disciplinedIQ Investment Advisory Process


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Risk-based Flexible Allocation

For many investors the idea of ongoing risk management in their portfolios is more of a hope than a reality. When markets get rough and investors begin calling their advisors asking the question, "What should we do?" or "Should we get out of the market?" an all-too-common response is that "eventually the markets will recover" and "if you hang in there you will be rewarded for your patience." Investors tire of this response because it provides no assistance to the trouble such markets pose to investors NOW. For example, retirees are more concerned about their reduction in current lifestyle spending because they fear their portfolios will not last as long as they need it. Pre-retirees are more concerned about maintaining their current jobs longer to defer their reliance on their diminishing retirement savings. "NOW" does make a difference.

The disciplinedIQ Answer:

We recognize that investors have a general level of risk that they are willing to bear and that they expect their advisors to manage their portfolios accordingly. The next Key Management Principal, "IQ", seeks to be responsive to fluctuating market and economic risks in maintaining the amount of portfolio risk than investors are willing to bear.

More specifically, the disciplinedIQ process determines the level of portfolio risk an investor is willing to bear and a suitable portfolio allocation is established. Each month thereafter, both market valuations and the value of the Leading Economic Index (LEI) are considered to determine whether overall market and economic risk remains consistent with that allocation or whether a portfolio adjustment would be appropriate to maintain a level amount of portfolio risk. If these factors suggest that there are higher levels of risk than previously ascertained, a defensive allocation is utilized until conditions become favorable again.

The explanation of any portfolio adjustment is therefore founded in current market and economic conditions, versus the common philosophy that all investments should be maintained through both favorable and unfavorable conditions. The aim of this investment strategy to become defensive when conditions have began to indicate that conditions are unfavorable rather than after significant portfolio losses. Similarly, the aim is that the portfolio will return to normal allocations as market and economic conditions have begun to become favorable again.

A simple example of how this process might have looked historically is illustrated below.

This chart illustrates the hypothetical growth of $100 invested in the S&P500 index from January 1, 1999 through December 31, 2010 in combination with the variances between the S&P500 and its 200 day moving average and the variance of the LEI and its 200 day moving average over the same time period. Also illustrated is a hypothetical investment utilizing the disciplinedIQ process over the same time assuming an investment in the S&P500 index. This is for illustration purposes only as the S&P500 is an unmanaged index and cannot be invested in directly. Past performance is no guarantee of future results.

For a better understanding of how this strategy can be implemented, please contact us today for an appointment. We feel you will find that your time spent exploring disciplinedIQ with us could be well worth your time.

Important Notes
Information not presented here is the specific IQ calculation. We utilize specific data smoothing techniques to avoid frequent trading which we feel would result in lower efficiency in meeting our objectives. Our objective is not short-term trading to capitalize on volatile markets. Rather, our objective is to minimize large portfolio drawdowns due to elevated market risk and/or economic weakness. As with any investment strategy (including your current strategy), no strategy can assure a profit or protection against a loss of principal. Also, the disciplinedIQ process applies only to specific and pre-arranged advisory client engagements.

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