Investment Strategy Conference - October 21, 2017

Understanding Risks 2

to Retirement
 Financial Plan
3

1 Understand Risks to Your Retirement

2 How to Manage Risks

3 Proposed Tax Changes

 Two Stages in Retirement Planning
4

Accumulation Distribution
 5

Dealing With Risk

The Ability to Walk

Away From the Table
 6

Sequence of
Return Risk
Why Do We Still Talk About
7

Sequence Risk?
 8

Tale of 2 Retirements Earning 9.3%

Returns from 1979-2009

Reverse order of returns

Net worth

Source: Bloomberg
Age
Inflation Risk
9

Source: Bloomberg
 10

Rising Cost of Healthcare

 11

Higher Taxes & Lower Returns

Taxes

Lower Returns
 12

How to Manage Risks

 13

Need for Continual Planning

Recent changes to:

1.Healthcare
2.Social Security

Proposed changes to:

1.Taxes
2. Estate Taxes
 14

The Case for Active Management

Source: Bloomberg
 The Dichotomy of Risk

Most Conservative 1 - 2 - 3 - 4 - 5 - 6 - 7 - 8 - 9 - 10 Most Aggressive

Current Risk Score Portfolio Risk Score

4 6
Ability Willingness
 16

DO NOT Make Decisions Based on Emotions

Greed and Euphoria

Wash, rinse, repeat

Fear and Panic

 17

Proposed Tax Changes

 18

Important Changes for Individuals

Standard deduction will almost double to 12k single and 24k married

Consolidate tax brackets

12% 25% 35%

Source: Bloomberg
Repeal alternative minimum tax (AMT)

Eliminate itemized deductions EXCEPT mortgage interest and charitable deductions

Repeal estate and generation skipping transfer tax (GSTT)

 19

Important Changes for Business

Max tax rate for income from small business appreciated @ 25%
only applies to sole proprietor, partnership and S-Corp -> not C-Corp

Reduce corporate tax rate to 20% from current 35%

Expensing capital investments

depreciable assets purchase after 9/27/17 can be expensed over 5 years

Remove other business deductions except R&D and low income housing
 20

Remove State and Local Tax Deduction

NY
IL PA

CA
NJ

Source: Tax Foundation

The Concentration of Risk
21

Financial crisis reduced number

financial firms and intermediaries

The too big to fail got bigger

Financial assets globally become

more concentrated
 22

What Makes This Bull Market Different

1. Dominance of
index investing
2. Force of
algorithmic
trading
3. Concentration of
financial assets in
few hands
4. Growth of leverage

Source: StockCharts
 23

Financial Crisis
The Big Got Bigger

Lehman Brothers
Barclays Capital/Nomura Holdings
Washington Mutual JPMorgan Chase
Bear Sterns JPMorgan Chase
Merrill Lynch Bank of America
Countrywide Bank of America
Wachovia Wells Fargo
 24

U.S. Banking System

1. JPMorgan Chase $2.55T

2. Bank of America $2.25T

3. Wells Fargo $1.95T

4. Citigroup $1.82T

5. Goldman Sachs $894B

6. Morgan Stanley $832B

Source: Bloomberg
 Financial Risk Exposure of Large Institutions 25

Bank Total assets Liabilities Equity Derivatives

JPMorgan Chase $2,675T $2,410.5T $264.5B $25.2T

Citigroup $1,860T $1,630.0T $230.0B $45.5T

Goldman Sachs $860.1B $773.2B $86.9B $32.0T

Bank of America $2,275T $2,002.9T $272.1B $23.4T

Source: Bloomberg
 26

Derivative Holdings Q1, 2017

1. JPMorgan Chase $63.5T

2. Citicorp $45.5T

3. Goldman Sachs $32.0T

4. Bank of America $23.4T

Source: OCC
 27

Netting Agreements Do Not Eliminate Risk

Netting agreements
legally enforceable
contract

Some jurisdictions, no
legal certainty

Netting agreements
revenue gross
exposure by 85.3%,
$2.1 Trillion total
 28

Net Positions of Derivatives

(The Confidence Game)

Long Short

Short Long
 29

Biggest Holders of Financial Assets

1. BlackRock $5.4T

2. Vanguard $3.4T

3. Schwab $2.5T

4. Fidelity $1.9T

5. Capital Research $1.6T

Source: Bloomberg
 30

Passive Indexing Distortions

Market Cap Sales Profits P/E

Amazon $475.4B $160.0B $2,770B 252X

Wal-Mart $236.0B $495.0B $11,925B 19.4X

Costco $68.9B $127.0B $2,485B 25.4X

Source: Valueline/WSJ 10/9/17

 31

$11M 1975 - $4T today

The Next Bubble By 2024 > 50% of investments assets

Passive overtake active management share 2021-2024 (Moodys)

2016: Passive index - $506B Active funds - $341B

Source: DoubleLine
 32

The Loss of Traditional Analysis

Loss of investors who
study markets and
companies

Distorting the ability of

markets to set prices for
stock and bonds

Algorithmic trading and

index investing control
90% daily trading
Source: Wall Street Journal
 Index Weight Impact on Buying 33

S&P 500 NASDAQ DOW

Apple 2.85% 11.6% 4.7%

Amazon 1.49% 6.7% -

Microsoft 2.22% 8.4% 2.3%

Source: Bloomberg
 34

Index Weight Impact on Buying

S&P 500 NASDAQ DOW
AAPL 2.85% AAPL 11.6% BA 7.8%

MSFT 2.22% MSFT 8.4% GS 7.4%

AMZN 6.7% 3M 6.5%

XOM 2.05%
FB 5.8% UH 6.0%
JNJ 1.74%
GOOG 4.8% HD 5.0%
GE 1.56%
ALPH 4.2% MCD 4.8%
AMZN 1.49%
INTC 2.6% AAPL 4.7%
BRK-B 1.49% COMCAST 2.6% IBM 4.5%
T 1.33% CSCO 2.4% JNJ 4.0%

WFC 1.25% AMGEN 1.9% CAT 3.8%

Source: Bloomberg
 35

S&P 500 top 10 = 16% index

NASDAQ (3300) top 10 = 51% index
Dow top 10 = 55% index
 36

Lower Expected Future Returns

these funds have led to the rise
of merely the latest speculative hot
potato passed around wall street.
~Jack Bogle (Vanguard)

Sept. 2015 ETFs valued at $1.5T

were turning over 864% $14T

100 largest stocks valued at $12T

turning over $15T 117%
 37

Lower Expected
Future Returns
Stocks 53.5% assets
vs. 44.8% average

Cash 24.7% vs. 32.2%

Bonds 21.8% vs. 23%

 38

The Case for Active Planning

Minimize impact of
recession and bear
markets

Avoid sequence risk

during retirement

Reverse impact of
negative/low returns
following bull markets

Adapt financially to
Source: StockCharts meet life changes
 39

An Extraordinary Era - Summary

Late Stage Business Cycle and Fed Rate Cycle

Aging Bull Market, Extreme Valuations, Lower

Future Expected Returns

Process of De-risking

Avoiding Sequence Risk

The Case for Active Management

- Financial planning

- Investment portfolios