June, 2013 FINAL.pdf · 2 THE GLOBAL INVESTMENT PULSE June, 2013 LOUIS P. STANASOLOVICH, CFP®,...

1THE GLOBAL INVESTMENT PULSE June, 2013

Welcome, continued on page 13

IN THIS ISSUEOver The Long Term, And Fairly Often In Periods As Short As One Year, CDs Typically Do Not Keep Up With Taxes And Inflation.......... 3

Risk Is Low But Inching Upward........................................ 4

The Importance of Avoiding Large Losses........................ 5

Beware That Fee-Based Financial Advisors Are Not Fee-Only.................................................................................... 6

Schiller Price/Earnings Ratios............................................ 8

Secular Bear Market Watch............................................... 9

How Long Can The Current Cyclical Bull Market Last?..... 10

Small Cap To Large Cap Historical P/E Ratio................... 12

Just For Fun...................................................................... 13

Pressure Is On Gold Prices In The Near Term Due To The Potential To Dump Gold Bullion Holdings.................. 14

Inflation And The S&P 500 P/E Ratio............................... 14

Is The Party Over For High Yield....................................... 15

Legend Financial Advisors, Inc.® & EmergingWealth Investment Management, Inc.’s Investment Management Services............................................................................. 18

June, 2013

Bank Loans, continued on page 6

WELCOME TO THE INAUGURAL ISSUE OF THE GLOBAL INVESTMENT PULSE

By Louis P. Stanasolovich, CCO, CEO and President of Legend Financial Advi-sors, Inc.® and EmergingWealth Investment Management, Inc. and Editor of

The Global Investment PulseWhat is it? Why should I want to read it? Why now? What will be included in future issues? Who is behind it? These questions and a great deal more will be answered by the end of this article!

What Is It?

This is the easiest question to answer by far! This is a new newsletter designed for investors. It will provide the reader with factual insight to the financial markets and economies worldwide. The Global Investment Pulse newsletter will include valuation information relative to history (typically in the form of charts and/or graphs) and insightful articles written not only by our investment team at Legend Financial Advisors, Inc.®, but also provided to us by some of the most intelligent and well-respected investment organizations in the world.

Why Should I Want to Read It?:

Our articles and charts will be designed for both novice and sophisticated

READING THE GLOBAL INVESTMENT PULSEWe have attempted through our articles and charts to address readers of all knowledge levels of investing.

Much of the valuable information in our newsletter is illustrated through the use of charts (Many times a picture is worth a thousand words, as they say.). Therefore, in order to gain a thorough understanding of what is being illus-trated, it is best to read the subheading, boxed information (which is often a mini-article in and of itself), notes and footnotes.

At times, an article or chart may be complicated, so please feel free to call us to explain the information in more understandable detail. We are here to serve you.

From The Editor,Louis P. Stanasolovich, CFP®

CCO, CEO and President

Legend Financial Advisors, Inc.® & EmergingWealth Investment Management, Inc.

RISING INTEREST RATES: NO PROBLEM! CONSIDER BANK LOANS

By Louis P. Stanasolovich, CCO, CEO and President of Legend Financial Advisors, Inc.® and EmergingWealth

Investment Management, Inc. Rising interest rates are problematic for bonds. Higher interest rates cause principal losses for tradi-tional bonds. Bank loans issued to corporations that have adjustable interest rates (They adjust every 30 to 90 days) preserve principal in rising interest rate markets and they would earn higher interest rates in rising interest rate environments.

2 THE GLOBAL INVESTMENT PULSE June, 2013

LOUIS P. STANASOLOVICH, CFP®, EDITOR

Louis P. Stanasolovich, CFP® is founder, CCO, CEO and President of Legend Financial Advisors, Inc.®

(Legend) and EmergingWealth Investment Management, Inc. Lou is one of only four advisors nationwide to be selected twelve consecutive times by Worth magazine as one of “The Top 100 Wealth Advisors” in the country. Lou has also been selected eight times by Medical Economics magazine as one of “The 150 Best Financial Advisors for Doctors in America”, twice as one of “The 100 Great Financial Planners in America” by Mutual Funds magazine, and once by Barron’s as one of “The Top 100 Independent Financial Advi-sors”. Lou was selected by Financial Planning magazine as one of six individuals to receive the inaugural Influencer Awards for 2010. He was selected for the Wealth Creator award recognizing the advisor who has made the most significant contributions to best practices for portfolio management. He has been named to Investment Advisor magazine’s “IA 25” list three times, ranking the 25 most influential people in and around the financial advisory profession, as well as being named by Financial Planning magazine as one of the country’s “Movers & Shakers”, recognizing the top individuals who have done the most to advance the financial advisory profession.

ABOUT LEGEND FINANCIAL ADVISORS, INC.®

ABOUT EMERGINGWEALTH INVESTMENT MANAGEMENT, INC.

Legend Financial Advisors, Inc.® (Legend) is a Fee-Only U.S. Securities and Exchange Commis-sion (SEC) registered investment advisory firm with its headquarters located in Pittsburgh, Pennsylva-nia. Legend’s Personal Chief Financial Officers (Personal CFOs) provide a multitude of services, including Wealth Advisory Services, which incorpo-rate Financial Planning and Investment Manage-ment strategies to affluent and wealthy individuals as well as business entities, medical practices and non-profit organizations. Our Personal CFOs offer so much more than wealth managers, financial

EmergingWealth Investment Management, Inc. (EmergingWealth), is the sister firm of Legend Financial Advisors, Inc.® (Legend) and is a Fee-Only Securities and Exchange Commission (SEC) registered investment advisory firm. EmergingWealth provides Investment Management services to indi-viduals as well as business entities, medical

advisors, financial planners and/or investment managers. We analyze each client’s financial strengths and weaknesses, then recommend creative solutions for improvement. Addition-ally, our Personal CFOs work closely with our client’s other professional advisors to achieve optimal results.

WHY LEGEND IS DIFFERENT?

1. Unlike brokerage firms and Fee-Based Advisors who both receive commissions and as a result are inherently conflicted; Legend is compensated exclusively by client fees, known as Fee-Only.

2. Legend’s Personal CFOs have been selected over 30 times by national publications as “Best Advisors in the Country”.

3. Legend is a Fiduciary and is therefore required by law to always work in the clients’ best interests.

4. Legend has had a historical client retention rate averaging over 96%.5. Legend designs dynamic, creative and personalized financial planning and investment

solutions for its clients.

practices and non-profit organizations whose wealth is emerging. All investment portfolios are sub-advised by Legend. Both Legend and EmergingWealth share a common advisory team, Investment Committee and Fee Schedule.


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RETURNS NEEDED TO REACH BREAK-EVEN POINTS AFTER LOSSES

PERCENTAGE LOSS

5.00% 5.26%

10.00% 11.11%

15.00% 17.65%

20.00% 25.00%

25.00% 33.33%

30.00% 42.86%

35.00% 53.85%

40.00% 66.67%

45.00% 81.82%

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70.00% 233.33%

75.00% 300.00%

80.00% 400.00%

85.00% 566.67%

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PERCENTAGE RETURN NEEDEDTO REACH BREAK-EVEN

D:\DATA2\WTK's Work Folder\Returns Needed To Reach Breakeven

PULSE

THE IMPORTANCE OF AVOIDING LARGE LOSSES

By Louis P. Stanasolovich, CCO, CEO and President of Legend Financial Advisors, Inc.® and EmergingWealth Investment Management, Inc. and Editor of The Global Investment Pulse

As any investor knows, losses are unavoidable no matter how conservative one is. The key, pure and simple, is to minimize losses wherever possible. This can be accomplished in a number of ways, which is beyond the scope of this article. However, we will ad-dress many of the methodologies to do so in future articles.

The purpose of this article is to illustrate the danger of large losses (which are usually self-defined) and what type of return is needed to achieve the breakeven point should it experience a certain level of loss.

Consider the period March 23rd, 2000 to October 23rd, 2002 (30 months), when the S&P 500 lost 49.0% and the period October 9th, 2007 to March 9th, 2007 (17 months), when it lost 55.0% (In both cases dividends are included). In the chart below, both losses can be used to determine the return needed to breakeven. In both cases, it actually took approximately five years to breakeven. Also, while it is not likely to occur again, the September, 1929 to July, 1932 loss of approximately 86.0% is the worst loss on record. Using the accmopanying chart compute that breakeven. Egads! No wonder it took until 1949 to breakeven! The moral of the story—“Don’t Have Large Losses In The First Place”.

COPYRIGHT LEGEND FINANCIAL ADVISORS, INC.®


However, it is important to understand all of the risks of investing in bank loans directly or through mutual funds. Too much supply and too little demand in the income market may result in valuation uncertainties and greater volatility, less liquidity and widening credit spreads. While these loans are secured by assets such as real estate or equipment when liquidating an asset that secures a loan, the sale price of that asset could fall short of satisfying the borrower’s obligation to repay the loan. Another problem could be the inability to liquidate the asset that is collateralized particularly if it is a physical asset such as a building or equipment due to a lack of buyers. Therefore, the ability to realize the benefits of any collateral may be delayed (for as much as a few years) or limited due to its realizable value in a secondary market sale.

Investments in bank loan and other types of fixed income securities are often affected by changes in the creditworthiness of the bor-rower and their ability to pay the principal and interest on the loan. The value of bank loans or even other income securities can also decline due to perceived concerns about the borrower’s ability to make principal and interest payments. Furthermore, investments such as bank loans which are typically rated below investment grade (often referred to as “junk”) usually have more price volatility and illiquidity than higher-rated investments. Bank loans are also subject to prepayment risk, although often there are small penal-ties for paying off a loan early, usually in the form of additional interest payments.

Also, since bank loans have adjustable coupons, they are not usually subject to principal loss as a result of rising interest rates. However, should interest rates rise to too high of a level, this may affect the borrower’s ability to make interest and principal pay-ments. In short, you can have too much of a good thing. Other recent investing developments in the bank loan investing universe include loans that are made via foreign instruments or in currencies other than the U.S. Dollar will involve greater risk and volatility than U.S. Investments because of adverse financial markets, economic, political, regulatory, geopolitical or financial market and/or economic conditions as well as currency fluctuations. Additionally, it is not unusual these days to see mutual funds making second and third loans against the same underlying collateral (asset)/borrower. However, generally there are very strict limitations by the mutual fund not to lend more than 50.0% or 60.0% of equity in such collateral.

These investments can offer a steady stream of income to investors. Nevertheless, it is important in our opinion to use mutual fund management groups that have significant size (several dozen if not more than 100) experienced credit analysts on staff. These are complicated underlying investment instruments. Also, bond analysts do not easily crossover into bank loan credit analysis. Special-ized management teams that are large and experienced offer the best chance for investment success. Despite these potential prob-lems (every investment has a multitude of potential problems) bank loans can be a positive in one’s portfolio, especially in today’s fixed income environment.

Bank Loans, continued from page 1

PULSE

BEWARE THAT FEE-BASED FINANCIAL ADVISORS ARE NOT FEE-ONLY

Diane M. Pearson, CFP®, CDFA, PPC, Personal CFO and Shareholder,Legend Financial Advisors, Inc.® and EmergingWealth Investment Management, Inc.

Back in the late 1980’s the public and media understood that there were three types of advisors: Commission-Only, Fee and Commission or Fee-Only. At that time, there was a movement among Fee and Commission advisors to separate them-selves from the “commissions” stigma. As a result, they began calling themselves “Fee-Based” in order to sound as if they were similar to Fee-Only advisors. Many people believe that the term, Fee-Based, is misleading because Fee-Based advi-sors often do not provide unbiased advice to their clients due to their recommending investment and insurance products which produce “additional compensation” in the form of commissions and/or product fees for them or their firm.

In contrast to Fee-Based or Commission-Only advisors, Fee-Only advisors do not receive any commission-type compensation whatsoever. In fact, many advisors such as the ones at Legend Financial Advisors, Inc.® and EmergingWealth Invest-ment Management, Inc. are fiduciaries. Fiduciaries are required by law to act in the client’s best interest at all times.


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SECULAR BEAR MARKET WATCHApril 1, 2000 to May 31, 2013(13 years and 2 months)

Annual TotalCompound Return Return

Consumer Price Index (Inflation) 2.37% (b) 36.07% (b)

90-Day Treasury Bills Index-Total Return 2.09% (a) 31.36% (a)

Barclays Aggregate Bond Index-Total Return 5.97% (a) 114.47% (a)

HFRX Global Hedge Fund Index 2.98% (b) 47.26% (b)

S&P 500 Index (U.S. Stock Market) 2.57% (b) 39.70% (b)

MSCI EAFE Index (Developed Foreign Equities) 2.99% (b) 47.47% (b)

MSCI Emerging Market Index (Equities) 8.30% (b) 185.81% (b)

Newedge CTA Index (Managed Futures) 5.33% (b) 98.33% (b)

Dow Jones–UBS Commodity Index-Total Return (USD)** 4.26% (a) 73.09% (a)

Dow Jones U.S. Real Estate Index-Total Return (USD)** 11.46% (a) 317.38% (a)

Gold Bullion 12.95% (b) 397.33% (b)

* Compound and Total Returns include reinvested dividends. MSCI Indexes do not include dividends prior to 2002. Newedge Index isequally-weighted.

**USD = U.S. Dollar(a) Source: Morningstar™ Principia Pro(b) Source: Bloomberg Investment Service

COPYRIGHT 2013 LEGEND FINANCIAL ADVISORS, INC. ®REPRINTED WITH PERMISSION OF LEGEND FINANCIAL ADVISORS, INC. ®

As of: May 31, 2013

PULSE

Note: During Secular Bear markets U.S. Stocks have historically returned a little more than inflation or a little less thaninflation—plus or minus 1.50%—and generally last between 15 to 25 years. The last Secular Bear market (1966 to 1982)lasted 17 years and underperformed inflation by approximately one-half of one percent per year. The other SecularBear markets since 1900 were 1901 to 1920 and 1929 to 1949. In both cases, the U.S. Stock market outperformedinflation by approximately 1.50% per year. All of the aforementioned performance numbers are pre-tax.

The performance of the U.S. Stock market so far in the current period (April 1, 2000 to the present) certainly appears toindicate that we are in a Secular Bear market. Long-term returns (over the next 10 years) for the S&P 500 will probablybe slightly better than the last 13 years and 2 months. Current 10 year normalized P/Es (long-term valuations) indicateapproximate annual compound returns of 3.00% over the next 10 years. Of course during the next 10 years, returnsduring various periods will be significantly higher and lower than the expected return. For example, the more thestock market rises in the near term, the less returns after that period will be and vice versa.

SECULAR BEAR MARKET WATCH (CONTINUED)April 1, 2000 to May 31, 2013(13 years and 2 months)

COPYRIGHT 2013 LEGEND FINANCIAL ADVISORS, INC. ®

REPRINTED WITH PERMISSION OF LEGEND FINANCIAL ADVISORS, INC. ®

As of: May 31, 2013


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Source: The Leuthold Group, LLC, Perception Express, March 7, 2013,REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

As of: March 7, 2013ww.leutholdgroup.com

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JUST FORFUN

Bubby and Johnny Ray, two good ‘ol boys from the country, were sitting on their front porch drinking beer. After a long while, a large truck hauling rolls and rolls of sod went by.

“I’m gonna do that when I win the lottery,” said Bubba.

“Do what?” asked Johnny Ray.

“Send my grass out to be mowed,” answered Bubba.

The Leuthold Group, Perception Express, July, 2012

Larry, age 5, watched, fascinated, as his mother smoothed cold cream on her face. “Why do you do that, mommy?” he asked. “To make myself beautiful,” said his mother, who then began removing the cream with a tissue.

“What’s the matter?, “asked Larry, “Giving up?”

By Barry Lazarus, The Leuthold Group, Per-ception Express, August, 2012

I was visiting my daughter and son-in-law last night when I asked if I could borrow a newspaper.

“This is the 21st century,” the son-in-law said. “We don’t waste money on newspapers. Here, you can borrow my iPad.”

I can tell you, that bloody fly never knew what hit him.

By Ed Favreau, The Leuthold Group, Percep-tion Express, August 2012

My wife left a note on the fridge… “It’s not working! I can’t take it anymore, I’ve gone to stay at my Mom’s!

I opened the fridge, the light came on and the beer was cold… God only knows what she was talking about!

By Ed Favreau, The Leuthold Group, Percep-tion Express, August 2012

investors. In other words, there will be something for everyone. At times, we will break up the investment themes with some comic relief as well.

We will also be featuring articles that will cause our readers to think about their own financial situation and make better investment decisions such as risk levels they are willing to accept, what type of investments potentially could be bought or sold, income tax issue implications, cost efficient ways to purchase investments, etc. and, of course, investment allocations.

Why Now?

Unfortunately, we are at a point in time that we have not seen for many decades – very low interest rates and sky high Price-to-Earnings (P/E) ratios as measured by a ten-year normal-ized P/E ratio (See the insert “Shiller Price/Earnings Ratios” Chart on page 8). The last time that this combination occurred, it produced a Secular Bear Market for the S&P 500 from 1966 to 1982. Historically, a Secular Bear Market generally provides little, if any, return over infla-tion. True to form, the 1966 to 1982 period produced a 6.73% pre-tax annual compound return while inflation compounded at a 7.24% rate. Imagine a period that for seventeen years, you lost almost one-half percent per year to inflation on a pre-tax basis. This time it’s worse; for the last 13 plus years’, annual compounded returns have barely exceeded 2.0% and have underperformed inflation (See our “Secular Bear Market Chart” on page 9).

While the current environment for stock valuations are not nearly as expensive as March of 2000, they are still at levels that are on par with some of the largest bubbles in history. That’ll do wonders for most investors’ sleep at night.

To complicate matters, high quality fixed income investments now offer low interest rates not seen since the late 1940s. This level of interest rates provided total returns less than inflation before income taxes for the subsequent 20-year period ending in 1965.

Surprised? Don’t be! According to a number of investment legends such as Robert Arnott, Jeremy Grantham, Bill Gross and Robert Shiller among others of similar stature, that’s exactly the type of returns, for both stocks and bonds, we may experience over the next ten to fifteen years. In short, this Secular Bear Market is not over by a long shot. Most investors are not and will not be informed about these issues.

The good news is that we will make our readers aware of these issues as well as when danger exists and when it doesn’t. While it is very difficult to avoid all types of losses, we hope to improve our readers’ percentage of success in both up and down markets.

What Lies Ahead?

In future months, we will be offering additional insightful as well as, of course, timely invest-ment information via Webcasts, videos, social media and other mediums. We welcome any suggestions or comments you may have, including the information in the newsletter, an invest-ment question and/or our services. You can either call us at Legend Financial Advisors, Inc.® (Legend) at (412) 635-9210 or e-mail us at [email protected].

Who Is Behind It?

The Global Investment Pulse is a monthly publication produced by Legend Financial Advisors, Inc.® (Legend) and its sister firm, EmergingWealth Investment Management, Inc. (Emergin-gWealth), two Pittsburgh, Pennsylvania based Fee-Only Securities and Exchange Commis-sion (SEC) registered investment advisor firms. Legend’s Personal Chief Financial Officers (CFOs) have been selected over 30 times by national publications such as Worth, and Medical Economics, etc. as “Best Advisors in the Country” and have also been selected for five other major industry awards including innovative investment research.

Additionally, we have included additional information about both Legend and EmergingWealth and their respective services in addition to our Investment Management Services that we offer.

We believe you will find reading our publication “The Global Investment Pulse” time well spent.

From The Editor,

Louis P. Stanasolovich, CFP®

CCO, CEO and President

Legend Financial Advisors, Inc.® & EmergingWealth Investment Management, Inc.

Welcome, continued from page 1


Source: Bureau of Labor Statistics, Thompson Reuters Datastream via DundeeWealth,Market Monitor, March 15, 2013, www.dundeewealtheconomics.com.COPYRIGHT 2013 DUNDEEWEALTH

As of: March 15, 2013REPRINTED WITH PERMISSION OF DUNDEEWEALTH

INFLATION AND THE S&P 500 P/E RATIOJANUARY, 1968 – FEBRUARY, 2013

Note: From a historical perspective,when inflation is at currentlevels, the P/E ratio on the S&P500 has been higher thancurrent levels.

Inflation

Source: DundeeWealth, Gold Price Scenarios, April 5, 2013,www.dundeewealtheconomics.comCOPYRIGHT 2013 DUNDEEWEALTH

As of: April 5, 2013REPRINTED WITH PERMISSION OF DUNDEEWEALTH

PRESSURE IS ON GOLD PRICES IN THE NEAR TERMDUE TO THE POTENTIAL TO DUMP GOLD BULLION HOLDINGS:

Liquidity of Last Resort – Europe Needs Liquidity

Gold Reservestonnes

Portugal 382Ireland 6Italy 2,452Greece 111Spain 282Total 3,233

Europe 11,260U.S. 8,133

• The PIIGS (Portugal, Italy, Ireland,Greece and Spain) hold over 3,000tonnes of gold

• We have been concerned about Italy foryears

• Europe collectively has more gold thanthe U.S.

• There are reports of “hardship” goldsales throughout Europe

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LEGEND FINANCIAL ADVISORS, INC.® &EMERGINGWEALTH INVESTMENT MANAGEMENT, INC.’S

INVESTMENT MANAGEMENT SERVICES

Legend Financial Advisors, Inc.® (Legend) and EmergingWealth Investment Management, Inc. (EmergingWealth) offer Personalized Investment Management Services to individuals and institutions. Investment portfolios are developed to match the client’s return and risk requirements, which are determined by the clients’ completion of a Risk Tolerance Ques-tionnaire, with the guidance of a Legend Personal Chief Financial Officer (Personal CFO) or EmergingWealth Advisor, respectively. Each type of investment portfolio is managed to achieve the short, intermediate and long-term investment objectives of the client, as may be applicable.

INVESTMENT PROCESS

Investment Portfolios:

Unlike most financial advisory firms that offer one style of investment or portfolio type, we offer a wide array of investment portfolios that usually fit with the large majority of client needs. If necessary, we will create customized solutions as well. For the types of investment portfolios, please see our Investment Portfolios, Potential Return and Risk Spectrum Chart on page 19. For a detailed description of our portfolios, please contact Louis P. Stanasolovich, CFP®, our CCO, CEO and President of both firms for a confidential discussion at (412) 635-9210 or e-mail us at [email protected].

Investment Research:

Our Investment Committee performs extensive research to identify opportunities, mitigate risks and structure investment portfolios. Emphasis is placed on developing portfolios that maximize the potential return relative to the amount of risk taken.

In-depth due diligence including face-to-face interviews in many instances with portfolio managers for open-end mutual funds is performed on each investment we select for a portfolio. Factors (both from a qualitative and quantitative stand-point) that we conduct a thorough analysis of each investment include, but is not limited to, liquidity (including the primary investment and/or the underlying investments, if utilizing pass through vehicles such as open-end mutual funds or ex-change-traded products), income taxation, all related costs, return potential, drawdown potential (historical declines from peak-to-trough), volatility and management issues (Anything having to do with the management team of a stock, open-end mutual fund or an exchange-traded product.).

All portfolios for EmergingWealth are subadvised by Legend.

Client Education:

Education is very important to us. We are dedicated to educating each client about the different investment portfolio types and how they relate to market volatility, time horizons, and investment returns. It is our goal to ensure that the client understands and agrees with our investment philosophy. Furthermore, we assist each client in selecting a risk tolerance level with which they are comfortable. Ultimately, an investment portfolio is designed to meet the client’s objectives.

PERFORMANCE REPORTING

Many investment firms only offer monthly brokerage statements, which provide minimal information; typically only account and investment balances. We, on the other hand, provide detailed quarterly reports that outline performance, income and management fees (among other items) in a simple, easy-to-read report. In addition, each performance report is sent with an extensive index page that illustrates the investment environment during the reporting period.

FEES

To find out more about the fees for either Legend or EmergingWealth’s Investment Management services, please contact Louis P. Stanasolovich, CFP®, our CCO, CEO and President of both firms for a confidential discussion at (412) 635-9210 or e-mail us at [email protected].

PULSE


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S&P500Risk

June, 2013 FINAL.pdf · 2 THE GLOBAL INVESTMENT PULSE June, 2013 LOUIS P. STANASOLOVICH, CFP®,...

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