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Capital Market Projections

Executive Summary

Capital market projections (risk & return) allow Centura Wealth Advisory (CWA) to help clients with long-term strategic financial planning
Estimates are applicable to financial planning, portfolio construction and risk management
Represent the best thinking regarding forward looking markets and a longer-term outlook
Issued by many sources and different methodologies are employed
Financial planning risk models (e.g., Monte Carlo simulation) require such assumptions as inputs
Portfolio construction utilizes these projections to evaluate markets and make informed decisions around asset allocation and investments
Careful planning is recommended given current views on forward looking markets and the uncertainty represented therein

Introduction

Capital market return (and risk) projections are at the heart of wealth management. These projections are a critical input to financial planning and portfolio management applications where the opportunity cost of mis-estimation is material: project too high and one may get a false sense of security out of their retirement plan and/or portfolio estimates; project too low and one may not provide a realistic estimate of the future, thereby making naïve decisions with potentially harmful results (e.g., working too long, saving too much, taking too much portfolio risk, etc.).

In part 1 of a 3-part series, we discuss capital market projections, provide a framework for creating current estimates and compare those estimates to historical results. In parts 2 and 3 of this series, we discuss how capital market projections are used in financial planning and portfolio construction (i.e., Monte Carlo simulation and mean/variance optimization) applications.

Capital Markets

Capital markets are venues where buyers and sellers engage in trade of financial securities. Examples include stock and bond markets where savings and investments are exchanged between the suppliers of capital and those who demand it. Suppliers of capital include retail and institutional investors whereas those in need of capital are businesses, governments and people. ^1,2,3

Capital markets consist of various types and sub-types. For example, stock markets can be broken down into large, mid and small company stocks as well as growth, value or blend.⁴ While there are many ways to slice and dice capital markets, below is a list of asset classes that are common among many of the providers and are also utilized in both financial planning and portfolio management applications at Centura:

Table 1 – Capital Market Asset Classes
Equities	Fixed Income	Alternatives
Large Cap Growth	Government	Real Estate
Large Cap Value	Municipal	Hedge Funds
Mid Cap	Corporate	Private Equity
Small Cap	High Yield	Commodities
International Equities	International
Emerging Markets	Cash

Each asset class has its own drivers of both risk and returns and must be evaluated differently when measuring and predicting both risk and returns. In addition, different firms and analysts within those firms may have different methods of evaluating each asset class and that means a wide variety of methodologies are employed.

To illustrate how firms may vary, here is an example of how Invesco estimates asset class returns which differs slightly from the approach used at the Callan Institute. We won’t dive into the specifics of different methods employed, but one should understand that differences exist between firms and careful consideration should be paid as to which estimates are utilized, when and why.

Capital Market Returns: Historical Results

Now that we understand different capital markets and their related asset classes, we can evaluate historical data to see how various asset classes have performed over time:

Table 2- Asset Class Historical Results
Asset Class	Index	*Annualized Return (10yr)**	*Annualized Return (25yr)**
Large Cap	S&P 500	13.12%	9.07%
Mid/Small Cap	Russell 2500	13.15%	9.62%
International Equities	MSCI World ex USA	6.24%	4.76%
Emerging Markets	MSCI Emerging Mkts	8.02%	7.9%¹
US Fixed Income	Barclays Aggregate	3.48%	5.09%
Non-US Fixed Income	Barclays Global Agg ex-USA	1.73%	4.39%
Cash	90-day T-Bill	0.37%	2.55%
Hedge Funds	Callan Hedge FOF	5.26%	6.06%
Commodities	Bloomberg Commodity	-3.78%	2.03%
Private Equity	Cambridge PE	11.62%	15.46%
Real Estate	NFI-ODCE	6.01%	8.05%
Annualized returns for periods ended 12/31/2018. ¹Denotes 15 yr annualized return as 25 yr data is not availableSource: Callan Institute

Historical returns are the baseline for which forward looking projections can be evaluated against and contextualized upon. While historical returns are insightful and provide context for both planning and portfolio management applications, they may have little or nothing to do with what is expected to take place in the near, intermediate and/or long term. To highlight this point, we note the well-known industry disclaimer which states, “past performance is not indicative of future results”. So, to cover our bases and provide a more robust view, we will now look at forward looking return projections followed by a comparison between the past and present.

Capital Market Return & Risk: Forward looking projections

To predict the future, however futile that may be, many institutions provide capital market projections that provide practitioners (and interested readers) with their firms best thinking regarding forward looking markets and long-term outlooks. These estimates serve as inputs for a variety of applications including Monte Carlo simulation and portfolio construction using mean variance optimization, both of which are key considerations to a healthy and sustainable long-term financial plan.

A partial but influential list of firms that provide capital market forecasts include:

Callan Institute
JP Morgan
Blackrock
Bank of New York
MFS
RBC
PIMCO
Goldman Sachs

While any single provider can be utilized, each brings a different methodology to the table and an average of several providers can be a good way to obtain exposure to many firms’ best ideas and to reduce risk associated with any one firms’ method being off in any given year.

The Table 3 below shows different asset classes and the 10 year forward looking estimates, averaged amongst several providers included in the list above. Table 3 also shows the estimated Sharpe ratio (i.e., risk adjusted return) which allows for an apples-to-apples comparison of asset classes, controlling for risk. Furthermore, we also include the real return, which is gross return less inflation (estimated to be 2.14% over the same period). In Chart 1 we represent these same results visually.

Table 3 – Forward Looking Estimates
Asset Class	Return	Risk	Sharpe Ratio	Real Return
Cash Equivalents	2.20%	0.48%	0.00	0.06%
US Fixed	3.49%	3.45%	0.37	1.35%
Non-US Fixed	1.95%	6.57%	-0.04	-0.19%
Hedge Funds	5.25%	6.91%	0.44	3.11%
Emerging Market Debt	5.37%	9.08%	0.35	3.23%
High Yield	5.47%	9.35%	0.35	3.33%
Real Estate	5.52%	11.34%	0.29	3.38%
US Large Cap Equity	6.33%	15.58%	0.27	4.19%
Commodities	3.04%	16.40%	0.05	0.90%
Dev International Equity	7.03%	17.55%	0.27	4.89%
US Mid/Small Cap Equity	7.03%	19.31%	0.25	4.89%
Private Equity	7.41%	21.45%	0.24	5.28%
Emerging Market Equity	8.61%	22.75%	0.28	6.47%
Note: inflation estimate is 2.14% annualized. Sources: Callan Institute, JP Morgan, Blackrock, Bank of New York, MFS, RBC

Chart 1

What is notable about the returns in Table 3, is that while asset class trends may be the same (e.g., stocks > bonds > cash) domestic equity returns are significantly lower than the returns in Table 2 as are private equity and real estate (over both time periods). This means that firms expect future returns in these asset classes to be less than historical results, which is in line with the big picture takeaways garnered from analysis of the current Shiller P/E ratio (as well as the current Buffett Indicator), both of which seek to estimate forward returns by incorporating capital market and economic data such as stock prices, GDP and earnings cyclicality. However, volatility in these asset classes is expected to stay in line with historical levels (if not slightly higher) which implies that investors should expect lower returns for the same level of risk on a go forward basis.

These lower forward-looking return projections are due to the cyclical aspect of business, credit and the economy. In the United States, we are late in the economic expansion cycle(s) and most expect some negative years (i.e., economic slowdown) in the coming decade which would materially impact return figures as compared to a decade prior when economic expansion was predominate.

This does not necessarily mean doom and gloom ahead but does imply that caution should be heeded in terms of where risk assets are allocated. Perhaps a greater allocation to cash and other stable investments is warranted given the relatively low level of anticipated inflation. However, if real returns on cash go markedly below zero, investors will be incentivized to purchase risk assets (e.g., stocks & bonds) at even more elevated prices than today, meaning the opportunity cost of sitting in cash is high. With such a dichotomy, careful planning is certainly required.

Conclusion

Individuals looking to retire (i.e., access investment assets for income) in the next 15 years would be well served to review their investment allocations and future income/cash-flow plans in the wake of a decade worth of gains in most risk assets. For these investors, locking in gains and preserving capital is of paramount importance, but in markets such as these professional guidance will certainly help navigate choppy waters.

Additionally, for investors already in retirement drawing down investment assets, extreme caution must be paid to asset distribution plans and how those assets are invested. Sequence risk can exacerbate financial plan failures and in order to protect against running out of money in adverse scenarios, sophisticated planning software and risk models must be employed to develop a robust cash-flow and integrated portfolio plan that is well suited to defend wealth in any and all markets.

In part 2 of this 3-part series, we will explore risk modeling in financial planning (e.g., Monte Carlo simulation). Last, part 3 will explore how capital market projections are used to construct portfolios and develop strategic asset allocations.

About the Author

Sean Clark holds a Master of Science in Risk Management from New York University and a Bachelor of Arts in Economics from Clemson University. Areas of practice include financial planning and portfolio management, specializing in applied mathematics and risk.

References

Disclosures

Centura Wealth Advisory (“Centura”) is an SEC registered investment adviser located in San Diego, California. This brochure is limited to the dissemination of general information pertaining to Centura’s investment advisory services. Investing involves risk, including risk of loss.

Centura Wealth does not make any representations as to the accuracy, timeliness, suitability or completeness of any information prepared by any unaffiliated third party, whether linked to or incorporated herein. All such information is provided solely for convenience purposes and all users thereof should be guided accordingly.

Past performance is no guarantee of future results and may have been impacted by market events and economic conditions that will not prevail in the future. This newsletter contains certain forward‐looking statements (which may be signaled by words such as “believe,” “expect” or “anticipate”) which indicate future possibilities. Due to known and unknown risks, other uncertainties and factors, actual results may differ materially from the expectations portrayed in such forward‐looking statements. As such, there is no guarantee that the views and opinions expressed in this letter will come to pass.

Indices are unmanaged. Any reference to a market index is included for illustrative purposes only as it is not possible to directly invest in an index. The figures for each index reflect the reinvestment of dividends, as applicable, but do not reflect the deduction of any fees or expenses, or the deduction of an investment management fee, the incurrence of which would reduce returns. It should not be assumed that your account performance or the volatility of any securities held in your account will correspond directly to any comparative benchmark index. Bonds and fixed income investing involves interest rate risk. When interest rates rise, bond prices generally fall.

For additional information about Centura, please request our disclosure brochure as set forth on Form ADV using the contact information set forth herein, or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov). Please read the disclosure statement carefully before you engage our firm for advisory services.

05/08/19

ESTATE PLANNING, NEWS

Your Teen is off to College!

20.4 million kids attended a college, university or trade school in 2017. Using simple math, that means approximately 40.8 million parents sent their babies off to school last year. There is so much to do and to remember! Try googling “college student checklist” and you’ll find countless links to exhaustive lists of things to remember to buy and pack. These lists include the obvious items like school supplies, but also list medicines, kitchen and bath necessities, cleaning supplies, computer/electronic needs, and items to decorate your room. All the things needed to prepare your child for college, right? It might seem so, but there is a glaring omission in this list.

When your child turns 18 years old, that “child” is considered an adult in the eyes of the law. This change comes with all the same rights and protections held by any other adult. What does this mean for you as the parent? As a parent, you no longer automatically have the right to speak freely with your child’s doctors and medical care providers. You no longer have the right to make your child’s medical decisions. You no longer have the right to manage your child’s finances, or to have access to your child’s financial records. You do not even have the right to access your child’s grades, class schedule, attendance records, etc. This is true even if you are paying for your child’s tuition, room and board, and even if your child is still on your medical insurance. Your rights as a parent are severely diminished on the day your child reaches age 18.

Accidents are the leading cause of death in young adults. Suicide by young adults is the second leading cause of death. Beyond that, approximately 250,000 Americans between the ages of 18 and 25 are hospitalized each year.

Consider what would happen if you were to receive a call that your child, who is attending college miles (maybe even states) away, has been in an accident. Yet, you as a parent do not have the right to gain information regarding the child’s condition or medical treatment options. This is a sad reality for many parents. Without being named in certain legal documents, you may have to petition a court to be appointed legal guardian of your adult child. This can be a lengthy and costly process.

Here are the critical documents for anyone age 18 and older:

Financial Durable Power of Attorney – With this document, your child can name Mom and Dad to have the ability to manage their financial affairs (pay bills, buy/sell assets, file tax returns, etc.).
Medical Power of Attorney (also known as a Health Care Surrogate) – This is the document in which your child can name Mom and Dad to have the ability to make medical decisions on his or her behalf (such as consenting to treatment or moving the child to a more specialized facility).
Living Will Directive (also known as an Advance Directive) – This document controls end-of-life decisions with regard to the administration of or the removal of artificial nutrition, hydration and respiration (i.e., life support).
HIPAA Authorization – Being named in a HIPAA Authorization will give you the ability to speak freely with your child’s physicians and medical care providers. This will also allow you the authority to have access to all of your child’s medical and psychiatric records.
Family Educational Rights and Privacy Act (“FERPA”) Consent – A FERPA Consent is required before Mom and Dad can have access to all of their child’s school records and information, including class schedules and attendance records.

Be sure to put an estate plan for your 18 year old at the top of your Labor Day break punch list! Don’t wait until an emergency happens. Plan for tomorrow today!

– Written by Charlsey Baumeier, First Financial Resources

Sources:

¹ National Center for Educational Statistics

² National Center for Educational Statistics

08/16/18

ESTATE PLANNING, NEWS

Financial and Estate Planning for Women

Ladies, in today’s world we are exposed to all kinds of sound bites, headlines and political propaganda….. “the war on women,” “wage inequality,” and other such catch phrases designed to incite feelings of helplessness, fear, betrayal and injustice.

What can you, as an individual woman, do about it? Instead of trying to figure out this Rubik’s Cube of global and national women’s issues, how about taking a look at your own personal situation first?

How educated are you on finances and estate planning? As women, we are most profoundly affected by financial and estate planning, or in most cases, the lack thereof. This article will identify the leading causes for financial strain and lack of planning among women, and how you can take control of your financial and estate well-being.

Let’s begin by looking at the facts.

Women control 75% of the financial wealth in the United States.
Only 35% of women who are offered retirement guidance through their employer take advantage of it.
77% of women are comfortable discussing medical issues with a doctor, but only 47% of women are comfortable discussing money and investing with a financial professional.
84% of custodial parents are women.
The average age of widowhood in the US is 55 years old.
Women are three times as likely as men to be widowed.
40% of surviving widows fall below the poverty line within a year of their husbands’ deaths.
Less than 1% of a widow’s income come from employment.

So those are the facts, but what do they mean? Regardless of age, women need to play an active role in their own financial and estate planning, as well as that of their families.

Understanding your assets, debts and expenditures is step one. On average, women tend to live 5 to 7 years longer than men. Couple that with the fact that women tend to marry older men, and it’s no wonder that women are the ones left alone and in control of how the family’s assets will ultimately be distributed. With this control comes great responsibility.

It is important for women to assume an active role in managing their finances. There is a common misconception that you must have a certain net-worth before you should start making plans. This could not be further from the truth. It’s difficult to implement a plan if you do not understand where you are starting and where you want to finish.

Make a list of your assets (real estate, vehicles, bank accounts, investment accounts, life insurance, 401K accounts, retirement accounts, and any other valuable assets and/or collectibles).
Make a list of your debts (mortgages, car loans, student loans, credit card debt, personal loans, tax loans, etc.).
Make a list of where your money goes each month – be sure to include all expenditures, including going out to eat, movies, gas, Starbucks, etc.

Going through this exercise is an eye-opener for many people. When you detail on paper how much money you are spending and where its being spent, it becomes much easier to identify areas in which you can cut spending and add to your overall savings and investible assets. Finding these “pockets” of money is critical for women, as we tend to have fewer assets in general than men. There are many reasons for this disparity between men and women, but typically it is due to the fact that women generally earn less money (per hour) than men, spend less time in the work-force (due to caring for children and/or ailing spouses and parents), and are generally more uncomfortable or uncertain about how money works and how to save and invest.

Make sure you understand how your assets are managed today so that you can plan for how they will be managed in the future for your own benefit and for the benefit of your loved ones.

Protecting your assets is step two. It is vitally important for women to seek the advice of professionals when it comes financial and estate planning. Learn to overcome your fear of speaking about personal matters with such professional advisors. The sooner you plan, the better off you will be in your later years.

Make sure your plan includes adequate life insurance coverage for both you and your spouse, to help support your needs after the first death and to support your surviving beneficiaries at the second of your deaths. Life insurance can be used to pay final debts and expenses, taxes (income taxes as well as estate and inheritance tax), as well as to continue the life styles of your surviving beneficiaries.

If you have recently married, divorced or have been widowed, have you updated your beneficiary designations on your life insurance and retirement accounts? Remember that the current designations on those accounts control the distribution of those assets – even if you have updated your Will.

If you are a recent widow, have you met with an attorney to discuss electing portability of your deceased husband’s unused federal estate tax exemption? Currently, (in 2018) every individual can exempt almost $11.2 million in assets from federal estate/gift taxes (during life or at death). The unused exemption of a deceased spouse can be passed to a surviving spouse, but only by making an election and filing an estate tax return in a timely manner (within 9 months from date of death), regardless of whether any taxes are due.

Finally, protecting your wealth and your health is step three. Once you build the wealth, make sure you are taking steps to protect it!

A Last Will and Testament is a document that directs the distribution of your financial and physical assets to whom you wish and in what manner. Dying without a Will is known as dying “intestate”. Without a Will, your assets will be distributed according to your state’s intestate succession laws. This is true even if you are married. These laws vary from state to state, so be sure you understand the intestate laws of your state. Another very important reason to have a Will is if you have young children. Your Will is the document that is legally recognized by courts, in which you name guardianship for your minor children. If you do not create a Will and name a guardian for your young children, a judge will name one for you. This can lead to turmoil between families and can potentially land your child in foster care until guardianship can be worked out.

A Revocable Living Trust is a document that can be used to avoid probate upon your death. This type of Trust is often designed to work with your Will, but unlike Wills, a Revocable Living Trust is a private document, not subject to probate and court jurisdiction. The terms of the trust, the assets owned by the trust, and to whom and how those assets are distributed all remain private. By having this Trust in place and retitling your assets into the name of the trust during your lifetime, your estate can avoid the probate process, thereby saving your surviving beneficiaries time and money. Properly drafted Trusts are also a great way to protect your assets for future generations, keeping those assets in your bloodline to benefit your family.

Many individuals may believe they do not need a Will or a Trust. Perhaps they are young and are just starting to accumulate assets, or maybe older with modest wealth. If either is true, there are still reasons to plan today. What are you doing to protect your rights with regard to controlling your healthcare? What would happen if you were to have a health-related event that left you incapable of managing your finances or unable to make your own healthcare decisions? Who would care for you and would that person truly know your wishes?

A Financial Durable Power of Attorney gives you the ability to name someone as your “attorney-in-fact” or “agent.” Your agent will have the ability to manage your finances, pay bills, buy and/or sell assets, vote stock, file your tax returns, pay your taxes, etc.

A Medical Power of Attorney (also referred to as a Healthcare Surrogate Designation), is a document in which you name someone to make your medical decisions for you when you are unable to do so for yourself. This document would be used in a situation when you cannot speak or otherwise communicate for yourself. With this power, your agent can make decisions such as consenting to treatment or moving you to a different facility for more specialized care.

A Living Will Declaration (also referred to as an Advance Directive) is the document that controls end-of-life decisions, such as the administration of or the withdrawal of artificial nutrition, hydration and respiration. In this document you declare your wishes regarding being allowed to die naturally without artificial intervention, or otherwise.

The HIPAA Authorization is the federal document in which you authorize individuals (including the agent under your Medical Power of Attorney) to have access to your private medical information. Such information may include current and past medical and psychiatric conditions, treatment options, and empowers the individuals named the ability to speak freely with your physicians and medical care providers.

If you have a health event without these documents in place, someone will have to petition the court to be appointed as your legal guardian, giving them the power to handle your finances and healthcare. I don’t know about you, but personally, I know who I would and who I would not want taking care of me. Unfortunately, a judge does not know your wishes and it will be a judge that will appoint a guardian for you if you do not have these documents in place.

Once you have completed your plan, you may want to consider sharing your wishes with your family and loved ones. Its also a good idea to review your plan with your financial and legal professionals at least every couple of years.

As women, it’s critical that we take an active role in managing our finances, planning for our financial future, protecting our assets during our lifetimes, maintaining control of our healthcare decisions, and having a clear plan for the management and distribution of those assets in the future.

Plan for tomorrow today!

Sources:

2015 Fidelity Investments Money FIT Women Study

US Census Bureau

https://medicine.jrank.org/pages/1843/Widowhood-Economic-Issues-Economic-effects-widowhood.html”>Widowhood: Economic Issues – Economic Effects Of Widowhood