Broker Check

Client Letter, January 2018

The First Financial Companies celebrated it's 30-year anniversary on New Year's Day 2018. We thank you for the part that you have played in our long term success in doing what we love to do, working on our client's behalf to provide quality advice in a manner that we constantly strive to keep simple and understandable. Thank you for your continued support, patronage and confidence in our mission to provide you with the best possible advice. Our duty is to provide you with personal planning advice offered in a responsive manner based upon your individual needs and circumstances.

By all measures, 2017 was a stellar year for the stock market. As we enter a new year, we are cautiously optimistic that stocks will continue their climb in 2018 but investors should always be anticipating a correction of 10% or more. Last year, stocks soared on increasing optimism, larger corporate profits and world wide economic growth. The rally was also fueled by the promise and ultimate enactment of the sweeping tax cuts by Congress and President Trump known as the Tax Cuts and Jobs Act. Over time, these tax cuts will reduce corporate America's tax by billions of dollars and should reduce the federal tax burden on middle income workers. We have already seen corporate America moving to return some of the resulting tax savings to their workforces. As of January 11th, over 2,000,000 workers have received raises or bonuses on top of the increases and bonuses awarded during 2017. The tax changes are likely to stimulate U.S. economic growth in 2018 and 2019 through higher consumer and business spending. Consumer spending, which represents about 70 percent of economic growth should continue to remain positive. The U.S. Economy expanded at a 3.2 percent annual rate during the July through September quarter despite the effects of major hurricanes Harvey and Irma.1 Some are forecasting increasing growth to 4.0 percent or higher in some 2018 Quarters.2 In 2017 the major asset class results were: Stocks: the benchmark SP 500 Index achieved a total return, with dividends reinvested, of 21.83%. The index was in positive territory all of 2017. Bonds: Barclays US Aggregate Index 3.54%.3 The broader market's technology-based NASDAQ Composite Index's total return returned 28.24% for 2017 and the measure of the world markets, the MSCI All Country World ex USA Index rose 27.19%.3

Diversification across asset classes remains important to help lessen the impact of major market swings on your portfolio. Keep in mind, diversification doesn't eliminate risk, and there is no guarantee against investment loss but it is an important approach to reduce large swings in value, in either direction, from the different asset classes and in doing so, assists in reducing investors downside loss. Understanding this concept means investors will simultaneously own winning asset classes and losing asset classes. Accordingly, investors will not take home a rate of return that matches the best asset class return. Our outlook, is for moderate asset growth in 2018, but we could be surprised (in either direction). Interest rates are likely to continue their slow climb in 2018 and we reaffirm our belief interest rates should continue to remain low relative to history which should continue to benefit the equity markets. We suggest the equity markets are likely to be more volatile during 2018 than we experienced in 2017. The S&P 500, including dividends, has gone up for 14 months in a row, the longest consecutive run since 1928, according to Bank of America Merrill Lynch.4 Stocks recent movements up and down have been smoother than in most periods since 1885, according to William Schwert, a finance professor at the University of Rochester.5

Recent outsized stock market returns remind us of the human psychology of "recency bias" which we presented in our January 2009 annual letter (read excerpt copied below) following the 2008 market decline when the benchmark S&P 500 Index had a total return of -36.99%. In 2017 we have just closed another year experiencing one of the least volatile and longest stock market bull runs in history and the resulting investor bias is the opposite of what was experienced in 2008. We encourage you to review your goals and objectives consistent with the recent outsized market performance of your portfolio and initiate any changes you believe to be prudent.

From our 2009 annual letter: "...humans we have a tendency to predict the future based on the recent past. This "recency bias" has investors thinking mostly about current events. If the market is thriving, as it was between 2003 and 2007, then we believe it will always be thriving. In times like these when the sustained market dive is giving us all headaches, we believe we'll never pull out of it. We think the biggest mistake that many individuals make at times like this is they respond after the markets difficulties. Quite simply, investors respond after stocks have gone down. Panic sets in - they go to cash or very conservative investments - and markets turn around. When the markets do turn around, the returns are likely to be "off to the races" long before anyone would be able to point to economic data that supports the notion, "Oh, now is the time to invest." History has demonstrated the market responds 4-6 months ahead of any news of a recovery.

So where are we now? Analysts have indicated we have moved from excessive optimism of 2006 and 2007 to excessive pessimism of 2008. Currently, American investors are pouring billions into Treasury bills that pay zero interest. To us, this clearly illustrates today's "tipping point." Investors are figuratively putting their money in their mattresses. Our experience as advisors and investors over the past three decades, demonstrates, to us, the markets rarely reward those who become excessively optimistic or excessively pessimistic. We encourage you to consider these examples as you make your own investment decisions.

So, if your current investment exposure is tilted more toward equities (stocks), we remind you of Warren Buffet's quote, "If you aren't thinking about owning a stock for 10 years, don't even think about owning it for 10 minutes." 6

The classic view of cash in the world of investing is that it's something to avoid, or at least minimize. To the extent cash is truly needed for immediate or near-term liquidity, holding some may be a necessity. But some believe an investment objective is to hold as little cash as possible and put the rest to work on your long-term behalf. Interestingly a 2016 research study of UK psychologists Ruberton, Gladstone and Lyubomirsky7 finds that maintaining a healthy level of cash in a checking or savings account appears to improve investor feelings of financial well-being and life satisfaction. This relationship holds up even after controlling for income, spending and other investments, as well as age and employment status. In other words, no matter how much total wealth and income we have, many find they are just not as happy unless it's also accompanied by a healthy pile of cash (or at least, a sizable and readily available bank account). In fact, the impact of increased savings (and the associated reduction in spending) can actually go a long way to help bridge the gap for retirement, especially for late-stage savers. On the other hand, for those who are still younger, strategies that help to maintain (but not substantially increase lifestyle), and let future raises be directed toward savings instead, can dramatically accelerate the path toward early retirement as well by controlling the retirement savings need. If the extreme, highly frugal living allows for early retirement, precisely because it facilitates both substantial investment savings accumulation and the lifestyle expense load isn't as large which allows the earlier achievement of financial independence because of that very frugality. For clients approaching their targeted retirement ages, one objective should include a healthy cash balance equal to at least 18 to 24 months spending needs.

In this ever increasing digital world we all live in, please know we do take your security and privacy very, very seriously. Please review our enclosed Privacy Policy for additional details. For your additional protection, please be aware that we are unable to accept buy or sell orders, distribution, check or wire requests via e-mail or voice mail. Please remember, you can e-mail us or leave us a voice mail but before the order or request is executed, we will need to speak with you by telephone.

Annually we gather data in preparation of assembling a comprehensive report including your Personal Financial History. We are currently working toward completion of these reports. Please help us by sending the necessary data to our office for any accounts for which we do not receive statements or other personal information. The assumptions we use in these reports are reasonable approaches in an attempt to estimate when a client should reach their individual level of financial independence or in the case of those that are currently retired, how long their investment assets will be available to support their targeted lifestyle.

Once you receive your report, please review and call us to schedule a mutually convenient time to review your goals, objectives, review your current savings rate and your accumulated investment assets together with an asset allocation review, and together we can determine if any changes might be in order to address your tolerance for volatility and your long-term wealth accumulation objectives as reflected on the annual report "Estimate of Retirement Needs."

1 THEHILL.COM "US economy grew at a 3.2 percent cip in third quarter" 12/21/17

2 CNBC.com "Trump could get 3 percent, and maybe even 4 percent, GDP growth this quarter" 12/14/17

3 Capital Group

4 bankofamerica.com/economic-and-industry-outlooks

5 Four Things Sure to Happen in Markets During 2018 - MoneyBeat - WSJ 01/05/18

6 Zacks.com/stock/news/181853/15-memorable-investing-quotes-from-warrenbu?ett [7/15/15]

7 Buying Happiness and Life Satisfaction With Greater Cash-On-Hand Reserves, www.kitces.com