Year's end is neither an end nor a beginning but a going on,
with all the wisdom that experience can instill in us.
Hal Borland, American Author (1900-1978)
PLANNING COMMENTARY
For many, year end is a time to reflect on the past 12 months- accomplishments, failures and significant events. More importantly it is also a time to focus on the future and what opportunity it holds. Wisdom, of course, often comes from not only learning from past failures and experiences but acting on them when finding the courage to make difficult decisions about our future.
For the planning community, 2010 was a tumultuous year- last minute income and estate tax changes, a fluctuating landscape surrounding IRAs and Retirement Plans, persistence of the lowest interest rates seen in a generation or more and widespread uncertainty characterize the year. These experiences have reminded us that we face an ever-changing world that constantly presents new challenges and opportunities. The importance of timely action will certainly become more and more valuable as a result.
The first baby boomers will file for Medicare benefits next year amid a struggling economy and record deficits. The Social Security system will soon face its own form of bankruptcy and this eventuality is being accelerated by our leaders’ decisions (for example, Social Security taxes collected in 2011 will be decreased from 6.2% to 4.2%). What used to be reliable high single or low double- digit returns from a portfolio to support one’s planned spending will likely be much less now due to a multitude of issues.
This all means we face great challenges but will enjoy greater rewards for making decisions about what is in our control. Consistently saving toward an important financial goal will help avoid having to make drastic changes to those goals in the future. Being smart about allocation of resources on a balance sheet amongst various asset options (example IRA versus Roth IRA) will reduce the impact felt due to tougher tax obligations in the future. Keeping an eye on future goals and consistently reevaluating them to adjust for changing circumstances provides a methodical process to accomplish those goals over one’s lifetime.
Instead of acting as the end or beginning, this New Year’s period should reenergize us all to continue striving to seize opportunities that better our families’ futures.
MARKET COMMENTARY
As we look back on 2010 the view shows a U.S. stock market that returned about 15% for the year (as measured by the S&P 500 stock index). The broad U.S. bond market returned about 6% in 2010 (as measured by the Barclays Capital U.S. Aggregate Bond index). There are many other markets that also did pretty well in 2010, including developed international stocks (EAFE index up 7% in 2010) and emerging international stocks (Emerging Markets index up 17% in 2010).
Although 2010 started off in positive fashion, markets worldwide deteriorated in the middle of the year as worries about another possible dip back into recession dominated headlines. A variety of European sovereign debt problems added to these concerns. In the fall the U.S. Federal Reserve stepped on the gas with their QE2 program to purchase U.S. Treasury debt and markets saw this as a reason for financial assets to increase in price. Although double dip concerns eased, we saw concerns about inflation combined with strengthening economic forecasts to pressure fixed income (rising interest rates are generally bad for fixed income holdings).
As we look forward it is important for us all to remember that the issues that came to a head in the 2008 credit crisis are still not resolved. Major areas of potential future problem include continuing high U.S. budget deficits (and resultant increases in debt as a percentage of GDP) and even worse debt problems in many European countries. These problems are a natural outgrowth of governments stepping in to support the private sector in the 2008 credit crisis. We are also faced with the demographic problem of the first wave of baby boomers (born between 1946 and 1964) beginning to turn 65 in 2011 and the increased demands that this generation will make for retirement and medical entitlements.
We continue to counsel others (and ourselves) to follow a disciplined investment policy allocation, while at the same time looking for tactical opportunities as certain areas reach extreme levels of overvaluation or undervaluation. It is somewhat concerning to hear the market “experts” from so many different firms discuss their positive view of 2011—makes us think people may be getting too optimistic in the short-term.
CONCLUSION
We look back on 2010 somewhat fondly, as a year of partnering with our clients to some successes in both the areas of investments and planning. We see much to look forward to in 2011 but also recognize that many challenges lie ahead. As always we are grateful for you, our client, and the trust you place in each of us and our firm.
