"So what do we do? Anything. Something. So long as we just don't sit there. If we screw it up, start over. Try something else. If we wait until we've satisfied all the uncertainties, it may be too late.”
Lee Iacocca, Business Leader (former Chairman of Chrysler) and Author
We selected the quote above for this month’s commentary because in our economy, in the investment markets and in planning for our clients’ financial future we are constantly faced with uncertainty. Our goal is to overcome the fear that uncertainty often creates, and then seize the opportunities it presents.
Uncertainty has always (and will always) be present for each of us when planning for the future. What makes the difference is how you approach that uncertainty in the decisions you make today and how that changes the results you see long-term.
We have been performing tactical Roth IRA conversions for a number of clients when their particular circumstances call for it. What makes this opportunity so appealing is that lower market pricing allows for conversion of securities at a lower tax cost; any prospective appreciation in these securities enjoys tax-free treatment in the Roth IRA. Action is what allows this to occur. Without action, the best you can do is look back at opportunities missed.
Uncertainty about the direction of our economy (and fear of another recession), uncertainty over whether Congress would raise the debt ceiling and begin to seriously address our budget deficits, and uncertainty hanging over Europe in regards to their debt problems have led to increased nervousness in the financial markets. As is typical in uncertain times, bonds have been a safe-haven and have helped to reduce volatility in diversified portfolios. This relationship can be seen in the chart below.
Financial Market Indices
Last 3 Months
Year to Date
Last 12 Months
S&P 500 TR (US Stocks)
MSCI Developed EAFE (foreign stocks)
MSCI Emerging Mkt. Equities (emerging country stocks)
Barclays Capital Aggregate Bond – Intermediate Term
Barclays Capital Municipal Bond Index
We believe the recent weakness in stock markets around the world created an opportunity for long term investors. Thus, in early August we made a tactical adjustment by moving 5% of portfolios into a combination of large cap growth stocks and emerging market stocks. Money to fund these purchases came from the complete sale of a long/short fund and the partial sale of an emerging market bond fund. We have also been busy over the past few weeks rebalancing portfolios back to their asset allocation targets. With the recent sell-off in the equity markets, stocks had become slightly underweight and bonds slightly overweight in portfolios versus their strategic target levels.
We would never try to call a market a market bottom, but we do believe that high quality growth companies are fairly priced when looking at various valuation ratios. The S&P 500 index is trading at a Price/Earnings (P/E) ratio of about 10 times forward earnings estimates and at close to 12 times trailing earnings. Both these valuation measures show that US stocks are very cheap relative to their long-term historical averages. For example, the 15 year average P/E ratio is 17 times earnings. (Note: the lower the P/E ratio, the cheaper stock prices). We see similarly attractive valuation opportunities in emerging market stocks too.
At Payne Wealth Partners we encourage our employees to academically challenge themselves and strive to obtain the highest levels of professional designations. With this principle in mind, Terry Prather has recently earned the CERTIFIED FINANCIAL PLANNERTM certification which signifies his completion of extensive education, examination, experience and ethics requirements in the financial planning profession. Often referenced as the gold standard in the industry, the CFP® certification exam is a rigorous, 10 hour comprehensive test in the areas of retirement planning, estate planning, investments, income tax planning and insurance.
Terry is the fifth professional at Payne Wealth Partners to achieve the certification. Team members Taylor Payne, Chad Sander, Ann Pendley and Perry Moore are also CFP® certificants.