Stocks, Bonds, Emerging
Markets and Tax Tips
BY
PATRICK BRADY, CRPS®, AIF®, UMA
A
FINANCIAL SERVICES
S WE NEAR THE end of the year, I thought it would be
a good idea to reflect on how far we’ve come this year.
And we really have come quite a long way.
I don’t want to overwhelm you with too many numbers, so
let’s look at just three asset classes listed below. These three have
been in the news a lot during the year and I thought it would be
useful to add some perspective on why one is way up, while the
other two underperformed.
We are talking about U.S. stocks (light blue bar, chart 1),
U.S. bonds (orange bond bar, chart 1) and emerging market
stocks (dark blue bar, chart 1). We’ll represent their respective
performance with the Russell 3000® Index; the Barclays U.S.
Aggregate Bond Index; and the Russell Emerging Markets Index.
Chart 1
U.S. STOCKS POST IMPRESSIVE GAINS
The first thing to note is what a strong year U.S. stocks are
having so far. Year-to- date through July 31, 2013, the Russell
3000 Index is up over 20%. This is especially impressive when
you consider that the economy has—for the most part—been essentially stuck in neutral. Growth hasn’t materialized as quickly
as we would have hoped. However, that has not held back the
U.S. equity markets.
As Floyd Norris of the New York Times recently noted in his
Off The Charts column, U.S. companies are now more profitable
than ever.1 This may help explain some of the strong performance in U.S stocks this year. But there is more to the story.
His thought-provoking analysis reveals that while companies
are enjoying record profits, workers are actually falling behind.
Recent revisions by the government showed that personal wage
and salary income hit an alltime low of 42.6% of GDP
in 2010, and then again in
2012. What’s more, U.S.
companies are paying historically low corporate
taxes, also adding to their
profitability. Add to this the
effects of the Federal Reserve’s easy money policy
and you can see how the
markets have been factoring in all this complex data
into the current valuations
of U.S. companies.
STOCKS | continued on page 18
UTAHPHYSICIAN 17
Still the Greatest Profession.
December • January 2014
Markets really are efficient. And the performance
of U.S. equities is proof
once again why it is so difficult, if not impossible,
to out-smart the markets.
Here’s something to consider: it is not necessarily
STOCKS | continued from page 17
year-to-date standpoint. In this case, as with bonds, how you feel
about their underperformance is really a matter of perspective.
We know, for example, that when you hold a diversified
portfolio with a mix of asset classes and investment styles, there
will be winners and losers. But successful long-term investors
understand this. It’s a fact of life for all investors and it is why we
diversify in the first place.
So why have emerging markets performed so poorly, posting a -2.3% year-to-date return? It seems that everything that
could
go wrong with this asset class has gone wrong in 2013.
Brazil, Egypt and Turkey, for instance, have seen their share of
political unrest this year and each is part of the broad Russell
Emerging Markets Index.
the strength of the economy that moves the market, but rather
the changes in the economy that moves the markets. And the
markets have been obviously anticipating some kind of change
for some time now.
U.S. BONDS ARE OFF SLIGHTLY
As you can see in the chart on page one, bonds have lost some
ground recently, but we still believe they have an important diversifying role to play in balanced portfolios. Now some folks
might look at that chart and compare U.S. stocks to U.S. bonds
and ask why should they own any bonds at all?
The answer is simple, really. No matter how much we think
we know about the markets, none of us are very good at predicting the future. That is why we preach diversification in the form
of stocks, bonds and alternatives like emerging market stocks,
commodities and other investments that tend to move in different
patterns in relation to each other. Keep in mind that diversification doesn’t assure a profit or protect against loss
The fact that bonds are underperforming stocks right now is
actually how a diversified portfolio is supposed to work. In fact,
after the recent theatrical tantrum by the United States Congress
of the debt ceiling and budgets, most economists think the Fed
will keep interest rates at very low levels through 2015. And we
still believe that. What’s more, we continue to believe that skilled
active bond managers can find opportunities and add value by
balancing the equity volatility of a total portfolio and providing
income in the form of dividends.
Yes, interest rates may eventually move up. But most investors still need the counter balance that bonds can provide to
stocks. So stay diversified and stick with the long- term investment plan that you and your advisor have agreed to.
EMERGING MARKETS: THE BIGGEST LOSERS
Okay, next up we have emerging market stocks. A quick look
at Chart 1 at the beginning of the article, shows that emerging
market stocks have been the biggest laggards of the bunch from a
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Another problem facing some emerging market countries is
the strength of the U.S. dollar. In the case of a country like China
that “pegs” or ties their currency to ours, a rising U.S. dollar can
be a detriment. That’s because these countries see their interest
rates rise as their central banks sell foreign reserves to maintain
the currency pegs. It’s another reason why it’s so important to
diversify globally—because a good economy for the U.S. doesn’t
necessarily translate to a good economy in every market around
the world. Once again, we can see why balance is so important
when it comes to investing.
Our investment partners at Russell Investments believe
emerging markets offer good value today. They also think they
could rebound in the medium-term as the goods they export become more attractive to developed economies like the U.S. and
Europe. This will occur if emerging market central banks allow
their currencies to depreciate against a stronger U.S. dollar.
It’s important to remember that emerging markets can be a
volatile asset class, but they can also offer real opportunities for
long-term investors who can look past any short-term uncertainty
and focus on future potential. We think the best way to do that
is to include
a small portion of emerging market investments in
a globally diversified portfolio and commit to it for the long-term.
GET A JUMP ON TAX SEASONS
It may seem crazy to talk about taxes when we haven’t even
said goodbye to summer, but let’s give it a try. We’ve assembled a
few ideas you may want to consider that could save you (or someone you love) some time and money in the long-run.
1. Fund a Roth “Conversion” IRA—for you and your spouse,
saving for retirement is something we can all relate to and it’s
a universal must for all of us. For the 2013 tax year, physicians who do not fit the income requirements for a traditional
Roth IRA (check with your tax professional or financial
advisor) can fund Roth “Conversion” IRA up to the $5,500
contribution limit ($6,500 if you’re at least 50 years old by
December 31, 2013). Also, funding a regular Roth IRA for a
child or grandchild is a great way to give a recent college grad
a head start on saving, with decades of additions and growth.
Just be sure the recipient meets the income requirements.
You have until April 15, 2014, to fund an IRA for the 2013
tax year.
The Bulletin is now the Utah Physician
Vol. 60, No. 5
October | November 2013
Still the greatest profession.
2. Federal energy tax credits are set to expire at the end of
2013—so now is the time to upgrade. Credits through the
Energy Star program may apply to a new furnace, windows
and doors, insulation or when you make other energy-friendly improvements to your home. You can save 10% of the
cost (up to $500) on an existing home that is your principal
residence. Learn everything you need to know at www.energystar.gov.
The Duty to Report –
a Physician’s Guide
UTAHPHYSICIAN
DECEMBER | JANUARY 2014
3. Know where your stand on capital gains—and losses—so
you and your advisor can make any necessary adjustments as
the year comes to a close. Your advisor can help you determine if it makes sense to offset any potential capital gains
you may have with capital losses. At that time, your advisor
may also want to review your investment policy, financial
plan and asset allocation to make sure your investments remain on track with your goals. n
Still the Greatest Profession.
The Himalayan
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PAGE 8
For additional help in deciding which tax strategy applies to you, please
speak with your UMAFS financial advisor or visit with a qualified tax accountant.
www.utahmed.org
ROBOTICS SURGERY
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Specialists in financial
planning for physicians.
No one knows the financial needs of physicians like
UMA Financial Services. Established 20 years ago to
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UMAFS is one of the most valuable benefits of your
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UMAFS has helped numerous physicians achieve their
goals. We can help you too. Take the next step and
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December • January 2014
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Still the Greatest Profession.