Probabilities Are Just That!

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

Chief Investment Officer

Sometimes it’s nice to take the time on a weekend to just sit and read the newspaper, something fewer Americans seem to do these days, either because of lack of time or interest, or both.  But this past weekend, as I perused the paper, I came across two relevant articles on the same page. The first to catch my eye was an article written by Jason Zweig about his recent conversation with Robert Schiller. You might remember Schiller from my last blog; he is the economist who has developed the “cyclically adjusted price/earnings ratio” or the CAPE ratio for short. This ratio is widely used by investors to determine whether the S&P 500 is over or under valued, compared to historical values dating back to 1871. Lately Schiller says the ratio, at almost 26, is above the long-term average of about 16. The thrust of Zweig’s interview was to question Schiller about the recent market volatility and whether it might be time to cut back on equities. At Longview, we feel the recent pullback is a normal part of owning equities, and that five to ten percentage downdrafts are usually a healthy reset. Schiller’s quote was the CAPE ratio “might be high relative to history, but how do we know history hasn’t changed.”  Bottom line – he is sticking with stocks for now.

The other story, written by Liam Pleven, was about a 61 year old widower, Peter Nelson, who was recently diagnosed with a form of blood cancer. With the diagnosis, Mr. Nelson was seriously weighing all of the pros and cons regarding his current situation. He was very open about whether he should quit his job, accelerate retirement and the spending that is attached to it, while all the time worrying that he may live much longer than the typical man suffering from his condition. It appears that Nelson, after much thought and consultation, decided on a “compromised” or moderate approach.  He decided to work at least through 2015, and to make his portfolio slightly more conservative. He was thinking that after 2015 of slightly “living large” with the funds in his portfolio, and also delaying taking Social Security until age 70 to boost his income in later years. With his longer term health concerns, this “spend a little more now, but with a backup plan” seems to be a prudent strategy.

Both of these juxtaposed stories deal with relevant financial planning concerns – decisions about an unknown future and the inherent probability attached to each decision.  The case of Schiller staying with equities in his portfolio is the easiest case to model. Many, if not most people are still fearful of a repeat of the market crash in 2008. But as I said earlier, market corrections of five to ten percent are normal events, and while these short-term swings are caused by global economic concerns, history has shown that usually the longer term trend is positive. The probability study regarding Mr. Nelson is much more difficult. Not only are you dealing with the market, but also how a disease may affect this man, how much money does he have to start with, how is it invested and how will it be spent! In the past 20 years, Financial Planners have come a long way in their ability to model situational probabilities, which generally leads to better financial decisions for clients. 

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.

The CAPE Crusader

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

Chief Investment Officer

The purpose of investing is not to simply optimize returns and make you rich.  The purpose is not to die poor.                                                                                                                                       – William Bernstein

“Holy Cow Batman!”  Wait a minute, you have the wrong crusader.  In the world of investing, it’s not Bruce Wayne of Gotham, but Robert Shiller of Yale.  And it’s not Caped, but CAPE (Cyclically Adjusted Price Earnings).  Shiller is a recently named Nobel Laureate, professor of economics, the developer of the Case-Shiller Real Estate  index, the author of the well timed book Irrational Exuberance, and oh yes, the originator of CAPE.

The CAPE valuation method uses per-share earnings normalized over a past 10 year period, which tends to smooth earnings (and then also the price / earnings ratio) over a typical business cycle.  The current valuation is 26 times earnings.  Leuthold/Weeden, a prominent financial research firm, uses a slightly different method calculated over a five year period, and their ratio is currently valued at 21 times earnings.  Both of these P/E valuations are above their respective average value, in both cases above the 80th percentile, at least when the exercise is applied to domestic stocks.

The concern from Shiller, James Montier of GMO and other market pundits is not that the domestic market is just expensive.  It is really that based on past history when the market was this expensive on a CAPE basis, five year future market returns have been flat to negative.  Shiller’s graph, included below, shows that his index has only been more expensive than now in three years, 1929, 2000 and 2007.  Uh oh! Obviously, price / earnings ratios are not the only (or even the best) market valuation tool.  The trailing twelve month P/E ratio is only 18.8, and the forward looking ratio (as if we can predict the future) is even lower.  U.S. corporate earnings have remained persistently strong over the last five years and with a near zero interest rate, some premium in the ratio may be justified.  Our markets have done very well since 2009 compared to other markets around the world, and domestic stocks are now more richly valued.  It does make sense to slowly move away from our high valued stocks into less expensive areas of the world, especially Europe and emerging markets, if one has the stomach for uncertainty.  It may also be prudent to begin to accumulate a little more cash, as we see some of our fund partners doing.  Bottom line:  U.S. stocks have done very well, but are no longer inexpensive compared to most of the world.  Time to be careful out there!

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My many thanks to Robert Shiller, James Montier and William Bernstein for their continued research, and frequent articles and books. I have used and abused their thinking many times over the years. If you want more, be sure to check out Shiller’s website by clicking here.

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.

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.