Note: This market review was published on October 17, 2014 and may not be reflective of current market or investing issues.
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 weighting 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 model situational probabilities, which generally leads to better financial decisions for clients. But we cannot predict the future – probabilities are just probabilities.
Disclosure: 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 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 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 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 upon request.