The conventional view serves to protect us from the painful job of thinking.
John Kenneth Galbraith, Canadian-American economist 1908-2006
PLANNING COMMENTARY
Galbraith was on to something when he inked the above quote. The conventional view has been called many things- group think, the beaten path and conventional wisdom, to name a few. What we should remember when reading this quote, particularly in these times, is that the conventional view isn’t always the correct view. Taking that a step further you find that the conventional view (many times thought of as rules of thumb in wealth planning) is rarely the best approach when considering one’s specific situation, circumstances and goals.
We have discussed in recent commentary some of the wealth planning strategies we’re using in our clients’ wealth plans that provide significant value to their family in this environment. In many cases these strategies defy the conventional wisdom in a number of ways. What we have found is that a well-though-out wealth plan makes taking the path less traveled not so scary (that thinking leads to the best path for our client). This however, takes thought- and lots of it. We’re preparing more wealth plans than we have in the history of our firm and helping clients find the answers to their questions- not by referring to the rule of thumb, but by developing customized plans that address their specific needs.
On a related note, based on Federal Reserve data, mortgage rates are at (another) all-time low (the 30-year fixed rate is just below 4.6%, although we’ve seen rates lower than this locally). In client wealth plans we’re evaluating whether refinancing makes sense given current mortgage characteristics, financial goals, and cash flow circumstances. Even a decision that seems as simple as whether to refinance a mortgage or business loan typically cannot be made in the best way by following a rule of thumb. There are just too many variables to consider, without a wealth plan, if you want to find your way to the option that makes the most sense for you and your family. We’ll keep thinking about what is best for our client’s in their wealth plans- whether it follows conventional views or not.
MARKET COMMENTARY
Investment markets regained their footing in the month of July, with the S&P gaining 7% (bringing YTD to about breakeven). Developed international markets did even better with the EAFE index earning a July return of about 10 ½%, although still down for the year about 1%. Emerging markets returned about 9% in July and are up about 2% year-to-date.
For the 2 months prior to July stocks had declined amid concerns of a slowing economic recovery and possible “double-dip” back into recession. Such concerns had found their way into headlines in May and June along with other negative news generally, such as the BP gulf oil spill and continuing reform and regulation from Washington DC and other governments.
The positive returns in July may well have been market recognition that the May and June declines had been overdone and created stock valuations that were very attractive as of the end of June. This is exactly what we told clients in communication dated July 14 when we indicated our portfolio changes generally moving about 10% of most client portfolios from bonds to stocks.
We still have a U.S. economy and world economy generally that is experiencing the after-effects of the 2008 credit crisis. Many countries (including the U.S.) now have high levels of debt and budget deficit. Those countries are now trying to navigate the challenging trade-offs between continuing stimulus to support growth and addressing their budget deficit & debt issues. Consumers are saving more and spending less. Companies have rebuilt inventories somewhat, but remain cautious with very high levels of cash on their balance sheets. Unemployment levels remain high and job growth has slowed.
There is some good news. As of July 30, the 2nd quarter earnings had been reported by 336 of the S&P 500 companies with 68% of those exceeding analyst estimates. The S&P 500 price/earnings ratio was 12.5 (on forward earnings) as compared to a 10-year average of 16.1 telling us stock still trade at a sizeable discount to their historical levels.
Recognizing the many challenges and concerns & also opportunities, we at Payne Wealth Partners have tried to use our independent thinking to adjust client portfolios in what we feel is appropriate fashion. Our equity (stock) allocations are now about mid-point in the planned low-to-high ranges. We have significant allocation to emerging markets in both the stock and bond areas (due to our belief in the long-term growth story of those countries).
