Q1 2015 Market Commentary

As human beings we tend to carry various cognitive and emotional biases that can affect our perceptions.
These biases tend to sway our decision making, as well as skew how successful we feel about the
outcome of those decisions. It becomes important to recognize these traits as we look back over 2014 and
prepare for the year ahead.
As the major indexes continue to move higher, one bias that concerns us, as advisors, is called fading
affect. This is described as a state of mind where emotional experiences fade with time. Studies show
this fading is more prevalent when attributed to negative events. That makes sense, as we have a better
chance of moving forward of healing if the pain of a traumatic experience can fade. And yet, if the
pain fades too quickly, we run the risk of not remembering how the trauma happened in the first place and
we risk putting ourselves into similar, potentially painful situations.
In 2008 and into 2009 we went through a massive financial crisis. It was the most stressful period in our
financial lives, a cascading catastrophe in magnitude not seen since the Great Depression. Many
investors watched as the speed of the markets reaction decimated their lifes savings for some that
impact would have permanent consequences. For all, it was a time to reflect on what was important; what
we were willing and unwilling to suffer, as investors, when it came to future market risk.
As we have said in a number of previous Commentaries, while we have accepted the actions of the
Federal Reserve in supporting the financial system during the crisis, and their strategies for reappreciating assets afterward, one serious downside to all of their policies was the fact that investors felt
an initial pain due to the crash but then little after.
This is not to mean we would rather see investors suffer greater pain than they had, but more a
recognition that the Fed not only assisted the economy it also assisted investors in forgetting how bad it
had been. It allowed us to begin to forget that the crisis had ever occurred in the first place. But we must
remain vigilant to the fact that such a recovery can cause us to rationalize taking similar risks with our
investments in the future.
In the latest budget deal, a provision was added in as part of the political negotiations, which reverses
financial regulation brought into existence by the Dodd-Frank Bill. The new provision negates the
requirement that commercial banks hold risky, derivative assets in an entity separate from their everyday
operations. Derivative assets were the core catalysts for the meltdown that resulted in taxpayers bearing
the burden of massive bailouts like TARP and TALF. Six years removed from the near meltdown of our
financial system, and we are looking at how to allow the risks to re-emerge.
On the investor level, fading affect is working to bring the S&P 500 index performance back as the
benchmark for investors to gauge their own portfolio performance, despite allocations that have been
purposefully designed to limit exposure to that index. These allocations were designed in answer to the
soul searching questions that arose in the wake of the financial crisis yet the passing of time, Fed actions
and our own cognitive biases have led many investors to question that reasoning. We encourage all of our

clients to remember that your own personal performance experience is based on your needs, your
planning, your tolerance for risk and not as a benchmark for how well you performed versus five hundred
large US companies. Your planning is designed for you, and you only, to achieve the things you have
stated are most important to you.
We encourage this because unfortunately the only thing that has really changed is our perception of the
financial landscape. Yes, the S&P 500 is up, but misplaced incentives and mal-investment are still
rampant throughout our financial system and the evidence is plain. Corporations have been incentivized
by easy money policy to use leverage rather than their own cash for business purposes. That is all well
and good, as debt is truly cheap. However they are also incentivized to boost short-term quarterly
earnings growth, rather than long-term enterprise growth. This means the cheap debt is being used to buy
back stocks at record levels, or pay special dividends as in late 2013.
This a boon to shareholders, so long as they can maintain access to cheap dollars. So investors are
incentivized by these rising stock prices to over-extend their stock exposure, and many have through the
use of cheap margin debt, which is also currently at record levels. Meanwhile, sovereign efforts to
smooth out the boom and bust cycles only add to the levels of cheap debt available to both investors and
corporations neither of which has shown the ability to utilize such resource in a measured and prudent
fashion. This invariably creates another boom and bust cycle.
The most recent example of misaligned investor sentiment is the oil patch.
Falling oil prices are typically a boon to consumers and the companies that serve them, as energy is
always a core cost in both daily activity as well as routine operations. As that cost goes down, more is
left over for other spending and falling energy prices act as a type of economic stimulus. That is
typically very good for stocks. But current financial environment is anything but typical, because our
current system tends to lavish attention on any single industry that looks as if it might outperform the rest
in the near-term.
Municipalities throughout the mid-west couldnt build infrastructure fast enough to meet the demands of a
recently exploding population, as the oil patches of Texas and the Dakotas attracted thousands of workers
from all parts of the nation. Oil drillers of varying sizes and fiscal health issued debt in the millions,
which was bought hand over fist by yield-starved investors. Pipeline companies increased dividend
payouts using long-term loans, based on the promise of future income from ever higher oil prices. New
Exchange-Traded funds were born.
This cycle should be familiar. The last industry to capture the markets imagination was housing and prior
to that, technology. Like both of those before, the energy industry was also the beneficiary of Federal
largesse, as monetary and fiscal policies were implemented to encourage development. Whether or not,
and how, such intervention makes sense is not our argument to make as advisors. Our challenge is to
recognize risk and prepare our clients for the eventual outcomes as best we can.
It is always easier to see where the specific mal-investment risk was after the boom bust cycle plays out,
because during the boom, the general consensus downplay market risks. Make no mistake, market risk is

alive and well despite the rise of the S&P index. Global growth is slowing, valuations are getting richer,
and one has to wonder where growth will come from in 2015.
Even as the S&P 500 was breaking records in 2014, there were cracks appearing in the global economy as
a whole. Foreign and emerging markets stocks registered losses through most of the year, while domestic
small company stocks struggled, barely eking out positive gains only by rallying at year end. Fixed
income security returns were tepid, as were mid-cap company stocks.
Will US stocks rise in 2015? Possibly, but the greatest risk exists primarily because many have already
risen; the risk is that investors will follow their natural human instincts. The inclination to forget trauma;
the urge to compete; the need to be a part of what is viewed as having succeeded and discard what is
viewed as having failed. These are the unquantifiable risks that we as advisors must mitigate on behalf
of our clients. There is nothing more dangerous than the herd mentality as it carries us along, oblivious to
the dangers it poses. We feel good. We feel empowered, like we are doing everything right. But it always
ends with someone getting trampled.
Many will review year-end performance reports and feel disappointed. They will ask, if the S&P 500
was up X, why am I at Y? And thats ok, as we understand it is discouraging to feel left behind. But as
your advisors we never forget the bad times. We never forget the fear and panic that sets in when the herd
turns, like it will invariably turn again.
Because our focus is always on what your assets need to earn to make your stated goals and desires
happen with as high a level of probability as possible. That means focusing, regardless of current
conditions, on all of the potential risks inherent in financial markets. Because it is our job to ignore the
noise of buy, buy, buy and instead listen to you.
As each of our clients portfolios are managed in a personal and unique manner, if you would like to revisit your investments relative to your stated goals, prior to your regularly scheduled review, then please
feel free to reach out to us by phone at 800.220.2161 or by email at steve@nstarfinco.com and
julia@nstarfinco.com.
Steven B. Girard
President
The opinions expressed are those of Northstar Financial Companies, Inc. and are based on information believed to be from reliable sources.
However, the informations accuracy and completeness cannot be guaranteed. Past performance is no guarantee of future results.
Northstar Financial Companies, Inc, 1100 East Hector Street, Suite 399, Conshohocken, PA, 19428 Tel: 800 220 2161 www.nstarfinco.com
Registered Representative, Securities offered through Cambridge Investment Research, Inc. a Broker/Dealer, member FINRA/SIPC. Investment
Advisor Representative, Northstar Financial Companies, Inc. a Registered Investment Advisor. Northstar and Cambridge are not affiliated