2014 Second Quarter Client Commentary

 “Fortune favors the bold”
– Virgil
(Roman Poet)

Courage & Boldness = Great Dividends 

As we think back over the five years that have passed since the depths of the financial crisis there are many instances in which boldID-100230615 action led to very significant differences in a family’s ability to meet their financial goals prospectively.  At the peak of financial stress, we often identify the greatest of opportunities although in days that decisions must be made it can feel as if it is madness!  In hindsight, however, we know that these actions make excellent sense and pay great dividends, but it takes courage and boldness to execute them.

For instance, performing Roth IRA conversions in the middle of 2009, after the investment markets had declined to their lowest points, felt as if you were only making a tough financial situation worse.  Investment account balances were down.  Home values were in the tank.  Job security for many was in danger.  Businesses were trying to come up with enough cash to meet their obligations for the year.  On top of all that, you voluntarily create additional taxable income (and consequently tax to be paid) by performing Roth IRA conversions?!

From an emotional standpoint this made little to no sense; in the moment it does not feel bold, it feels crazy.  However, from a finance and logic standpoint it made all the sense in the world!  To summarize, when you move securities from a taxable account to a tax-free account while values are low, you pay a smaller amount of income tax and get the same holdings in the Roth IRA to grow tax-free in the future.  The bottom line is that you must be willing to overcome the emotional fear driven by the events around you (be bold) and then act.

For those that did this (and many other smart things) over the past five years as the economy, tax law, geopolitical landscape and everything else about this world changed dramatically, they and their families are now reaping the rewards.  In the future, there will be more periods of strain and extremes and the key will remain to be bold and seize the opportunities these windows create.

Posted: April 4, 2014

Authored by: N. Perry Moore, CBEC™, CFP®, ChFC®

Direct Phone: 812-602-6306

Email: npmoore@paynewealthpartners.com

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Taking Risk -Taking Action



Our quote this quarter, “Fortune favors the bold,” alludes to taking risk and taking action…which are central elements of investing. If you think back five years ago to March 2009, we were in the midst of the great recession, the global economy was in utter chaos, banks and insurance companies were failing, and central bankers around the world were scrambling to add liquidity to a crumbling financial system. ID-100236047Many, who could not look past the mess of the day, were selling their stock holdings in favor of less-volatile government bonds or 90 day Treasury Bills. But for the “bold” – those investors who were patient and kept a long-term perspective, or those investors who were willing to re-balance their portfolio away from the perceived safety of bonds and T-Bills in favor of holding an appropriate allocation to the equity markets – “fortunes” have been recovered, and/or created.

When we look at actual returns in the chart above, the U.S. equity markets have seen significant gains over the past five years with the S&P 500 index generating an average annual return of 21.2%. The international equity markets have been a little slower to recover from their lows, but gains have still occurred. Over the past 5 years, the average annual return from foreign stocks was 16.6%, and the average annual return from emerging market stocks was 11.9%.

Based upon our research and the research of others in whom we have confidence, we continue to believe in the long-term investment potential of emerging market stocks. Some may think we’re being “bold” with this positive long-term outlook. However, given the advantage of higher economic growth prospects from emerging market countries over the U.S., Europe, and Japan, we think it is appropriate to have a significant allocation to the stock markets of Latin America, Asia, and Eastern Europe. Admittedly, these markets have disappointed us by under-performing our U.S. investments over the past five years, but we believe there are compelling reasons to stay the course and maintain our investment positions, such as:

  • Higher projected economic growth prospects. For example, China’s economy is forecasted to grow by roughly 8% this year, which is four times the expected growth rate of the U.S. economy.
  • Better demographics to support economic growth. In general, emerging markets have a younger workforce that is experiencing an increase in wealth. On the other hand, most developed markets have a higher percentage of their population past the age of 65; thus, beyond their peak earning and spending years.
  • Emerging market fundamentals have improved considerably since the late 1990’s. In general, when compared to 15 years ago, many emerging countries have relatively low levels of debt, more robust financial sectors, greater-access to capital markets, and, in some cases, significant foreign currency reserves. These factors help to better insulate emerging economies from financial shocks.
  • Price matters, and, based upon traditional valuation measures, emerging market stocks are cheap relative to both their history and to developed markets. Using a price-to-earnings ratio (P/E), emerging market stocks were recently trading at a little over 10x earnings which is a significant discount to their long-term average. The S&P 500 index is currently priced closer to 15x earnings. (Note – the lower the P/E number, the cheaper the stock market.) We believe there is more pessimism built into today’s pricing of emerging markets than is warranted by the fundamentals. Historically, similar discounts have produced strong relative returns in future years.

Posted: April 4, 2014

Authored by: Chad A. Sander,CFP®

Direct Phone: 812-602-6302

Email: casander@paynewealthpartners.com

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The information in this material is only as current as the date indicated, and may be superseded by subsequent market events or for other reasons. While all information prepared in this document is believed to be accurate, any statements of opinion constitute only current opinions of Payne Wealth Partners, Inc., which are subject to change and which Payne Wealth Partners, Inc. does not undertake to update. Accordingly, you should not put undue reliance on these statements. The information does not attempt to examine all the facts and circumstances that may be relevant to an individual’s financial needs. Payne Wealth Partners, Inc. is not soliciting any action based on these statements.

Contact Our Offices

Payne Wealth Partners, Inc.
Keystone Financial Consulting
601 N Cross Pointe Blvd
Evansville, IN 47715
Phone: 812-477-6221
Toll Free: 888-477-6221
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