Research Update • Inflation • Opportunity Zones
Monthly AIRE Perspectives – November 2021
Dear Friends and Valued Clients,
Please take a moment to read this email each month, as we always try to provide brief but important information for you here!
Season of Thanks – and an Anniversary
As AIRE Advisors approaches its one-year anniversary on November 20th – appropriately just before Thanksgiving, we reflect on what an incredible year it has been – one filled with many hours of hard work, countless tasks and decisions, healthy business growth, an office move and upgrade, periods of extreme stress, but ultimately gratification and gratitude. Our firm is now 10 people strong and continuing to grow, and we have finally completed the buildout of our initial foundation to serve you better and more efficiently. We did not create this firm just for the sake of starting a business: we created it solely to start a firm centered around you, with a goal of creating what we feel is the ideal client experience. Our clients are the most important part of our business and our reason for existing. We would like to take this opportunity to thank each of you for your continued trust and support, and wish all of you and your families a very healthy and Happy Thanksgiving!
Behind the Scenes: Research
Having completed the initial phase of the buildout and foundation of our firm (and I say initial, because this will always be a work in progress), we have now turned the bulk of our attention and “behind the scenes” time to research. While we continue to believe that public markets are highly efficient and immediately price in all information, this does not mean that we feel research is useless! We continue to study the concepts of portfolio construction, proper asset allocation and each of the potential solutions we choose for each asset class. Moreover, given the continued low yields in the bond market, along with the continued highs of the stock market, we feel it is particularly important to diversify into lower-correlated assets and private investments as part of a balanced, diversified portfolio. Accordingly, we are spending a healthy amount of time researching, and when appropriate, traveling around the country and the world, to explore potentially promising alternatives.
Jenny Chu and I just returned from a three-day due diligence trip to Dallas, Texas, where we met with the management teams of two separate funds that we felt warranted further investigation: one that invests in colored diamonds, which are a very scarce and limited resource with a strong long-term track record, and another which invests in promising startup companies in Africa, which are winners of an annual continent-wide contest. Please note that we are not recommending these investments at this time, as our research is not yet complete, but these are examples of the type of research and due diligence we are doing behind the scenes on your behalf. We are solicited by dozens of funds and companies on a weekly basis for potential investments and reject the vast majority of these investments, but from time to time, we do find ideas that are interesting and warrant additional research. Please note that, as a fiduciary, we never earn any incentives, commission or payment of any kind for any investment we recommend to our clients. Our reason for existing, along with any recommendation we ultimately decide to make, is solely made for the best interest of our clients. Part of our role is to consider all different types of investments, but ultimately, to weed out most and consider a small percentage after considerable due diligence.
A Note on Inflation
The Consumer Price Index (CPI), which is the most used measure of inflation, rose at 6.2% year-over-year in October, marking the largest gain in the index since 1990. The general consensus for this seems to be two-fold: first, the supply chain issues have caused a drop in supply, which creates pricing pressure, and second, prices dropped in 2020 as a result of the economic slowdown, so the increase is also partially a return in prices due to the return in the economy. While the Fed has hinted that inflation might “normalize” again in 2022, we do not want to speculate as to whether this is a “transitory” or temporary inflation, or one that is here for the longer term.
Since we feel it is impossible to predict inflation and, therefore, interest rates, we ultimately turn back to portfolio construction. During times of uncertainty, asset allocation and portfolio construction continue to help mitigate risk (although not remove it altogether.) Generally speaking, here is how certain asset classes traditionally perform in times of high inflation:
Commodities tend to often be among the best-performing asset classes, as rising commodity prices are part of the very definition of inflation. This is also a reason why we always keep commodities as part of a well-balanced portfolio. Even though they have not had strong performance over the past 10-years, they are among the top performers this year, and help balance out portfolio volatility.
In times of sustained higher inflation, interest rates tend to move up. Over long periods of time, interest rates tend to be highly correlated with inflation. As a result, in times of sustained high inflation, long-term bonds are often have drops in price, as the lower rates locked in on such bonds become less attractive in a rising interest rate environment.
Stocks and real estate sometimes (not always) tend to get depressed initially during times of inflation, but in the long run, tend to outpace inflation. For example, if interest rates go higher due to inflation, it would make mortgages more expensive, thereby potentially depressing real estate. However, in the long run, real estate has traditionally caught up and outperformed inflation by a large margin.
Cash – this tends to be a little misunderstood, as in the long run, it has been the worst performer and has consistently underperformed versus inflation over longer periods of time. However, in the short run, if rates rise due to inflation, cash can actually serve as a point of safety, as it allows an investor to take advantage of higher interest rates or lower investment prices in stocks and real estate.
Again, this is not at all a prediction that inflation will be sustained or that interest rates will be moving up, but just a primer on how certain asset classes usually perform in times of higher inflation. We will be in touch to discuss this individually with you this month.
Got Gains? Last Chance on Opportunity Zones
We wanted to remind you once again of an opportunity that essentially only exists through the end of 2021: Opportunity Zone funds, which can be a potential solution for almost any type of appreciated asset. Please note that this is not a recommendation, as our advice is always custom-driven to each client. However, for those who have taken capital gains in the last 180 days, this is something we want to make sure you are aware of.
With Opportunity Zone funds, investors who take gains on assets can invest those gains (within 180 days) into managed Opportunity Zone funds and receive a number of tax benefits. First, the gains taken are not taxed until the end of 2026 or when the purchased asset (the Opportunity Zone investment) is sold. Second, for gains placed in such funds for at least 5 years, the cost basis of the original investment is increased by 10%. In other words, the investor not only defers the capital gains taken on the prior investment, but also gets a reduction in the tax if held for 5 years. Third, if the Opportunity Zone fund is held for at least 10 years, the gains realized on the Opportunity Zone fund itself are fully tax-free. Please contact us if you have taken significant capital gains in any assets within the last 180 days to discuss if this may be a potential solution for you.
AIRE Advisors Welcomes Dana Farias!
AIRE Advisors is pleased to welcome Dana Farias to our team in the role of Private Client Associate!
Born in New York and raised in Los Angeles, Dana began her professional career in the fashion industry as a luxury brand ambassador, trainer and product buyer for top industry retailers such as Nordstrom, Neiman Marcus and Bergdorf Goodman. She was then recruited by luxury optical industry visionary, Oliver Peoples, where she would embark on a highly successful optical career of nearly 20 years. Dana traveled the world for the highly successful brand, managing over 200 foreign and domestic accounts, focusing on sales, product awareness and orchestrating large-scale events.
Ready for the next challenge, she became a licensed optician and went on to run some of the most successful, high-end optometric practices in Los Angeles until starting her own exclusive full-service luxury optical practice within the famed Fred Segal. Catering to some of the most influential clientele in the world, it was there where she became involved with many charitable organizations providing medical services for various underprivileged communities throughout the country, such as New Eyes for the Needy, Remote Area Medical Clinic and Baby 2 Baby. Dana understands the needs of ultra-high-net-worth clients and truly enjoys prioritizing them.
Dana lives in Los Angeles with her husband, Edward, daughter, Emme, and Olive, their rescue Chihuahua. She is extremely active and enjoys strength training, Pilates, running, golf and even an occasional Spartan race.
Once again, we would like to thank you for your trust and loyalty, and look forward to speaking with you in the upcoming month.
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