Our investment approach is called Risk-Controlled Investing.

Based on our Chief Strategist’s perspective of more than 50 years in investment research, we contend that investing is essentially about three things in this order of importance:

• Cash
• Risk
• Taxes

The most important aspect of investing for any purpose, the Time Horizon, consists of these two vitally important factors. The cash flow factor is the first and most overlooked area of investment planning. In retirement most people understand that the most important issue is having enough cash to meet their needs. If a person is adding to investment accounts on a regular basis and has no foreseeable need to take any money out, this greatly lengthens the potential holding period (and tolerance for fluctuations) for all investments. If, on the other hand, the investor is making regular withdrawals for lifestyle needs, this makes for a much shorter Time Horizon. The drawdown of cash from the portfolio when values are down may make it difficult or impossible to recover and create a downward spiral.

The second aspect is the risk factor. There are many definitions of risk, but we find these two to be the most significant for retirement solutions:

1. Permanent loss of some or all of your money.
2. Failure to have adequate cash available when it is needed.

The risk factor is made up of two equally important parts. The first is the longevity; that is the time period over which investments must serve the owner’s needs. For example, a person age 50 may well live, and need to draw on investments, for another 40 to 50 years. Even small incremental increases in inflation over a long period can dramatically impact the cost of living. The second is personal risk tolerance, which is a person’s psychological readiness to handle risk. It is important to understand that risk tolerance is a very personal concept and is the most changeable item for most people. There is a great tendency to underrate one’s risk tolerance when everything looks bleak and to over-estimate it when everything looks rosy. Too many people foolishly focus on short-term results and lose sight of their true time horizon and why they are investing resulting in buying high and selling low.

After time horizon, the next important issue is the tax position of your money. This is one of the most under-appreciated aspects of investing. Many investors fail to take into account the impact of income taxes on their net rates of return and of estate taxes on their ability to pass assets on to heirs. By carefully selecting appropriate investments to place in each type of account (taxable, non-taxable or tax-deferred), you can improve your probabilities of achieving a higher after-tax return and making your money last.

Remember, it’s not what you make; it’s what you keep - Net⁴. That is, what’s left
after all costs, expenses, market loss, income taxes, estate taxes and inflation.

The goal of retirement investing should not be to try to make as much money as you can. Since there is a trade-off between risk and reward, that approach is almost always self-destructive. More appropriately, investors should seek to build a tax-efficient portfolio that has a strong probability of meeting their target rate of return at the lowest total risk acceptable according to their time horizon.

Our Risk-Controlled Investing strategy, recognizing that no single investment or strategy can assure success under all circumstances, seeks to help investors achieve a target rate of return over the long term that will meet their cash flow goals at an acceptable level of total risk. It also coordinates with your Planned Succession Management plans developed in the S-T-A-R-S System for Retirement Success^SM. This is done through a written Statement of Objective and Investment Policy.

Risk reduction is essentially a matter of diversification, or spreading the risk.

Our Risk-Controlled Investing approach uses diversification strategies on three levels. We call this the Three-Dimensional Allocation. It is based on many years of studying markets and the work of many professional investors. It attempts to develop an investment approach that combines historical success with modern technology.

The first dimension in building a well-diversified portfolio is through investing in a very broad range of asset classes that will allow for some investments to do well when others are not. While past performance is not a guarantee of future results, it is possible to develop a Strategic Asset Allocation that, based on historical data, would have provided the optimized rate of return at a your acceptable level of risk consistent with your time horizon. This gives recognition to the fact that different asset classes perform differently under varying economic and market circumstances and when combined may provide a steadier long-term rate of return.

The second dimension of risk control is to diversify investments within each asset class. We then try to carefully select solid investments, both individual and managed. We use a database of thousands of funding choices and hundreds of money managers to seek the most appropriate investments for our clients. At the same time, we seek to reduce the risk of having too much money invested in one place.

The third dimension of diversification is through utilizing a broad range of investment strategies. This approach, we call Adaptive Value Investing, accepts the fact that no single strategy will succeed at all times. It acknowledges the fact that some strategies will not be doing as well as others under certain circumstance, but will be superior under a different set of conditions. This approach frequently utilizes the expertise of multiple outside investment managers from several different investment disciplines, which we employ in a cost-efficient manner.

Our portfolio structure four strategy quadrants: Cash and Cash Generating, Core Equity, Inflation and Monetary Hedge and Adaptive Value Tactics. Each of these strategy quadrants holds a diversified group of asset classes and individual investments. As economic and market circumstances dictate, we adjust the balance among these quadrants in the attempt to achieve the desired risk-adjusted return. No strategy can guarantee results and past performance does not assure future success. However, this multi-strategy balance increases the probability of less volatile performance and more stable returns permitting a more reliable retirement cash flow.

Our primary concern is making sure our clients have enough retirement income to
last throughout their lifetime and, hopefully, meet their legacy planning goals.

So it is important that we focus on absolute returns at acceptable risk levels, which means having the cash you need when you need it. While there is never a guarantee, this focus is preferable to the usual focus on relative returns that consider it a success when only losing 20% when the “markets” a losing 40%. Absolute returns seek to meet cash flow needs regardless of external factors. In retirement, failure is not an acceptable option and large losses must be avoided if at all possible.

Adapt or Perish. There is no single strategy, investment or asset allocation that will serve you well in all economic situations. That is the most important lesson our Chief Strategist has learned in 50 years as an investment professional. It may sound extremely harsh, but those who choose to stick with a single-minded approach to investing often get blown away by the winds of change. For example, for many years simply buying and holding good blue-chip stocks was considered the road to success. Now, as we see what has a happened to the domestic automobile industry and several others, we realize the folly of inaction. Unfortunately many investors who had most of their money in a relatively few such stocks have been nearly wiped out.

While nearly all investment professionals agree that asset allocation is important, we have seen that merely following a computer-generated asset allocation may be ineffective under extreme circumstances. As an increasing number of investment managers converged on the same allocation strategy, the benefits of such a strategy were severely diminished. The herd mentality simply ruined its effectiveness.

Because we are now in a global economy, there are now more investment opportunities than there have ever been. There are also a greater number of sophisticated participants in the markets with different motivations and time horizons. This suggests that we may continue to see opportunities appear and disappear quickly as these professionals react to them.

The old adage of "buy low and sell high" is as valid today it has ever been. Most investors, however, practically ignore the sell side and simply watch investments go up and then back down. Where's the profit?

The bottom line is that you can't expect to make a significant profit
in a highly competitive market by doing nothing.

The Missing Detail - Strategy. The difference between success and failure is often the absence of one detail. Most professional investors and many individuals have a process. Some even have an Investment Policy Statement. Very few, however, have a clear understanding of strategy. The key to strategy is recognizing the fact that in financial markets change is inevitable. While there have been many theories and programs developed to mechanically adjust portfolios to changing markets, I know of none that have avoided eventual catastrophe.

Strategic thinking involves consideration of many potential events and outcomes along with possible tactics to optimize results. This is a much broader and more subjective perspective than most investment plans utilize. At any point in time the economy or a single investment can do one of three things. It can go up, it can go down or it can stay the same. As simple as this sounds, when we add in magnitude and timing, it becomes quite complex.

Suppose the global economy skyrockets for an extended period of time. Do we just sit back and smile and wait for it to go back down? Or do we take advantage of the excess and take some profits? Likewise if the economy spirals into total collapse, do we simply call under the covers and hope for better days, or do we have a strategy to capitalize on the weakness? Do we rely on preparation or whimsy?

The essential difference between strategy and program is in not only anticipating change, but also in evaluating magnitude and probability. For example the higher and more extended the climb, the greater the probability of a fall and the greater the potential magnitude of that fall. With investing we are seldom talking about certainties. We are nearly always talking about probabilities and payoffs.

A competent strategist will take into account as many potential happenings as practical even considering rare but potentially catastrophic events. He will then assign probabilities of occurrence to each along with likely payoffs. It's important to note that payoffs are two-sided. That means most occurrences could have both positive and negative consequences. The strategist will then take action in measured steps relative to the probability/payoff potential. Finally, the strategist will regularly update the probability grid and adjust tactics accordingly.

Opportunity Out of Chaos. While we do not know anything for certain about the future, we do have history as a guideline. We never know until after the fact what the highest or lowest value of a given item is. But, we do have massive amounts of historical data that help us to understand relative valuation.

Economists and investment strategists frequently talk about the concept of "reversion to the mean". Most people would call that the "law of averages". Over very long periods of time a given economic series tends to fluctuate around the long-term average for that period.

While relative valuations are not particularly helpful in the short term, they can be very useful over longer periods of time. When a given series gets to the outer extremes of its historical range, either high or low, there is an increasing probability that it will revert to the mean. That is, it will tend to move back toward its average valuation and perhaps move toward the other extreme.

This pendulum swing tendency brings us back to the concept of buy low, sell high. When we buy well below the historic average valuation or sell well above it, we tilt the probability/payoff potential in our favor. This is more applicable to broad-based investments than to single issues due to solvency concerns with the latter. Moving against the herd in this fashion takes patience, discipline and courage, but it can pay off handsomely.

When the financial markets are under severe stress as they are now, any numbers of investments are likely to move to extremes compared with their historical relationships. At these times it may be appropriate to make substantial adjustments to your asset allocation to defend against loss or to improve profit potential. This is where a proactive strategy is of special benefit. By previewing possibilities and developing tactics in advance, you are in a position to move swiftly at the appropriate time. We refer to this approach as an Adaptive Value Investing.