The oldest Millennials are hitting an inflection point — what should they be thinking about as they begin to grow their wealth, make partner, and get promoted?
They say that if you hear something once, it is an interesting anecdote. If you hear it twice, it could be a coincidence. But if you hear something a third time, you should pay attention. The topic of our piece originated from a situation exactly like this. Over the past month or so, we have had a number of mid-thirty somethings bring up the same discussion about how to handle their emerging wealthy status.
Every day investors accept unknown and potentially far-reaching economic and geopolitical risks. Watergate, OPEC’s embargo, the Gulf War, 9/11, Russia’s credit default, and the U.S. Debt downgrade are some historic examples that come to mind. More recent threats include acts of terrorism, an unforeseen foreign policy or major trade dispute, and a widespread cyber breach or disruption to the nation’s power grid.
Equity investors entered 2016 with low expectations. Nine months later, markets are just shy of all-time highs. Year-to-date gains of 8% for the S&P 500, 4% for the MSCI All-World index, and 6% for the Barclays Aggregate Bond index have pushed us to these near record levels. After a greater than 10% correction to start the year, and the quick drop and pop from the Brexit vote, markets have steadily trended higher, including a historically calm two-month stretch in the summer without a 1% or greater daily swing. Income-focused investors, in particular, have experienced solid capital appreciation as fears over rate hikes gave way and the rush to buy stocks with relatively attractive yields went into another gear. Our dividend-focused clients have enjoyed this 2016 tailwind.
Yet, despite these gains, Wall Street and most investors are far from euphoric. Participation remains rather narrow with many companies still far from their highs. The market has been more interest-rate sensitive than earnings driven, and negative sentiment has kept investors defensively positioned. Love or hate this bull market, the question is “What to do from here?” On the following pages, we share our views, including highlighting some developments about which we worry and get excited. The worry side of the equation seems disproportionately weighted toward policy and leadership risks. The excitement side is rooted in frequent proof that individuals continue to innovate creating improvements to existing and exciting new companies in which to invest. Or, as President George Washington more eloquently put it “a people… who are possessed of the spirit of commerce, who see and who will pursue their advantages may achieve almost anything.” Thus, we continue to believe a diversified portfolio with exposure to equities that will participate in the upside from these pursuits makes sense for long-term investors.
In early August, the IRS issued a proposed rule that effectively ends the practice of “valuation discounting.” For example, say that ownership interests in a privately held business are estimated at a fair market value of $100 (typically as determined by a third-party valuation expert). While that may represent a fair market price, in the case of illiquid assets such as closely-held businesses, there is not a fair market available. As a result, the interests are typically discounted 30–40% to account for this lack of liquidity, along with the sometimes limited rights of a minority ownership stake. For estate planning purposes, that $100 interest is carried on a person’s balance sheet for $60. This lower valuation is then used as the basis to determine annual exclusion gifting levels and lifetime exemption planning.
The first half of 2016 proved yet again investors can expect the unexpected. After the worst start to a year ever in January, just about everyone concluded 2016 would be the year for a long-anticipated market correction. We were seven years into a bullmarket, the Federal Reserve needed to tap the breaks on the “easy money,” and the global leadership stage in this exceptional period of history was looking rather sparse. Fast forward to the 2016 mid-way point and the S&P 500 has gained a respectable 4%. The MSCI all-world index is up 1%. Emerging markets are still down for the year, but there have been pockets of strength including Brazil’s 46% increase despite the Zika threat.