Before anything else, preparation is the key to success.
Alexander Graham Bell, inventor 1847-1922
MARKET COMMENTARY
In October, U.S. stocks as measured by the S&P 500 returned 3.8% representing about one-half of the year-to-date return of 7.8%. Developed international markets had a similar October return of about 3.6%, although their year-to-date return of about 5% is not as strong as in the U.S. Emerging markets enjoyed October gains of 2.8%, but still are the year-to-date equity return winners at about 12%. October’s equity gains can be at least somewhat attributed to the market’s expectation that further quantitative easing by the U.S. Federal Reserve will be good for stocks.
Investment grade bonds in the U.S. returned about .7% in October, bringing their year-to-date returns to parity with U.S. stocks at 7.7%. Expectations going forward for bonds are now tempered with the concern that present low yields and quantitative easing will combine to result in upward pressure on bond yields and downward pressure on bond prices and returns.
Returns on both stocks and bonds in the U.S. of about 8% for the first 10 months of 2010 likely exceed investor expectations going into this year, and this all leaves everyone with the question of how to position portfolios going forward. In this we must concentrate on proper preparation. At Payne Wealth Partners we have certain key investment themes for the long-term, however we also must recognize the possibility, or maybe even probability, of short-term volatility to the downside. In the short-term we feel investors must be prepared for possible negative market reaction due to:
• Disappointment if the Fed’s quantitative easing program is smaller or more tentative than expected
• Discouragement with election results or actions by Congress and the White House for the remainder of 2010 and beyond
Still, to us the long-term themes apply. Those key themes should guide how portfolios are constructed, and any significant volatility in the short-term should be viewed as an opportunity to reposition portfolios to further address the long-term themes. These themes include:
1. Emerging market economies will continue to grow more strongly than the rest of the world.
2. Emerging market currencies will have long-term strength against slow growth, debt-burdened developed markets.
3. Active mutual fund managers can add substantial value as they find those companies that will be the winners in a world that rewards winners and punishes losers more than ever before.
Our guidance to investors and to ourselves: be prepared for short-term volatility, but use it as opportunity to position for maximizing long-term returns.
PLANNING COMMENTARY
As election day nears, there are numerous financial concerns among U.S. citizens related to income taxes and/or estate taxes and, more specifically, how any changes will affect each family’s financial future. A recent Wall Street Journal article titled Key Tax Breaks at Risk as Panel Looks at Cuts details several income tax benefits rumored to be at risk due to the deficit commission’s goal to balance the federal budget by 2015. Potential recommended cuts include the mortgage interest deduction, the child tax credit and the ability of employees to pay health insurance premiums using pretax dollars. These possibilities – along with the looming departure of the Bush tax cuts which would affect not only ordinary income tax rates but also long-term capital gains and qualified dividend income – may cause significant increases in income tax rates in the near future.
When considering how all these possibilities relate to one’s personal financial situation, what wealth planning strategies should (and should not) be considered in light of these (and other) potential changes? What if tax rates do not increase- how can we concurrently be prepared for this possibility? We continue to work to help our clients understand the impacts that legislative changes have on their overall financial goals as they occur. More importantly, all of the continued uncertainty speaks to how important being prepared for all the possibilities is to successful completion of long-term goals. For example, the mixture of assets one creates and manages on their balance sheet as it relates to taxes (taxable, tax-deferred, tax-exempt, etc.) is a critical tool in remaining prepared for change and must be managed continuously as it relates to one’s goals and circumstances.
The best way we’ve found to accomplish this is to continue updating our clients’ personal wealth plans at least annually and make continuous recommendations to adapt. It’s one thing to react to happenings, it’s another entirely (and of much greater value) to proactively address potential changes and be prepared in advance. We’ll continue to provide our best guidance so that our clients can remain prepared for these many uncertainties.
