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For the second year, the North BayBusiness Journal surveyed wealth management advisers across the North Bay on three questions related to the investment climate today and long-term. Their responses follow.

(Listed alphabetically by company name)Colleen Supran, principalBingham, Osborn & Scarborough, LLC1201 Vine St., Ste. 102, Healdsburg, 707-433-7300, www.bosinvest.com

[caption id="attachment_78849" align="alignleft" width="200"] Colleen Supran[/caption]

Have you adjusted your investment strategies in response to economic trends over the past year? Why, or why not?

We have recommended some modest adjustments for many of our clients’ portfolios over the past year. First, we are reducing our clients’ allocation to Treasury Inflation-Protected Securities, TIPS bonds. These bonds have been great performers over the past few years as investors anticipated inflation that could result from the monetary policies of an accommodative Federal Reserve. A second change has been an increase in our allocation to emerging markets, which remain an important part of the global economy and therefore our diversified portfolios. The stocks of emerging market companies have underperformed other asset classes, giving us the opportunity to buy these securities at lower valuation levels. In a third change, we are making a small reduction in the average maturities of our clients’ bond portfolios. We want to reduce the volatility in bond performance if interest rates rise. All of these changes are intended to further stabilize portfolio values in an environment of uncertainty.

What mistakes do you see individual investors making in the current financial climate?

In general, investors are very focused on bond performance and the possibility that rising interest rates could lead to significant losses in their fixed income holdings. At the same time, many of these investors prefer to increase their allocation to stocks that are trading near all-time highs. History tells us that the potential losses from stocks are much greater than potential losses in short- to intermediate-term bonds. We believe that portfolio volatility in the future will be more closely tied to the performance of stocks, not high-quality bonds. Investors should be realistic about their risk tolerance and stick with a portfolio allocation that gives them the best chance of meeting their long-term goals.

A second mistake investors seem to be making in the current environment is buying securities that are sold as bond substitutes to earn higher yields. Investments that act like bond substitutes such as junk bonds, Master Limited Partnerships (MLPs) and other securities have higher yields because they are riskier than high-quality, low-yielding bonds. These types of securities can be very volatile when compared to high-quality bonds.

What trends are you anticipating will most impact investors over the next year?

Without a crystal ball, we have to assess the future based on what we see now. In our opinion, we would predict that investors are likely to be focused on central bank activity around the world over the next year. Central bank policy has wide-reaching implications for interest rates, currency valuation, and export growth trends. There will be winners and losers in the global economy and investors will express their expectations by buying and selling securities. This could create bouts of sharp volatility at times, particularly in stocks.Irv Rothenberg, principalBuckingham Asset Management, LLC3550 Round Barn Blvd., Ste. 212, Santa Rosa, 707-542-3600, www.wealthmc.com

[caption id="attachment_78833" align="alignright" width="200"] Irv Rothenberg[/caption]

Have you adjusted your investment strategies in response to economic trends over the past year? Why, or why not?

We have changed the recommended size of our municipal bond fixed income portfolio’s that use individual municipal bond purchases be increased from $500,000 to $1 million.

The motivation for the increase is to ensure we can maintain adequate municipal bond issuer diversification. We try to limit exposure to any single municipal bond issuer to no more than 10 percent of the total fixed income portfolio. The only way to do this for smaller fixed income portfolios is to sacrifice liquidity of the bonds purchased in return for diversification, which generally is not a tradeoff we choose to make.

Some people are worried about Detroit’s bankruptcy and if it has broader implications for the municipal market and whether it is a harbinger of further defaults. At this point, Detroit’s defaults and other defaults have been idiosyncratic and sporadic in nature, and the prediction of a wave of defaults (on rated bonds at least) remains extreme in our view, particularly given the pricing of Aa-rated and Aaa-rated municipal bonds in the market place, which is hardly suggestive of high default risk.

What mistakes do you see individual investors making in the current financial climate?

After withdrawing hundreds of billions of dollars from stock funds in recent years, investors are now pulling assets out of safe bond funds and using the cash to buy stocks -- at much higher prices and much higher valuations than they were selling for not too long ago. Individual investors are, once again, making investment decisions based on the rearview mirror. They should not. When markets are setting new highs, it's just as important to keep a balanced perspective and adhere to your investment plan as when markets are setting new lows.

Smart investors know that while there's little to no evidence that you can successfully use valuations to time the market, valuations do matter. And they matter a lot in terms of predicting the mean expected return you can expect from your portfolio. Higher valuations predict lower returns and vice versa.

Just because the market has historically provided a real return of close to 7 percent, it doesn't mean we should use the historical return to project the future. Again, valuations matter but you shouldn't treat the mean as the only possible outcome. There is a wide dispersion in outcomes away from the mean. The bottom line is that those investors making decisions based on the historical long-term real return to stocks of 7 percent are highly likely to be disappointed.

The recent sharp decline in the price of gold is another opportunity to learn from the well-known quote attributed to George Santayana that "those who cannot learn from history are doomed to repeat it."

I have no idea whether the price of gold will continue to decline or will reach new highs. Neither does anyone else. That's precisely my point. Clearly, some of those making predictions will turn out to be right, but I would caution investors against relying on the analysis of anyone concerning the direction of the markets, much less the price of any commodity like gold. There is no way to prospectively identify which predictions will be correct. The risk of relying on these predictions is more like speculation and not investing. The expected return of speculation is zero.

Fortunately, there's a better way to invest. It doesn't rely on financial astrology. Instead, guessing about the future is replaced with deciding how much of your portfolio to allocate to a globally diversified portfolio of small, large, value and growth stocks, and how to use fixed income to mitigate risk. Replacing speculation with science is the only responsible and intelligent way to invest. The last time I checked, hope isn’t a particularly wise investment strategy.

What trends are you anticipating will most impact investors over the next year?

The evidence keeps piling up that investors can benefit from building portfolios that diversify across factors that not only explain stock market returns but that also generate superior returns. Two of those factors receiving a lot of attention are momentum and value. Studies tend to indicate that these two factors independently deliver market outperformance, with negatively correlated active returns and a low probability of simultaneous market underperformance. We believe that the evidence is sufficient motivation for pursuing a momentum and value diversification strategy as part of a well thought out globally diversified portfolio.Charles Root, managing directorDouble Eagle Financial2300 Bethards Dr., Ste. R, PO Box 2790, Santa Rosa, 707-576-1313, www.double-eaglefinancial.com

[caption id="attachment_18838" align="alignleft" width="108"] Charles Root[/caption]

Have you adjusted your investment strategies in response to economic trends over the past year? Why, or why not?

We feel that our investment strategy priorities are pretty much the same, focused on risk management for the client and capturing gain wherever possible.

The market hasn’t changed much in the last months or even a year. There are corrections that matter but the trend is up and it’s important to take advantage of that trend. Our philosophy has always been to select the strongest asset classes and ride that trend until a new asset class emerges.

We have found that economic trends have some effect on markets but little to do with results where attention is paid to what the market is saying.

What mistakes do you see individual investors making in the current financial climate?

We feel that business owners and investors need to plan the transition for business and retirement long before the event is to occur. In many cases, we find that no one pays attention to that retirement date until it’s a year or so away then they panic.

This is even more important for business owners. A business transition can take years and must have some thought as to how it will flow. If the family is to stay in control, planning is more important, since funding, experience possible outside executive experience may be needed. It takes at least five to ten years for a family transition plan to mature, sometimes longer. There are several families in Sonoma County that have successfully made that transition and most will concur with this advice.

What trends are you anticipating will most impact investors over the next year?

Since baby boomer owners of businesses are a very high percentage of retirees, there is a huge demand for retirement and business transition advice. While most people consider an estate plan with a trust and wills important, the larger consideration is the business transition portion. Fundamental choices made now will have effects going far into the future. We feel it’s important to put those choices in place to maximize your benefit now.Steven Jenkins, senior vice president & director of trust servicesExchange Bank545 Fourth St., Santa Rosa, 707-524-3151, www.invest.exchangebank.com

[caption id="attachment_78834" align="alignleft" width="200"] Steven Jenkins[/caption]

Have you adjusted your investment strategies in response to economic trends over the past year? Why, or why not?

Our core strategy of constructing low-cost, tax-efficient, and broadly diversified portfolios has not changed. For investors who have been sitting in cash waiting for good news on GDP and employment growth, most feel that the news is still too tepid to get back into the market. Unfortunately, while they have waited, stocks have staged a remarkable comeback since March 9, 2009. As of Aug. 1, 2013, the S&P surpassed the 1,700 mark versus 677 at the bear market trough. Every day along the way, one could point to troublesome factors that could give one pause — the Euro crisis, gridlock in Washington, D.C., quantitative easing, sequestration, slowing growth in China and more recently, rising bond yields.

What mistakes do you see individual investors making in the current financial climate?

A common mistake is allowing short-term events to impact one’s long-term investment plan. Investors and the financial media are often quick to embrace negative news. However, there has been quite a bit of good news and the run up in stock prices has not been irrational. GDP growth, albeit sluggish, is occurring, the risk of recession and/or accelerating inflation is low, corporate balance sheets are strong, and the real estate market is rebounding. Many economists are predicting GDP growth in the 2.5 percent to 3 percent range over the next couple of years. Likewise, the unemployment rate has been falling slowly with a forecasted rate of approximately 6 percent by the end of 2015. Yes, the makeup of new jobs is skewed toward lower paying and part time employment, but the movement is in the right direction.

What trends are you anticipating will most impact investors over the next year?

Investors who have maintained their portfolio within a thoughtfully constructed investment policy have fared very well. Shortened bond durations plus an emphasis on quality dividend paying stocks, both large cap and small cap, have allowed our clients’ portfolios to appreciate while minimizing volatility. However, for those with cash to invest today, the fear of investing at the top of the market is palpable. To those investors, my advice is to focus on creating an investment policy that addresses their unique investment goals, the timing of net portfolio additions or withdrawals, their time horizon, the amount of risk one can afford to take ( their objective risk capacity), and one’s risk tolerance (their emotional aversion to short-term losses). With these factors defined, or at least estimated, a diversified multi-asset/multi-style portfolio is the best strategy to assure investment success through any investment environment. This approach will enable investors to avoid the latest investment fads and schemes on one hand while also avoiding the perils of market timing on the other.Andrew F. Mathieson, presidentFairview Capital300 Drakes Landing Road, Ste. 250 Greenbrae, 415-464-4640, www.fairviewcap.com

[caption id="attachment_78835" align="alignright" width="200"] Andrew Mathieson[/caption]

Have you adjusted your investment strategies in response to economic trends over the past year? Why, or why not?

We have maintained equity allocations at the high end of our tolerance ranges over the past year. Looking out 5-10 years, we assign an exceptionally high probability to stocks outperforming bonds, and that hasn’t changed even though interest rates have risen quite a bit in the past several months.

What mistakes do you see individual investors making in the current financial climate?

Individuals consistently make the mistake of letting short term market movements distract them from long-term plans and objectives, and as a result are usually underinvested in risk assets. When you are 30 years old, it isn’t really relevant what your retirement assets are worth at age 35, or even 40 or 45, but yet investors change their asset allocation based on current concerns and emotions. Establishing a long-term plan and sticking to that plan, both regarding saving and investing, is the best way for individuals to achieve their retirement goals.

What trends are you anticipating will most impact investors over the next year?

We think we will continue to see investors embrace low-cost, exchange-traded funds. We also think investors will continue moving capital from bond funds to equity funds as they learn that bond funds, no matter how conservatively managed, will lose value in a rising interest rate environment. Broad tax reform is also an issue that could impact investors looking forward, most likely negatively, and the legal system will be making some important rulings as to the rights of bond-holders vs. retirees in several high profile municipal bankruptcies. This could cause a lot of volatility in the historically staid municipal bond market.Brian Pon, principalFinancial Connections21 Tamal Vista Blvd., Ste. 105, Corte Madera, 415-924-1091 , www.financialconnections.com

[caption id="attachment_78836" align="alignright" width="200"] Brian Pon[/caption]

Have you adjusted your investment strategies in response to economic trends over the past year? Why, or why not?

As interest rates have declined/remained low over the past year, we have steadily reduced the allocation in our clients’ investment portfolios to the bond investments that are the most sensitive to interest rates. Typically, this has led to an increase in our clients’ allocations to stocks and to various defensive investments we prefer that do not rely upon low interest rates. Similarly, as inflation—and expectations for inflation—have remained low, we have stayed away from precious metals investments.

What mistakes do you see individual investors making in the current financial climate?

The two most common mistakes that individual investors are making in the current climate are one: complacency and two: “analysis paralysis.” Actually, these tend to be mistakes in any financial climate!

For complacency, we see this manifest itself in clients who pay insufficient attention to their investment portfolios. While patience is a virtue, neglect is not. We suggest that investors critically review their portfolios on an ongoing basis; if they make no changes, let the inaction be an “active” decision as opposed to a complacent decision made by default.

Many of the prospective clients we meet hold a significant amount of money in low-yielding accounts because they are overwhelmed by investment choices and responsibility and by being “too close” to the money. We help clients take a more balanced view. We are not dispassionate toward their money, but our experience provides our with a wider perspective.

What trends are you anticipating will most impact investors over the next year?

Great question. We think that the widening array of investment choices (e.g., more ETFs are being introduced and hedge funds will soon be permitted to advertise) and the potential fluctuations of bond investments as interest rates rise may cause additional “analysis paralysis” with many confused individual investors. In particular, if the new ETFs and hedge funds advertise significantly, the financial media may hype the investments but might not help the individual investor. More noise, less clarity of decision.James BurlesonGreenleaf & Burleson Wealth Management, LLC201 First St., Ste. 204, Petaluma, 707-283-0520, www.gbwealth.com

[caption id="attachment_78837" align="alignleft" width="200"] James Burleson[/caption]

Have you adjusted your investment strategies in response to economic trends over the past year? Why, or why not?

At Greenleaf & Burleson Wealth Management, LLC, we have maintained our equity and fixed income allocations over the past year. To focus on fixed income, we have kept the maturities on our bond portfolios quite short in duration. With rates at generational lows, we have sacrificed yield, yet the 68 percent move in the 10-year Treasury Note from May 1 to Aug. 1 exemplified the risk in the bond market. With the 10-year Treasury Note now yielding 2.72 percent, we still feel that rates have room to rise with the benchmark reaching 4 percent by the first quarter of 2015 assuming economic growth continues at a measured pace.

What mistakes do you see individual investors making in the current financial climate?

A mistake we see individuals making in the current financial climate is reducing their fixed income holdings as rates increase and rotating into equity-oriented investments. The main purpose of bonds in a portfolio is to serve as ballast for risk. It is difficult to see a portfolio losing value in its “safe” assets, yet all equity portfolios demand significant time in the market to compensate for volatility. The rising interest environment should not send a message to rotate to equities, yet it should serve as an opportunity to roll the fixed income ladder further out on the yield curve to increase income into the portfolio.

What trends are you anticipating will most impact investors over the next year?

Investors will be most impacted by the gradual rise in interest rates as our economy improves. The rise in mortgage rates will have a direct impact on the investor through a decrease in construction activity and home sales and an indirect impact of lower home prices and less refinancing activity on consumption. On the corporate and municipal level, the refinancing of maturing debt at higher interest rates will have a direct impact on operating budgets. The race to roll debt to these historical low rates may be running out of time. The longer term impact of rising rates is the opportunity for greater yield for the individual investor. Holders of cash and short term instruments will be able to reset their holdings at higher rates. The investor should utilize this trend by selectively profiting from the gradual strengthening of our economy and not disposing of their interest rate sensitive instruments for the risk of the equity markets.Neil Hennessy, portfolio manager and chief investment officerHennessy Advisors7250 Redwood Blvd., Ste. 200, Novato, 415-899-1555, www.hennessyfunds.com

[caption id="attachment_78838" align="alignleft" width="201"] Neil Hennessy[/caption]

Have you adjusted your investment strategies in response to economic trends over the past year? Why, or why not?

We have not adjusted our investment strategies in response to economic trends over the past year, nor do we adjust in any kind of economic cycle. I believe in sticking to good fundamental investing in every type of market, because I am confident that once you begin changing your methodology in a tough investing climate, that’s when your investments fail. We stick to our knitting and stay the course with our portfolio parameters and never let emotion enter into our investment decisions. If you invest with a consistent methodology, over time you will do well.

What mistakes do you see individual investors making in the current financial climate?

Many investors are not even participating in the market currently, and I think that is unfortunate, because in every market there are always companies that do well. I also have seen so many investors recently flock to fixed income and I think this is a big mistake, because when interest rates rise they will lose part of their principal. We believe it is "time in" the market not "timing" the market that really works.

What trends are you anticipating will most impact investors over the next year?

I am not sure what trends will impact investors. I don’t believe in investing in “trends.” When I hear pundits use the phrase “stock pickers’ market” I get a bit frustrated. To me, it is always a stock picker's market. If investors choose a fund manager that stays with his or her investment strategy over time, I am sure they will do fine. Investing in hot products, trends, or fads may work in the short term, but in the long term, good stock pickers with good formulas always win.Noah Jacobson, partnerJacobson & Breen Wealth Strategies201 Keller St., Petaluma, 707-763-0354, www.jacobsonbreen.com

[caption id="attachment_78839" align="alignleft" width="200"] Noah Jacobson[/caption]

Have you adjusted your investment strategies in response to economic trends over the past year? Why, or why not?

We continue to manage money around our disciplined, prudent investment process. This active management process includes making tactical asset class decisions based on technical trend indicators and identifying investment themes believed to be in long term price trends. Over the last year we have remained bullish in equities with an overweight to the U.S., primarily small cap equities and very little exposure to the international markets. We have also increased our allocation to fixed income securities that are less interest rate sensitive.

What mistakes do you see individual investors making in the current financial climate?

We see two major mistakes that individual investors are making in the current financial climate. First, individual investors are constantly bombarded with “media risk.” They have difficulty maintaining a disciplined process and can end up making serious investment decisions based on opinions and predictions rather than the facts. Second, with the economy improving and the equity markets hitting all-time highs, individual investors pay less attention to future risks and the strategies to minimize them. As JFK once said, “the best time to fix a roof is when the sun is shining.” This holds true to managing investment portfolios. Though things are good now it doesn’t mean that investors can close their eyes and take a nap, instead they need to revisit their investment policy statement and sell discipline. And if they don’t have these strategies in place then they need to develop them with a qualified wealth adviser.

What trends are you anticipating will most impact investors over the next year?

There are two current trends that we anticipate will most impact investors over the next year however; the question is whether it will be bullish or bearish. First is the most commonly discussed, what will be the impact from the Federal Reserve exiting their quantitative easing program? One thing everyone can agree on for sure about the Federal Reserve’s quantitative easing program is that it did give borrowers some incredibly attractive interest rates on their loans. Much of the housing recovery could perhaps be tied to the fact that people could afford more home for their dollars because interest payments were so low. However; if this is reversing, it could potentially now become a headwind to consumers making large purchases. For instance, we witnessed the largest monthly increase of mortgage rates in 30 years in June as the average rate on a 30-year fixed mortgage leaped to nearly 4.5 percent from under 3.5 percent. While a 1 percent increase still puts you near record-low borrowing rates under 5 percent, if this trend continues, it could be costly for future home buyers. The bullish case is that interest rates are still very low and are only one component of purchasing decisions. Also, there are many savers who would benefit greatly from more attractive interest rates as they climb higher. Also, bonds will continue to lose value as interest rates move higher and investors will flock back into stocks. More on that later. The bearish case is that this is unsustainable as interest rates continue to march higher.

The second trend is what was termed late last year as the “The Great Rotation”. The theory is that nearly half a trillion dollars has departed from stocks since 2007, while more than $1 trillion went into bonds and other income providing assets. The theory looked like it was wrong up until June of this year, when investors started to turn negative on bonds. If the Federal Reserve is correct, and they begin to end their asset purchasing program, there is a chance this theory will become reality as investors flood out of bonds and pile back into stocks. The bullish case is exactly what will happen because investors’ won’t want to hang on to bonds in a rising interest rate environment. Commodities have also performed poorly lately and emerging markets such as China appear risky. This leaves the stock market as the most rational place to invest in this environment. On the flip side, the bearish case is that The Federal Reserve is wrong; the economy isn’t getting better. This flow of money out of bonds lately is temporary, and investors will remain safely tucked away in the bond markets because the stock market nightmare of 2008 is still too fresh in investors’ minds.Matt Delaney, partnerJDH Wealth Management187 Concourse Blvd., Santa Rosa, 707-542-1110, www.jdhwealth.com

[caption id="attachment_78840" align="alignleft" width="200"] Matt Delaney[/caption]

Have you adjusted your investment strategies in response to economic trends over the past year? Why, or why not?

Investors are constantly bombarded with the investment risks that are on the horizon. Between Egypt’s turmoil in the Middle East and the U.S. Treasury possibly hitting its debt ceiling sometime later this year, investors have plenty to keep them up at night. Do we buy, sell, go to cash, rebalance our portfolio, etc.? There is always going to be uncertainty around the global and investors need to remember that they can’t control these issues. The only thing they can control is how they are going to react to the doom and gloom news.

With all of this being said, it has been a great year for stocks around the global with the exception of emerging markets. Our investment approach has not changed as we are continuing to rebalance our clients’ accounts. When possible, we want to take a portion of the equity gains off of the table and redeploy those dollars in the underperforming asset classes.

We continue to remind our clients that they need to focus on the things they can control – how much risk they need to take, spending, diversifying risks, etc. The markets are going to do what the markets are going to do. Once investors stop worrying that “this time is different,” they will increase the odds of having better long-term financial success with their portfolio.

What mistakes do you see individual investors making in the current financial climate?

Strong equity returns often lead to bad behavior. Let’s use Apple as an example.

As Apple shares closed 2012 at $529.09/share, many predicted that Apple would be a guaranteed winner in 2013. It finished June at $396.53, a drop of 25 percent. It also underperformed the S&P 500 by almost 39 percent. While no one could have predicted what Apple would do in 2013, many investors jumped on the Apple train because they thought it was somewhat of an investment guarantee. “Of course Apple will do well.”

This is all about investor behavior. While investors make many mistakes, behavior is the biggest driving force that undoubtedly creates the gap between the returns that the investor earns and the return of the investments themselves.

In a rising market, investors often fail to rebalance their accounts as they don’t want to sell something that is doing well and has momentum. In a down market, investors start to sell the “losers” instead of buying while the investments are trading at a discount. We see this consistently through the market ups and downs and this year is no different.

What trends are you anticipating will most impact investors over the next year?

With interest rates at historic lows, they have started to creep up in the past few months. This is no surprise as everyone knows that rates will eventually rise. We just don’t know when. The recent rise in rates has had a negative impact on bond prices and has caused a lot of angst for many investors.

In a low interest rate environment, investors often start to stretch for the extra yield and take on additional risks that they may not necessarily be aware of. With uncertainty of interest rates and what they will do over the next 2-3 years, this will continue to be a difficult decision for investors as they decide how far to go out on the yield curve.

To shed some additional light on this, let’s take a look at both the taxable yield curve and the tax-exempt yield curve.

In the taxable market, secondary market CDs look very attractive between four and five years with rates between 1.5 percent and 2.09 percent. Going out six years will only give you an additional 10 basis points. The tax-exempt yield curve looks much different as it is much steeper. A four-year muni is currently at 1.18 percent while a nine-year muni is at 2.95 percent. It is crucial for investors to weigh the pros and cons to adding additional maturity risk to their portfolio. While they may be picking up additional yield, they need to know the risks that come with a longer maturity.

It is imperative for investors to utilize a written investment plan. This will help them stay focused during both the good times and the bad.James Demmert, managing partnerMain Street Research30 Liberty Ship Way, 3rd fl., Sausalito, 800-357-3863. www.ms-research.com

[caption id="attachment_78841" align="alignright" width="200"] James Demmert[/caption]

Have you adjusted your investment strategies in response to economic trends over the past year? Why, or why not?

Our approach to investing is quite flexible and we tend to change direction depending upon the overall global economic climate. In the past year, we have remained fully invested in stocks depending on each clients tolerance for risk and investment policy. However, we have migrated away from emerging market companies (where economies are slowing) toward companies in Europe (where we expect economic recovery). We also have the bulk of our stock exposure in high quality US based companies. Lastly, we continue to believe that interest rates will eventually move up significantly and so we own individual bonds with short maturities as well as bond alternatives such as utility stocks, preferred stock, real estate investment trusts and master limited partnerships. Each of these provides much higher yields than the bond market while providing less volatility than traditional common stock.

What mistakes do you see individual investors making in the current financial climate?

After 20 years of doing this as MSR, we see today a pattern that often repeats itself when markets have an upward bias -- basically a tendency for investors to be greedy and underestimate risk. Therefore we continue to use our Active Risk Management Process to mitigate the risk of catastrophic loss.

What trends are you anticipating will most impact investors over the next year?

Over the next year we imagine that two things will have the most impact on investors. The stock market will continue upward surprising most investors and forcing them to get in, if they are not already invested. Also, we expect a general rise in interest rates over the next year which will cause bond fund holders to sell in droves.Montgomery Taylor, founderMontgomery Taylor & Company, LLC2880 Cleveland Ave., Ste. 2, Santa Rosa, 707-576-8700, www.TaxWiseAdvisor.com

[caption id="attachment_78842" align="alignright" width="200"] Montgomery Taylor[/caption]

Have you adjusted your investment strategies in response to economic trends over the past year? Why, or why not?

Yes, it’s important to tilt your investment allocations as economic trends occur. Periodically I reassess the long-term market outlook and add or reduce exposure to asset classes. This takes time and effort, but adds value and a sense of control in what can otherwise be a roller-coaster experience.

A whole year ago I began talking with clients about the coming decline in the bond market and let them know that I would be adjusting portfolios…but not just yet. In January I started the transition from traditional long-term bond funds to a newer class of “unconstrained” bond fund. This new class is an absolute return-oriented bond strategy that is not tethered to benchmark-specific guidelines or significant sector constraints.

Over the months of May and June, when the bond market dropped 4 percent, we had just a taste of what lies ahead for the traditional bond market. In July, I did further research and made additional adjustments to our clients’ bond allocations. I’m confident that they are well prepared for the coming bond market crash.

What mistakes do you see individual investors making in the current financial climate?

I think most people are too passive when it comes to their investments. If they’re managing their own investments, they get stuck on decisions to buy or sell and then end up doing nothing. If they have an adviser managing their portfolio, they’re afraid of asking “dumb” questions, and, again, end up doing nothing.

To avoid mistakes, you should work with an adviser who has a reputation for competency and integrity, of course, but who is also known for good listening skills and the ability to explain financial matters in terms you understand.

What trends are you anticipating will most impact investors over the next year?

Two things will happen that you need to be prepared for -- one: bond values dropping when interest rates rise, and two: stock market volatility as the Fed tapers their propping up of the economy. In preparation, you need a disciplined buy and sell strategy.

Exit strategy is always a tool in my back pocket. I don’t believe in watching any client portfolio go off a cliff. I monitor portfolios, asset classes and individual positions for declines which trigger my exit strategy. As Warren Buffet says, “You’ve got to control your losses.”

More importantly, however, is the huge, negative impact from retiring this coming year without being absolutely confident that you’ll never run out of money. The cost of a Wealth Integration Review Plan is money well spent.Stuart Crandall, certified financial plannerMoss Adams Wealth Advisors, LLC3700 Old Redwood Hwy., Ste. 200, Santa Rosa, 707 535-4167, www.mossadamswealthadvisors.com

Have you adjusted your investment strategies in response to economic trends over the past year? Why, or why not?

We’ve been focused on preparing portfolios for the eventual rise in interest rates. For our firm, that has entailed some adjustments to how we manage our bond allocation. A lot of our work has been concentrated on taking gains in longer-dated maturities and reinvesting those proceeds on the shorter end of the yield curve. Although yields remain very low, we want significant dollars maturing over the next 1-3 years and that should allow us to reinvest at higher yields as rates move up.

Also, we’ve added an allocation to an absolute return-oriented bond manager. This strategy should act as a complement to our core bond allocation and add flexibility to how we approach the current interest rate environment. The added flexibility should allow the fund to position itself more defensively against a rise in interest rates.

We still believe that bonds will continue to play a significant role in many investor portfolios. That being said, you have to diligently manage your exposure to rising interest rates in today’s environment.

What mistakes do you see individual investors making in the current financial climate?

There is a lot of pressure to chase returns in this type of market. In 2013, U.S. equities have outpaced most other asset classes by a significant margin. But now is not the time to take on more U.S. equity exposure. In fact, most investors would be better served by reducing their U.S. equity allocation back to its target weighting and rebalancing towards asset classes that have significantly lagged the US market. Most individuals chase performance and very few chase value.

What trends are you anticipating will most impact investors over the next year?

The actions of the Federal Reserve are going to take center stage as they try to unwind the massive amounts of stimulus that they’ve injected into the economy.

Also, I’d point to the most recent weakness in corporate earnings as a trend to watch. You are going to see many Wall Street analysts cut their earnings projections for the upcoming quarters and this will have an immediate impact on forward looking valuations. A U.S. stock market that many viewed as inexpensive is going to start looking much more fairly, if not, overvalued.Richard Stone, founder and chairmanPrivate Ocean750 Lindaro St., Ste. 130, San Rafael, 415-526-2900, www.privateocean.com

[caption id="attachment_78843" align="alignright" width="200"] Richard Stone[/caption]

Have you adjusted your investment strategies in response to economic trends over the past year? Why, or why not?

As a strategic decision, we have added multi-alternatives (aka “liquid hedge funds”) for additional diversification and as an alternative to stocks and bonds. Overall, we have increased our allocation to alternatives and reduced our allocation to equities. As both a strategic and tactical decision, we have shortened duration slightly in our fixed income portfolios to hedge against the risk of rising interest rates. Together we feel that these changes position our portfolios for improved risk-adjusted returns in the future.

What mistakes do you see individual investors making in the current financial climate?

The primary mistake investors make is forgetting that risk and return are related. We’ve seen investors making allocation changes in search of yield or returns, without regard to the risks that those changes introduce into portfolios. Emotions can cause also cause investors to overreact, driving fear in down markets and greed when markets are soaring. It is our opinion that allocation changes should be driven by a person’s financial plan and changes made only when there is a change to their overall financial planning objectives or circumstances.

What trends are you anticipating will most impact investors over the next year?

We anticipate the potential for a continuing rise in interest rates and reduced government intervention in the markets – both resulting in short term market volatility. Investors may also be affected by a possible recovery in foreign developed and emerging markets relative to domestic markets.Nate Cornell, partnerPrivate Wealth Partners, LLC80 E. Sir Francis Drake Blvd., 4th fl., Larkspur, 415-461-3850, www.pwpart.com

Have you adjusted your investment strategies in response to economic trends over the past year? Why, or why not?

We’ve found that our underlying investment strategy for equities, which is centered on buying high quality, shareholder oriented companies with compelling cash flow characteristics, continues to produce attractive returns in the current environment. Our strategy for income encompasses MLP’s, preferred stock, and in some cases international sovereign bonds. This strategy has rewarded our clients with attractive yields in a low-rate environment.

What mistakes do you see individual investors making in the current financial climate?

It’s easy for individual investors to get carried away with the 24-hour news cycle. A good example is the recent reaction to the Fed’s potential tapering of quantitative easing (bond purchases) in September. Yields may rise on a relative basis but we expect them to remain at historically low levels into 2015.

What trends are you anticipating will most impact investors over the next year?

The actions of the Federal Reserve have had a dramatic impact on the financial markets. Therefore, we expect the nomination of Ben Bernanke’s replacement to be closely followed for clues to the pace and structure of future monetary policy and its subsequent impact on the markets. Additionally, it’s our belief that equities will need to show more compelling growth to sustainably drive the market to new highs in 2014.Michael Schmitz, vice president of investments and COOSchmitz Capital Partners655 Redwood Hwy., Ste. 109, Mill Valley, 415-381-9076, www.schmitzcapital.com

[caption id="attachment_78844" align="alignright" width="200"] Michael Schmitz[/caption]

Have you adjusted your investment strategies in response to economic trends over the past year? Why, or why not?

Yes. We believe that the driving force behind our economy and financial markets - people - are both unpredictable and irrational. Accordingly, our view is that markets can become inefficient and prolonged bull and bear markets do occur with relative frequency. Therefore, we believe that active strategies and more tactical allocation maneuvering are likely necessary to produce the desired results to meet investor expectations. During more "normalized" times when markets are behaving more "efficiently", we adhere to more passive portfolio strategies, but still continuously assess the current environment to determine where risks are elevated and where there is additional return potential.

Currently, our investment strategies reflect an optimistic bias, with some downside preservation mechanisms. Since the last half of 2012, as we saw gradual improvements in certain economic fundamentals (i.e. unemployment slowly improving, housing remaining on an uptrend, retail sales at record highs, consumer confidence and sentiment at-or-near post-crisis highs, systemic risks in Europe temporarily contained, low relative inflation, etc.), we generally retained more passive portfolio strategies. For those clients with appropriate flexibility within their risk tolerance, new allocations were recommended into U.S. equities, European equities, Japanese equities, MLP’s, etc. to try and take advantage of near-term trends.

However, more recently, growing concerns over the longevity of the Federal Reserve's stimulus policy (which has been widely credited with fueling the markets’ gains this year) was contributing to heightened volatility. Once the Fed officially began speaking about tapering its $85 billion per month bond buying program, it was time to think about sector and capital structure rotation. Government intervention/monetary policy risk can make it more challenging to try to manage portfolio risk through traditional diversification, since systematic risk cannot technically be diversified away. Therefore, we explored how various asset classes could be affected by possible future Fed actions, and discussed ways to try to hedge exposure to possible downside risk and to help minimize volatility.

Bond markets, in particular, took the brunt of the market’s shock when the Fed released its initial blueprint for an exit from quantitative easing. Although the Fed backed off, we think the proverbial punch bowl is going to be taken away in short order. Consequently, we’ve started to reduce our exposure to longer-duration bonds. We expect that bond prices will come under pressure as investors worry that higher interest rates may eventually cut the principal value of bonds. More specifically, we have been reallocating into assets classes that we believe will be less impacted by rising rates in the U.S. We believe that strategic bond fund managers may be well positioned to seek pockets of value in the fixed-income landscape, and floating rate securities may provide some relief, plus the potential for capital appreciation, in a rising interest rate environment.

We believe that the key to successful investing is predicated upon a thorough investment process, a carefully crafted investment plan that includes an understanding of the true nature of investment risk and continual monitoring and evaluation of that plan as the highly dynamic economic climate changes. It is certainly prudent to be defensive at times, and we think it’s going to be important to help investors maintain perspective in the face of tighter monetary policy, heightened volatility, corrections or other market turbulence. We tend to nudge investors to try and ignore fear mongering and the media circus and try to remind them that one of the reasons for any monetary tightening is that the Fed's outlook for the economy is actually more encouraging. While we will be continually monitoring the unfolding situations, we certainly won't let every twist and turn derail our longer-term game plan, which is unique for each client.

What mistakes do you see individual investors making in the current financial climate?

Often times investors are not always accurate in describing their risk tolerance thresholds and make costly decisions based on emotion. In the current financial climate, one of the most easily identifiable problems are the rapid changes in investor sentiment and a corresponding willingness to immediately accept more risk, or remain in an unproductive, defensive investment posture worrying about an impending Armageddon that may never materialize. This bifurcation in “stated” and “psychological” risk tolerances can pose some unique problems.

Risk tolerance is often heavily influenced by outside, disinterested parties (i.e. friends, family, media) and traditional behavioral finance shows that investors usually have an asymmetric view of risk -- they are more scared of sustaining losses than they are of missing the opportunity to generate returns. However, since risk carries a “recency effect” (e.g. investors’ most recent investment experiences are often what they expect to happen in the future), the market's record-breaking spree has certainly induced envy and the fear of missing out on the potential for generating larger returns.

Given the performance of the U.S. indices that are most widely followed by investors (Dow, S&P 500, NASDAQ), it is understandable than many investors are now feeling the mounting pressure to run with the bulls in an attempt to try and capture any potential future appreciation. However, in the investment world, reacting to emotion often turns out to be precisely the wrong thing to do. Chasing returns and buying into markets that have already seen record run-ups can be a costly decision, especially for those that were particularly hard hit in 2007 and 2008. On the flipside, many who were paralyzed by past investment decisions due to post-traumatic stress following events like the 2008 Global Financial Crisis, or the European sovereign-debt crises, have also realized that extreme risk aversion and remaining on the sidelines are also costly.

While changing investor appetite for risk is not a mistake in and of itself, not understanding the underlying implications for making a change is a mistake. Exposing oneself to greater risk can prove particularly painful in the event of a correction, especially when one’s risk tolerance and circumstances have not substantially changed. However, extreme risk aversion and not exposing oneself to an appropriate amount of risk can cause an inadvertent reduction in wealth.

What trends are you anticipating will most impact investors over the next year?

With the exception of Europe, most countries have had their feet firmly on the monetary gas pedal since the global financial crisis. In the quest to achieve “escape velocity,” the rate necessary for the economy to grow in order to escape a recession and return to a normal long run rate of economic growth, we have entered a period where global governments and their central banks are no longer players in the global economy, but the players. Now, with the U.S. Fed considering tightening measures, the world's other central banks are about to re-learn the true meaning of central bank independence. However, that decision carries consequences since it is fairly clear that the global economy has simply become addicted to government intervention and loose monetary policy. As with any addict, the global economy is now very susceptible to withdrawal symptoms because of the large doses of monetary policy it has become accustomed to. So, the unintended consequence of providing constant support and stimulus is the rippling global impact of taking it away, or, in some cases, even the threat of weaning off of it.

The trends we feel will most impact investors over the next year are as follows:

•The 800-pound gorilla is slowing central bank liquidity. We just experienced a relatively unusual episode of positive correlation between spreads and rates in the credit markets. We believe that was temporary and was caused by an extended period of unusually tight spreads, which was further exacerbated by bond outflows. However, we expect a rise in longer-term rates as the Fed tapers off its bond buying program, unless global economic conditions worsen. Given the fragility of the recovery, the Fed left itself plenty of room to maintain its support if economic conditions don't continue to improve in the coming months. If longer-term rates start to creep up, floating rate securities, with short durations, may offer a hedge against rising rates (noting that resets are typically tied to the front end of yield curve). Strategic bond fund managers may be well positioned to seek pockets of value in the fixed-income landscape.

•We also believe that continued political dysfunction and the debt ceiling debates will inject unnecessary levels of uncertainty into the markets, making them more volatile until a last minute resolution is reached. Although likely temporary, this may impact investors more from a psychological standpoint, than a financial one.

•Moderating growth in China seems to be clouding the short-term prospects for many emerging markets, and may continued to be reflected in EM growth and investor returns over the next year. Many EM’s are working through commodity pullbacks, growth deceleration and challenging cyclical credit dynamics. However, we think longer term it is wise to have allocations to both foreign developed and emerging market equities. EM’s are more structurally sound, appear attractively priced relative to developed markets over the long-term and are expected to deliver stronger growth than many developed nations.

•Although a pullback may be on the horizon, we think relative corporate strength, combined with modest growth domestically, makes the U.S. attractive. We believe in a globally diversified portfolio with a U.S. bias within developed markets.

•Europe seems to have averted several crises for the time being. Italian elections and the Cypress debacle remind us that the path to reform is a long and painful process and although many European nations have high/unsustainable levels of debt, a collapse seems unlikely. We have not ruled out further risk aversion/reduction sentiment, especially since Eurozone unemployment is approximately 12.2 percent, and the threat of more credit rating downgrades loom on the horizon. However, despite the headwinds and growth difficulties exhibited in Europe, we believe that we will see a gradual emergence of specific Eurozone countries from recession.

•Aggressive fiscal and monetary policy in Japan (the third-largest economy), and the uncertainty of those policy outcomes, will be closely monitored as Abenomics unfolds. Abenomics (a portmanteau of Abe and economics) refers to the “three arrow” policy measures advocated by the current Prime Minister of Japan, Shinzō Abe. Abenomics are economic policies meant to resolve Japan's macroeconomic problems and includes a ‘mix’ of aggressive monetary policy, proactive fiscal policy, and an economic growth strategies designed to pull it out of the economic purgatory that has gripped Japan for more than twenty years.

•We expect that near-term inflation stays within the Fed’s comfort zone. As long as inflation stays within the Fed’s “trigger” of 2.5percent for policy changes, we think that commodities may continue to see downward pressure.Eric Aanes, presidentTitus Wealth Management700 Larkspur Landing Cir., Ste. 109, Larkspur, 415-461-4800, www.tituswealth.com

[caption id="attachment_78845" align="alignleft" width="200"] Eric Aanes[/caption]

Have you adjusted your investment strategies in response to economic trends over the past year? Why, or why not?

Yes, we are continually adjusting our strategy to attempt to take advantage of the ever changing investment climate.

What mistakes do you see individual investors making in the current financial climate?

Individual investors on occasion are the last to enter a bull market. While we don't time the market, we believe a prudent strategy based on a globally diverse portfolio can help mitigate overall risk.

What trends are you anticipating will most impact investors over the next year?

Interest rates are front and center on everyones radar these days. It is difficult to anticipate where rates are going in the short term and this brings concern to bond investors. We believe in a diversified fixed income strategy that uses several different types of bonds with various maturities to mitigate risk.Jon MallonUBS Financial Services, Inc.100 B St., Ste. 300, Santa Rosa, 707-535-2961, www.ubs.com

[caption id="attachment_78846" align="alignright" width="200"] Jon Mallon[/caption]

Have you adjusted your investment strategies in response to economic trends over the past year?

Our investment strategy, over the past year, has been adjusted to reflect improving economic growth in the U.S and the likelihood for longer term interest rates to begin to normalize from historically low levels and gradually trend higher. As a result, the overall strategy has involved shortening the maturity of fixed income securities to reduce interest rate risk; focusing on strategic income funds that have a more flexible mandate to actively hedge duration risk; and a shift away from Government issued fixed income securities into short term U.S. high yield corporate issues. Cash levels have been increased at the expense of fixed income holdings in order to have cash available to invest opportunistically. The equity allocation, as part of a balanced approach, has been more heavily weighted in the U.S. market versus European and Asian markets due to relative strength of the U.S. Economy. Within equities, we continue to emphasize investments in fundamentally strong companies with growing dividend payouts.

What mistakes do you see individual investors making in the current financial climate?

The most common mistakes that we continue to see individual investors make occur at different ends of the risk spectrum. For example, in the current low interest rate environment, we see some investors reaching for yield to maintain a high level of income. However, they may not be fully considering the added potential risk associated with -- one: longer maturity bonds or less creditworthy issuers in their fixed income portfolio; and/or two: the underlying fundamentals of stocks with high dividend yields.

The recent upward movement in rates has forced investors to re-evaluate their investment holdings, as many rate sensitive products have suffered weak near-term performance. While our conversations with clients had been focused on avoiding undue risk, we are now also having conversations about potential opportunities that tend to arise in any broad-based sell-off. Failing to take advantage of opportunities is another mistake we do not want to see our clients make.

What trends are you anticipating will most impact investors over the next year?

Financial markets, which have seen strong and broad gains this year, will likely face a more challenging environment during the 2nd half of the year. Increasing focus on the timing of the U.S. Federal Reserve's eventual tapering of, and ultimate withdrawal from, its quantitative easing program, a new appointment to head the Federal Reserve, and a possible upcoming stalemate on the U.S. budget and federal debt ceiling have increased the potential risk of policy errors. Any of these aforementioned issues, not to mention potential headlines out of Europe and/or Asia, could lead to increased volatility in the global markets and impact the improving, but still fragile, U.S. economy.

We would expect to see:

•Increased volatility in financial markets

•An increased need be active and make tactical adjustments to protect gains

•Allocation shifts in fixed income portfolios to reduce interest rate risk

• Continued focus on companies with solid earnings growth and a track record of increasing dividend payouts to generate additional income in portfolios

• Potential opportunities in international financial markets, which have lagged the U.S.Marc Doss, deputy CIO, CaliforniaWells Fargo Private Bank3550 Round Barn Blvd, third floor, suite 307, Santa Rosa, 707-521-1200, www.wellsfargo.com/theprivatebank

Have you adjusted your investment strategies in response to economic trends over the past year? Why, or why not?

[caption id="attachment_78907" align="alignleft" width="160"] Marc Doss[/caption]

We continue to take a longer term view towards managing our client’s assets. Our portfolios are globally diversified across 4 asset classes: bonds, stocks, real assets, and alternative or complementary assets. This approach has served our clients well, despite the strains of two Bear Markets. All our investment objectives have more than fully recovered from the depths of the Global Financial Crisis. This approach to managing assets also includes a disciplined rebalancing process, periodically trimming winners and buying laggards.

The strength of the U.S. equity markets have exceeded our expectations. As a result, we raised our year-end target for the S&P 500 to 1650-1700. We have also raised our year-end target for the 10 Year Treasury to 2.75% as a result of the recent upward move in rates. These changes have not altered our disciplined approach to investing.

What mistakes do you see individual investors making in the current financial climate?

Clients may not be fully prepared for the longer-term risks that they face regarding longevity. For example, clients are living longer and face the long-term risks of inflation. Despite those risks, clients often focus on short-term movements in markets that distract them from their long-term goals. Some clients continue to hold too much cash, because they remain risk averse. Our job is to provide them with a long-term plan to help them achieve their goals and keep them focused on achieving those goals.

Clients need to be global investors. U.S. equities have significantly outperformed other markets around the world, but that does not mean investors should no longer hold international investments. The global economy is approximately $72 trillion and the U.S. economy represents only $16 trillion of that total. Investors are missing out on too many investment opportunities when they only invest domestically

What trends are you anticipating will most impact investors over the next year?

The biggest impact to investors is the secular change that is occurring with interest rates. For over 30 years, we have seen interest rates in secular decline. The next 30 years appear to be much different. While rates may not spike higher overnight, they should gradually push higher as the Federal Reserve begins tapering its quantitative easing program. The question is no longer whether the Federal Reserve will begin tapering, but when. The Federal Reserve has indicated they plan to begin tapering this year and end by mid-2014.

Investors need to carefully review their portfolios to make sure they are properly positioned for rising rates. They should be asking the following questions: What is the sensitivity of their portfolios to rising rates? Are they taking a more holistic approach to generating income by including other asset classes to generate income? Do they understand that rising rates, while painful in the short-term, should actually be helpful to most longer-term investors?Bruce Dzieza, CEO and partnerWillow Creek Wealth Management825 Gravenstein Hwy. N., Ste. 5, Sebastopol, 707-829-1146, www.wcfsinc.com

[caption id="attachment_78847" align="alignright" width="200"] Bruce Dzieza[/caption]

Have you adjusted your investment strategies in response to economic trends over the past year? Why, or why not?

It is not our policy to adjust our strategies based on economic trends. Our investment strategies are based on academic investment principles, including global diversification and tactical rebalancing. These strategies have paid off handsomely for our clients both during the market drop in 2008 – ’09, as well as during the recent surge in stock prices.

What mistakes do you see individual investors making in the current financial climate?

The biggest mistake we see investors make is not having a clearly articulated long-term investment plan. This mistake seems to be consistent regardless of the financial climate. Stock market bubbles will happen, as will declines such as we experienced in 2000/2001 and 2008/2009. Remaining fearful of these drops happening again is financially unhealthy. A disciplined long-term investment strategy, incorporating global diversification and structured rebalancing, guides the investor through uncertain times ahead of the pack. Markets may or may not sustain another dramatic drop in values, but history has shown that with a little patience markets always rebound.

What trends are you anticipating will most impact investors over the next year?

2013 has been a great year for equity investors. We think equity investors should be cautious about “jumping on the bandwagon” at these market levels. Only an investor willing to take the time to thoroughly understand their personal risk tolerance and who has reasonable expectations on the volatility he or she can withstand should consider increasing equity exposure at this time. Investors need to be cautious about their bond purchases. The recent rise in interest rates has rattled more than a few investors who thought they could hide from equity market volatility in the bond market.Alice King, CEOWine Country Wealth Management, LLC755 Baywood Drive, 2nd Floor, Petaluma, 707-933-1549, www.winecountrywealthmanagement.com

[caption id="attachment_78848" align="alignleft" width="180"] Alice King[/caption]

Have you adjusted your investment strategies in response to economic trends over the past year? Why, or why not?

A big challenge in the current economic environment is counseling the clients who still feel “shell shocked” even though the stock market has essentially recovered since 2008. We are focused more on client education so as to engage the rational sides of their brains and coach them to make good financial decisions, while empathizing with their emotions concerning the economic “roller coaster” of the past few years.

What mistakes do you see individual investors making in the current financial climate?

Some have a tendency to become paralyzed and hesitant to make decisions, because the continuing volatility in the stock market (and the protracted real estate recovery) has them second guessing themselves. We see our role as being their objective “sounding boards” and encouraging them to take a long term view as opposed to reacting to the doom and gloom in the media.

What trends are you anticipating will most impact investors over the next year?

We continue to keep a close eye on all the many factors that affect our clients’ abilities to reach their financial goals, especially their lifestyle in retirement. Of course, this goes beyond how their portfolios are invested, as there are many other variable to consider such as future income tax rates’ likelihood to increase, rising costs of uninsured medical expenses in retirement and options for funding long term care expenses (with fewer insurance companies staying in this business). In the near term, for high income and high net worth clients, we are reviewing tax mitigation and estate planning strategies in light of this year’s income tax increases and Congress’ enactment of the new federal estate tax regime.