Risks to Consider Before and During Retirement

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By Jeffrey Cedarholm, CFP®, ChFC®, CLU®
Chief Investment Officer

Within the last month, we have had two meetings with new clients each of which are planning for retirement. Like many of our clients, neither of the two knew when retirement would begin. At our first meeting, as we discussed risks – specifically investment risks – one of the clients asked “So, how much risk do we need to take in retirement?” While we always complete their planning before providing a specific answer, the general response given to our new clients who ask the question is that you should only take as much risk needed to accomplish your short- and long-term goals. Usually their response guides us into a discussion about what those goals are which will serve as the framework of a customized ongoing plan.

The zinger really came in the second meeting when our client asked “So, what are the risks you see for us in retirement?”  This time I didn’t answer in order to gather my thoughts.  After some time to think, I have concluded that there are many, but four seem to be more prominent than others. They are:

Longevity Risk – Most people imagine their life in retirement at least as good as in their working years, including being economically as well off.  With Social Security and pension income, we know that clients can maintain a fixed source of income, but their lifestyle could suffer greatly if the steady capital inflow from their investments is eroded over time. In our initial planning process, we project lifespans out between 20 – 30 years and much will happen during that time!  The risk is that with ever better nutrition and medical care, retirement lifespans could last well beyond those projections and beyond that investment income.

Healthcare Costs – As a parallel to longevity risk, healthcare costs will continue to rise as we breeze through retirement.  Even if we don’t consider the high rate of healthcare inflation, it is estimated that most retirees will spend between $250,000 and $300,000 on health related expenses, including the cost of long-term care (or the insurance to offset that care).

Investment Risk – Many of the gurus in our profession are preaching of a future with lower returns than have been the average since 1982.  Even though we have had a bull market over the last five years, it has certainly been a reluctant bull.  And after last year’s gains, it appears the market has stolen returns from future years.  With stocks a little on the high side and bonds being very expensive, it is hard to see what will drive returns to their long term averages of 8 -9% over the next 20 years.  Add to that the conundrum of the massive number of baby boomers retiring and the outlook becomes pretty murky, at least based on our historical perspective.

Finally, as I said in the beginning, there are many financial risks for retirees to ponderHowever, the sneaky one, the one few consider is the risk of not enjoying retirement to its fullest because you are worried about all the other risks. A good spending plan, appropriate investing, and ongoing monitoring will go a long way towards mitigating all of these risks.

Jeffrey Cedarholm is the Chief Investment Officer at Longview Financial Advisors, Inc.  He is a CERTIFIED FINANCIAL PLANNER™ practitioner with a passion for investment and wealth management. Jeff can be reached via e-mail at jeff@longviewfa.com.

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Longview Financial Advisors, Inc.), or any non-investment related content, made reference to directly or indirectly in this newsletter or post will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter or post serves as the receipt of, or as a substitute for, personalized investment advice from Longview Financial Advisors, Inc.. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Longview Financial Advisors, Inc. is neither a law firm nor a certified public accounting firm and no portion of the newsletter or post content should be construed as legal or accounting advice. A copy of the Longview Financial Advisors, Inc.’s current written disclosure statement discussing our advisory services and fees is available for review upon request.

1st Quarter Market Letter

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By Jeffrey Cedarholm, CFP®, ChFC®, CLU®

Chief Investment Officer

Only when the tide goes out do you discover who’s been swimming naked.

-Warren Buffet

Don’t you think it odd that market sentiment has a habit of changing with the calendar, or more precisely, from one calendar year to the next?  Other than a tax-year change, which admittedly is a significant change for some, what really changes overnight from December 31 to January 1?  As we go into 2014, our research sources have mostly the same forecast:  a year where returns should be high single digits (8 – 9%) with the U.S. economy stronger, Europe on the road to recovery,  Asia, both developed and developing, having a mixed bag of problems and more market volatility than we have seen in a couple of years.

A wise old market truism says that as goes January, so goes the year.  Unfortunately, back testing data shows this to be correct a high percentage of the time.  So with January over and the S&P down almost 5%, the positive returns may be in jeopardy, but the return of volatility is spot on. Many investors, including some prominent academics, equate volatility with risk, but we tend to view this relationship a little differently.  Human emotions are sometimes slow to turn and where last year’s fourth quarter showed unadulterated greed, it seems the magic of the calendar year change has reintroduced greed’s counterbalance, fear.  Investors knew that our Federal Reserve was beginning to taper its massive quantitative easing program and the initial withdrawal was causing some turmoil in the emerging markets debt and currency markets, but they just kept buying and buying global stocks right up until New Year’s Eve!

As we review portfolios at any time, but especially in last year’s fourth quarter, we do so with the intent of investing any new cash accrued. We typically hold only 2 – 4% cash by design, so this is an endeavor of asset allocation.  Also, we have software that allows us to study our portfolios back tested with the actual assets used in their construction.  With these reviews, the cash percentage numbers were quite dissimilar – about 3% cash we hold on purpose to over 12% showing in our models.  Why such a discrepancy?  Some of our investment managers tend to reverse the greed / fear equation that leads to volatility by accumulating cash as excess greed builds and then deploying that cash as volatility, lower prices and some sanity returns.  This past month has given us a small taste of this smoothing process.

So if we don’t completely agree with many market participants on risk, how do we define it?  Longview really views risk not as volatility per se, but as the “permanent impairment of capital”, a loss so deep that you could not accomplish the monetary life goals you intended.  We view volatility as a necessary reset, where our investment managers get us collectively better values and the investment markets return closer to stable conditions

We wish you all a good investing year and as always, we are very appreciative of your continued confidence.

Jeffrey Cedarholm is the Chief Investment Officer at Longview Financial Advisors, Inc.  He is a CERTIFIED FINANCIAL PLANNER™ practitioner with a passion for investment and wealth management. Jeff can be reached via e-mail at jeff@longviewfa.com.

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Longview Financial Advisors, Inc.), or any non-investment related content, made reference to directly or indirectly in this newsletter or post will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter or post serves as the receipt of, or as a substitute for, personalized investment advice from Longview Financial Advisors, Inc.. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Longview Financial Advisors, Inc. is neither a law firm nor a certified public accounting firm and no portion of the newsletter or post content should be construed as legal or accounting advice. A copy of the Longview Financial Advisors, Inc.’s current written disclosure statement discussing our advisory services and fees is available for review upon request.

4th Quarter Market Letter

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By Jeffrey Cedarholm, CFP®, ChFC®, CLU®

Chief Investment Officer

Just the Facts, Ma’am .

-Joe Friday, Dragnet

This blog post is long overdue, but with the hijinks in Washington during most of October, the quiet time after Halloween going into the end of year Holiday season seems to be a good time for a summary. Most of these letters are about the investment markets, but this deals with the short- and long-term U.S. economic climate. Short is considered 7 -8 years out; long is 25-30 years into our future. In late September, Barron’s published an article entitled Budget Disaster, profiling not what might have been the results on Congress’ scary October shenanigans, but outlining a report published by the non-partisan Congressional Budget Office. On October 25, BCA Research published a similar article entitled It’s Time for a Reality Check.

While both articles discuss the U.S. fiscal short- and long-term outlooks, BCA focuses on the short term. Other than high cost of healthcare in the United States, they are positive on our economic outlook, compared to U.S. historical averages and also compared to our developed country peer group. Their main points are these:

  1. Currently, the United States government spending, as a percentage of gross domestic product (GDP), is in line with historical averages (historical being since World War II). Compared to 21 other industrialized countries, only four have government spending levels, as a percent of GDP, lower than the United States.
  2. Overall, the United States is a low personal tax country, although many of our peer group has a national sales tax. Because of our lack of such a sales tax, we are overly reliant on income taxes. Currently, both discretionary and mandatory federal spending is shrinking, while tax revenue is increasing.

In contrast, the Barron’s article focused on the long-term, and had very little positive to say.  Both articles focused on the negative of the extremely high cost of healthcare in the U.S as compared to our peer group, but Barron’s concentrated on the long term future of U.S. entitlement programs, including the new Affordable Care Act. Our federal debt is currently 73% of our annual economic output and the CBO projects by 2038 it will grow to between 100-190% – well above where Greece was during the recent financial crisis.  Obviously, the demographic of the Baby Boomers retiring and using more healthcare as they age is the culprit. Bill Clinton, in his 1999 State of the Union address, with a rare budget surplus, urged Congress to seize “an unsurpassed opportunity to address a remarkable challenge, the aging of America.”  Obviously, our Congress didn’t seize the opportunity, but simply ignored it. Barron’s goes on to state, fourteen years after that challenge, “…the next decade is the relative calm before the coming storm. Any short-term improvement in the budget during the recent upswing in the business cycle is negligible when measured against looming long-term shocks.”

Both articles concur that the main stumbling block to mitigating these long-term problems, to reforming the existing entitlement programs, is lack of political will in Washington. The fact that we Americans feel entitled to our entitlements makes it that much harder for Congress to make some very difficult choices. In May of this year, Clinton circled back to his comments made years ago.  At an economic conference, he stated that deficit doves are “right in the short run” to continue our current easy money policies. But he then stated that deficit hawks are “right in the long run” to be calling for entitlement tweaks now “to avert a fiscal crisis resulting from soaring debt.”

The CBO’s latest report was published on September 17. At the coinciding news conference, CBO Director Elmendorf stated “We as a society have a fundamental choice of whether to cut back on those programs or raise taxes to pay for them.  So far we’ve chosen to do very little of either.”

So does “just the facts, ma’am” lead into “just the conclusions, ma’am”?  Both reports lead to the conclusion that over the next seven to eight years, our national debt burden will continue to ease, albeit from a currently high level. The research also draws one to conclude that the extraordinary debt we have added to the national balance sheet may not cause extraordinary inflation, although this conclusion seems to be more uncertain.  But both reports warn that this “calm before the storm” will deter the sense of urgency politicians need in order to deal with program tweaks now, rather than waiting until the debt burden accelerates so rapidly that it gets out of control.  (I have the benefit of seeing the graphs of the projected debt – imagine a line like a hockey stick, straight out for a short while, then almost straight up.)

As for the markets, it is very difficult to project out that far into the future with any certainty, but one just has to remember the painful inflation of the 1970’s and the painful markets during that period to understand that the projected extraordinary debt burdens would be a hindrance to good returns.

As always, thank you for your confidence in the team at Longview.

Jeffrey Cedarholm is the Chief Investment Officer at Longview Financial Advisors, Inc.  He is a CERTIFIED FINANCIAL PLANNER™ practitioner with a passion for investment and wealth management. Jeff can be reached via e-mail at jeff@longviewfa.com.

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Longview Financial Advisors, Inc.), or any non-investment related content, made reference to directly or indirectly in this newsletter or post will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter or post serves as the receipt of, or as a substitute for, personalized investment advice from Longview Financial Advisors, Inc.. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Longview Financial Advisors, Inc. is neither a law firm nor a certified public accounting firm and no portion of the newsletter or post content should be construed as legal or accounting advice. A copy of the Longview Financial Advisors, Inc.’s current written disclosure statement discussing our advisory services and fees is available for review upon request.

June 2013 Market Letter

cedarholm condBy Jeffrey Cedarholm, CFP®, ChFC®, CLU®
Chief Investment Officer

It’s Complicated.

Nancy Meyers, 2010

Do you remember, years ago as a child, when you had to go to the doctor?  Usually you were a little scared, or maybe downright frightened, at the prospect of who knows what prods and probes, and heaven forbid, shots that might be coming your way.  The nurse or doctor would always say that it’s going to hurt a little, but in time, it would make you better, or even make you well.  Good grief, many times I didn’t even know I was sick!  Squirming, crying or even hiding were all unsuccessful tactics, and generally, what was supposed to be a calm day turned somewhat volatile.

Now imagine the global economy being sick, and not a little, but a lot.  The Federal Reserve and central banks around the world are pushing the “medicine” of quantitative easing into the system at a rapid rate.  Finally, they see the patient improving enough to just hint that it is time to cut down the dosage if improvement continues.  This is good, right?  Well yes, but certainly uncomfortable.  The slow withdrawal of the stimulus, “medicine” by any other name, also means a normalization of interest rates over the next three or four years.  Again, it is very uncomfortable for the fixed income market, but ultimately good for the patient.  Why is it, that just like a child going to the doctor, the global stock and bond markets can’t see that this is actually good news, and not be quite so volatile?  It’s complicated!

After the financial crisis in 2008, we were all afraid of a market collapse.  Even during the period since March 2009, a slow, choppy bull market, investors were much more concerned about downside risk than upside returns.  While we are now concerned about a bear market in fixed income, at least for four or five years, we are long-term bullish on global equity markets.  And while it may be uncomfortable short term, this pull back in the stock markets will provide us with lower prices and higher expected future returns.  Over the past weeks, we have sold those fixed income holdings that we thought would depreciate the most in a rising rate environment.  Most of this money has been held in cash, awaiting the trip to the doctor and the inevitable volatility that would follow.  As prices fall, we intend to follow Warren Buffett’s advice about being greedy when others are scared.

So it’s uncomfortable and complicated.  Usually, so are trips to the doctor! As always, thank you for being clients and your continued confidence in the Longview team.

Jeffrey Cedarholm is the Chief Investment Officer at Longview Financial Advisors, Inc.  He is a CERTIFIED FINANCIAL PLANNER™ practitioner with a passion for investment and wealth management. Jeff can be reached via e-mail at jeff@longviewfa.com.

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Longview Financial Advisors, Inc.), or any non-investment related content, made reference to directly or indirectly in this newsletter or post will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter or post serves as the receipt of, or as a substitute for, personalized investment advice from Longview Financial Advisors, Inc.. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Longview Financial Advisors, Inc. is neither a law firm nor a certified public accounting firm and no portion of the newsletter or post content should be construed as legal or accounting advice. A copy of the Longview Financial Advisors, Inc.’s current written disclosure statement discussing our advisory services and fees is available for review upon request.

April 2013 Market Letter

cedarholm cond“And one other thing: you have to be willing to look wrong for a while.”                                                        -Howard Marks, Oaktree Capital

By now, most of you know when it comes to investing, we generally prefer active fund managers as opposed to passive, or index investing.  Sometimes index funds work very well, such as the phenomenon of low volatility investing. And then there is the argument that index funds, usually in the form of exchange traded funds (ETFs), are less expensive and more tax efficient.

But as allocators of risk capital, yours and our own, it makes sense to study long term, high performing investment managers (or better yet, management teams) and compare them over time to their respective index.  Markets usually move on three things: 1) global economic conditions, 2) corporate valuations and 3) investor psychology.  It is at market tops and bottoms, when the “greed and fear” factors of investor psychology are at their greatest, that we see the most value being added by active managers.  As markets go up, well, let the good times roll! And as they fall, well, things are bad and will never get any better.  Indices mirror this human behavior, but good managers usually don’t.

It’s not news to any of you that the U.S. markets have been on an incredible bull run, both last year and through the first quarter of this year.  This is despite a lackluster U.S. economy, which generally has been the best performing in the developed world.  Our research leads us to conclude that our market has gotten ahead of itself, overbought, so to speak, and needs to rest.  As I write this on April 5th, the jobs report widely missed the economic consensus forecast, so we are seeing the beginning of a pullback and the return of some volatility.

Some of the managers we employ stay fully invested during a downturn and use the volatility to either add to existing positions at lower prices or to pick up new bargains. But some, like the management team of First Eagle Global, slowly raise their cash position as the markets climb.  The primary reason for this is that as the markets get more expensive, the higher prices conflict with their discipline and they can find nothing to buy that meets their value criteria.  It is not unusual to see their cash allocation at 20 -25% of their asset base at a market top.  This strategy of being disciplined buyers slows their returns slightly as markets reach for a top, but it also gives them a natural cushion as markets retreat. It also gives them plenty of “dry powder” to use as bargains become available in a lower market.  This strategy is one that has worked well for them for over thirty years, and is most “un – index” like, but tends to smooth the jagged tops and bottoms of the market.

We know that index funds, whether they cover a broad market index or a tiny sliver of an individual market sector, are a daily reflection of the markets’ progress.  This must be correct because it presents a summation of not only global economic health and individual corporate health, but also a snapshot of the underlying investor sentiment that day.  Yet we also know that our active managers have choices:  they can choose to hold what they consider are the best stocks or bonds, or can hold abundant cash if need be.  Because of these choices, good active managers tend to outperform over long periods of time, and often do so with much less market risk.

In closing, if we go back to Howard Marks’ quote about “looking wrong”, we often do.  We are willingly to “look wrong” sometimes in order to achieve good long term results with less risk.  As always, thank you for being clients and for your continued confidence in the Longview team.

Jeffrey Cedarholm is the Chief Investment Officer at Longview Financial Advisors, Inc.  He is a CERTIFIED FINANCIAL PLANNER™ practitioner with a passion for investment and wealth management. Jeff can be reached via e-mail at jeff@longviewfa.com.

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Longview Financial Advisors, Inc.), or any non-investment related content, made reference to directly or indirectly in this newsletter or post will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter or post serves as the receipt of, or as a substitute for, personalized investment advice from Longview Financial Advisors, Inc.. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Longview Financial Advisors, Inc. is neither a law firm nor a certified public accounting firm and no portion of the newsletter or post content should be construed as legal or accounting advice. A copy of the Longview Financial Advisors, Inc.’s current written disclosure statement discussing our advisory services and fees is available for review upon request.