This talk is intended for educational purposes only. It reflect our opinions and are based on our best judgment, but no warranty is given or implied as to their accuracy. Past performance does not guarantee future performance. No investment or trading advice whatsoever is implied by our commentary, coverage, or charts. DISCLAIMER

Shana Madoff, served on Finra’s Compliance Advisory Group Made possible by a grant from the Financial Industry Regulatory Authority (FINRA) Investor Education Foundation and the American Library Association (ALA)

ASSET ALLOCATION For (NOT SO) DUMMIES Larry Kirsch

Increasing wealth is all about Investment Returns True or False False Increasing Wealth is all about managing RISK “But in all my experience, I have never been in any accident of any sort worth speaking about.. nor was I ever in any predicament that threatened to end in disaster of any sort” — E J Smith, captain RMS Titanic, 1907

CATEGORIES OF RISK INVESTMENT INTEREST RATE INFLATION LIQUIDITY DEFAULT CURRENCY BLACK SWAN

WHO HAS YOUR INTEREST AT HEART? FINANCIAL ADVISOR STOCK BROKER MUTUAL FUND THEY ALL MAKE THEIR LIVING SELLING YOU SERVICES WHETHER OR NOT YOU MAKE MONEY

MYTHS & TRUTHS STOCKS ALWAYS RISE IS THE LONG TERM BUY AND HOLD STOCKS- YOU CAN’T TIME THE MARKET INCREASED RISK – INCREASED RETURN

S&P500 1/1/ /1/ MYTH 1 S&P500 1/1/ /1/ STOCKS ALWAYS RISE IS THE LONG TERM

MYTH 2 BUY AND HOLD STOCKS- YOU CAN’T TIME THE MARKET

I’ve been hearing that trying to “time the market” doesn’t work... I could miss out … AARP Bulletin YES

Winners 10/21/ /24/ /29/ /20/ /28/ /8/ /27/ /3/ /29/ /16/ Losers 10/19/ /26/ /27/ /31/ /8/ /28/ /26/ /13/ /14/ /26/ S&P 10 Biggest Days ( )

Buy-and-Hold 9.55 S&P RETURN % per year Missed 10 best days 7.03 Missed 40 best days 2.12 Missed 10 worst days Missed 40 worst days 18.75

SIMPLE ARITHMETIC I LOSEI HAVE TO EARN (to break even) 10%11% 35% 54% 50% 100%

Don’t Try to Time the Market (Yahoo-Retirement) -44% LOSS 79% BREAK EVEN

10/11/ /13/ % 126 days later % 7/12/ %

MYTH 3 INCREASED RISK – INCREASED RETURN CORROLLARY DECREASED RISK – DECREASED RETURN

INCREASED RISK – INCREASED RETURN

3 YEAR RISK/RETURN LARGE CAP GROWTH FUNDS RISK- STANDARD DEVIATION RETURNRETURN S&P 58% FAIL TO OUTPERFORM INDEXES

3 YEAR RISK/RETURN MULTI-CAP CORE FUNDS RISK- STANDARD DEVIATION RETURNRETURN

The NOT so SECRETS of RISK MANAGEMENT ASSET ALLOCATION MARKET TIMING (Belt and Suspenders Approach)

INDEXES WHAT DO I MEAN- “THE MARKET WAS UP TODAY” “AVERAGES” CALCULATED IN VARIOUS WAYS THAT REFLECT PART OR ALL OF THE MARKET PRICE LARGE CAPITALIZATION STOCKS DOW JONES INDUSTRIAL AVERAGE30 STOCKS STANDARD & POORS 500 (S&P500) 500 STOCKS SMALL CAPITALIZATION STOCKS RUSSELL STOCKS FOREIGN STOCKS EUROPE, AUSTRALASIA & FAR EAST (EAFE)

INDEXES ALLOW US TO LOOK AT THE BEHAVIOR OF LARGE PARTS OF THE MARKET WITHOUT PROBLEMS UNIQUE TO INDIVIDUAL STOCKS RISK REDUCTION 1

$1.50  $ % $21  $21 0% PORTFOLIO OF PINK & BLUE STOCKS/INDEXES

$50  $ % $21  $21 0% PORTFOLIO OF PINK & BLUE ASSETS

The “UP” Portfolio and the “DOWN” Portfolio share a common characteristic CORRELATION = +1

CORRELATION = -1 The “MIXED” Portfolio is different

ASSET ALLOCATION CORRELATION = -1 But I don’t make any money RISK REDUCTION 2

CORRELATION = -1 PORTFOLIO OF PINK & BLUE ASSETS

MARKET TIMING BUY/HOLD ASSETS WHICH ARE RISING SELL ASSETS WHICH ARE FALLING IF CORRELATION = -1 then some of each RISK REDUCTION 3

BUT THAT TAKES TIME AND EFFORT Lazy Portfolio’s

CORRELATIONS IN THE REAL WORLD CORRELATION CHANGES OVER TIME Large Cap (Big) Stocks vs. Small Cap Stocks U.S. Stocks vs. Foreign Stocks Stocks vs. Bonds vs Real Estate Let’s look at some indexes

CORRELATION BETWEEN LARGE CAP AND SMALL CAP

BUT I CAN’T CALCULATE CORRELATIONS -LOOK AT DATA -WEB SITE

CORRELATION BETWEEN DOMESTIC AND FOREIGN

Correlation = 0.05 CORRELATION BETWEEN STOCKS AND BONDS

PORTFOLIO WITH REDUCED CORRELATION STOCKS U.S. FOREIGN EMERGING MARKET BONDS U.S. TREASURY CORP. REAL ESTATE REIT COMMODITIES CASH

CREATING AN ACTUAL PORTFOLIO INDIVIDUAL SECURITIESHIGHLY CORRELATED EVENT RISK MUTUAL FUNDSCOSTS CAN BE HIGH LIMITED TRADING ACTIVE MGMT EXCHANGED TRADED FUNDS(ETF) LOW COST CONSTANT TRADING INDEX CONTENT

STOCKS U.S SPY, IWM FOREIGN EFA EMERGING MARKET EEM BONDS U.S. TREASURY TLT CORP. AGG INFLATION PROT. TIP REAL ESTATE DOMESTIC IYR FOREIGN RWR COMMODITIES DBC ETF SYMBOLS

Most Assets Crashed in 2008!

MARKET TIMING WHAT MARKET TIMING IS NOT NOT AN ATTEMPT TO PREDICT MARKETS WHAT MARKET TIMING IS WHERE THE MARKET HAS BEEN WHERE THE MARKET IS NOW TREND FOLLOWING SIMPLEST EXAMPLE- MOVING AVERAGE

S&P500 MA(200) MA(50)

COMMODITY ETF DJP

A SIMPLE STRATEGY BUY ASSET PRICE GREATER THAN MA(200) SELL ASSET PRICE LESS THAN MA(200) and STAY IN CASH

BUT I CAN’T CALCULATE MOVING AVERAGE MANY WEB SITES WILL DO IT FOR YOU

SIMPLE PORTFOLIO-EQUAL AMOUNTS US STOCK FOREIGN STOCK BONDS COMMODITIES REAL ESTATE

B&HTIMING US STOCK: % 1.33% FOR. STOCK: % -8.17% BONDS: 21.51% 21.51% COMMODITIES: % 1.08% REAL ESTATE: % -9.67% AVERAGE -28.4% 1.2% 2008 PERFORMANCE

ASSET ALLOCATION CHOOSE A SMALL NUMBER OF UNCORRELATED ASSETS CORRELATION= -1 MARKET TIMING USE A SIMPLE TREND FOLLOWING RULE REMEMBER- RISK MANAGEMENT WINS!

THINK RISK- NOT RETURN Larry Kirsch