october 2012 pinnaclemonthly · 410.995.6630 410.505.0960 fax 5150 north tamiami trail suite 500...

PINNACLEOctober 2012

MONTHLY

Weighing theRick Vollaro, Carl Noble, Sean Dillon,and Sauro Locatelli

Blocking and Tackling

Ken Solow

Protecting Yourself AgainstFinancial Email Fraud

Kristin Tucker

Evidence

PinnacleAdvisory.comOctober 2012

6345 Woodside Court

Suite 100

Columbia, Maryland 21046

410.995.6630

410.505.0960 Fax

5150 North Tamiami Trail

Suite 500

Naples, Florida 34103

239.692.8888

239.692.8878 Fax

October 2012

MARYLAND

FLORIDA

Table of Contents

Protecting Yourself AgainstFinancial Email FraudKristin Tucker, CFP®

6

Market Review: September 2012Rick Vollaro, CPACarl Noble, CFASean Dillon, CMTSauro Locatelli

8

Blocking and TacklingKen Solow, CFP®, CLU, ChFC

2


Blocking and Tackling

We’rewell into the football season so it’s time to breakout the tired sports metaphors. This column is titled,“Blocking and Tackling,” which I’m using as a newand interesting way to announce that this is a goodtime to review the fundamentals of Pinnacle’s invest-mentphilosophy.With luck,we’ll soonhaveanoppor-tunity to write about how to invest without being“blind-sided,” how avoiding a bear market allows usto not have to “drop back ten yards and punt,” andhow looking at trailing returns is an exercise in “Mon-day morning quarterbacking.”

But fornow, let’s concentrateonblockingandtackling.

Ken Solow, CFP®, CLU, ChFC

Chief Investment Officer,

Senior Partner


unanimouslyconcludedthatPinnacleportfoliosshouldbe tilted slightly bullish. For our long-suffering ChiefInvestment Strategist, Rick Vollaro, whose job is (inpart) to get an idea of what the consensus opinion ofPinnacle analysts might be, last week’s unanimity wassomething of a relief. Over the past year there has beenplenty of disagreement on the team regarding the cur-rent bull market as some analysts remain skeptical(count me in), while others have been more willing totake risk. The unanimous conclusion to tilt slightlybullish is actually another way of saying that we areunwilling to be outright bullish, a state of affairs thatwould require the team to have high conviction aboutourmarket forecast. In other words, we have high con-viction thatwehave fairly lowconviction. If youunder-stand this somewhat confusing state of affairs, thenyoutruly understand the nuances of howwe actively man-age portfolios.

When we say we’re willing to be slightly bullish, thistechnically means that we’re willing to position theportfolio tohaveslightlymorevolatility thanourblend-ed benchmark portfolio for each Pinnacle strategy. In-terestingly, in real time it’s difficult to know just howbullish we are. Sauro Locatelli, Pinnacle’s quantitativeanalyst, has constructed several quantitative models tomeasure portfolio volatility in real time. A few weeksago, as we pondered how to best reposition the portfo-lio, wewereworkingwith a pro-formamodel that usescurrentdatatoforecasthowtheportfoliomightperformifwemadecertain changes.According to thepro-formamodel, we are currently somewhere between 5% and10% more volatile than the benchmark. However, ac-cording to models that measure the actual trailingvolatility of our portfolios, as opposed to forward-look-ing models of pro-forma volatility, we are still close tobenchmark. In fact, themodels are very sensitive todai-ly performance and the data dances all over the place.Fortunately, the teamhasworkedwithourmodels for along time andwehave a good idea of the impact of pro-posedtradeswithorwithoutthequantitativemodeling.Ifweget this right, thenweshouldseeportfoliosoutper-

A few weeks ago, Pinnacle analysts


form to the upside in “risk on” days, and presumablyunderperform on “risk-off” days. This has certainlybeen the case over the past few weeks.

When we have low conviction, we position the portfo-lios to have benchmark levels of risk, while other in-vestorswhohavelowconvictionpositiontheirportfolioto have no risk at all. The difference in philosophy re-garding risk taking is the difference between investorswho are trying to earn absolute positive returns versusinvestors who are trying to earn relative positive re-turns. As relative valuemanagers, we steal some of thefundamentalpreceptsofBuyandHoldinvestors,whichis somewhat ironic for an investment team under thesupervision of a CIO who has authored a book called,Buy and Hold is Dead (AGAIN). We still subscribe to thenotion that adiversifiedportfolio is anecessary require-ment for proper riskmanagement.We also believe thatthe historical risk and reward parameters for a blendedand unleveraged benchmark portfolio are relevant forinvestors trying to evaluate worst case drawdowns inportfolio values. And finally, we believe that invest-ment strategymustbeevaluatedovera reasonableperi-od of time, which (for better or worse) we define as acomplete market cycle. Hence, by owning the blendedbenchmark when conviction is low, we are putting in-vestors in the best possible position in termsof having arealistic perspective of worst case historical portfoliodrawdowns and still offer the opportunity to not misslonger-term opportunities for portfolio return.

Absolute return investors believe this definition of riskcompletely misses the mark. For them, risk is either therisk of losing all of their capital, or the risk of short-termdownsidevolatilityof theircapital.Wefindbothof thesedefinitionsofrisktobeproblematic ifyouchoosetoviewinvesting as a process of allocating capital to have thehighestprobabilityof earninga riskpremiumover time.If you own a portfolio that is diversified by asset class,within asset classes, andwithout leverage, the possibili-ty of losing all of your capital in even the most violentbear market is extraordinarily unlikely. The notion ofdefining risk as peak to trough declines creates a situa-tionwherediversification is abandoned in favorof cash.Whileowningcashinbearmarkets iswonderful,getting

the timing exactly right is very hard to do. We wouldrather give ourselves the flexibility to reduce risk versusour benchmark, which allows us the very importantfreedomtobewronginourassessmentofmarkets,whilestill giving us the flexibility to manage risk over andabovesimplybuyingandholdingadiversifiedportfolioofassetclasses.Theresultofourrelativeapproachtoriskmanagement is thatwhenwehave lowconviction inourforecast, we own the benchmark portfolio.

It is also interesting to note that all of this relative riskposturing results in comparing our very diversifiedportfolios to a blended benchmark constructed of onlytwo asset classes, U.S. stocks and U.S. bonds. As I havelamented on many occasions, the notion that we mustbeat the performance of a two asset class benchmarkwhile sticking to a strategy that requires us to own agloballydiversifiedportfolio issomewhatabsurd.How-ever, since this is an absurdity of our own making, it’sworth explaining our position about benchmarks onceagain. The fact is, any benchmarks thatwe conjure up touse for portfolio comparison will be completely arbi-trary.Choosing twowell-knownproxies for risk and re-ward for bonds and equities keeps things simple, andkeeps the benchmark performance easily understand-able for Pinnacle clients. However, when the S&P 500Index, ourproxy for stocks, is beatingall other riskprox-ies including developed country international stocks,commodities, and emerging market stocks, we tend tosuffer in terms of our relative return comparisons.

Finally, the current themeweare investing is ‘reflation,’meaning thatwebelieve the globalCentral Bank effortsto push asset values higherwill be successful. This doesnot mean we believe that buying billions in mortgageswill necessarily stimulate the U.S. economy or actuallyreduce therateofunemployment.Nordoes itmeanthatthe structural problems in the Eurozone will be fixedbecauseMr.Draghi has declared that buyingEuropeangovernment bonds is part of the European CentralBank’s mandate to promote stability in the price of theeuro. However, it does mean that we believe there’s alikelihood that the liquidity from these programs willfinditswayintoglobalriskmarketssuchasEurope,U.S.late cyclical stocks, gold, oil, and corporate bonds and


mortgages. It also means that the hedges we own thatare designed toworkwell if we’rewrong in our assess-ment of global reflation are likely to trail (so if we’recorrect in our view, the same geniuses who made youmoney in the above mentioned investment ideas willlose you money by owning the dollar, high qualitybonds, volatility hedges, and defensive stocks). Hope-fully our discerning clients will focus on the overallportfolio performance and allow us the luxury of de-fending against big investment mistakes. This meansthat clientswon’t focuson the“losers” in theirportfolio,which we own for the purpose of safely owning the“winners.”This is theconundrumfacedbyanyonewhounderstands the nature of a diversified portfolio.Whileweall claimtowantportfoliodiversification for thepur-pose of risk management, the only diversification wereally want is to own cash in bearmarkets. In bull mar-ketswewant toownasmuchof thewinningasset class-esaspossiblesinceeverythingelse—eitherrelativelyorabsolutely—losesmoney.Unfortunately, only inhind-sight do we get to see which asset classes turned out tobe thewinners and the losers…an inconvenient truth ifever there was one.

Pinnacle clients who understand high conviction/lowconviction forecasts, relative versus absolute returns,comparingperformance to two asset class benchmarks,and the many frustrations of maintaining a diversifiedportfoliohaveearnedourspecialPinnacleadvancedde-greeinactiveandtacticalportfoliomanagement(aswellas our short-course in sportsmetaphors). They cannowmove past blocking and tackling and pass on to moresophisticated plays in our Pinnacle playbook.

Ken Solow, CFP®, CLU, ChFC is the ChiefInvestment Officer and a Senior Partner atPinnacle Advisory Group.

Email: [email protected]: pinnacleadvisory.com/ksolow/

We believe theglobal CentralBank efforts to

push asset valueshigher will besuccessful.


Protecting Yourself AgainstFinancial Email Fraud

Email fraud is on the rise in the financialworld.We’venoticed the phenomenonourselves:Over the past sev-eral monthswe’ve seen an increase in computer hack-ers targeting client emailwith the intentionof commit-ting wire fraud. These scammers hack into the client’spersonal email account and either create a cloned ac-count using a similar email address, or they combthrough the “Sent Folder” looking for financial or per-sonal information. In either scenario, once they comeacross Pinnacle’s contact information, the hackersends an email from the client’s address (or the clonedaddress) posing as the client and requesting funds tobe wired to their bank account.

Kristin Tucker, CFP®

Operations Manager


Thus far, these fraudulent emails have been easy tospot. Because our Wealth Managers and OperationsAssociates work with a fixed group of clients, we’refamiliar with their communication style and are expe-rienced in recognizing what we call “trigger words orphrases” (for example, “I am not available by phonetoday”). Working with our custodians, we have alsobeenwell trained indetectingwire fraudattempts andphishing attacks. Furthermore, Pinnacle’s processesare completely secure and there’s nothing in personalclient email accounts that would let hackers get intoour network.

Nevertheless, email fraud is increasing and these forg-eries are getting more sophisticated. That’s preciselywhy we created special online vaults for our clientsearlier this year – to provide a secure location for their

personal and financial information. Client vaults areessentially secure online lockboxes that they canuse tostore sensitive documents – tax returns, wills, trusts,Power’s ofAttorney, etc. In addition to protecting sen-sitivematerial, they alsouse their vaults to receive andsendbackdocumentswith theirWealthManagers andOperationsAssociates.This isvery important,becauseit keeps their account and financial information frombeing transferred through email (and thus, vulnerableto hackers).

While it appears the onlineworld is gettingmore dan-gerous, there are a few easy things you can do to pro-tect your finances:

• Never send sensitive financial (or personal) infor-mation by email, unless your email is encrypted.• Make it harder for hackers to crack your personalemail account by using a mix of capital and lower-case letters, numbers, and symbols in your pass-word.• Use our client vault to store and send all financialinformation.

Weareabsolutely committed todowhatever it takes toprotect our clients’ assets and sensitive information.Andwhilewe can’t eliminate all the criminal risks outthere,we’remakingsure tokeepseveral stepsaheadofthem, through technology and training.

Kristin Tucker, CFP® is the OperationsManager for Pinnacle Advisory Group.

Email: [email protected]

Pinnacle’s processesare completely secureand there’s nothing inpersonal client emailaccounts that wouldlet hackers get into

our network.


After a healthy August, investors entered September withsome trepidation over the idea thatmarkets could be ready forawell-deservedpullback. Butdespite calendar-based fears, in-vestors enjoyed solid returns from the risk trade during themonthasequities, commodities, credit sensitivebonds,andtheEuro currency enjoyed material gains. As risk bounced thesafety tradepulledback,mostnotably in longmaturitygovern-ment bonds and the dollar. Catalysts for the rally in risk assetsincludedacontinuingreduction inEuropeansystemrisk,glob-aldata thatwasn’t asbadasexpected, anda fresh roundofhighpowered stimulus from the U.S. Federal Reserve. The Fedfoundaway to surprisemarketswith the open endednature ofa new quantitative easing program that promised to accepthigher levels of inflation in the future in exchange for progressin lowering unemployment. Markets immediately celebratedtheFedpouringmore fuel on the fire, and theknee jerk reactionled to fresh recovery highs for the S&P 500.

But the rally was not long lived, and the market quickly re-traced some gains as investors sobered up and reassessedwhether they should be focusing on more Fed stimulus or thefact that Ben Bernanke may have just fired his last bullet.

Rick Vollaro

Chief Investment

Strategist

Carl Noble

Senior Analyst

Sean Dillon

Technical Analyst

Sauro Locatelli

Quantitative Analyst

September 2012MARKET REVIEW


Weighing the Evidence

It’s a considerable understatement to say we live inunusual economic and financial times. But despite thestructural risks that confront global investors, they al-so face the harsh reality that risk-free assets yield nexttonothing, andare actually evenworsewhenadjustedfor inflation. In addition, policymakers’ actions haveput investors inapositionwhere theymust respectnotonly the downside tail risk that could produce devas-tating losses, but also the upside tail risk that maycome from excess liquidity leading to asset inflation.

At times like this it’s important to have a disciplinedandrepeatableprocess toassistwithdevelopingaviewthat gets expressed in the asset allocationof aportfolio.Luckilywehave such aprocess;what follows is a sum-mary of how we view the market at present.

The Business Cycle

The global business cycle remains in a soft spot. U.S.economic data is improving on balance, but continuesto remain mixed with some data points picking up asotherscontinue to lag.Theupshot is thatmodestexpec-tations have created a low hurdle going forward if thedata has turned the corner and continues to pick up.Europecontinues towallow ina recession, andChina’sdeceleration has not shown signs of stabilization yet.Unlike U.S. growth rates, the best that can be said ofinternational growth is that the data continues to trendin a ‘less bad’ direction. For a time that will suffice, butat some point international markets will need to stabi-lize and turn the corner if risk assets are going to rise inthe fourth quarter.

The obvious risks to growth come from the fiscal cliffand thepossibility that thedownwardgrowth trajecto-ry inEuropeandChinacouldworsen rather thanstabi-lize.We continue to remain encouraged that datamaybepassingtheirworstpoint,butwewill remainflexibledue to the low level of global growth and the politicalrisk of the coming months.

Technical Conditions

After climbing to new cyclical highs in September, eq-uitymarketsaroundtheworldaredigesting thestrongperformance. Momentum and breadth indicators areshowingbroadoverbought conditions consistentwitha short-term pause in earlier bull markets. Investorsentiment has continued to climb higher through theyear but is still well below levels that would supportadopting a contrarian stance. Seasonal patterns in-cluding the Presidential cycle and 4th Quarter bullishbias suggest that the path of least resistance points upfor riskmarkets. Andwhileweakness in the industrialand transportation sectors is something to watch,there is no distribution present to be overly concernedright now.

Valuation

Overall, the valuation of the S&P 500 has been in theneutral zone for many months now. While forwardearnings seem to be priced below the historical medi-an, the price-to-earnings multiples based on normal-izedearningsportraya relativelyexpensivebackdrop.The bright side of valuation remains: Compared toother assets, particularly Treasury bonds, the S&P 500currently carries a muchmore attractive earnings anddividend yield. Those relatively lofty yields don’tcome without volatility, but even long-dated Trea-suries could turn out to be a dangerous place to be ifinterest rates begin to rise off of a very low base.

Quantitative Models

Over the past few weeks our proprietary model hasconfirmed the bullish signal initiated around June ofthis year. Consequently, the model’s trend has nowturned up and looks very healthy. The fact that thisbullish message is being confirmed by the other inde-pendentmodelswe follow further increases our confi-dence in our moderately positive view.


System Risk/Policy Response

Global central banks continue to stimulate growth at atimewhen the fiscal arms of governments are trappedin gridlock or are too debt strapped to participate incountercyclical policy. The recent ECB program hasmaterially reduced the immediate solvency risk in theEurozone, and the Federal Reserve announcement in-troduces a fresh reflationary impulse throughout theglobal economy. China continues to underwhelm inthe size and scopeof its reflationary efforts, but has theability to contributemuchmoreon the fiscal front thanthe developed world.

Taken together, the shockwaves coming from globalcentral banks are reflating growth and assets prices.Investors are wise to be skeptical regarding the long-term effects of such policy and the potential unintend-edconsequencesof the liquidity tsunamihitting finan-cialmarkets.However, investorsmust also respect theold adage not to fight the Fed, particularly since theFed is being joined by other major central banks inimplementing pro-growth policies.

Current Positioning

Given the clash of slow growth fundamentals withhigh octane policy stimulus, we continue to positionportfolios just slightly above benchmark levels ofvolatility. Our modestly upbeat posturing is mostlyreflected in our sector rotation strategies which haveincreased in cyclicality and reduced interest rate expo-sure.Givenanagingbusiness cycleand themagnitudeand duration of the run off of the 2009 bottom, we be-lieve that getting too aggressive in asset allocation atthis juncture is imprudent. Insteadwewill continue tofocus our efforts on sector rotation in an effort to addalpha to client portfolios.

Portfolio Transations

In all portfolioswith aposition in theRisingDollar,wetrimmed 1% on September 6. The proceeds from thesale (including 2% of cash in the portfolio) were used

At times like this it’simportant to have a

disciplined andrepeatable process to

assist with developing aview that gets expressedin the asset allocation of

a portfolio.


Top 5 Performers

September 2012

Please note that the returns andweightings used for this illustration are based on theDynamicModerateGrowthportfolio at the end of the period. The individual security returns for other strategies may vary due to tradeexecution or security selectiondifferences. Securitiesmayhave beenbought and soldduring themonth; therefore,client returns (which are shown here) may not reflect a security’s actual monthly return. Holdings identified donot represent all of the securities purchased, sold, or recommended for advisory clients. Past performance doesnot guarantee future results.

Bottom 5 Performers

September 2012

to purchase the Guggenheim Short Duration ETF. Inthe DMG, DA and DUA portfolios, we made a minorshift fromearly cycle stocks to late cycle stocksby trim-ming 1% fromDiscretionary stocks to purchase 1% inMetals and Mining.

September Portfolio Performance

Riskwason inSeptemberandPinnacleportfolioswerewell positioned to take advantage of the rise in equity

markets. Overall, the portfolios achieved high abso-lute returns and strong relative performance as theS&P500 rose2.58%.Overweightallocations toEnergy,Materials andDiscretionary sectors contributed to thestrong performance while Technology and portfoliohedges weighed on the returns.

The tablebelowhighlights thebestandworstperform-ing securities during the month:

POSITION WEIGHT RETURN

iShares Home Construction 2% 6.80%

Metals and Mining ETF 3% 6.19%

First Trust Natural Gas 2% 6.00%

Matthew’s Asian Gro. & Inc. 3% 4.84%

Gold 4% 4.67%

POSITION WEIGHT RETURN

Barclays Dynamic VIX 3% -5.77%

iPath Oil 2% -4.14%

iShares Semiconductors 4% -3.40%

Rising Dollar 3% -1.74%

Schwab Interm. Treasury 5.5% -0.07%


Start�Date End�DateDynamic�

Conservative

Dynamic�Conservative�

Growth

Dynamic�Moderate�Growth

Dynamic�Appreciation

Dynamic�Ultra�Appreciation*

Barclays�Capital�U.S.�Aggregate�Bond�Index

S&P�500�Total�Return�Index

10/31/2002 12/31/2002 1.83% 0.85% 0.66% 0.59% 2.04% Ͳ0.34%12/31/2002 12/31/2003 9.50% 17.35% 20.87% 24.75% 4.10% 28.69%12/31/2003 12/31/2004 6.43% 8.69% 9.51% 10.64% 8.16% 4.34% 10.87%12/31/2004 12/31/2005 3.77% 4.40% 5.12% 5.69% 6.39% 2.43% 4.89%12/31/2005 12/31/2006 8.82% 8.81% 10.65% 12.75% 14.27% 4.33% 15.80%12/31/2006 12/31/2007 5.66% 6.62% 7.73% 7.99% 8.45% 6.97% 5.49%12/31/2007 12/31/2008 Ͳ9.86% Ͳ12.57% Ͳ16.90% Ͳ23.86% Ͳ27.71% 5.24% Ͳ37.00%12/31/2008 12/31/2009 9.24% 11.19% 18.67% 23.58% 31.60% 5.93% 26.46%12/31/2009 12/31/2010 5.73% 8.40% 11.05% 11.33% 11.27% 6.54% 15.07%12/31/2010 12/31/2011 4.14% 3.44% 2.07% 0.75% Ͳ2.46% 7.84% 2.12%12/31/2011 9/30/2012 4.89% 6.29% 7.15% 8.31% 10.20% 3.99% 16.42%

Total�Return�to�9/30/2012 61.02% 80.54% 99.98% 104.22% 62.27% 68.77% 98.6%�/�49.7%**Annualized�to�9/30/2012 4.92% 6.14% 7.24% 7.47% 6.04% 5.42% 7.16%�/�5.01%**

Month�of�September�2012 0.86% 1.19% 1.38% 1.67% 2.26% 0.14% 2.58%TrailingͲOneͲYear�Annualized 6.65% 9.95% 11.52% 13.79% 17.86% 5.16% 30.18%TrailingͲThreeͲYear�Annualized 5.16% 6.56% 7.69% 7.90% 7.73% 6.19% 13.20%TrailingͲFiveͲYear�Annualized 2.61% 3.02% 3.63% 2.56% 2.45% 6.53% 1.05%

Best�Month 3.53% 3.74% 4.99% 6.32% 8.43% 3.73% 10.93%Worst�Month Ͳ5.76% Ͳ6.75% Ͳ8.90% Ͳ11.69% Ͳ12.48% Ͳ3.36% Ͳ16.80%Average�Down�Month Ͳ1.14% Ͳ1.43% Ͳ1.99% Ͳ2.63% Ͳ3.14% Ͳ0.71% Ͳ3.87%Best�Quarter 5.60% 7.74% 10.29% 12.72% 17.57% 4.58% 15.93%Worst�Quarter Ͳ6.05% Ͳ6.06% Ͳ7.27% Ͳ11.98% Ͳ14.23% Ͳ2.44% Ͳ21.94%Average�Down�Quarter Ͳ1.66% Ͳ2.17% Ͳ2.92% Ͳ4.18% Ͳ5.32% Ͳ0.78% Ͳ7.19%

Risk�Metrics�Vs.�Benchmarks�(Since�Inception)

Beta 0.78 0.76 0.81 0.84 0.75Correlation 86.17% 90.93% 93.83% 95.01% 95.30%Alpha 0.28% 1.12% 1.69% 1.50% 2.04%Information�Ratio 1.03 1.21 1.18 0.82 0.55Standard�Deviation 4.47% 5.96% 7.88% 10.07% 12.36% 3.60% 15.05%

Comparative�Performance

Pinnacle

Month�of�September�

2012TrailingͲTwelveͲ

MonthSince�Inception�Annualized

Dynamic�Conservative 0.86% 6.65% 4.92%Dynamic�Conservative�Growth 1.19% 9.95% 6.14%Dynamic�Moderate�Growth 1.38% 11.52% 7.24%Dynamic�Appreciation 1.67% 13.79% 7.47%Dynamic�Ultra�Appreciation* 2.26% 17.86% 6.04%

BenchmarksDC�Blend 0.63% 9.95% 5.95%45%�S&P�500�/�55%�Barclays�Capita 1.24% 16.09% 6.52%60%�S&P�500�/�40%�Barclays�Capita 1.61% 19.86% 6.77%75%�S&P�500�/�25%�Barclays�Capita 1.97% 23.68% 6.97%100%�S&P�500* 2.58% 30.18% 5.01%

IndicesS&P�500 2.58% 30.18% 7.16%Barclays�U.S.�Aggregate�Bond 0.14% 5.16% 5.42%Dow�Jones�Industrial�Average 2.75% 26.52% 7.55%NasDaq 1.61% 29.14% 8.98%Russell�2000 3.28% 31.91% 9.91%MSCI�EAFE 2.96% 13.79% 7.71%MSCI�Emerging�Markets 6.03% 16.98% 16.42%DJ�UBS�Commodity 1.71% 6.00% 5.35%

*Inception�06/30/2004

All�Returns�Reported�Are�Net�Of�FeesBrokerage�Composites�As�Of�9/30/2012

��Pinnacle�Portfolios�Ͳ�Growth�Of�$10,000.00

Dynamic�Ultra�Appreciation�not�shown�because�of�later�inception�date�(06/30//2004)

�$8,000

�$10,000

�$12,000

�$14,000

�$16,000

�$18,000

�$20,000

$22,000

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Russell 2000 – An unmanaged, market-capitalization weighted index that measures the performance of the 2,000 smallest companies in the Russell 3000 index.

45% S&P 500 / 55% Barclays Capital U.S. Aggregate Bond – Comprised of the S&P 500 Total Return Index and Barclays Capital Aggregate Bond Index.

60% S&P500 / 40% Barclays Capital U.S. Aggregate Bond – Comprised of the S&P 500 Total Return Index and the Barclays Capital Aggregate Bond Index.

75% S&P 500 / 25% Barclays Capital U.S. Aggregate Bond – Comprised of the S&P 500 Total Return Index and Barclays Capital Aggregate Bond Index.

Beta - A measure of systematic risk of a portfolio in comparison to the market or benchmark. It is calculated using a linear regression.

Correlation - A statistical measure of how two securities or portfolios tend to move in relation to each other.

Alpha - A measure of risk-adjusted performance, defined as the return in excess of a normal return implied by a portfolio's systematic risk, measured by Beta.

Information Ratio - A measure of risk-adjusted performance, calculated as the ratio of Alpha over the Standard Deviation of Alpha.

Standard Deviation - A measure of risk, defined as the dispersion of a set of returns from its mean.

DisclaimerPinnacle Advisory Group, Inc. (hereinafter “Pinnacle”) is an investment advisor registered under the applicable provisions of the U.S. Securities and Exchange Commission (SEC).

Pinnacle Dynamic Portfolios

Barclays Capital U.S. Aggregate Bond Index – An unmanaged, intermediate term, market-capitalization weighted index used to represent investment grade bonds being traded in the U.S. The

index includes Treasury securities, Government agency bonds, mortgage-backed bonds, corporate bonds, and a small amount of foreign bonds traded in U.S.

DC Blend – Comprised of the S&P 500 Total Return Index and Barclays Capital Aggregate Bond Index. 30% S&P 500/70% Barclays Capital Aggregate Bond Index from 10/31/02 to 8/31/09,

and 20%S&P 500/80% Barclays Capital Aggregate Bond Index from 8/31/09 to present.

Any reference to “Pinnacle’s” portfolio volatility or portfolio performance is based on the actual performance of Pinnacle’s composite portfolio groups. There are five Pinnacle composite

portfolios – Dynamic Conservative, Dynamic Conservative Growth, Dynamic Moderate Growth, Dynamic Appreciation, and Dynamic Ultra Appreciation – and each is managed within the

constraints of a specific Investment Policy Statement. The composite portfolios are actively managed and the underlying securities and/or percentage holdings in each security can and do change as

Pinnacle alters its market outlook based on a continuous evaluation of market and economic conditions. The composite portfolios typically own a diversified mix of no-load or load-waived mutual

funds and exchange-traded funds that invest in U.S. and international equities, fixed income securities, and alternative investments such as commodities, real estate, and hedge-fund-like strategies. It

is important to note that the returns and volatility shown are accurate representations of past performance, but are not necessarily predictive of future performance or volatility as market conditions

can and do change. Returns are calculated using month-end portfolio values. Any and all return or volatility data for the composite portfolios are shown net of all Pinnacle fees and any other related

fees (such as fund expense ratios or transaction/trading costs where applicable), include dividends and interest, and are size- and time-weighted. Policy composites include portfolios formerly

categorized as “Stock” or “Mutual Fund,” which may have deviated slightly from target model weightings in the past. Policy composite returns may vary from individual Pinnacle client accounts

due to deposits orwithdrawals from the account, or other client-driven market timing or security selection issues. Pinnacle composite portfolios may be compared to various asset classes, blends of

asset classes, indices, or mutual fund universes. The performance and volatilityof these asset classes are for comparison purposes only and such performance can be materially different than a

Pinnacle composite portfolio.

MSCI Emerging Markets Index - An unmanaged, market capitalization weighted index composed of stocks from 26 emerging markets. The countries included in the index are located in Europe,

South America, Africa, and Asia.

S& 500 Total Return Index – An unmanaged, capitalization-weighted index composed of 500 widely held common stocks listed on the NYSE. This index provides a broad snapshot of the overall

U.S. equity market . The index selects its companies based upon their market size, liquidity, and sector. Includes reinvestment of all dividends and distributions.

DJ UBS Commodity Index - This rolling index is composed of futures contracts on 19 physical commodities. It is designed to be a highly liquid and diversified benchmark for the commodity

futures market.

MSCI EAFE Index - An unmanaged, market capitalization weighted index composed of stocks from 21 developed markets, but excludes those from the U.S. and Canada. The countries included

in the index are located in Europe, Australia, Asia, and the Far East.

NASDAQ – An unmanaged, market-capitalization weighted index. The security types eligible for the index include domestic or foreign common stocks, ordinary shares, ADRs, shares of beneficial

interest or limited partnership interests, and tracking stocks.

Dow Jones Industrial Average Index (DJIA) - An unmanaged, price-weighted index of 30 widely held stocks traded on the NYSE. The 30 stocks in the Dow Jones Industrial Average are all

major factors in their industries and their stocks are widely held by individuals and institutional investors.


DisclaimerPinnacle Advisory Group, Inc. (hereinafter “Pinna-cle”) is an investment advisor registered under the ap-plicableprovisionsof theU.S.SecuritiesandExchangeCommission (SEC).

Pinnacle Dynamic PortfoliosAny reference to “Pinnacle’s” portfolio volatility orportfolio performance is based on the actual perfor-manceofPinnacle’s compositeportfolio groups.Thereare fivePinnacle compositeportfolios–DynamicCon-servative, Dynamic Conservative Growth, DynamicModerate Growth, Dynamic Appreciation, and Dy-namicUltraAppreciation–andeach ismanagedwith-in the constraints of a specific InvestmentPolicyState-ment. The composite portfolios are actively managedand the underlying securities and/or percentage hold-ings in each security can and do change as Pinnaclealters itsmarketoutlookbasedonacontinuousevalua-tion ofmarket and economic conditions. The compos-ite portfolios typically ownadiversifiedmix of no-loador load-waived mutual funds and exchange-tradedfunds that invest in U.S. and international equities,fixed income securities, and alternative investmentssuch as commodities, real estate, and hedge-fund-likestrategies.

It is important to note that the returns and volatilityshown are accurate representations of past perfor-mance, but arenotnecessarily predictive of futureper-formance or volatility asmarket conditions can anddochange. Returns are calculated usingmonth-endport-folio values. Any and all return or volatility data for thecomposite portfolios are shownnet of all Pinnacle feesand any other related fees (such as fund expense ratiosor transaction/trading costs where applicable), in-clude dividends and interest, and are size- and time-weighted. Policy composites include portfolios for-merly categorized as “Stock” or “Mutual Fund,” whichmay have deviated slightly from target model weight-ings in the past. Policy composite returns may varyfrom individual Pinnacle client accounts due to de-

positsorwithdrawals fromtheaccount,orotherclient-drivenmarket timing or security selection issues. Pin-nacle composite portfolios may be compared to vari-ous asset classes, blends of asset classes, indices, ormutual funduniverses.Theperformanceandvolatilityof these asset classes are for comparisonpurposesonlyand suchperformance canbematerially different thana Pinnacle composite portfolio.

The material contained in this brochure is providedsolely for informationpurposes only anddoesnot con-stitute investment, legal, or tax advise, nor is it an offerto sell or a solicitation to buy any investment, invest-ment process, strategy, or advice. It has beenpreparedwithoutregardtothe individualcircumstancesandob-jectives of persons who receive it andmay not be suit-able for all individuals. Pinnacle encourages individu-als to seek the advice of a professional advisor. Theappropriateness of particular advice, an investment,orother strategydependsonaperson’sorentities indi-vidual or particular circumstances.

The information provided was prepared by Pinnacleonly. The facts, views, analysis, strategies, and opin-ionspresented inthisbrochurehavenotbeenreviewedby any of the individuals or entities other than repre-sentatives of Pinnacle. Pinnacle makes every effort touse, reliable, comprehensive information, but Pinna-cle, its employees, or any affiliated entities, or thirdparties make no warranties or representations of anykind relating to the accuracy, completeness, or timeli-nessof the informationprovidedandshallnotbe liablefor any damages of any kind relating to such informa-tion. Pinnacle has no obligation to inform you whenopinions or information discussed is changed.

The trademarks and service marks contained hereinare the property of their respective owners.Noportionof any information containedhereinmaybe reprinted,sold, or redistributed without the written consent ofPinnacle and/or the individuals or entities mentionedherein.

Goals you want to achieve… places you hope to go…things you want to do… people you yearn to spendtime with.

These dreams have motivated you over the years towork hard and to sacrifice, so that one day youwouldbe in the financialposition to live the lifeyou’vealwayswanted. But you’re not there yet. Achieving yourdreams takes more than work and sacrifice… it alsotakes planning and the knowledge of how to get there.

AtPinnacleAdvisoryGroup,weareexpertsathelpingaffluent people like you accomplish their life goals.Whether you want to spend your future retirement…

…traveling the world with your spouse…

…spendingmore timeonhobbies likephotography,or wine collecting, or cooking…

…living on a horse ranch in the country or a cabin inthe mountains…

…creating a lasting legacy for your children andgrandchildren…

…supporting the charities and causes that you holddear…

Or even if you just want to have the money and guid-ance right now to do the things that are important toyou, we can help.

You see, at Pinnacle, we combine both expert invest-mentmanagementwithpersonalized,unbiased finan-cialplanning.Wedon’t thinkyoucanseparate the two.

After all, what’s the point of securing your financialhealth if you can’t do what you want with it? Andwhat’s the use of creating a plan to achieve yourdreams ifyou lack the financialmeans togetyouthere?

In 1993, our founders started Pinnaclewith the goal ofcreating the perfect financial advisory firm—the kindof place they themselves would feel safe entrustingtheirownmoneyandfuture.Wethink theysucceeded.Over the years, Pinnacle has developed a proprietaryinvestment system — the “Pinnacle InvestmentMethod”— alongwithan independent teamthatdoesnothing but analyze the markets and manage ourclients’ portfolios. At the same time, we have assem-bled an all-star group ofwealthmanagerswho devoteall of their attention to individual clients, helping themplan for their future and achieve their life goals.

While large financial advisory companies also haveseparate investment departments, they lack the per-sonalized attentionof a smaller firm.At the same time,small advisories have the personal service, but lack afull-time investment team — advisors are forced tosplit their attention between serving clients andmoni-toring the markets.

Here at Pinnacle,wehave thebest of bothworlds.Andwe’d like to put that to work for you.

If youhave aminimumof $750,000 in investable assetsand would like to arrange an introductory meetingwith one of our wealth managers, email Brian Saint-Paul at [email protected] or phonehim at (410) 995-6630.

You have dreams...

PINNACLEADVISORY GROUP, INC.

october 2012 pinnaclemonthly · 410.995.6630 410.505.0960 fax 5150 north tamiami trail suite 500...

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