Q2 2013

“THERE IS ONE CONSOLATION WITH INFLATION: THE MONEY YOU HAVEN’T GOT ISN’T WORTH AS MUCH AS IT USED TO BE.”

- ANONYMOUS

INSIDE THIS ISSUE

PortfolioUpdateBy Mike Booker, CFP®, ChFC, CFS®

As I’m sure you have noticed, we’ve been very busy in your account. We implement-ed some recent asset allocation changes which we believe will provide an even more solid foundation for strong future returns.We eliminated three asset classes and added two new managers, all on the fixed income side of the ledger. We believe, as do our bond management teams, that the “Golden Era” that bonds have experienced over the past 32 years is coming to an end. The primary reason that this Golden Era existed is that interest rates have been steadily dropping down to where we find ourselves today, near 0%. As you know, when interest rates decline, bonds benefit in the form of price appreciation. Likewise, the values of bonds can drop in a rising in-terest rate environment. In May, we began to see the initial signs of rising interest rates, a trend which could last a very long time as rates return to nor-mal historical levels. On May 22nd, Fed Chairman Ben Bernanke signaled the be-ginnings of a “tapering” of its long-stand-ing quantitative easing program, causing rates to spike and bond prices to decline.As part of our strategic allocation, we elim-inated three of our fixed income mutual funds and replaced them with two funds that are better positioned to survive and even thrive over the years to come. Three years ago, we began to favor bond man-agers with flexible investment mandates, and we added BlackRock Strategic Income Opportunities to our portfolios. These ad-ditions are a continuation of that same thinking.

On the following pages, Bryan Zschiesche and Mike Minter provide additional de-tails regarding the changes we’ve made in our portfolios. Here’s a preview:

Treasury Inflation Protected Securities (TIPS): This category is suffering some of the most severe losses as rates have begun their ascent. By prospectus, the man-agers of the fund, BlackRock Inflation Protected Bond, have very little flexibility in their response to this environment, so we have exited the position.

Foreign Bonds: While there is opportunity abroad, the two bond funds we have added will have the ability to invest in foreign bonds if they believe the environ-ment is beneficial to this asset class. More importantly, they can elect to have little or even no exposure to foreign bonds if the environment is deemed less than op-timal. With our previous dedicated foreign bond fund, T. Rowe Price Institutional International Bond, the manager was required to invest abroad, even if those areas were overpriced or unattractive. Again, flexibility is critical going forward, so we have exited the position.

Low Duration Bonds: The rationale for our exit from low duration bonds is similar to the rational for our departure from foreign bonds. Because the managers of this fund (T. Rowe Price Short-Term Bond) are required to invest in only certain areas of the bond markets, we have eliminated the position in favor of more flexible manag-ers.

Alternative Strategies: In our more conservative portfolios (those with less than 50% equity allocation) we have reduced this category from 20% to 15%. That 5% difference was reinvested in the equity side of the portfolio. The reduction of the alternatives to 15% in our moderate and aggressive portfolios was executed earlier this year.

Queens Road Small Cap Value: While Queens Road was home to a very capable manager, Diamond Hill Small Cap is a supe-rior fund in our view. The Diamond Hill fund was our #1 choice at the time we purchased Queens Road as our new small cap value replacement fund, but due to investment restrictions in the Diamond Hill fund, we were unable to buy it. Diamond Hill recently loosened those restrictions, providing an entry point for our clients. We pounced.

� PORTFOLIO UPDATE 1 � BOND ALLOCATION CHANGES 2-3 � VOLATILITY ISN’T THE ENEMY 3 � YOUR OUTSIDE ASSETS 3 � SMALL-CAP VALUE CHANGES 4 � 84YR OLD WIDOW WINS $590MIL 5 � THE IMPORTANCE OF BEING 20-SOME-

THING 5 � ANNOUNCEMENTS 6

2

“EXPANDED MANDATES IMPROVE CHANCES OF SUCCESS IN A CHOPPY BOND MARKET”

Bond AllocationChangesBy Bryan Zschiesche, CFP®, MBA

A big component of the changes Mike discussed in his opening article centered around our bond allocations. For clients whose portfo-lios lean more aggressive, these bond fund changes will have little impact. But for our more conservative and moderate clients, these moves represent a meaningful shift in our bond allocations. Before we get into the changes in detail, let’s start by looking at where we’ve been, both over the past 30 or so years, and then more recently, over the last couple of months.

For a long-term perspective, take a look at the chart below from J.P. Morgan’s July 1st, 2013 Guide to the Markets. Focus on the blue line, which represents the yield (or interest rate) on the 10-year U.S. Treasury bond. Beginning in the early 1960s, interest rates rose dramati-cally until they peaked in Sept. 1981 at 15.84%. Many of our clients will remember mortgage rates and CDs in the double-digits during the late ‘70s and early ‘80s. However, after that peak, a decline in rates commenced which has continued in a steady downward path until it hit about 1.6% on May 2nd of this year. What is the significance of this persisent downward trend? As Mike mentioned earlier, bond prices go up when interest rates go down. So this continual decline in interest rates over the past 30+ years has led to siginficant increases in bond prices over that timeframe. In other words, bond investors have experienced a supportive tailwind of declining rates to help boost bond returns.

Now for the more recent perspective. From May 2nd to the time of this writing (July 8th), the 10-year Trea-sury yield has risen from 1.6% to 2.6%. While a one percentage point move doesn’t seem like much, it represents an increase of nearly 63% in just over two months. And, as we know, when interest rates go up, all things being equal, bond prices go down. This sudden spike in rates, while not unprecedented, made waves in the bond world and led to losses by most bond managers over that short period. The spike in yields was caused primarily by hints from Fed Chairman

Ben Bernanke that the pace of “quanititative easing” (QE) may slow later this year as the economy appears to be on firmer footing, reducing the need for stimulus by the Fed. While the Fed hasn’t actually reduced QE, the mere anticipation of a possible reduction caused the bond market to react.

As we can see above, interest rates tend to move in prolonged cycles, potentially as long as 20 or 30 years. While we don’t profess to have the ability to call an interest rate bottom, we saw opportunities in our bond investments to improve our chances of success in what could be a prolonged rising rate environment. Now, onto the changes themselves…

We eliminated three bond funds from our portfolios entirely: T. Rowe Price Institutional International Bond fund, BlackRock Inflation Protected Bond, and T. Rowe Price Short-Term Bond fund. (Again, not every client owned all of these funds, depending on the risk profile of your portfolio.) All three of the funds represented very specific sectors of the bond markets: foreign bonds (primarliy govern-ment bonds), Treasury Inflation Protected Securities (TIPS), and short-term bonds, respectively. While all of these funds are stand-outs in their respective categories, we saw a need to expand the investment mandate within our bond portfolio to give our managers the best opportunity to navigate a rising-rate enviornment. In that vein, the new additions to our portfolio include JPMorgan Strategic Income fund (JSOSX) and PIMCO Income fund (PIMIX).

Volatility Isn’t the Enemy...

3

JPMorgan Strategic Income fund is managed by Bill Eigen, a 23-year veteran of bond management. Eigen has free range in this “go-anywhere” fund, meaning he and his team can exploit opportunities in any sector of the bond market they find attractive. It also means he will sit on a pile of cash until such opportunities present them-selves. We recently spoke with Eigen as part of our due diligence on the fund. He started our conversation by saying, “Well, the good news is that volatility is back!” Volatile environments provide Eigen the opportunity to take advantage of “indiscriminate selling.” He expects continued “spurts of volatility” in the months and, poten-tially, years ahead as interest rates find their way back to normal historical averages.

With 21 years of investment experience, PIMCO Income fund is managed by Dan Ivascyn at PIMCO’s Newport Beach office. The fund’s objective is to target a steady income stream from multiple areas of the global bond market. In Ivascyn’s words, the fund’s “flexibility allows us to pursue the most efficient and attractive sources of income across the global bond markets and shift exposures from one country or sector to the next, moving to wherever we believe the most attractive yields can be generated, while actively managing portfolio risk.”

In addition to these two new funds, we have been investors in BlackRock Strategic Income fund, which also boasts a “go-anywhere” investment mandate, since 2010. Together these

three funds now represent 75% of our bond allocation for most clients, and with proven expertise and great flex-ibility, we are confident in their collective ability to exploit opportunities and mitigate interest rate risk in the months and years ahead.

BOND ALLOCATION CHANGES, CONTINUED...

In today’s fast paced world it’s easy to neglect outside accounts like your 401(k) or deferred compensation plan. We are pleased to announce that we now have the ability to help you manage your 401(k) (or any investment account) held outside of Charles Schwab for a nominal fee. We believe that a comprehensive understanding of our client’s financial lives is essential when providing sound advice. We’ve always offered our clients asset allocation recommendations for these “held-away” accounts. However, only now do we have the technology in place to help our clients with the ongoing management of accounts held outside of Charles Schwab & Co.

In addition to making investment recommendations, we can also provide detailed performance reporting, assistance with trading and rebalancing, daily account monitoring, and online access through finsyn.com, just as we do now for your managed Schwab accounts.

We strive to provide our clients with cutting edge service offerings. If you would like ongoing professional guidance with your 401(k), 403(b) or any other account held outside of Charles Schwab & Co., please feel free to give us a call.

Are your outside assets getting the attention they deserve?

Bruce Brugler, an advisor from San Francisco, wrote an interesting piece in the Wall Street Journal on June 10th. He conducted a study that looked at what would have happened over the past 50 years to a hypotheti-cal investor who invested on the absolute worst possible day just prior to each of the 9 occasions the market crashed, including 2008. His team wanted to find out how many occasions over the 50 years the investor would have lost money five years after their portfolio tanked. Answer? NONE.

Conclusions: Have enough liquidity (cash) in your portfolio so you don’t have to sell in downturns, and create a diversified mix of assets that don’t all sink during stock market downturns. Check and check.

4

“WINNING COMBINATIONS”

By Mike Minter, CFP®

As Mike mentioned in his opening article, we’ve made a change in our small-cap value stock category. We’ve replaced the Queens Road Small-Cap Value fund with Diamond Hill Small-Cap Institutional (DHSIX). This fund has been on our radar for years, but only recently were we able to purchase the institutional share class. The team at Queens Road did a fine job for us, but Diamond Hill was always our first choice so we’re very happy that it’s now available for our clients.

I met with the Diamond Hill Investments founder and CEO, Ric Dillon, back in March of this year as part of our continuing due diligence on the fund. The purpose of the meeting was to gain insight into their firm’s culture and philosophy as we considered our options in the small-cap value category.

After only a few minutes I was genuinely impressed with Ric’s approach to the discussion. He came across as very humble, and seemed more interested in learning about Financial Synergies than talking about himself. Ric founded the firm in the year 2000. Diamond Hill Investments is publicly traded on the NASDAQ exchange with $10.2 billion under management.

We’ve done extensive analysis on the fund, and there is no question that it’s been an exceptional performer since its inception. So the bulk of my conversation with Ric was focused on the more qualitative factors that make up Diamond Hill In-vestments, since this information is impossible to uncover by just looking at the numbers. I thought the following were particularly noteworthy:

• Since the firm’s inception they have not lost one primary fund manager or lead analyst.

• All employees must own Diamond Hill funds to represent any asset class in which Diamond Hill runs a strategy.

• Fund managers must have a “significant” stake of their own money invested in Diamond Hill funds.

• To avoid conflicts of interest, no employee may own any individual stocks.

• Fund managers are compensated on fund performance only, not growth in fund assets.

• The firm is a model of transparency – the website offers a detailed description of their straightforward investment philoso-phy, valuation models, and fees.

• They rarely launch new funds, preferring to stick to their areas of expertise rather than trying to capitalize on every new investment fad.

• Morningstar awarded Diamond Hill their highest honor – the Gold Star Analyst Rating (in the areas of firm culture and stew-ardship they are second to none).

• Lead manager on the small-cap strategy, Tom Schindler, is a young guy with a long tenure – and has had the privilege of studying under Ric Dillon for more than 13 years.

As I mentioned above we’ve run the detailed analysis on the Diamond Hill Small-Cap fund, and the numbers speak for themselves. It is a fantastic long-term risk-adjusted performer. Tom Schindler applies a classic value (Graham/Dodd) approach to investing. Simply put, he buys stocks trading below his estimates of their intrinsic value, and sells them once they reach that value.

He keeps a long-term viewpoint (5-7 years) on his stocks’ performance, so the fund boasts one of the lowest portfolio turnovers in the category. He’s not beholden to any benchmark’s sector weighting, and will pursue value where he finds it. It’s not unusual for the fund to look very different than the Russell 2000 Value Index.

Inherent in the classic value style is the downside protection gained by buying undervalued stocks, and this fund has not disappointed in that regard. Since its inception thirteen years ago the fund has handily outper-formed the bulk of the category in down markets.

Diamond Hill is a first-class asset management firm. Their proactive effort to put their clients’ interests ahead of their own is a rare quality in the investment world. Couple this with outstanding risk-adjusted performance and you’ve got a winning combination. Our clients will be well served with Diamond Hill.

Small-Cap Value Changes

5

By Heath Hightower, CFP®

Last month, the world learned that 84-year-old Gloria MacKenzie was the sole winner of the $590 million Power-ball jackpot. This makes her one of the biggest winners in lottery history. The widowed great-grandmother chose to receive her winnings as a lump-sum payment, worth over $370 million.

Some people may talk about how lucky she is to win such an extraordinary amount of money. But then again, maybe she’s not so lucky. The National Endowment of Financial Education estimates that as many as 70% of Americans who experience a sudden windfall lose that money within a few years. In fact, many people’s lives become notably worse after they win the lottery. One can find countless horror stories on the internet of people who have won the lottery only to live a life of lawsuits, broken relationships, and bankruptcy. The most ironic stories are the people who win the lottery and then tell their boss to “shove it”, and then end up interviewing for the same job a few years later.

As I read the story about Ms. MacKenzie, I couldn’t help but wonder if she will be the exception to the rule. At 84 years old one would hope she has the wisdom to handle her fi-nances appropriately. However, a quick Google search will reveal that even the elderly are no match for greed. I’ve come to believe that acquiring sudden wealth can be more of a curse than a blessing. Time and time again, I’ve seen people acquire wealth (typically from an inheritance) and squander it away due to poor decision making. To the contrary, I’ve also had the honor of working with people who accumulated millions of dollars in their retirement ac-counts by simply saving money and living a financially re-sponsible lifestyle. These are the people who tend to build the kind of wealth that lasts for generations to come.

So the next time you buy a lottery ticket with hopes of winning it big, think twice about what you’re really doing. You may be better off just buying a coke.

By Marie VillardI was 24 when I realized I was going through my quarter-life-crisis (QLC).

Upon this discovery, which wasn’t identified as QLC at the time, I decided to take extended leave from my job and see if I really had what it took to become a flutist, which was a dream since child-hood. So, I packed up my things and went to Europe to spend some quality time alone with my flute. Granted, this sounds ri-diculous now, but when I was there, I had a transformation.

The decision to abandon my current reality was probably the first decision that I had made in my life that wasn’t already made for me. My whole life had been a series of “supposed-tos” and pre-set, society-driven milestones. Honestly, I felt a bit erratic, but I also felt a new power charging inside of me, something that was empowering and, yet, slightly terrifying.

With 15% of the population currently in their 20s, I know that I’m not the only one who has gone through this, and I’m clearly not the last.

The New York Times did a piece recently that discussed 20-Some-things and their decisions to defer student loans while working minimum-wage jobs, how they live with their parents to save money, live in loads of debt (student loan and personal), and pro-crastinate in most every aspect of their lives.

Because we 20-Somethings have always had decisions made for us, we grow up thinking that we can put our own decisions until later in life, whether it’s marriage, career, or even basic decisions – that our 30s are the new 20s, and that we have all the time in the world. An extended adolescence, if you will.

In that article, one late-20-Something remarked that he was told “the world is at my fingertips, you can rule the world, be whatever you want, all this stuff. When I was 15, 16, I would not have envi-sioned the life I am living now.”

The truth is, the 20s are a time where we should be exploring, not procrastinating, and it can’t be stressed how important that journey is for self-awareness and adult development.

University of Virginia professor and private-practice Psychothera-pist, Meg Jay, spends much of her time studying 20-Somethings. Her book, “The Defining Decade”, focuses on some lesser-known realities about handling life in your 20s. She highlights that 80% of what we consider as life’s defining moments happen before age 35, and that the first 10 years of our careers have an expo-nential impact on our ability to earn in the future. She seeks to remind us that “the best time to work on things is before they happen.”

When I returned back from Europe, I was in absolute shambles; this one decision to take a break from my life completely turned everything upside down. Later on, I would find that it was ulti-mately for the better. After that, I made a series of changes: I left my relationship, left my job, and moved to a new place where I could seek my passions. The most brilliant thing I learned from that trip was that I have the power to choose everything in my life, and that I can be intentional in those choices.

Do you know, love, or have a friend who is a 20-Something? This is the time for those people in your life to define themselves. It’s time to encourage those we know in their 20s to embrace those difficult decisions and take responsibility over their own lives, or else we may see them kicking that same can down the road for a very long time.

84-year-old Florida Widow Wins $590 Million Lottery

The Importance of Being20-Something

Congratulations Bryan and Cele!On Sunday, June 16th Bryan and Cele Zschiesche’s newborn, Carson, was baptized at St. Peter’s United Meth-odist Church in Katy, TX.

Congratulations Caitlin and Greg!Mike and Pat Booker’s daughter, Caitlin, tied the knot on Saturday, July 13th in The Woodlands, TX. We wish them a happy and prosperous life together!

Heath Hightower celebrated his 10th anniver-sary with Financial Synergies on February 16th, and has been awarded a minority equity stake in the firm.

Please join us in congratulating Heath on this important accomplishment.

CongratulationsHeath Hightower!

For more information, please contact us at:

Financial Synergies Asset Management, Inc 4265 San Felipe, Suite 1450 Houston, TX 77027

Phone: 713-623-6600 www.finsyn.com

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