, trading against their very own clients and regularly proposing investment strategies to the people they are supposed to serve that are the polar opposite of what they do in their own trading departments. We also don’t use managers who ascribe to the time-tested failure of an investment approach called asset allocation. Managers who preach “diversification” simply don’t know where to put money – if they did, they wouldn’t have to “diversify.” The truth is the most successful money managers in the world don’t really have diversified portfolios in the traditional sense of the word. They take calculated risks and concentrate their money in positions that generate returns that far outpace the benchmark averages. Warren Buffet is the perfect example. In the market crash of 2008 – 2009, when everyone else had sold, he and Charlie Munger loaded up on a select few investments and made a fortune. They most certainly did not “diversify.” To be clear, SOME diversification is necessary, but what’s being sold out of most money management firms doesn’t cut it.
Let me explain – the purpose of diversification is to offset potential downside risk that equities experience as the stock market goes down. There are, broadly, two types of down markets. A correction is a shorter-term drop in equity market indices like the S&P 500 or Nasdaq, for example, that range from five to ten percent. These moves are often short-lived, lasting from a few days to a few months. Here’s the rub: in a bull market, prices recover quickly so having bonds doesn’t really help because they provide lower longer-term expected returns. Because equities generally bounce back quickly from a correction and thus provide better returns than bonds, and unless a manager is actively moving money from the bonds to equities during these dips, owning bonds actually hurts performance during most time periods.
The second type of down market is called a bear market. These are no fun and are defined by a price drop of at least 20%. There have been three significant bear markets since the turn of the century. The last two took place in 2008-2009 and more recently in February to April of 2020 and were brutal. Initially, during a bear market, bonds may hold up well and provide protection to offset the declines in the stock market, however, as fear spreads and panic selling kicks in, bonds get sold off as well, for a variety of reasons. While bonds may not go down as much as equities, in severe bear markets, they can still drop by a lot and thus provide little actual protection. When the market ultimately bounces back, bonds don’t rebound as quickly as stocks do, which again, reduces potential portfolio returns. To be fair, there are many types of bonds, and there are some that have provided better protection; good money managers know this and will begin selling stocks and moving into those assets as prices fall to avoid as much damage as possible. The strategy is not about trying to time the market by perfectly selling at the highs and buying at the lows; it is about avoiding max pain.
The world is moving faster, and the investment business is no exception, and in some ways, is leading the charge. High-frequency trading has taken over Wall Street, which has radically shortened market cycles and has reduced the amount of time that price swings take from months to days. What hasn’t changed, however, is that people still drive the decision making, and if that continues, then market behavior largely remains the same, leaving enormous opportunity for those who can exploit that to their advantage; again, think Warren Buffet. The key to any longer-term successful investment strategy is to maintain discipline and eliminate emotion. Nothing new here, however, there is a difference between simple and easy. By harnessing the power of computer-based mathematics, it is quite possible to combine the discipline of an unemotional math-based investment strategy with fast-moving computers to produce excellent longer-term potential investment returns. Well-designed electronic trading systems can trigger sell signals as the market shows signs of distress, and in doing so, allow expert money managers to potentially avoid a good portion of the painful price drops. Haven’t you ever wondered how big-name Wall Street investment banking firms generate such profitable trading operations during the most volatile times? Do you really think they’re taking a buy-and-hold approach to produce those profits?
I am here to tell you these systems exist, and we use them to help our clients reach their goals every day. Initially, I believed what I was taught, that nobody can beat the market consistently so don’t even try. Now, I not only reject that ridiculous assertion, but I have built an enormously successful practice around helping select families and businesses escape from the traditional system that would gladly continue to drain them of their precious resources, if allowed. Sadly, for people who hire firms that operate in the traditional way, they are relegated to below-average returns coupled with out-of-line fees that are rationalized by “value-adds.” Large investment and banking firms have convinced their salespeople and, more importantly, their salespeople’s clients, that excess returns can’t consistently be generated so they will just do other “stuff” in an effort to justify their fees. Imagine if you had a heart condition, and your heart surgeon said, “Well, I couldn’t really fix your heart because I don’t know how, but to add value, I gave you liposuction so now you look super-fit.”
Sawchuk Wealth doesn’t manage money, we hire experts who have great systems and have consistently outperformed their peers to do that for us. We also employ a variety of strategies that reduce downside risk without having to commit vital resources to bonds or other lower-producing assets. One area that we know is vitally important to families and businesses with at least $5 million of liquid wealth is taxation. If you’re working with the conventional wealth management team, they will likely engage the services of a CPA and attorney to provide plain vanilla solutions for tax and estate planning. Yawn. We work with expert tax strategists, who don’t prepare tax returns, they leave that to the “dime a dozen” CPAs, but rather develop brilliant strategies that reduce taxes due, taxes owed, and taxes paid. To put it more succinctly, they don’t charge a fee to explore your situation, they collect roughly 1/3 of what they save, and the typical savings are about $300,000. These strategies aren’t for wage earners or salaried employees but are designed to help business owners leverage every available tax-saving opportunity.
I believe in the Pareto Principle, that 80% of the results are generated by 20% of the population. At Sawchuk Wealth, we don’t waste time and resources on the other 80%. If you’re not getting top-tier results, or worse, if you don’t know what top-tier results even look like, it could be time to explore other options.
Any information discussed in this article is for educational purposes only. It is not meant to be any kind of recommendation or financial advice. The information contained in this video is intended for informational purposes only. Any opinions are those of Terry Sawchuk and not necessarily those of JW Cole Financial, Inc. or JW Cole Advisors, Inc.
Securities offered through J.W. Cole Financial, Inc. (JWC) Member FINRA/SIPC. Advisory services offered through J.W. Cole Advisors, Inc. (JWCA). Sawchuk Wealth and JWC/JWCA are unaffiliated entities.