Volume 7 | Issue 1 January 2018

Inside this issue:

Year to DateReturns of

Major Indices The bull market continued to run in 2017 with an astonishing lack of volatility. Despite dramatic headlines including North Korean missile threats and hurricane devastation, stocks enjoyed one of the smoothest investment rides in the past century.

A breakdown shows that just about everything gained in 2017. The Russell 3000, the broadest measure of U. S. stocks, rose 7.2% in the fourth quarter, and was up 21.1% for the year. The widely-quoted S&P 500 index of large company stocks returned 21.8% for the year.

International stocks finally joined the bull run in 2017. The MSCI All World Ex U.S. index, a representative basket of international developed companies, increased 6.1% in the fourth quarter to finish the year with a gain of 27.2%. Emerging market stocks of less developed countries, as represented by the MSCI EM index, rose 9.5% in the fourth quarter, ending 2017 with a remarkable 37.3% gain.

In the bond markets, yields continued to be range-bound despite the Fed increasing short-term rates by .75% during 2017. The Barclay’s US Bond Index finished the year up 1.3%.

How long can this continue? Who knows? The S&P 500 is now trading around 18 times forward earnings, above the historical average of 16 — which, loosely translated, means U.S. stocks are not cheap but nor are they extremely expensive. International stocks, by the same measure, are cheaper and offer more growth opportunity going forward.

Other factors that suggest U.S. stocks still have room to grow include low unemployment, higher corporate profits and a market psychology that doesn’t match the buying frenzy you typically see at market tops. In fact, investor preference for stocks since the great recession of 2009 has turned somewhat ambivalent for investors of all ages and educational backgrounds. As a result, stock ownership in America has decreased from 62% between 2001 and 2008 to 54% from 2009 to 2017.

Eventually, there will be a bear market where we will see major equity indices lose considerable value. It will be impossible to spot by forecasters, but the timing will seem obvious with the benefit of hindsight. The important thing to remember is few people have ever become wealthy by timing the market. Many have gotten significantly wealthier by holding on whenever the raft hits the rapids. We missed the rapids in 2017, but everybody knows they’re coming — someday, though perhaps not soon. Let’s make sure we have a tight grip by owning a diversified portfolio and staying invested when the ride gets choppy.

What Lies Ahead in 2018?

The Media and Your Mind

Tech Rally

Mutual Fund Ratings

Retirement Communities

Bitcoin Frenzy

New Medicaid Cards

Portfolio Notes

End Notes

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Russell 300021.1%

MSCI All World Ex US27.2%

MSCI Emerging Markets 37.3%

Barclay’s US BondIndex1.3%

Alternative Strategies

6.8%

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Today I am discussing something which subtly impacts the important financial decisions you make.

Let me start with your mind’s ability to recollect information. Let’s say you’re with a friend and they mention something about Korean BBQ. And then the conversation moves on to other things, and you completely forget about Korean BBQ. Then the next day, on your usual way to work, your eyes suddenly fixate on a Korean BBQ billboard and you pay extra attention to the sign that day. Has this ever happened to you?

Some researchers call this the “availability bias” which helps our brain sift through and prioritize information. The more we hear or see something the more our brain prioritizes it as important and focuses on it.

Suffice it to say, there is power in the sequence and recall of that same information. Advertisers and the media have tremendous power to get you to focus on the things they choose by using your mind’s cognitive abilities. For example: what are you more aware of, inappropriate sexual exploits of politicians or our mounting national debt? If you’re like most Americans, you’re probably more focused on the former story because of the constant media coverage.

U.S. MEDIA CONTROLLED BY JUST FIVE COMPANIES

In 1983 90% of all U.S. media was controlled by 50 companies; now that number is just 5 companies. In order from largest to smallest they are Comcast, The Walt Disney Company, 21st Century Fox, Time Warner and National Amusements. Comcast, for example, owns NBC, CNBC, Telemundo, USA Networks, Bravo, the Weather Channel and so on. In mid-December The Walt Disney Company reached a deal to buy most of 21st Century Fox – the parent company of Fox News. The big keep getting bigger.

So even though you may think you’re getting your news from different sources, the content you see and hear is curated across multiple channels by just a handful of media giants.

INVESTORS ARE INFLUENCED TOO

Examples of availability bias abound in the financial media with topics changing daily, weekly or monthly. Currently there is a lot of focus on bitcoin and technology.

Remember, read and listen defensively and try to be aware of your information sources. It’s not in your long-term financial interests to let the media hijack your focus. The more important thing is to hold a diversified portfolio and adhere to a plan that allows you to reach your goals.

“In 1983 90% of all U.S. media was controlled by 50 companies; now that

number is just 5 companies.”

How the Media Hijacks Your MindAdapted from: How the Media Hijacks Your Mind Without Knowing It! Steve Pomeranz, stevepomeranz.com, November 2017

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Adapted from: Tech Rally Powers World Markets, Riva Gold, The Wall Street Journal, November 2017

Shares of global technology companies are outpacing other sectors this year by the widest margin since the height of the dot-com era, with a handful of key players dictating how markets are performing around the world.

Just these eight companies together — Facebook, Apple, Amazon, Netflix, Alphabet, Baidu, Alibaba and Tencent—have increased by $1.4 trillion in market cap in 2017, a sum roughly equivalent to the combined annual gross domestic product of Spain and Portugal.

Tech giants’ powerful user networks, large cash piles and access to consumer data have led many investors to expect the big will only get bigger.

“You need critical mass to support continuing innovation,” said Christopher Dyer, director of global equity at Eaton Vance. While there are exceptions, “China and the U.S. would be natural destinations for incremental dollar investment within tech,” he said.

While technology companies have helped take U.S. and some Asian stock markets to records, the less tech heavy markets of Europe, Canada and Australia haven’t enjoyed the same success.

For MSCI Europe, roughly 85% of its underperformance relative to world stocks can be attributed to differences in the weight and performance of their technology sectors, according to Morgan Stanley.

“The narrow nature of this rally has to be seen as something of a concern but these are cash-generating companies who are being seen as the bedrock of the new economy,” says Paul Markham, a global equities portfolio manager at Newton Investment Management.

Global tech stocks are up 42% this year, roughly double the gains of the broad-based MSCI All Country World Index. As the graph above reflects, in 2017

the tech sector is up 21 percentage points more than the next best sector, materials — leading by the widest margin of any sector since 1999, according to an analysis by Morgan Stanley.

The sector’s dominance could make leading markets vulnerable should investors’ enthusiasm fade for tech or regulation hamper company development, some analysts say. But most don’t see that happening soon as the giants of this sector continue to deliver

on earnings, meaning tech could continue to be the differentiator among global markets in the years to come.

As we watch this growth, it is hard to dismiss the fears of another dot.com bust similar to what we experienced in 2002. But there are some important differences. Tech valuations in the U.S. are just a fraction of where they were during that era. In early 2000, the S&P 500 tech sector traded at a forward price-to-earnings ratio (P/E) of 52, according to FactSet. Today, that P/E is 19, compared with 18 for the S&P 500 an index of diversified large cap U.S. stocks.

In 1999 tech companies were incredibly expensive and didn’t yet have a lot of earnings,“ says Mark Phelps, an equities chief at AllianceBernstein. But today, not only are their earnings keeping up, “they’ve got more data, more processing power and they’re giving the consumer a really good product,” he said.

In short, many market experts think this tech rally still has legs as we enter 2018.

Tech Rally Powers World Markets

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Mutual Fund Ratings Are Not What They SeemAdapted from: Mutual Fund Ratings Are Not What They Seem, Kirsten Grind, Tom McGinty and Sarah Krouse, The Wall

Street Journal, October 2017

From pension funds to endowments to financial advisers to individuals, investors rely on Morningstar’s star ratings to help them decide where to put their money. A lot of these investors assume that the number of stars awarded to a mutual fund is a good guide to its future performance.

The thing is, upon examination, it isn’t.

The Wall Street Journal tested Morningstar’s ratings by examining the performance of thousands of funds dating back to 2003, shortly after the company began its current system. Funds that earned high star ratings attracted the vast majority of investor dollars but most of them failed to perform going forward.

Of funds awarded a coveted five-star overall rating, only 12% did well enough over the next five years to earn a top rating for that period; 10% performed so poorly they were branded with a rock-bottom one-star rating. The chart to the right reflects similar results for a shorter three-year period of time.

The falloff in performance was even more dramatic for domestic stock funds, the largest category of U.S. funds by assets.

This means a five-star rating for the equity funds was no more an omen of success than it was one of failure or mediocrity.

The Journal analysis also found Morningstar analysts’ ratings of funds were overwhelmingly positive. From November 2011 through August 2017, the firm gave analyst ratings to about 9,200 fund share classes. Just 421, or 5%, received negative reviews. At the end of August, only 1% did which doesn’t provide much of a compass to investors.

Morningstar’s reach is so pervasive that the marketing used by mutual fund firms revolves around it. These firms heavily advertise their star ratings – and pay Morningstar for the right to do so. Morningstar said it publishes the ratings because it believes they have

investment merit, not for financial gain. It said its intellectual-property licensing packages, which include the stars, contributed to only 4% of their total 2016 revenue.

FUTURE PERFORMANCE

Morningstar says it has never claimed its star ratings suggest how funds will do in the future. The star system is strictly backward-looking, assessing past performance, the firm says. “We have always been

very clear that it’s not intended to predict future performance,” the company said in a written statement.

In reality, the firm sends conflicting signals about the star ratings’ predictiveness. A study published by Morningstar in September said the stars point investors to funds “likelier to outperform in the future.”

Inside Morningstar, some employees have expressed discomfort about how much investors rely on the ratings. Stephen Wendel, head of behavioral science at the Chicago-based firm, wrote in the June issue of Morningstar magazine that part of his job was “examining whether we are contributing to abuses in the industry,” and said: “Morningstar’s star ratings for funds are clearly used in the industry to imply that funds that performed well in the past will do so in the future.”

He added, “That needs to change.”

In fairness to Morningstar, no system is perfect. The firm’s efforts have contributed significantly, over time, to the field of investment research. But there is no doubt that this study uncovers conflicts of interest that should be addressed in order for Morningstar to preserve its industry leader status.

Note from Shine: Our investment committee does not consider a fund’s star rating in the investment selection process due to the factors discussed in this article.

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Buying the Total Community PackageAdapted from: Buying the Total Package, Patricia Mertz Esswein and Eileen Ambrose, Kiplinger’s Personal Finance, January 2018

There are nearly 2,000 continuing care retirement communities (CCRC’s) nationwide, many with waiting lists. To buy into one you usually need to be at least 62 and healthy enough to live independently. You live in a house or an apartment and go to a community dining room for as many meals as you choose. The CCRC provides entertainment, fitness centers and wellness programs, plus excursions to museums, theatres and stores. If your health declines, you can move on to assisted living, memory care or skilled nursing until the end of your life.

WHAT YOU’LL PAY

All this comes at a steep price. The majority of CCRC’s require a hefty entrance fee, which averages about $320,000 according to the National Investment Center for Seniors Housing and Care, an industry research group.

You’ll also pay monthly fees, which average $3,266 nationwide. This average sounds high, but often it costs less to live at a CCRC than a former home, after eliminating mortgage payments, property taxes, homeowner’s insurance and utilities.

In general, the higher the entrance fee and monthly fees, the more of your health care costs your fees cover. Many communities offer a partial – or even full – refund of the entrance fee if you leave or after you die, but adding this option does come at a cost.

When you apply for a CCRC, be prepared for your finances to be heavily vetted. The CCRC wants to make sure you can afford the up-front fee and the monthly fee, which will likely go up each year by 3% to 4%.

Most people finance the entrance fee by selling their home. If you can’t immediately sell your home, you may be able to pay the entrance fee using a home-equity line of credit. “Some CCRC’s may allow you to delay the payment of your entrance fee by 60 to 120 days if you pay a nominal sum,” says Steve Fleming, president of Well Spring, a CCRC located in North Carolina.

CHECK OUT THE CCRC

The box above lists ways to vet a CCRC. To dig deeper into the quality of the health care, use the “Nursing Home Comparison” tool at www.medicare.gov, which rates facilities. Note the total number of licensed-nurse staff hours devoted to each resident per day.

Money aside, for many residents, the value of a CCRC is the ability to control their future without having to rely on others to make critical care choices for them. It puts you in the driver’s seat on this very important topic.

“Opportunity is missed bymost people because it

comes dressed in overallsand looks like work.”

Thomas Edison

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Bitcoin: What’s Driving the Frenzy?Adapted from: Bitcoin: What’s Driving the Frenzy?, Daniel Shane, @CNN MoneyInvest, December 2017 Bitcoin is Going Wild – Here’s What the Cryptocurrency is All About, Chris Weller, Business Insider, May 2017 The Truth About Blockchain, Marco Iansiti and Karim Lakhani, Harvard Business Review, February 2017

Move over Chinese rooster – 2017 has become the year of the bitcoin.

In February 2011, one bitcoin was worth a dollar. Its value at the beginning of 2017 was worth less than $1,000 but has since soared above $19,000.

So how does this cryptocurrency work – and what’s behind its spectacular rise?

WHAT IS BITCOIN?

Bitcoin was created in 2009 by an unknown person using the pseudonym Satoshi Nakamoto.

At the time, its backers saw it as a simple global payment system. In countries that accept it, you can buy groceries and clothes just as you would with the local currency. Only bitcoin is entirely digital; no one is carrying actual bitcoins around in their pocket. Instead, people send bitcoins to each other using mobile apps or their computers and a fee is charged for every transaction.

The technology at the heart of bitcoin is referred to as blockchain. Essentially it is a ledger that records transactions between two parties in an efficient, verifiable and permanent way. You’ll be hearing more about this technology as transactions are protected from deletion, tampering and revision. Some claim blockchain technology will revolutionize transactions in the business world long-term.

WHY HAVE PRICES GONE CRAZY?

With its 2017 breathtaking price appreciation, bitcoin trading has overshadowed the product’s original purpose – and has become a preoccupation with speculators and prognosticators alike.

Some experts say the biggest force pushing bitcoin prices higher has been, well.... higher prices. Investors have been buying in this year out of “FOMO,” or the Fear Of Missing Out, according to Dave Chapman, managing director of Octagon Strategy, a Hong Kong-based crypto-currency exchange. “There is admittedly a lot of specula-tion in this market,” he said.

It’s worth noting some major financial institutions in the U.S. are helping bitcoin gain greater mainstream accep-tance. Starting December 10th, investors are now able to trade bitcoin futures via the Chicago Board Options Exchange and Chicago Mercantile Exchange. In fact, the Nasdaq plans to launch its own bitcoin futures in 2018.

“With a total value of $270 billion, the bitcoin market is small compared with more established assets. As a result, just a small change in the amount of mainstream investors’ money would make a big difference to bitcoin prices,” said Thomas Glucksmann, head of marketing at Hong Kong bitcoin exchange Gatecoin.

WHO’S BUYING IT?

For much of this year, it’s global mom-and-pop investors who have been buying in. Japan alone comprises about 60% of all bitcoin trading. This is attributed to recent regulatory changes there that have made it easier to trade this cryptocurrency, according to experts.

Part of the rally has been sparked by the anticipation of institutional investors, such as U.S. hedge funds and asset managers, entering the market for the first time. But some experts, including Warren Buffett and JPMor-gan Chase CEO Jamie Dimon, are very skeptical of this materializing.

SHOULD YOU BUY BITCOIN?

The answer is an emphatic “NO” for these reasons:

• Investing in cryptocurrencies involves very high risk and prices are extremely volatile. For example, be-ginning December 6th the price of bitcoin increased 40% in 40 hours. On December 10th the intra-day price dropped 17% from it’s opening value.

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Coming Soon – New Medicare CardsAdapted from: Coming Soon - New Medicare Cards, AARP.ORG, October 2017

Congress has come up with a way to make it harder for Medicare scammers to steal your ID and rip you off. The solution: new Medicare cards that don’t include your Social Security number, gender or signature.

The new cards start going into the mail on April 1, 2018. Each will feature a computer-generated Medicare beneficiary identifier (MBI) assigned just to you. The MBI, made up of 11 numbers and letters, will be used for billing, to verify eligibility for services and to check the status of a claim.

These changes will make it considerably harder for criminals to steal your identity. According to the Jus-tice Department, the number of identity-theft cases for people 65 or older hit 2.6 million in 2014.

But true to their nature, scammers are already using the moment to target the 58 million people who will be get-ting new cards next year.

The Federal Trade Commission reports that rip-off art-ists are now calling beneficiaries, pretending to be Medi-care. Three common pitches are:

1. You’re asked for your Social Security number and bank information so you can get the new card. HANG UP! Medicare will never call you and never ask for such information.

2. You’re asked to pay for your new card. HANG UP! The new card is free.

3. You’re told you’ll lose your Medicare benefits if you don’t give them money and personal information right now. REALLY HANG UP! The free card will be sent to you automatically. Your benefits will remain the same.

Mailing cards to so many people is a big job. So it will take some time. Don’t worry if you get your card before or after your spouse, or if friends get theirs first. Medi-care members have until December 8th, 2019, to begin using the new ID. Both the new card and your current card will be valid until then.

• It is very risky to invest in bitcoin as it is simply a computer algorithm not backed by any tangible asset.

• So far, the volume of actual bitcoin transactions has been minuscule. As a result, the market is unregulated by banks or government entities. This means, if you get treated unfairly in a bitcoin transaction it is impossible to get your money back.

• Payments in bitcoin can be made without traditional middlemen such as banks and without the need to give your name. This has made bitcoin popular with criminals and others who want to move money anonymously.

• There is a high risk of fraud as there is much misinformation distributed and lack of clarity around bitcoin trad-ing. Opportunists have taken advantage of this to launch Ponzi schemes.

In short, there has never a better time for Warren Buffett’s famous piece of investment advice: “Be fearful when oth-ers are greedy.”

The top 5% of all earners now pay 57.1% of all federal income taxes. That’s up from 36.8% in 1980.

The top 1% pay 36.9%, up from 19.1% in 1980. The really, really rich - those wtih more than $1 mil-

lion in income, or about 181,000 people - pay 19% of all federal taxes.

- Investor’s Business Daily, April 17 2007

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U.S. equities ended 2017 on a very strong note, delivering positive returns in every month of the year for the first time since 1958. International stocks joined the bull run in 2017, and overseas valuations currently look less expensive than their U.S. counterparts amidst a backdrop of synchronized global economic growth.

We are adjusting portfolio allocations to capture strong returns and to take advantage of good future investment opportunities. We have reduced our Strategic Alternatives category target weight by 3% and increased our allocation to International stocks accordingly. Specifically, we are selling positions in Preferred Stocks and adding the Vanguard International Explorer Fund, which invests in small and mid-size companies of developed and emerging international countries.

Update on Cyber SecurityAt Shine, the safety of your information is a high priority. As a result, we have engaged Advisor Armor, a cybersecurity firm, for ongoing expert consulting in the areas of technology and practices designed to protect our networks and computers from data attack, damage or unauthorized access. On this topic, the best defense is a great offense!

Tax ReportingYou’ll receive year-end 1099 Tax Forms for your taxable accounts from Charles Schwab in mid-to-late February. In addition to interest and dividends, these forms report all taxable gains and losses in your investment accounts. Please note that these 1099s provide the comprehensive information you need to complete your taxes.

If you have any questions or would like additional detail, please contact us. Also, if you’d like us to forward tax reports to your accountant, please let us know. We have worked with many of your accountants for years and are happy to assist in any way.

Personal Information UpdatesAs always, we rely on you to inform us of any changes in your personal and/or financial situation. We enjoy hearing from you and remain available to meet on an ongoing basis. Please call if you’d like to schedule a time to get together.

Wishing you a prosperous 2018!

All of us at Shine

Portfolio Notes

End Notes

2018 ANNUAL LIMITS

Retirement Plans

Elective deferrals 401(k), 403(b), 457 $18,500

Catch-up contribution (age 50 or older) $6,000

IRA or Roth IRA contribution $5,500

Catch-up contribution (age 50 or older) $1,000

Estate and Gift Tax

Annual gift tax exclusion $15,000

Estate and gift tax basic exclusion $5,600,000

Health Savings Accounts

Contribution - Single $3,450

Contribution - Family $6,900

Catch-up contribution (age 55 or older) $1,000