Wealth Engineering Power Point

Summit Portfolio Management. © 2009

“Wealth Engineering”Timothy F. Bock

President

Summit Portfolio Management. © 2009

Summit Portfolio Management

• Founded in 1984 by Timothy F. Bock

• S.E.C. Registered Investment Advisor

• State-of-the-Art Strategies- “Wealth Engineering”

• Fee-only Financial Consulting Firm

• Comprehensive Personal Financial Services

• Offices in Los Angeles, Newport Beach, Walnut Creek, and Las Vegas

Summit Portfolio Management. © 2009

Wealth Engineering

• Invest Using Scientific Evidence

• Take Only Appropriate Risks

• Measure Risk and Return

• Coordinate Investing with Financial Planning

• Limit and Control Costs

• Limit Emotional Influence

• Control Security and Fraud Risk

Summit Portfolio Management. © 2009

Fraud Protection

• Ponzi Schemes

• Certain Life Products / Annuities

• Partnerships / Hedge Funds

• Packaged Financial Products

• Commission Based Financial Advisors / Misleading Sales Tactics

• Identity Theft

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Who to TrustWho to Trust

FearFear

GreedGreed

When is Enough, Enough?When is Enough, Enough?

Loss Versus DeclineLoss Versus Decline

Emotional and Psychological Distractions

Claiming LossesClaiming Losses

Sunk CostSunk Cost

Hindsight BiasHindsight Bias

OverconfidenceOverconfidence

Probability vs. PossibilityProbability vs. Possibility

Summit Portfolio Management. © 2009

Risk is Not Bad

• Taking Risk is What Produces Returns

• Understand Risks

• Control Risks

• Measure Risks

• Market Declines are Different Than Losses

• Avoid Uncompensated Risk

Summit Portfolio Management. © 2009

Why Flip a Coin?

Academic Research Provides Many Answers

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Active vs. Passive

• Active Management

The belief that stock prices are often incorrect and can be exploited via market timing or stock picking

• Passive Management

Market mechanisms price securities effectively...Efficient Markets Hypothesis

Summit Portfolio Management. © 2009

Efficient Markets Hypothesis Eugene F. Fama, University of Chicago

• Prices incorporate all available information and expectations

• Current prices are the best estimate of intrinsic value

• Price changes are due to events/news

• Mispricings do occur, but not predictably

Summit Portfolio Management. © 2009

Why Passive Management is Superior

• Competition Makes Capital Markets Efficient

• Concentrated Portfolios Have Higher Risks and Costs, But Not Higher Returns

• Superior Returns are Due to Lower Costs and Less Taxation

• Less Than 1% of Active Managers add Value

• Analyzing Track Records Doesn’t Help

• Forecasting the Future Doesn’t Work

Summit Portfolio Management. © 2009

Predictability of Mutual Funds Returns

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

2002 2003 2004 2005 2006 2007 2008

Percentage of Funds Predictedby Flipping a Coin

Actual Percentage of Funds

Source: Morningstar (May 2009)

Summit Portfolio Management. © 2009

Summit Portfolio Management. © 2009

Structure Determines Returns

96% Structured Exposure to Factors• Market (Beta)• Size – Market Cap• Value/Growth

4% Stock Picking and Market Timing

Summit Portfolio Management. © 2009

Small and Value “Tilts”

Increased Expected Returns

Total Stock

Market

Small

GrowthHigh P/B

ValueLow P/B

Large

Summit Portfolio Management. © 2009

T i m e

I n d e x V a l u e s ( U S D )G r o w t h o f $ 1 . 0 0

0 . 8

4 0 0

1 2 4

1 02 04 0

1 0 02 0 0 1 8 9 . 1 4 4

3 2 . 3 2 7

D e c1 9 6 9

M a y2 0 0 9

D e c1 9 7 5

D e c1 9 8 0

D e c1 9 8 5

D e c1 9 9 0

D e c1 9 9 5

D e c2 0 0 0

S & P 5 0 0G l o b a l V a l u e S t o c k s B l e n d

Summit Portfolio Management. © 2009

I n t e r v a l : 6 0

R e t u r n V a l u e s6 0 M o n t h R o l l i n g R e t u r n s

- 1 0 . 0 0 %

4 0 . 0 0 %

0 . 0 0 %

1 0 . 0 0 %

2 0 . 0 0 %

3 0 . 0 0 %

1 . 9 1 %- 1 . 9 9 %

D e c1 9 7 4

M a y2 0 0 9

D e c1 9 8 5

D e c1 9 9 5

S & P 5 0 0P o r t f o l i o 1 0 0 C

Summit Portfolio Management. © 2009

Fixed Income Strategies

• Bonds Should Provide Income and Safety

• Limit Term Risk: Optimal 1-3 Years

• Limit Credit Risk: Govt. and Inv. Grade Only

• Currency Risk? High Volatility, Uncertain Benefit

• Index Funds Better Solution than Active Funds or Individual Bonds

Summit Portfolio Management. © 2009

R i s k ( S T D )

R e t u r n ( G M )S e p t e m b e r 1 9 7 1 - M a y 2 0 0 9

R i s k v s . R e t u r n

2 . 0 0 % 1 2 . 0 0 %4 . 0 0 % 6 . 0 0 % 8 . 0 0 % 1 0 . 0 0 %7 . 2 0 %

8 . 7 0 %

7 . 4 0 %

7 . 6 0 %

7 . 8 0 %

8 . 0 0 %

8 . 2 0 %

8 . 4 0 %

H i g h Y i e l d B o n d s

I n t e r . G o v t . B o n d s

L o n g T e r m G o v t . B o n d s

S h o r t T e r m G o v t . B o n d s

S h o r t T e r m B o n d s - S P M B l e n d

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Rebalancing

• Maintains Desired Risk Level

• Buy Low, Sell High

• Avoids Timing Uncertainty

• Time Based or % Based

• Avoids Emotional Distraction

Summit Portfolio Management. © 2009

Dimensional Fund Advisors

• Academically Based Research

• Created Many Firsts in “Index” Funds

• Passive Management, Added Returns from Small and Value Companies

• Fierce Attention to Keeping Costs Low

• #1 Fund Family for Lending Revenue

• Advisor-Only Network

Summit Portfolio Management. © 2009

• High Quality Short-Term Bonds

• Fixed Annuities

• CDs

• Global Value Stocks

• Real Estate

• Private Equity and Hedge Funds

Where is Your Portfolio?

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Timely Opportunities

• Is Your Equity Exposure Appropriate?

• Value Stocks Tend to Lead Growth Out of Recessions: From March 9th Low:

S&P 500: 40.74%, USV:58.50%, DC: 61.34%, EM: 79.14%

• Limit Term Risk on Bonds

• Portfolio Analysis: $500-$5,000

• Harvest Tax Losses

Summit Portfolio Management. © 2009

7 Steps to a Better Investment Experience

• Manage Your Investment Risks, Don’t Speculate

• Passive Management Means: Lower Costs, Less Taxation, Less Risk, Less Uncertainty and Better Returns

• Focus on Return Sources: Market Cap, Relative Value

• Control Risks: Diversification of Securities, Countries

• Control Emotional and Psychological Influences

• Get Expert Guidance if You’re Not an Expert

Summit Portfolio Management. © 2009

“Wealth Engineering”Timothy F. Bock

PresidentToll Free: 800.683.5800 Tim@SummitPortfolio.com

www.SummitPortfolio.com

Summit Portfolio Management. © 2009

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

Investor Average Equity Treasury Note One-Year S&P 500 Index

The Average Investor’s Mutual Fund Return Compared to Indexes

20 Years – 1989 to 2008

Sources: Dalbar QAIB Study 2009, Ibbotson

Summit Portfolio Management. © 2009