Friday, July 16, 2010

June 2010 Marketing and Planning Update (Posted to our blog two weeks after sending to clients.)

The greatest enemy of a good plan is the dream of a perfect plan.
Carl von Clausewitz, Prussian military leader, 1780-1831

As with prior letters, this letter will address both planning and investment market issues. At Payne Wealth Partners we believe proper handling of both planning and investments is important for clients to best achieve their goals.


On May 20 we blogged about the opportunities that these unusual market and economic conditions continue to present to us in wealth planning for our clients. To the pessimistic observer it would be easy to conclude that investment market and economic weakness is entirely bad. As wealth planners we’re concentrating on the opportunities these conditions present in the form of planning strategies that maximize the legacy our clients can leave to future generations.

Roth IRA conversions are one way in which we are taking advantage of market weakness. When an account owner converts IRA assets to a Roth IRA when the assets are trading at lower values, there is a smaller amount of resulting tax due for conversion of the same assets. Second, there is a greater chance that any subsequent market improvements will occur inside the tax-free Roth IRA (after conversion).

Additionally, this is one of the most attractive times in recent history to implement wealth transfer techniques such as Grantor Retained Annuity Trusts (GRAT) and Intentionally Defective Irrevocable Trusts (IDIT). While the federal estate tax is still in limbo there are very few experts that believe Congress will settle on no estate tax. In light of this realization, there is continued need for those with sizeable balance sheets to timely implement strategies such as “GRATs” and “IDITs” that permit transfer of excess wealth to future generations. Wealth identified as excess through our wealth planning process that is transferred to future generations via GRAT or IDIT techniques reduces the cost of estate taxes that could take 50% or more from beneficiaries in the future.

To expand on the quote at the beginning of this letter, a well-thought-out and deliberate plan may not be perfect but it is certainly better than no plan. This well-thought-out planning process is what allows us to identify opportunities for our clients even in tough times. Only with the basic building blocks of a comprehensive wealth plan can we (acting as a team with our client’s other advisors) provide the highest level of guidance and advice on these complicated issues.


The first one-half of 2010 has turned south in both economic and market terms, amid worries of a dip back into recession in Europe and other parts of the world. China, a key driver of world growth, has taken several policy steps to cool a potential bubble in residential real estate but those same steps have led to concerns that China’s economic growth could fall short of the once expected 9% for 2010.

For the quarter ended June 30, 2010 the S&P 500 Index return was a negative 11.4% bringing the first one-half return for 2010 to a negative 6.7%. China, with a 23% loss in the second quarter, led the MSCI Emerging Markets Index to a down 9.1% for the second quarter and 7.2% loss for the first six months of 2010.

With the decline in stock prices has also come a decline in the interest yields on the 10-year U.S. Treasury (now 2.9%) as investors are shift money from stocks into treasuries, somewhat like they did in late 2008, early 2009. The yield on stocks, measured by the S&P 500 has now risen to 2.1% and is 72% of the treasury yield. The higher this percentage relationship, the better value stocks are as compared to treasury bonds (note the peak of Fall 2008 and Spring 2009 in retrospect was a good time to buy stocks). See the chart below for some historical perspective.

Certainly stocks may continue their decline as confronted by economic challenges, however we feel the long-term investor should recognize the value proposition of stocks at this level and consider when to begin increasing their allocation to stocks. Payne Wealth Partners is actively following market activity and considering at what point we will increase our stock allocations (as a reminder stocks as a percentage of client portfolios are presently near the low end of our ranges). Just like the quote at the top of this letter, we don’t want to be frozen by waiting for the “perfect” time to increase stock allocations.

These are challenging times, no doubt. Please rest assured that Payne Wealth Partners and each of us on the professional team will continue to do our very best for you.