May 21, 2015 | Volume 6 | Issue 8

Active investment management’s weekly magazine

Dangerous divergence? Dow Transports vs. S&P 500

Is it an “Acey Deucey” world?

Using the Internet as a virtual business card

Trading expert Dave Landry: Daylight patterns in moving averages

Excessive debtmeans high risk

Jim Bowen

The responsibilityof readinessA discipline in managing risk

Advisor perspectives on active investment management

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LOUD & CLEARJim Bell • Langhorne, PA FSC Securities • Legacy Financial Services Group

Forget emotion, stick with quants

I believe in quantitative-based active strategies that can take the emotion out of investing, and I want to use the right blend of all of them … that is a positive thing which resonates with clients, especially as they see how it can work over time. My goal is to have clients come to see the big picture of long-term planning and an appreciation of active management within that, as I do.

3May 21, 2015 | proactiveadvisormagazine.com

LOUD & CLEAR

xcessive debt is the problem in today’s world. It cannot be rectified unless you either have hyperinflation or a hard-debt

deflation similar to the 1930s.Corporations have taken advantage

of borrowing at ultra-low rates and have used that money to purchase their stock—financial engineering at its best. Yet earnings are in decline here and glob-ally. A concerning combination. Call me crazy, but I’m of the belief that an influx of fresh new capital (a global rush to dollars/safety) may propel U.S. stocks even higher.

With negative interest rates in Europe and a Fed edging ever closer to lifting U.S. rates (expectations range

“Acey Deucey” wo ld?Are we living in an

E

By Steve Blumenthal

from June to early 2016), the advantage goes to the U.S. dollar with U.S. assets the beneficiary of global capital flows. That’s my thesis for now as we watch the equity market step higher, though not without volatility.

Remember the card game called Acey Deucey? You are dealt two cards and you split them. The dealer would then flip a third card. If that card number fell between your two cards, you’d win the pot. If you lost, you’d have to double the amount of money in the pot and the turn would move to the next player. The best combination was an Ace and a Deuce (2). This gave you the best odds to win but it was a risk nonetheless and nerves were tested—especially as the pot grew bigger.

4 proactiveadvisormagazine.com | May 21, 2015

cyclical downturns in the market. 77% of the time!—that is telling. It’s in the mathematics of loss: remember, it takes a 100% gain to overcome a 50% decline.

My belief is that many investors have come to expect 9% to 11% annual returns again; yet we currently live in a world where 4% to 5% returns might be a more reasonable expectation. If you are an older dog like me, you’ll remember investors

expecting 18% gains per year or more in the late 1990s and 2000. One of my clients left our firm in December of 1999 after her account had grown 30% over the prior two years. She was ultra-conservative and positioned accordingly.

The problem, of course, was that 30% paled in com-parison to the 51% the S&P 500 gained in 1998-99 or the 159% the NASDAQ gained

over those two years. She told me she was going to a traditional broker and was investing in “safe stocks.” Her $1 million account fell to less than $500,000. Had she stayed, the same $1 million

would likely have grown to over $1.3 million. It is tough to compare a conservative bond strategy to stocks, but I showed her the forward return prob-abilities back then and I wrote frequently about a technology bubble. Unfortunately, it didn’t help. She was in her mid-60s then. Safe stocks. Right.

As a quick aside: Do you remember those NASDAQ gains in 1998 and 1999? An interesting data point is that more than three-quarters of all of the money invested in Fidelity mutual funds was concentrated in their technology funds. The NASDAQ crashed some 75% by mid-2002 and has only just recently surpassed those early 2000s levels. It took about 15 years to get back to even, but who was really able to stay with that bumpy ride back? The bigger question is: Who took advan-tage of the buying opportunity that the dot-com crash created?

I believe we can get a good fix on what forward returns will be. Take a look at the following from Research Affiliates, which shows that by knowing the beginning dividend yield, EPS growth, and im-plied inflation, one can fairly accurately predict the Expected Equity Return over the coming ten years.

Take a look at the Expected Equity Return for the 2001-10 period. In 2001, the expected

continue on pg. 13

Risk is high in an investment environment driven by low rates and financial engineering

1000%

900%

800%

700%

600%

500%

400%

300%

200%

100%

0%

-100%

900%

400%

233%

150%100%

67%43%25%11%

-10%

Gain

Loss

-20% -30% -40% -50% -60% -70% -80% -90%

Source: CrestmontResearch.com

The impact of losses

KEY POINTS

Avoid losses: The gain required to recover from a loss is exponential; likewise, a relatively smaller loss can erase big gains.

Memorable declines: What gain does it take to recover from these losses?

Dow 1929-32 -89% NASDAQ 2000-02 -78%

S&P 500 1973-74 -48% S&P 500 2007-08 -57%

S&P 500 2000-02 -49% Next ?

Today’s investment environment kind of feels a bit like a version of Acey Deucey, except we are holding a 5 and a 10—some opportunity but not a lot of room for error. As much as I know about global currency flows, valuation, supply and demand dynamics, and human behavior, I can’t help but wonder what it is that I don’t know. We live within a highly complex system with many moving parts.

Bullish market bets may still pay off, but recessions happen (often two times every decade) and risk is elevated. When the bubble is fully inflated, bear market declines can be at their greatest. Similar to 2000 and 2007, now is the time to have a stop-loss or hedged risk manage-ment game plan in place.

I was interviewed on a radio program recently and the host asked, “What keeps you up at night?” I think, globally speaking, we need to face the hard reality of unmanageable debt. It involves restructure (some form of default), which in turn means underfunded pensions will become even more underfunded. Banks will take hits, investors will take hits, and economies will slow.

In the meantime, all of this is confusing to individuals who are not living every day in our professional investment world. Lack of planning can prove painful and it is far easier to feel good and project yesterday’s returns forward—it is just so emotionally difficult to stay disciplined.

When valuations are high (like today), history tells us to expect very low forward 10-year returns. The bigger challenge, and coming oppor-tunity, is to prepare investors for a period of high forward 10-year returns after a bear market occurs. Their confi-dence to invest will be chal-lenged so some advance prep work is required. It rarely feels like an opportunity during 40%+ bear market declines (times of stress). That 40% decline can hurt more than you realize.

According to Ned Davis Research, during the average buy-and-hold stock market, an investor spends 77% of his or her time recovering from

Why the first rule ofinvesting is

also the second rule

May 21, 2015 | proactiveadvisormagazine.com 5

8 Dec 22 Dec 5 Jan 19 Jan 2 Feb 16 Feb 2 Mar 16 Mar 30 Mar 13 Apr 27 Apr 11 May

2%

0%

-2%

-4%

-6%

Dow Industrials (DJIA)Dow Transports (DJT)

Source: MarketWatch

Dow Transports fighting S&P 500 trendhile the S&P 500 set a new all-time record closing high last week, the Dow Transport Index has not been cooperat-

ing so far in 2015. According to MarketWatch, the Transports

are seriously lagging behind the broader stock market, and that’s potentially quite bearish. When the Transports show divergence to the trends of major indexes, it is, they say, “ominous for stocks” and often the precursor to a correction.

Newsletter author Mark Hulbert wrote at the end of last week, “Few people are focusing on this divergence, however, and fewer are even aware of it, especially as the stock market keeps hitting new highs. Although another record [for the S&P 500] occurred recently, the divergence was very much in evidence.”

According to Hulbert, the divergence began late last November, when the Dow Transports rose to a record high. They are now close to 7% below their all-time closing high (as of May 15), while the Dow Industrials have risen more than 2% over the same period.

Hulbert cites research from Jack Schannep, editor at market-timing advisory service TheDowTheory.com. Schannep has looked at similar divergences over the past 25 years and comes up with some troubling statistics. He found 14 such instances: In nine of them, the broad market subsequently dropped, but by less than 10%. In the remaining five cases, the stock market’s eventual decline averaged around 25%. While Schannep has not yet officially turned bearish, he says that when the broad market hit its bull-market highs in 1990, 1998, 2000, and

W

2007, the Dow Transports in each case had al-ready turned down several months before.

CNBC also picked up on the Transports theme last week, as Carter Worth, technical an-alyst with Cornerstone Macro, said, “Transports were the single best-performing theme, aside from Biotech, over the past few years. They start-ed to roll over on November 28th, 2014, which was not coincidental—it was when OPEC said it would not cut oil production to boost prices. Since then, the stock prices of major railroads, truckers, and even airlines have stalled and I think further declines are coming.”

Art Cashin, director of floor operations at UBS, cautioned, “The Transports are dangerously

close to key support levels. If they break down hard, a macro Dow Theory sell signal for the broad market might trigger.” The conditions for a Dow Theory sell signal have three basic steps, says Ken Polcari of O’Neil Securities: 1) the Dow and the Transports must each experience a significant correction; 2) from that correction, both of the indexes need to “fail” to rise above their pre-cor-rection highs; and 3) finally, both of these indexes must then drop below their correction lows.

Josh Brown, Reformed Broker blogger, is dismissive of this latest warning sign: “Maybe this ‘non-confirmation’ will matter. But it hasn’t mattered about a hundred times before as this sort of divergence has resolved itself to the upside.”

DANGEROUS DIVERGENCE?

The Dow Industrials and Dow Transports since November 2014

7May 21, 2015 | proactiveadvisormagazine.com

TOPPING THE CHARTS

A discipline in managing riskBy David Wismer

Photography by Cy Cyr

Proactive Advisor Magazine: Jim, tell me about your transition from the military and academia to financial services.

It was really not as much of a change as you may think. In my command position in the service, I was responsible for hundreds of U.S. Army personnel and their families. From that experience you understand the responsibility that a soldier has to his or her family when they might be deployed overseas on a moment’s notice or for an extended tour. There are so many things to be done to have their family prepared: powers of attorney, health care plan-ning and surrogates, and financial readiness and contingency planning.

Theresponsibility of readiness

As a leader, I was involved in such issues, and also was in the tougher role of Survivor’s Assistance Officer, dealing with the impact of the death of a soldier on their family. These ex-periences gave me a deep understanding and ap-preciation of the role of planning and readiness. After the service and my teaching job, I made the decision to work in an industry where I could address the serious life and financial issues that people have. I am motivated by serving clients.

How did you develop your investment philosophy?

Philosophically, I started as a conservative value investor. The dot-com bust taught me

a lot about investing styles, client behavior, and psychology. I was only in my first decade of advisory work when that hit, and I saw the frenzy of greed in the run up to it, even among my own clients. I also saw the intense fear and despair when the markets crashed. Fortunately, we had exit plans for clients who were insistent on being more aggressive in that market. But I certainly learned that neither of the two emo-tional extremes of that period was something that clients should experience again.

I firmly believe that the slow and steady route of risk-managed investing over time is going to win out. The math has been done around that concept many times to prove it. It also is an approach that is going to help

proactiveadvisormagazine.com | May 21, 20158

Jim Bowen is president of JD Bowen Financial Group and is a Registered Principal of LPL Financial. His firm, located in Indialantic, FL on the Space Coast, “specializes in income-producing investments and preservation of principal” for pre-retirees and clients already in retirement. Mr. Bowen, the son of an army officer, traveled all over the world as a child. He earned his bachelor’s degree at Colorado State University and his Masters in Business Administration from the University of Northern Colorado. He entered the U.S. Army after college, was commissioned, and served in South-east Asia, Germany, Belgium, Hawaii, and various stateside locations. He retired following his tenure as Professor of Military Science at the Florida Institute of Technology.

Following military service, Mr. Bowen leveraged his management experience into building his indepen-dent investment advisory practice, which currently has several advisors and associates. He and his wife Lynn have two daughters and six grandchildren and they greatly enjoy golf, travel, and family gatherings.

Mr. Bowen is a life member of the Military Officers Association of America, the Military Order of the World Wars, and serves on the Board of Directors of the Space Coast Early Intervention Center.

Jim BowenIndialantic, FL

LPL FinancialPresident, JD Bowen Financial Group

“Our clients cannot tolerate deep portfolio losses. Money managers work to reduce the downside risk.”

active money managers for client portfolios. This risk-managed approach does not always lead to outperforming the market, but does suit our client needs and attitudes.

What kinds of clients do you work with?

Here, on the Space Coast, we tend to find a lot of middle management professionals from the technology and aerospace industries, par-ticularly engineers. Our clients come from all backgrounds and professions, but in terms of age they are mostly close to retirement or in retire-ment. Our sweet spot is in active and defensive market timing as it relates to investments, and that fits well with this demographic. Our clients

tend to have comfortable incomes and assets, but generally are not high-net-worth families.

They cannot afford to lose 30% to 40% of their assets. If you have even a 20% drop in your portfolio and are drawing down 4% to 5%, it is a huge hit that is tough to recover from. We do not think clients should be risking their current or future lifestyles by accepting the full risk inherent in the financial markets—risk must be managed.

Are there other benefits of working with third-party money managers?

There are three key ones: risk management, time management for our practice, and

continue on pg. 10

alleviate that fear and greed mentality that many investors fall prey to.

It did not take very long for me to understand that there are third-party investment managers that have developed a discipline to create the kind of risk-managed approach I was looking for.

What is particularly appealing to my firm and our clients is a manager’s development of exit strategies and offensive market timing. Our clients cannot tolerate deep portfolio losses and these money managers work to reduce the downside risk. But our clients also need to grow their assets for retirement, so we look for managers who are equally adept at performing well in a bullish market environment. You need to have both sides of the equation when selecting

May 21, 2015 | proactiveadvisormagazine.com 9

Jim Bowen is a Registered Representative with and Securities and Advisory services offered through LPL Financial, a registered investment advisor. Member FINRA & SIPC. Investing involves risk, including potential loss of principal. No strategy ensures success or protects against a loss. JD Bowen Financial Group is a separate unaffiliated entity from LPL Financial.

manager diversification. I have talked about the risk management piece and our desire to work with managers who have a strong de-fense and a strong offense in place. It is not appropriate, in my opinion, to use passive Modern Portfolio Theory in today’s invest-ment world. Reviewing and rebalancing on a quarterly basis does not provide the kind of risk management we want for our clients—active management is much more in line with our philosophy.

Time management refers to what many top advisors in the industry frequently speak about. When you have worked long and hard to build a successful practice, you need to decide if you are going to manage money or manage relationships. It is very difficult to do both effectively with a large number of clients. When we reached that point and that realization, we began to use third-party managers extensively. That is not a default

position by any stretch—they serve our client needs very well.

Third, it is very advantageous to be able to work with a number of different managers and different strategies. Some managers tend to spe-cialize in a specific asset class or strategy, while others offer many different types of strategies. But they all bring a focus on risk management and their own strengths, skills, and philosophies. The most critical factor is whether or not they consistently deliver on their stated parameters.

I like having the ability to match the right manager resource or combination of resources for a specific client portfolio need. Whether a client is very conservative or very aggressive, we can put together portfolio strategies that should meet their needs. We work hard with clients to develop shared expectations. The bottom line is that we want to meet clients’ reasonable objec-tives, while exposing them to the least possible amount of risk.

continued from pg. 9Jim Bowen

10 proactiveadvisormagazine.com | May 21, 2015

- A custodian that makes your life as an RIA simpler.

Beyond the active vs. passive debateIt is less “Hatfields and McCoys” and more “Yin and Yang”: The best strategy is to use both wisely and ignore the noise advocating one at the ex-pense of the other.

Strange machinationsWhat to make of markets that are no longer on speaking terms with their fundamentals.

Don’t get caught investing in the “rear-view mirror”The major demographic changes that are coming are largely misinterpreted or underestimated.

L NKS WEEK

May 21, 2015 | proactiveadvisormagazine.com 11

See the light

Dave Landry has been trading the markets since the early 1990s and is the author of three books on trading. He founded Sentive Trading LLC in 1995 and since then has been providing ongoing consulting and education on market technicals. He is a member of the American Association of Professional Technical Analysts and was a registered Commodity Trading Advisor (CTA) from 1995 to 2009. www.davelandry.com

And then, there was light

There’s nothing magical about moving averages but they can help keep you on the right side of the market. Since all price-based indicators have lag, I like to look for patterns in price itself. With moving averages, I like to look for price “daylight.” This means that the price bar lows are greater than the moving av-erage in uptrends. There is “light” between the price bar and the moving average. Now, you certainly don’t want to rush out and buy and sell every time the market crosses the moving average, but paying attention to daylight can help keep you on the right side of the market.

Using this concept, the longer-term trend remains intact in the S&P 500. And, when this occurs you want to err on the side of the longer-term trend. Using the well-watched 200-day moving average, the S&P has had daylight in all but a few days since the begin-ning of 2012. In this period, the market has gained nearly 70%. “And, counting?” is the $64,000 question.

Not getting any brighter—yet?

When it comes to markets, like Janet Jackson, you have to ask: “What have you done for me lately?” And, lately, it hasn’t done much. When I wrote my last column for Proactive Advisor Magazine in February, the S&P 500 was stuck in a range. It was nearing the top of that range, circa 2100, but it was still stuck in a range nonetheless. Fast forward three months and we not only have a “Janet” market but also a “Yogi” one: It’s déjà vu all over again. The index is once again probing the top of its range but it is still in a range nonetheless.

Daylight come and I want to go home—lights out?

Although the major indices remain in longer-term uptrends, bonds have been headed lower as of late. The TLT recently crossed below its 200-day moving average and has had down-side daylight (price highs < moving average) since early May. The absolute level of interest rates isn’t as troubling as the delta (change). This fear of sharply higher rates could put pressure on people to sell stocks first and then ask questions later.

The U.S. dollar has also been in a slide. It has had daylight below its 50-day moving average since late April. Commodities seem to be waking up based on this.

Any bright ideas?

The good news is that there are some emerg-ing trends in areas that can trade independently

to the overall market while the market finds its way. These include the aforementioned com-modities, specifically Steel & Iron, Copper, and the Energies. Other areas that can trade independently to the overall market such as Latin America and second-tier Chinese stocks (i.e. those at lower levels) also have nice trends emerging.

Stay in the light, the light is good

It’s probably a good idea to continue to err on the side of the longer-term trend when it comes to stocks. However, you might want to hold off on being aggressive on new purchases in stocks until the major indices can both break out and hold. In the meantime, focus on the emerging trends in those areas mentioned above that can trade contra to the overall market just in case it’s “lights out.”

Proactive Advisor Magazine presents weekly commentary provided by well-known market analysts, financial authors, investment newsletter publishers, and economists. The opinions expressed each week represent their personal perspectives and not necessarily those of the magazine.

S&P 500 TREND VS. 200-DAY MOVING AVERAGE

proactiveadvisormagazine.com | May 21, 201512

HOW I SEE IT

There can be no assurance that any investment product will achieve its investment objective(s). There are risks associated with investing, including the entire loss of principal invested. Investing involves market risk. The investment return and principal value of any investment product will fluctuate with changes in market conditions. Guggenheim Investments represents the investment management businesses of Guggenheim Partners, LLC. Securities offered through Guggenheim Funds Distributors, LLC. Guggenheim Funds Distributors, LLC is affiliated with Guggenheim Partners, LLC. x0516 #17180

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The Diversi� cation DilemmaTactical Management and Today’s Evolving MarketsBy Douglas C. Mangini, J.D., Senior Managing Director

Chicago | New York City | Santa Monica

continued from pg. 5

forward 10-year annual return was 4.7% per year (orange arrow in the chart). Not 9%, 11%, or the 18% many hoped for. The actual compounded annual growth rate, or return, using the source calculator for the S&P 500 Index was just 1.4%.

What can investors do? When there is a richly priced market, especially in a very low yield environment, investors need to be more defensive with their portfolios and incorporate more of a tactical approach.

For example, this might be a 30% equity/30% fixed-income mix, and then 40% to what I call “tactical alternative.” Mix in some tactical strategies that complement each other but don’t correlate. If the market gets hit, they can pivot from equities to fixed income, from more aggressive to less aggressive. Being tactical provides the option to act when markets change.

What’s hard for investors is that the market’s been up and they compare everything to the S&P 500, getting really concentrated in their risks. Now is the time for all investors to be seriously diversified and to incorporate risk management within their portfolios. While it is okay to play the occasional game of Acey Deucey, it is wise to pick your spots and your wagers carefully and always have an exit plan.

Acey Deucey world?

Steve Blumenthal founded Capital Management Group Inc. (CMG) in 1992 and acts today as CEO and portfolio manager for equity, fixed income, and tac-tical investment portfolios. Mr. Blumenthal writes frequently on the markets and is the author of two weekly newsletters, “Trade Signals” and “On My Radar.”

Decades Beginning dividend

yield

Reallong-term

EPS growth*

Implied inflation

Expected equity return

Beginning bond yield

Expected 60/40 return

Realized 60/40 return

Realized minus

expected

1871-1880 5.9% -0.5% 2.4% 7.9% 5.3% 6.9% 8.3% 1.4%

1881-1890 4.5% 1.0% 0.8% 6.3% 3.7% 5.3% 3.1% -2.2%

1891-1900 4.8% 2.4% 0.5% 7.8% 3.4% 6.0% 6.9% 0.9%

1901-1910 4.4% 1.8% 0.0% 6.2% 2.9% 4.9% 5.7% 0.9%

1911-1920 5.2% 2.0% 0.4% 7.8% 3.3% 6.0% 2.9% -3.1%

1921-1930 7.5% 2.4% 2.8% 13.2% 5.7% 10.2% 11.6% 1.4%

1931-1940 6.3% 1.7% 0.1% 8.3% 3.0% 6.2% 3.9% -2.2%

1941-1950 6.4% -1.0% 1.3% 3.8% 1.6% 2.9% 8.6% 5.6%

1951-1960 7.4% 0.1% -0.7% 6.8% 2.2% 5.0% 10.6% 5.6%

1961-1970 3.4% 2.5% 0.9% 7.0% 3.8% 5.8% 6.3% 0.5%

1971-1980 3.5% 4.1% 3.5% 11.4% 6.4% 9.4% 6.9% -2.6%

1981-1990 4.6% 3.0% 9.9% 18.4% 12.8% 16.2% 14.3% -1.9%

1991-2000 3.7% 1.3% 5.2% 10.4% 8.1% 9.5% 14.4% 4.9%

2001-2010 1.2% 1.1% 2.3% 4.7% 5.2% 4.9% 3.8% -1.2%

Average 4.9% 1.6% 1.9% 8.6% 4.8% 7.1% 7.6% 0.6%

Current 1.8% 1.3% 2.0% 5.1% 2.3% 4.0%

Maybe: future returns are a shadow of the pastExpected return model for a 60% equity/40% bond portfolio

*Trailing 40-year Real Dividend Growth Rate for the first four samples, 40-year Real Earnings Growth for the restSource: Research Affiliates based on data from Robert Shiller, Federal Reserve, BEA, and FastSet, (Data as of 12/31/14)

13May 21, 2015 | proactiveadvisormagazine.com

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Copyright 2015© Dynamic Performance Publishing, Inc. All rights reserved. Reproduction of printed form, whole or in part, without permission is prohibited.

EditorDavid Wismer

Associate EditorElizabeth Whitley

Contributing WritersSteve Blumenthal

Jerry WagnerDavid Wismer

Graphic DesignerTravis Bramble

Contributing PhotographerCy Cyr

May 21, 2015Volume 6 | Issue 8

Proactive Advisor Magazine is dedicated to promoting and educating on active investment management. Distribution reaches a wide audience of financial professionals who advise clients on investments and portfolio management. Each issue features an experienced investment advisor who offers insights on active money management, client service, and investment approaches. Additionally, Proactive Advisor Magazine offers an up-close look at a topic with current relevance to the field of active management.

The opinions and forecasts expressed herein are those of the author and may not actually come to pass. Any opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security nor specific investment advice. The analysis and information in this edition and on our website is for informational purposes only. No part of the material presented in this edition or on our websites is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any portfolio constitutes a solicitation to purchase or sell securities or any investment program.

Using the Internet as a virtual business card

Damon RidleyGreenbelt, MD

FSC Securities GroupPresident, Ridley Wealth Strategies

Securities and advisory services offered through FSC Securities Corporation, member FINRA, SIPC, and a Registered Investment Adviser. Ridley Wealth Strategies is not affiliated with FSC Securities Corporation or registered as a broker dealer or investment advisor.

ask. The items that I display typically pro-vide education in a way they have not seen before and that provides a marketing edge for our firm.

The real beauty of LinkedIn and other social media is the use of logarithms to help direct people to your site or profile. I actively look to reach out to connections who may know someone that I want to connect with. I am also now experiment-ing with some marketing campaigns via LinkedIn that may prove very worthwhile. By doing these things, LinkedIn has become a form of an active sales tool and a relationship manager.

do a lot of prospecting the traditional way, receiving referrals from current clients. I also enjoy hosting small

social gatherings. I will ask a current client if they know anybody they would like to invite, whether it is for a ballgame, concert, play, or other activity. This is low-key and I am just trying to expand my network for future outreach.

I have two distinct target groups for my business development efforts: 1) small business owners, executives, and corporate employees who have had long careers and will be rolling over significant pension or 401(k) money and 2) young professionals who are in the accumulation phase. The younger group is attuned to technology and using the Internet for information, and the older crowd is catching up.

I use LinkedIn as a virtual business card. I look at it in a couple of different ways. If you view my profile, I have an on-demand presentation and seminar. If someone is interested in learning more about financial planning or retirement and getting some free information, they can click on a couple of links and go through 15-minute webinars.

I post new information or articles fre-quently, so people can see some consistency and worthwhile content on a regular basis. I also have a couple of videos of my financial planning process and how our firm works with clients via the use of technology to enhance the client experience.

These are all things that clients or prospects may not really be aware of and can prompt their interest in speaking with me. They also help position my credibility as financial advisor, taking advantage of the latest technology in the industry. Too many prospects have read the same tired and outdated material and often they really do not even know the right questions to

I

14

TIPS & TOOLS

Active ManagementThere is a great deal of confusion surrounding the term “active

management” created by the business press. When one reads a headline in any given year that “active managers” are underperforming or overper-forming their benchmarks, this typically is referring to “active” managers of a mutual fund—who are being measured against a specific index or competing funds within that style.

Within the field of true active portfolio management, this narrow and misleading definition really has little significance.

Active investment management is not about exceeding a specific benchmark or “beating the market.” Active management seeks favorable risk-adjusted returns in any market environment, generally employing sophisticated algorithms and models to capture gains and protect against losses in a wide variety of sectors, asset classes, and geographies.

It is about controlling risk in the markets, finding new ways to dynamically diversify, and smoothing out the long-term volatility typically found in any asset class. Active managers tend to rely on quantitative approaches for asset allocation, exposure to the market, and adjustments to portfolios based on current market conditions. When it comes to evaluating returns, they generally will not compare to the S&P 500 or global total market indexes, but are far more interested in risk-adjusted returns and in meeting their portfolio objectives.

In theory, it is fundamentally about a long-term approach to portfolio management that is diametrically opposed to “buy-and-hold.”

Fee-based revenues remain strong among advisors

101

DynamicStrategic

Diversification

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5 reasons to consider active management

Buy-and-hold is dead(ly)—While bull market runs are impressive, history shows it is not a matter of “if” but more a matter of

“when” for the next bear market. Investment expert Kenneth Solow sums it up: “Patiently waiting for stocks to deliver historical average returns does not rise to the level of an investment strategy.”

Bear market math is daunting—It takes longer than most in-vestors think to recover from bear markets—a gain of 50% is

needed to overcome a 33% portfolio loss.

Risk first: Always—As one prominent active manager has said, “No one would ever jump into a car without brakes, so why

would investors even consider having an investment strategy that did not have a strong defense?”

Active management aligns with investor psychology—Behavioral finance studies have documented the tendencies of investors to

operate on the destructive principles of “fear and greed.” Disciplined active management takes emotion out of the equation.

Does “set it and forget it” really make sense?—For retirees or those approaching it, the “sequence of returns” dilemma can

have a devastating effect on future income needs. Active management offers a prudent path to achieving the twin goals of asset preservation and compounded capital growth.

Resources for AdvisorsWebsitesProactive Advisor Magazine: Active investment management’s weekly magazine, providing advisor perspectives, topical issues in active management and commentary on strategy and tactical tools. www.proactiveadvisormagazine.com

National Association of Active Investment Managers (NAAIM): Peer-to-peer networking in the active investment management community, providing best practices among successful advisors and advisory firms. www.naaim.org

Market Technicians Association (MTA): Leading national organization of investment analysts, stock market analysis professionals and certified market technicians. www.mta.org

Advisor Perspectives: Audience-generated and vendor-neutral forum where fund companies, wealth managers and financial advisors share their views on the market, the economy and investment strategy. www.advisorperspectives.com

Whitepapers“Bucket Investing with Dynamic Risk-Managed Portfolios,” Flexible Plan Investmentsgoto.flexibleplan.com/download/whitepaper-bucket-investing.pdf

“Comparison of ETFs and Mutual Funds—The True Cost of Investing,” Guggenheim Investments guggenheiminvestments.com/rydex

“Understanding Leveraged Exchange Traded Funds,” Direxion Investmentswww.direxioninvestments.com

“Small Accounts, Big Opportunities,” Trust Company of America www.trustamerica.com/resources

“Why Gold? Seven Enduring Reasons,” Flexible Plan Investments goldbullionstrategyfund.com

“The State of Retail Wealth Management, 5th Annual Report,” PriceMetrixwww.pricemetrix.com

2012 2013 2014

Fee-Based Assets (% of Total Assets) 28% 31% 35%

Fee-Based Revenue (% of Total Revenue) 45% 47% 53%

Average Fee Accounts per Advisor ($000s) $258 $293 $293

Average Assets of New Client HHs ($000s) $475 $477 $538

Source: PriceMetrix Insights – The State of Retail Wealth Management 2014 – 5th Annual Report (Aggregated data representing 7 million retail investors and over $3.5 trillion in investment assets.)