Maximizing Wealth through Comprehensive Financial and Estate Planning

At Harvest Portfolio Management, we humbly accept that true financial success is not solely dependent on portfolio management. While high-quality equity investing is at the core of our expertise, we firmly believe that a well-conceived financial and estate plan, combined with prudent portfolio management, can create even greater value for our clients.

Let’s delve into the importance of comprehensive financial and estate planning, highlighting how it impacts asset allocation, security selection, and overall wealth generation. Our approach is guided by the principle that the tax structure should complement economic goals, and we echo the age-old wisdom, “Don’t let the tax tail wag the economic dog.”

The Synergy of Financial and Estate Planning

Planning is not simply about minimizing tax liabilities; it is a strategic endeavor that aims to align one's financial objectives with their life goals. Our 38 years of trust and investment management expertise have taught us that a well-structured plan can optimize asset allocation and security selection, thereby enhancing overall portfolio performance. By considering factors such as risk tolerance, liquidity needs, and long-term objectives, we create a framework that guides investment decisions and enables our clients to stick with their long-term goals.

Asset Allocation Informed by Planning

This is a cornerstone of successful investment management. However, without a solid financial and estate plan, determining the appropriate allocation becomes challenging. Our approach integrates the client's financial roadmap with their risk profile to allocate assets in a manner that reflects their unique circumstances. For high-net-worth individuals, attorneys serving as trustees, and corporate trust companies, this customized approach ensures that investments are aligned with long-term goals.

Security Selection Aligned with Objectives

Once a comprehensive plan is in place, security selection becomes more than just a process of evaluating potential returns. Instead, it becomes a careful consideration of how each investment fits into the larger financial picture. By understanding the plan's structure, we can identify investments that offer not only strong growth potential but also contribute to specific financial objectives. This approach minimizes the risk of making hasty investment decisions that may not align with the broader strategy.

The Tax-Effective Approach

We embrace the philosophy that the tax tail should not wag the economic dog. While we are committed to tax-efficient strategies, we recognize that the primary goal of financial planning is wealth generation. By focusing on constructing a well-rounded financial and estate plan, we create an environment where tax considerations are integrated rather than dominating the decision-making process. This approach enables our clients to maximize their wealth while adhering to tax laws.

The Wisdom of the Supreme Court

The famous statement by the Supreme Court, "Anyone may so arrange his affairs that his taxes shall be as low as possible..." captures the essence of our approach. While we remain dedicated to helping clients minimize tax burdens, we also emphasize that individuals have the right to structure their financial affairs in a way that aligns with their economic objectives. This perspective reinforces the notion that proactive financial planning is both prudent and strategic.

Conclusion

At Harvest Portfolio Management, we are committed to providing holistic financial solutions that extend beyond traditional portfolio management. Our belief in the power of comprehensive financial and estate planning is rooted in years of experience and the understanding that a well-conceived plan is the foundation upon which successful wealth generation is built. By integrating asset allocation, security selection, and tax considerations, we empower our clients to achieve their financial goals while adhering to the principles of strategic financial planning.

Tax-Managed Portfolios

More than tax-loss Harvesting!

We use six techniques in your managed portfolio at different times throughout the year to help improve after-tax returns.

Personalized Strategies

Our team takes a personalized approach, tailored to your unique financial situation and investment preferences.

A Proactive Approach

Portfolio managers review all your holdings, including individual purchase dates, in search of opportunities designed to reduce the impact of taxes on your investments.

Improving after-tax returns may have a significant long-term impact! The chart below is designed to help demonstrate how tax-smart techniques can help add value, which can compound over time.

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Tax-loss Harvesting: Unlike some investment firms, which wait until year-end to search for tax-loss harvesting opportunities, we're looking at your managed portfolio throughout the year. This enhances our ability to offset any realized gains you may have in your account.

Manage Capital Gains: When selling investments in your account, we'll generally first look to sell those that you've held for a longer time, allowing us to take advantage of lower long-term capital gains tax rates.

Manage Mutual Fund Distributions and Eliminate Internal Expenses: We work to manage your exposure to income distributed by mutual funds in which you're invested, due to either capital gains or because the securities held by those funds pay dividends or interest.

Invest in Municipal Bonds: When selecting bonds for your account, we consider several different factors. When it makes sense, we may purchase municipal bond funds that generate interest that may be exempt from federal taxes and, in some cases, state taxes.

Transition Management: When it makes sense in the context of your chosen investment strategy, we search for ways to integrate your existing holdings into your managed account as opposed to selling all of your existing investments in order to "start from scratch." This can help reduce the potential tax consequences of creating your personalized investment strategy.

Tax-smart Trust Distributions: If you take money from your account, we'll seek to reduce the tax consequences of that. If withdrawals are planned, we'll seek to keep sufficient cash in your account. If they're unplanned, and we must sell securities to fund them, we’ll work to reduce the tax impact of those sales.

For informational purposes only. Returns for individual clients will vary. Each line represents the value from tax-smart investing techniques at various starting dates, assuming an initial account value of $1 million. Based on the performance of a composite of accounts managed using the following strategy characteristics: Growth with Income asset allocation using tax-smart investing techniques, the total return investment approach and blended investment universe, investing in municipal securities, and separately managed accounts (“SMAs”). Please be aware that the value of tax-managed investing techniques would be different, perhaps significantly, for an account that is not managed using the same configuration of strategy characteristics as the composites shown above.

The Growth with Income asset allocation, total return investment approach, and blended investment universe were chosen because they are the most commonly used asset allocation, investment approach, and universe in the program.

Mid-Year Review and Outlook 2023-24

Dear Investors,

As we forge ahead into the second half of 2023, it appears that much of the market has been caught up in the excitement of tech, while many "boring" stocks, like rails and utilities, are not riding the AI wave. But we've been around this track before. While tech has led the charge in early 2023, we are increasing our S&P 500 forecast by a stunning 15% over the next 12 months. We believe it will be essential not to overlook these undervalued sectors. Our full-year 2023 outlook remains at 17.5% increase in the S&P 500.

There is no denying that the road ahead may have a few bumps. Increasing rates from the Federal Reserve, geopolitical tensions stemming from Russia and China, credit tightening, and an unexpectedly resilient jobs market will undoubtedly offer resistance to a more accommodative Federal Reserve Bank. But remember, the wise investor navigates these headwinds, not with fear, but with anticipation.

At the same time, we see several tailwinds in our favor. Early AI-fueled productivity growth, a pause in August/September and eventual easing from the Fed in early to mid-2024. Continued inflationary cooldown, and creative innovation across industries, particularly in tech, transportation, and even food, could spur unexpected growth in corporate earnings.

As the year progresses, the emphasis will shift towards a more aggressive strategy in equities, gradually introducing mid-cap growth as we navigate the second half of the year. This plan acknowledges the likely headwinds we face but also captures these opportunities before they arise.

Our bond strategy will evolve as well. We anticipate lengthening bond maturities from short term, 3 months to 3 years, to a more intermediate-term, 7-to-10-year maturity. As we observed the Fed's actions and the market's response, we believe this strategy will provide a reasonable balance between risk and return.

Above all, we'll be following a well-worn piece of advice that I've adhered to throughout my career: Buy well run companies. We will actively seek to take advantage of downturns in the market during the 3rd and 4th quarters of 2023 by adding mid-cap stocks especially those benefiting from Artificial Intelligence.

As always, remember that we're in this for the long haul. Predicting the market's short-term movements is a game for fortune tellers, not investors. The key is to remain focused, disciplined, and above all, patient.

That's how wealth is built.

Thank you for your continued trust and confidence.

One-Year Outlook and Investment Strategy

S&P 500 +10% to 4600

As we enter the 2nd quarter of 2023, investors are keeping a close eye on the markets and providing guidance on how to navigate the uncertain economic landscape. While there are headwinds that are impacting the market, there are also tailwinds that offer opportunities for patient investors.

One thing that is clear is that the 2023 recession has not been fully priced into stocks. This was a prediction made last year, and it has proven to be true. Analysts are also lowering their earnings forecasts, which is causing some concern for investors. Inflation remains too high for the Fed to respond with lower rates, and there is a decline in the money supply due to quantitative tightening by the US Treasury. Additionally, there is a moderate housing correction that has been worsened by the US Treasury selling its mortgage-backed securities into a rising rate environment, causing higher mortgage rates. These are all factors that are weighing on the market.

However, there are also tailwinds that investors should consider. Despite the bearish sentiment on Wall Street, the market was up 7% in the first quarter, which suggests that there is room for growth. NATO's patient containment of Putin is allowing energy prices to decline, and China's not-quite-zero tolerance policy is easing the worldwide chip shortage. Additionally, there are 1.4 billion Chinese consumers who are spending like they've been in lockdown for 26 months, which is expected to boost demand.

Harvest is advising our clients, in the face of these headwinds and tailwinds, that defensive equities are the way to go early in 2023, with mid-cap growth stocks being added in the second half of the year. Lengthening bond maturities from 3 months to 3 years is also recommended. And when weakness presents itself in mid-2023, we are prepared to buy.

It's important to keep in mind that risk management is key to success in the early part of 2023. However, there is an opportunity to earn a 20% return during the next year ending March 31, 2024. By staying invested in high-quality equities from Europe and well-diversified, defensive U.S. equities, investors can position themselves to benefit from the positive 10% addition to the S&P 500, reaching 4600, while being mindful of the expected decline to 3700 in the second half of 2023.

As Warren Buffet famously said, "Be fearful when others are greedy, and greedy when others are fearful." By staying the course and remaining disciplined, we will find opportunities in this volatile market.

S&P 500 +17% to 4500

Headwinds:

• The Fed-induced earnings recession, analysts lowering forecasts late in 2023

• Labor, energy (Russia), and computer chip shortages (China) prolonging the 2023

recession into 2024 with inflation running at 5%

• Money supply decline (Quantitative Tightening) by the US Treasury with a moderate

housing correction in 2024

• Crypto, the SEC’s reluctance to regulate, more criminal activity ahead

Tailwinds:

• NATO’s containment of Putin – Oil price decline, green energy fashionable

• China’s not quite Zero Tolerance easing chip supply, and Chinese consumer spending

• Corporate profits benefiting from: pricing flexibility, moderating U.S. consumer demand,

and productivity gains through AI, work-at-home, and on-shoring

• Professional market forecasts almost universally bearish “Stagnant earnings”

• Slowing interest rate hikes and the 10-year Treasury Bond Yield pivot.

Strategy:

• Defensive equities in the 1st quarter, add mid-Cap growth in the second half

• Lengthen bond maturities from 3 months to 3 years to intermediate.

• Buy the dips in mid 2023.

Investment Strategy: Q4. Better Times Ahead

The long-term view of the market, the earnings that justify the pricing of companies, the rate at which those earnings grow, and prevailing interest rates, all lead me to conclude that we are free-falling to “normal” pricing for the S&P 500. I believe the S&P 500 should be in the 3,300 to 3,600 range, we are now just under 3,700 and yes, it could go below the normal valuation.

We have remained essentially invested but eliminated all but a handful of higher growth companies. We compare our returns against the S&P 500 and the NADAQ indices, because they are readily available and cost next to nothing to own. While we have the flexibility to hedge the portfolio in most accounts, we have managed to reduce our risk, and therefore outperform our benchmarks, simply by raising the cash from the sale of riskier stocks early in the year.

Risks:

The Fed raising rates too high - too fast, the US Treasury selling too many mortgaged backed securities (quantitative tightening) for the housing market to absorb, Putin’s expanding ambitions, China’s desire to have Taiwan, and no market capitulation.

The Opportunity:

Higher growth equities, as were previously held in our Mid-Cap Model have declined by 45% since January. Yes, this category of stocks was valued against the backdrop of 0% interest rates, priced as if every possible positive event had already occurred, and needed to adjust to the world as it exists in the 4th Quarter of 2022.

When the only good news is that all the news is bad, it is time to review our aggressive-growth buy list. While this market may feel like the plane is going down, I encourage investors to simply tighten their seatbelts and expect more volatility.

There are 25 great higher-growth companies that we have owned and have been following for years. Now is not the time to venture out, but soon enough the better times will be upon us.

Look at these three companies to own for the long haul:
Generac Holdings (GNRC) down 37% year to date
Hertz Global Holdings (HTZ) down 31% year to date
LAM Research (LRCX) down 47% year to date.

Investment Strategy: Q3. Discernment

At the beginning of 2022 our concerns included:

• A new Covid variant causing supply-chain bottlenecks

• Rising interest rates intended to slow demand and lower inflationary pressures

• Lower earnings growth in 2023.

• China’s Chip & Tech War

• The pending invasion of the Ukraine

• The economic effect of post-Covid oil demand

• The Fed tapering its purchases of Government Bonds, aka quantitative tightening.

At the beginning of the 2nd Quarter of 2022 our concerns also included:

• Yield curve inversion, and an even more aggressive Fed

• An oil-shock/supply chain induced recession in 2023

• China’s acquiescence of Russia’s invasion and quiet funding of Russia’s war effort

• “One inch of NATO territory…” leading to an escalation of the conflict

• And the ever-present something we didn’t see coming.

At the end of the 2nd Quarter of 2022 our additional concerns now include:

• A prolonged energy crisis causing persistent inflationary pressure

• Lasting supply chain disruptions

• The growing threat of a Cold War with China

• The consumer spending spree ending abruptly with gas prices at all time highs.

Hope for recovery:

• Peace and oil correcting

• Supply-constraint induced inflation abating

• NATO with a stronger, more unified purpose with broad-based funding, aka the peace dividend

• Emerging tech finding a bottom.

Very careful security selection is required because this is not a “buy the dip” market. Please anticipate volatility in the coming weeks and months but don’t let this rare opportunity pass without a specific investment strategy.

Call now for an immediate portfolio analysis and investment proposal.

Remain Patient

Market Strategy

This graph shows that, in August 2000, October 2007, and February 2013, the S&P 500 reached 1515, representing a 12+ year period of no growth.

This graph attempts to allow for the slow-growth period following 2009, the manic years following 2016, and now points to 3250 as the fair value of the S&P 500 in 2022.

The direction of the market in 2023 will, as always, depend on the earnings in 2024 and beyond. Where to invest during periods of slow economic growth can be guided by history. Going back to our first chart, the slower growth period between 2007 and 2013 looks a great deal like what may occur between 2023 to 2029.

This final graph shows the S&P 500 provided 4.08% growth between 2007 and 2013, the 6-year period of slow growth, while the NASDQ provided moderate growth of 28.33%.

Our current market strategy is to remain in the highest quality equities and short-term fixed income securities during the next several months. We estimate that today the S&P 500 resembles the black dotted line as represented on this graph and we are quickly approaching a market bottom.

Soon there will be a time to increase exposure to the stocks that will recover more quickly and provide outstanding results in the years to come: Technology, Artificial Intelligence, 5G, Biotech, Electric Vehicles, Alternative Fuels… the companies that will drive world-wide productivity for decades to come. We plan to lock in higher yields as they become available.

While these stocks were priced as though all the possible positive events had already occurred, they are quickly approaching values representing all possible negative events, and will represent excellent values.

Remain patient. This, too, shall pass.

Mark J. Seski
Chief Investment Officer