telephone: 845.334 · 2019. 11. 25. · securities and advisory services offered through...

Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser.

Clifford L. Faintych, MBA, AIF®, CFP®, ChFC®

291 Wall Street, 2nd Floor Kingston, NY 12401

Telephone: 845.334.0508

Website: www.ashokanwm.comE-mail: [email protected]

291 Wall Street | 2nd Floor | Kingston, NY 12401 | 845.334.0508 | www.ashokanwm.com | [email protected]


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TABLE OF CONTENTS

Our Philosophy and Vision 1

Financial Professional 2

A Quick Guide to Financial Designations 3

Independence Means Greater Freedom for All 4

Introduction to Commonwealth 5

The Role of the Wealth Manager 6

Investment Management vs. Wealth Management 7

How You Can Benefit From a Financial Plan 8

The Benefits of a Managed Account 9

Introduction to Asset Allocation 10

Periodic Table of Asset Classes (with Alternative Investments) 13

Emotions of Investing 14

Understanding Your Risk Tolerance 15

Investing In Your Values: Environmental, Social, and Governance (ESG) Factor 16



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OUR PHILOSOPHY

Welcome to Ashokan Wealth Management! We are an independent financial firm that helps our clients throughout the Hudson Valley, and those beyond, establish and maintain their long-term financial goals.

It is important to review your financial position through all stages of your life. We can help create a strategy that covers all areas of wealth management including:

• Retirement Planning (Personal and Business & Qualified and Non-Qualified Plans)

• Protection Planning (Including Life and LTC Insurance)

• Tax Planning

• Estate Planning

• Education Planning

• Asset Allocation

• Investment Planning

OUR VISION

At Ashokan Wealth Management, we are dedicated to making our clients feel comfortable seeking help with their financial goals, and assisting our clients in a knowledgeable, courteous, and professional manner.

We offer you a wide range of financial planning and investment strategies. Our primary focus is always on you. We provide exceptional service and personal attention. We seek to identify your uniqueness, so everything we do is committed to meeting your specific values and life goals.

Our success comes from helping you get where you want to be in life. Working in partnership, we provide options and seek solutions with you, not for you.

Solving problems. Helping you clarify your goals. Freeing up your time so you can do what you want to do. This is our purpose.



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Clifford L. Faintych, MBA, AIF,® CFP,® ChFC®Accredited Investment Fiduciary® CERTIFIED FINANCIAL PLANNER Professional Chartered Financial Consultant®

We live in a fast-paced, constantly changing world. One of my responsibilities is to help my clients maintain their financial focus, so that they can pursue the things that are important to them and their families. I work diligently to provide a high level of quality in

financial planning, guidance, and service.

I received my undergraduate degree in Industrial Design from the Cleveland Institute of Art. I also earned a graduate MBA degree from the Fordham University School of Business Administration.

I have earned the industry recognized credentials of CERTIFIED FINANCIAL PLANNER™ certification, Chartered Financial Consultant,® and Accredited Investment Fiduciary® designation.

FINANCIAL PROFESSIONAL

To further my professional education, I have earned a post-graduate certificate in Retirement Planning from The Wharton School at the University of Pennsylvania.

I stay involved in my local community: I currently serve on the Board of Directors of RUPCO, the Hudson Valley region’s leading provider and advocate of affordable housing and community development programs aimed at delivering life-changing opportunity and revitalizing communities.

I live in Denning, New York, in the heart of the beautiful Catskill Wilderness Preserve, with my wonderful wife, Deb Graziano. We are avid hikers, and enjoy challenging trails all over the Catskills, as well as the Swiss and Italian Alps. I am especially proud of our trek in Nepal to Mount Everest Base Camp and Mount Kala Patthar at over 18,000 feet elevation!



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A QUICK GUIDE TO FINANCIAL DESIGNATIONS

When selecting a financial advisor to help you plan for your future, you need to feel confident that the person you choose is competent and ethical. You might assume that all financial planners are certified, but this isn’t true. Only those who have fulfilled the certification and renewal requirements of the CFP Board can use the CERTIFIED FINANCIAL PLANNER™ certification. Here’s an overview of the CFP® program, as well as several other designations financial advisors may hold.

CFP® Certification Requirements• Education: CFP® professionals develop theoretical

and practical financial planning knowledge by completing a comprehensive course of study at a college or university offering a financial planning curriculum approved by the CFP Board.

• Examination: CFP® practitioners must pass a comprehensive, six-hour CFP® Certification Examination that tests their ability to apply financial planning knowledge in an integrated format. The exam covers the financial planning process, tax planning, employee benefits and retirement planning, estate planning, investment management, and insurance.

• Experience: Because CFP® professionals must have at least three years of hands-on experience in the financial planning process, they possess financial counseling skills in addition to technical knowledge.

• Ethics: CFP® practitioners agree to abide by a strict code of professional conduct, known as the CFP Board’s Code of Ethics and Professional Responsibility, which sets forth their ethical responsibilities to the public, clients, and employers. The CFP Board also performs a background check on candidates for CFP® certification, who must disclose any investigations or legal proceedings related to their professional or business conduct.

What Is an AEP®?An Accredited Estate Planner® (AEP®) designee meets the highest standards of knowledge, skill, ethical conduct, and experience in estate planning. The AEP® designation is the only graduate-level, multi-disciplinary accreditation that focuses specifically on estate planning. It emphasizes multiple disciplines, including law, accounting, insurance, financial planning, and trust services. The AEP® brings together these diverse areas of practice into one personalized plan.

The AEP® designation is administered by the National Association of Estate Planners & Councils. Founded in 1962, the association’s core belief is that the client is best served by a team approach to estate planning, involving attorneys, accountants, trust officers, insurance and financial planners, and other qualified professionals.

What Is an AIF®?Accredited Investment Fiduciary® (AIF®) designees have acquired a thorough knowledge of fiduciary responsibility. AIF® designees have successfully completed a program on investment fiduciary standards of care at the Center for Fiduciary Studies and have passed a comprehensive examination of the 27 Prudent Investment Practices. Designees are also required to adhere to continuing professional education requirements, which keep them abreast of recent events in the industry.

What Is a ChFC®?The Chartered Financial Consultant® (ChFC®) program provides in-depth knowledge of the skills needed to perform comprehensive financial planning for clients. ChFC® practitioners specialize in identifying and establishing specific financial goals for their clients, as well as formulating, implementing, and monitoring comprehensive plans to pursue them. Candidates must meet prescribed ethical, experiential, and educational requirements to earn the designation.



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INDEPENDENCE MEANS GREATER FREEDOM FOR ALL

In the highly regulated securities industry, multiple federal and state entities provide oversight of the work financial advisors do on behalf of investors. The types of services an advisor provides carry a corresponding requirement to affiliate with an appropriate firm or entity to ensure compliance with the rules governing those services. But we have many choices of whom to affiliate with and which business model we want to follow. The fact that we’ve chosen to work with Commonwealth Financial Network,® a Registered Investment Adviser–broker/dealer, provides some key advantages to you:

• Our firm remains free to act in your best interest and to help you follow the best course of action to meet your financial goals. We can make recommendations to you without any pressure to promote proprietary products or strategies. It’s a

model that differs from that of some other types of financial firms whose advisors are accountable not just to their clients, but also to the parent company that employs them.

• Because Commonwealth is independently owned and managed, the firm is able to allocate resources toward whatever is in the best interests of its financial advisors and their clients, not shareholders.

• Fidelity Clearing & Custody Solutions® (FCCS)1 provides clearing, custody, and other brokerage services to Commonwealth through National Financial Services LLC (NFS). Like Commonwealth, NFS is an industry leader with a long and stable history of customer service excellence. We have the utmost confidence in the proficiency with which NFS handles every trade, statement, report, and myriad other transactions for millions of clients—and we believe that you can as well.

1 Fidelity Clearing & Custody Solutions® (FCCS) is an independent company, unaffiliated with Commonwealth. FCCS is a service provider to Commonwealth and provides clearing, custody, and other brokerage services to Commonwealth through National Financial Services LLC (NFS), member NYSE, SIPC. 812041.1.0

NATIONAL FINANCIAL SERVICES LLC (NFS)

Fidelity Clearing & Custody Solutions® (FCCS) provides clearing, custody, and other brokerage

services to Commonwealth through NFS

REGULATORS

YOUR ADVISOR

YOU

(Registered Investment Adviser–broker/dealer; processes investment business of af�liated advisors)

COMMONWEALTH FINANCIAL NETWORK

(FINRA, SEC, state securities divisions)



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INTRODUCTION TO COMMONWEALTH

Just as you’re free to choose the advisor you believe is best suited to help you meet your objectives, our firm benefits from the same freedom in selecting a firm to help us serve you. The partner we chose to help us help you pursue your goals is Commonwealth Financial Network,® the largest privately held Registered Investment Adviser–independent broker/dealer in the country, with more than $161 billion in total assets* and approximately 1,950 affiliated advisors.*

As a 100-percent management-owned firm, Commonwealth is not beholden to shareholders, stock prices, or a parent company. The firm can focus on a much longer time horizon than a public firm can and is free to invest in the kind of infrastructure, scale, and support that helps us maintain our own independent status—and allows us to focus exclusively on what benefits you most.

The client-centric values we share with Commonwealth, coupled with the firm’s continually expanding resources, mean we’re all working toward the same goal: to provide you with the exceptional guidance, products, and service you want and deserve. This includes:

• Investment choice. Commonwealth offers us robust, independent market research and a wide universe of third-party investment options—from individual stocks and bonds to mutual funds, exchange-traded funds, alternative investments, managed accounts, and retirement plans. Our access to Commonwealth’s expert, impartial guidance and a diverse range of products helps ensure that we remain free to operate in your best interest and to make recommendations based on your financial objectives, personal investment style, and risk tolerance—without pressure to promote proprietary products or strategies.

• Responsive service. Commonwealth’s business model centers on delivering indispensable service at every level of the organization—so that we, in turn, can do the same for you. The firm’s 2.1:1 advisor-to-staff ratio* is one of the best in the industry, which means that Commonwealth staff members stand ready to respond to our needs promptly and execute transactions quickly and efficiently.

• Integrated technology. Commonwealth’s technology platform gives us a truly comprehensive view of your complete financial life, all in one place. This enables us to efficiently and easily review your financial situation, make updates and changes, and keep you apprised of your status through user-friendly web-based systems. A client portal allows you to see much of the same information we see online.

• Breadth of expertise. Commonwealth’s team includes more than 45 staff with CFA,® CFP,® ChFC,® and JD credentials, as well as niche-qualified specialists with experience spanning estate planning, taxation, risk management, business planning, and retirement planning. So however complex your needs, we can tap into the capabilities of some of the most knowledgeable people in the industry to provide solutions that align with your goals.

• Access to top management. Commonwealth delivers the scale and breadth of resources that are typically available at bigger, publicly held firms—but with more personal service. The firm’s uncommon approach gives us regular access to its 12 managing partners, who have an average tenure of 25 years. Access to this depth of knowledge translates into better, faster, more informed decisions for you.

• Business consulting. Commonwealth offers us complimentary in-house support to help us optimize our efficiency and ensure that our business model enables us to most effectively respond to your needs.

• Compliance support. We also benefit from legal and regulatory guidance to help us ensure that your investments—and our firm’s business practices—are in compliance with the industry’s myriad rules and regulations.

These are just a few of the ways the firm goes above and beyond what most broker/dealers do, and why we feel so strongly about our partnership with Commonwealth.

*As of December 31, 2018

Commonwealth is a member of the SIPC, which protects securities customers of its membership up to $500,000 (including $250,000 for claims for cash). An explanatory brochure is available on request or at www.sipc.org.



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The Wealth Management Pyramid

THE ROLE OF THE WEALTH MANAGER

Independence is at the core of wealth management. Our process-driven strategy is designed to provide solutions to all of your financial needs.

As investment products have become increasingly complex and investor needs have expanded, clients have turned to financial professionals rather than relying on brokers. Individuals who used to pay for products and get guidance for free now pay for guidance while still getting best-of-class products. Because we believe that the trend toward guidance conforms to our client-first philosophy, we offer ourselves to you as wealth consultants.

Wealth management is about replacing products with process—a strategy that provides total professional services. Instead of picking the hottest stocks, we rely on a strict investment methodology to help ensure that our clients’ portfolios are aligned with their best interests. We don’t try to sell a particular life insurance policy, but we do assess your personal goals and needs before considering what sort of insurance might be appropriate. Rather than turning you away when you ask us to develop a college plan, we will help you understand the nuances of 529 plans and other college savings vehicles.

Our services range from coordinating an estate plan to managing risk, from income distribution planning to business succession planning. We partner with accountants and attorneys to provide solutions to all of your financial needs.

As independent advisors, we have no obligation to sell a particular product, so we suggest the best-suited one instead. Knowing that there is no one-size-fits-all solution to personal finance, we strive to find the proper solutions for you.

We seek to provide invaluable financial guidance to high-net-worth individuals with complex planning needs. Our focus is to help you achieve your goals. Our strategy is wealth management.

WM

Process Implementation

Plans: retirement, income, college, tax, risk, business, estate

Products: mutual funds, ETFs, stocks, life/LTC/disability insurance, annuities, separate accounts



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INVESTMENT MANAGEMENT VS. WEALTH MANAGEMENT

The first step along the road to financial security is taken entirely by you. Are you looking for an investment manager or a wealth manager?

An investment manager will concentrate primarily on managing investments, aiming to meet specific targets and objectives; a wealth manager will oversee the management of your total financial picture, looking to preserve, protect, and transfer wealth in a cost- and tax-efficient manner. With expertise in both areas, we

can work with you in either capacity, depending on your individual needs.

For a quick review of the differences between an investment manager and a wealth manager, please see the chart below. Will you turn to a financial professional for investment guidance or for holistic wealth management? The choice is yours.

Regardless of which path you choose, you can be confident that we will always work with your best interests in mind.

Investment Manager Wealth Manager

Concentration Investment management Investment management, retirement planning, tax/estate planning, risk management, business planning, etc.

Typical Asset Level At least $50,000 investable assets At least $500,000 investable assets

Strategies Asset allocation Asset allocation, distribution planning, college planning, taxation planning, succession planning, gifting, risk planning

Products Investment products only Investment products, insurance, trusts, cafeteria plans, education savings accounts, and more

Associated Professionals None CPA, tax/estate planning attorney

Scope Primary focus on investment portfolio Focus on total financial situation

Review Quarterly analysis, annual meeting Quarterly analysis, annual meeting

Compensation Asset management/advisory fee Asset management fee, consulting/planning fee

Goal Manage investments to meet goals and objectives

Preserve, protect, and transfer wealth in a cost- and tax-efficient manner



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HOW YOU CAN BENEFIT FROM A FINANCIAL PLAN

A financial plan is the written document detailing the short- and long-term steps that we will take as we strive to meet your financial goals and objectives. It’s a road map of what’s to come and a guide until circumstances change—at which point, we will consult with you about modifying the plan.

Your financial plan is also a strategy or series of strategies involving multiple aspects of your financial situation designed to bridge the gap between where you are today and where you want to be tomorrow.

Developing a financial plan follows naturally from identifying goals, objectives, and existing positions. The first step in the wealth management process told us what you wanted and required in terms of dollars, risk, insurance, retirement, and beyond. The second step revealed your present circumstances. Now, having placed the two side by side, we can put a series of action steps in writing specifically intended to get you from here to there.

The goal of a financial plan: to narrow the gap between

where you are and where you want to go

FinancialGAP

Plan

Goals andObjectives

ExistingPositions

We believe that the wealth management process is not just about working for you; it’s about working with you. For that reason, there shouldn’t be any surprises in your financial plan. Instead, it should serve as a record of the steps that we’ve decided to take together. Also, while it is not product-specific, it will indicate the types of products to which we may or may not direct your assets.

Your financial plan may include an income plan, a distribution plan, a retirement plan, an insurance review, an Investment Policy Statement, and an investment proposal. It will always contain an action plan.

For the short term, the financial plan will serve as our guide, but it is a “living document” subject to change over time as your financial needs, goals, and circumstances change. In some cases, there may not be a gap between your existing positions and your goals and objectives. At other times, your goals and objectives may be out of reach given your present situation. Regardless, the financial plan will continue to serve as our blueprint for managing your wealth.



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THE BENEFITS OF A MANAGED ACCOUNT

There have never been more choices in the financial services arena. With literally thousands of mutual fund providers, it sometimes seems that there are just as many ways to pay for services. If you are tired of trying to understand commission structures, contingent deferred sales charges, rights of accumulation, and the ever-increasing multitude of share classes, perhaps you should consider a managed account.

When you use a managed account, you pay your financial advisor a management fee based on a percentage of the assets you invest. From a cost standpoint, the greatest advantage to this strategy is simplicity; you pay as you go. But there are many other advantages to managed accounts, including:

• You sit on the same side of the investment table as your advisor: “I prosper as you prosper; I suffer when you suffer.”

• You do not need to make an upfront load com mitment in order to do business with the advisor. Some investors prefer the pay-as-you-go approach.

• You can terminate your relationship at any time without paying closeout fee-based surrender charges.

• You can purchase no-load, load-waived A share, and NAV funds.

• You have virtually unlimited product options, including more than 5,000 mutual funds.

• You have the ability to rebalance your portfolio across different fund families.

• You can give your advisor discretion without any concern for exposure to continuous commissions.

• You can transfer existing positions into a fee-based account.

• You have the ability to harvest tax losses and stay in the market by purchasing exchange-traded funds to wait out the Wash Sale Rule.

• You will receive enhanced quarterly investment progress reports and can potentially meet more frequently with your advisor to review your portfolio and your financial needs and goals.

Managed accounts, like all investments, are subject to risk. A managed account can fail to meet its investment objective. Aggressively managed accounts, accounts that concentrate on more volatile investments—such as small-company stocks—and accounts whose managers’ investment styles are suffering in the current market are likely to fall more sharply in value under certain market conditions than conservatively managed accounts. But they also have the potential to gain more in rising markets.



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INTRODUCTION TO ASSET ALLOCATION

Asset allocation is the process of dividing your investment dollars among a variety of complementary asset classes, such as stocks; bonds; real estate; and short-term, highly liquid vehicles—including money market funds—so that your portfolio is well diversified.

The ultimate objective of an asset allocation program is to develop an investment portfolio that is properly aligned with your investment objectives and risk tolerance. A well-diversified portfolio will rarely outperform the top asset class in any given year, but over time, it has often been one of the most effective ways to pursue long-term financial goals.

Key benefits of a sound asset allocation strategy include:

• Reduced risk: A properly allocated portfolio strives to lower volatility, or fluctuation in return, by simultaneously spreading market risk across several asset class categories.

• More consistent returns: By investing in a variety of asset classes, you can improve your chances of participating in market gains and lessen the impact of poorly performing asset class categories on overall results.

• A greater focus on long-term goals: A properly allocated portfolio is designed to alleviate the need to constantly adjust investment positions to chase market trends. It can also help reduce the urge to buy or sell in response to short-term market swings.

Asset allocation in practiceAlthough there is a broad range of asset classes in which you can invest, most investment professionals agree that a strong allocation strategy includes stocks, bonds, real estate, and cash equivalent instruments.

The chart below illustrates the performance of each of these core asset class categories for the 20-year period ending December 31, 2018. During this time period, stocks outperformed bonds, and bonds outdistanced money markets. In turn, the volatility declined from stocks to money markets.

In any given 20-year time period, one can expect the various asset classes to perform differently and to assume varied levels of volatility in relation to one another.

Source: MPI Analytics. Stocks: S&P 500 Index, Russell 2000 Index, and Morgan Stanley Capital International (MSCI), Europe, Australia, and Far East (EAFE) Index. Bonds: Bloomberg Barclays U.S. Aggregate Bond Index and Bloomberg Barclays U.S. Corporate High Yield Total Return Index. Commodities: Bloomberg Commodity Index. T-Bills/Cash: Bank of America U.S. 3-Month Treasury Bill Index. Results are for the 20-year period ending in December 31, 2018, and assume full reinvestment of dividends and capital gains. Volatility is measured by standard deviation and shows how past returns vary from the average rate of return for the period considered. The higher the standard deviation, the higher the price volatility and fluctuation. The lower the standard deviation, the lower the level of investment risk. All indices are unmanaged and are not available for direct investment by the public. Past performance is not indicative of future results.

Proponents of asset allocation argue that rather than investing in a single asset class, investors should consider allocating a portion of their portfolios to several asset class categories in an effort to achieve higher risk-adjusted returns over time. The theory behind this approach was developed in 1952 by economist Harry Markowitz, who discovered that overall portfolio risk can be reduced by combining various asset classes whose returns are not perfectly correlated or whose returns do not move in unison.

20-Year Asset Class Performance

December 1998–December 2018


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INTRODUCTION TO ASSET ALLOC ATION continued

Source: Gary P. Brinson, Brian D. Singer, and Gilbert L. Beebower. “Determinants of Portfolio Performance II: An Update,” Financial Analysts Journal, May–June 1991.

This study supports the idea that in addition to the core asset categories—stocks, bonds, real estate, and cash equivalent instruments—investors should consider including sub-asset class categories, particularly as their portfolios increase in value.

Within the equity arena, these subcategories might include multiple styles (value, blend, growth), company sizes (small-, mid-, and large-cap), and geographic regions (foreign and domestic). In the fixed income arena, one might consider government bonds, corporate bonds, mortgages, and municipalities, with a conscious effort to include bonds of varying maturity and credit quality. Diversification at this level can further dampen volatility, as various subcategories often react differently to changing economic and market conditions.

The process of determining which asset classes to include and the appropriate weights to assign to each is, in part, defined by your time horizon, risk tolerance, and familiarity or comfort level with the financial markets and various investment products.

The Efficient FrontierThe outgrowth of Markowitz’s work on Modern Portfolio Theory was the development of a plotted graph identifying portfolios that have the maximum expected return for any given level of risk, or the minimum level of risk for an infinite number of asset class combinations.

By plotting each portfolio or combination of asset classes on one axis and the volatility measures—or standard deviations—on another, a line graph representing the optimal combination of asset classes for various levels of risk is produced. This graph is known as the “efficient frontier.”

Factors of Portfolio PerformanceMarkowitz’s Nobel Prize-winning theory, Modern Portfolio Theory, is illustrated by the chart below. The diversified portfolio, which held 35 percent in stocks, 45 percent in bonds, 10 percent in real estate, and 10 percent in cash equivalent instruments, performed almost as well as the all-stock portfolio. It captured 81 percent of the return of the all-stock portfolio, with 46 percent less volatility—a tradeoff most investors would gladly accept and one that illustrates how effective asset allocation can be.

Source: MPI Analytics. Stocks: S&P 500 Index, Russell 2000 Index, and MSCI EAFE Index. Bonds: Bloomberg Barclays U.S. Aggregate Bond Index and Bloomberg Barclays U.S. Corporate High Yield Total Return Index. Commodities: Bloomberg Commodity Index. Real Estate: Dow Jones Select REIT Index. T-Bills/Cash: Bank of America U.S. 3-Month Treasury Bill Index. Results are for the 20-year period ending in December 31, 2018, and assume full reinvestment of dividends and capital gains. Volatility is measured by standard deviation and shows how past returns vary from the average rate of return for the period considered. The higher the standard deviation, the higher the price volatility and fluctuation. The lower the standard deviation, the lower the level of investment risk. All indices are unmanaged and are not available for direct investment by the public. Past performance is not indicative of future results.

Another study, published in 1991 by Gary Brinson, Brian Singer, and Gilbert Beebower, further cemented the value and benefits of asset allocation, concluding that the asset classes used, and the extent to which each is weighted in an investor’s portfolio, are the most important decisions an investor can make. They determined that asset allocation decisions account for approximately 92 percent of a portfolio’s long-term performance. Individual investment selection accounts for only 5 percent, while other factors—market timing included—account for a mere 3 percent of portfolio performance.

20-Year Diversified Portfolio Returns

Asset Allocation: 92%

Security Selection: 5%Other: 3%

December 1998–December 2018


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INTRODUCTION TO ASSET ALLOC ATION continued

investment advisors construct and manage client portfolios for investors at any level.

Things to rememberAsset allocation is a critical element to any sound investment plan. By building a portfolio that encompasses a wide selection of securities and a broad range of asset classes and investment styles, you can help protect your portfolio from sudden changes in the financial markets. A diversified strategy can potentially help you attain your long-term goals more readily and with additional financial confidence.

There can be no guarantee that any particular yield or return will be achieved from any investment. Investors should note that diversification does not assure against market loss and that there is no guarantee that a diversified portfolio will outperform a nondiversified portfolio.

A change in your goals, time horizon, risk tolerance, or personal financial situation may require a change in your strategic asset allocation, which is why it’s important to periodically review your asset allocation strategy. For example, as your time horizon shortens, you may have less time to recoup losses from sudden market downturns. Therefore, you might consider a more conservative asset mix. In contrast, investors whose financial situation has improved significantly or who have become more comfortable and experienced with more volatile assets, such as stocks, might shift to a more aggressive allocation strategy.

Fluctuations in the financial markets may also necessitate a reassessment of your portfolio. For example, if you begin an investment program with 75 percent of your money in stocks, 20 percent in bonds, and 5 percent in money market funds, several years of strong stock market performance (as was the case from 2009 through most of 2018) could quickly shift your allocations. The resulting, unplanned overexposure—or in negative conditions, underexposure—to an asset class may not be in keeping with your risk tolerance, investment goals, and time horizon.

That’s why it is important to maintain an ongoing dialogue with your financial professional to establish and periodically rebalance your portfolio, so you can help ensure that your investment plan remains consistent with your long-term goals.

Source: Harry Markowitz, “Portfolio Selection,” Journal of Finance, 1952. Standard deviation is an indicator of a fund’s total return volatility. The larger the fund’s standard deviation, the greater its volatility.

Points on or under the curve (in the darker area) represent the possible combinations of investments. Points above the curve (in the lighter area) are unobtainable combinations given the particular set of available asset class categories. The curve itself represents where you could not obtain higher average returns without generating higher volatility or where you could not obtain lower volatility without generating lower average returns.

The portfolios that lie directly on the curve are viewed as efficient, which is why the curve itself is called the efficient frontier. Portfolios that lie below the curve are deemed inefficient, as alternative portfolios exist with higher returns, lower volatility, or both.

Utilizing efficient frontier analysis, advisors can select which asset classes to include in a given portfolio and then view all possible combinations of those asset classes to help determine the most appropriate mix for each client.

Until recently, the benefits of the revolutionary efforts of Markowitz and others in the financial arena have been largely reserved for institutional and high-net-worth investors who were able to access the high-level mathematicians and computer systems needed to capture, calculate, and report risk and return data on a multitude of asset class categories.

Now, with advances in computer technology and additional studies done to quantify the true value of the asset allocation decision, sophisticated software programs are available to help financial planners and

Standard Deviation of Return

Mea

n R

etu

rn

Inefficient

Efficient

Risk

Rew

ard

Efficient Frontier



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PERIODIC TABLE OF ASSET CLASSES (WITH ALTERNATIVE INVESTMENTS)

Highest Return

Lowest Return

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Emerging Markets 78.51%

Real Estate 26.97%

Muni National Intermediate

10.70%


Small-Cap Blend

38.82%

Real Estate 28.82%

Market Neutral 8.86%

Small-Cap Blend

21.31%


Money Market 1.87%

High-Yield 57.51%

Small-Cap Blend

26.85%

Intermediate-Term Bond

7.84%

International 17.32%

Mid-Cap Blend

34.76%

Managed Futures 18.37%

Long/Short 3.55%

High-Yield 17.49%



1.28%

Mid-Cap Blend

40.48%

Mid-Cap Blend

25.48%

Real Estate 7.48%

Mid-Cap Blend

17.28%

Large-Cap Blend

33.11%

Large-Cap Blend

13.24%


3.30%

Mid-Cap Blend

13.80%

Large-Cap Blend

21.69%

Intermediate- Term Bond

0.01%



High-Yield 4.38%

Real Estate 16.47%


Mid-Cap Blend

13.22%

Real Estate 1.28%

Large-Cap Blend

12.05%

Mid-Cap Blend

18.52%

High-Yield –2.26%

Large-Cap Blend

28.43%

Commodities 16.83%


Large-Cap Blend

16.42%

Long/Short 17.74%


9.05%

Large-Cap Blend 0.92%

Commodities 11.77%

Small-Cap Blend

14.65%

Market Neutral –2.28%

Small-Cap Blend

27.17%

Large-Cap Blend

16.10%

Large-Cap Blend 1.50%

Small-Cap Blend

16.35%

High-Yield 7.42%


5.97%


0.55%


Long/Short 13.41%

Long/Short –4.62%

Real Estate 26.27%

High-Yield 15.19%

Money Market 0.07%

High-Yield 15.58%



Money Market 0.02%

Real Estate 7.14%

High-Yield 7.48%

Large-Cap Blend

–4.78%

Long/Short 19.47%


Mid-Cap Blend

–1.55%

Long/Short 8.21%

Real Estate 1.26%

Long/Short 5.55%

International –0.81%


2.65%


5.45%

Real Estate –5.83%

Commodities 18.91%

Long/Short 9.28%

Small-Cap Blend

–4.18%


6.78%

Money Market 0.05%

Small-Cap Blend 4.89%

Managed Futures –0.93%

International 1.00%

Real Estate 3.74%



12.91%

International 7.75%



4.21%


–2.02%

High-Yield 2.50%

Mid-Cap Blend

–2.44%



3.54%

Mid-Cap Blend

–9.06%



6.54%Long/Short

–7.31%



–2.55%

Money Market 0.03%

Small-Cap Blend

–4.41%

Money Market 0.25%


Small-Cap Blend

–11.01%


5.93%



Money Market 0.07%


Emerging Markets –2.19%

High-Yield –4.64%


0.25%


Commodities –11.25%

Money Market 0.14%


2.38%






Long/Short -3.43%

Commodities 1.70%



Money Market 0.13%




Commodities –17.01

Commodities –24.66

Managed Futures -6.84%

Money Market 0.86%


Source: Morningstar® Direct

This example is for illustrative purposes only. Performance data quoted represents past performance. Past performance does not guarantee future returns. Investors should note that diversification does not assure against market loss and that there is no guarantee that a diversified portfolio will outperform a nondiversified portfolio. The return and value of investment products will fluctuate with market conditions. Indices are unmanaged and investors cannot invest directly in an index. The above asset classes are represented by the following indices: Large-Cap Blend – Russell 1000; Mid-Cap Blend – Russell Midcap; Small-Cap Blend – Russell 2000; International – MSCI EAFE; Emerging Markets – MSCI Emerging Markets; Intermediate-Term Bond – Bloomberg Barclays U.S. Aggregate Bond Index; Muni National Intermediate – Bloomberg Barclays U.S. Municipal Bond; Real Estate – MSCI U.S. REIT; High-Yield – Bank of America U.S. High Yield Master II; Money Market – Bank of America U.S. 3-Month T-Bill; Credit Suisse Long/Short Equity Hedge Fund Index; Credit Suisse Managed Futures Hedge Fund Index; CISDM Equity Market Neutral Index; Bloomberg Commodity Index.



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EMOTIONS OF INVESTING

Logic and emotion have never been a perfect pairing. It is logical for investors to stay focused on their long-term goals during volatile markets, but emotionally it is very difficult to follow this reasoning.

Emotional instincts, which may be valuable in certain aspects of our lives, may contradict sound investment decisions. The image below depicts the emotional cycle relative to market changes.

When the market is doing well, investors are excited, even blissful. This can be the riskiest time to invest,

however, because it may foster a “can’t lose” attitude that strays from a disciplined investment approach. During these times, it’s important to review and rebalance as appropriate and stay focused on long-term investment goals.

When the market is low, investors often feel defeated. Although the market may be down, buying at this time can offer investors a great opportunity to make money. We all know the old adage that investors should buy low and sell high, yet few investors take advantage of down markets in this way. If it makes sense for your risk tolerance and goals, we may take advantage of market downturns.

This hypothetical scenario is for illustrative purposes only and does not reflect actual market performance, nor is it a prediction of future market conditions.

Market Performance

Opportunity to Make Money

Hopeful

Defeated

Riskiest Time

Bliss

Nervous

Desperate

Bold

Positive

Negative



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UNDERSTANDING YOUR RISK TOLERANCE

There are several methods for measuring your risk tolerance. We have found that one of our clients’ primary concerns in relation to risk involves historical portfolio return.

The chart below illustrates the high, average, and low returns for different styles of portfolios over time. Understanding which set of returns feels most comfortable to you is a way to gauge your risk tolerance and begin constructing a portfolio that is aligned with your goals and comfort with risk.

High Return 28.56% 29.10% 32.57% 35.26% 36.91%

Average Return 8.96% 10.20% 11.18% 11.98% 12.49%

Low Return –14.30% –24.26% –30.31% –34.37% –36.64%

Source: MPI Stylus

Past performance does not guarantee future results, and current performance may be lower or higher than the performance data quoted. The chart summarizes the high rate of return, low rate of return, and average annual rate of return for the time period January 1, 1986, through December 31, 2018. Returns are based on the historical performance of the underlying indices associated with each asset class and are weighted according to the allocations identified below. Indices are unmanaged and it is not possible to invest directly in an index. Portfolios listed are made up of the following index mixtures: Conservative – 20% S&P 500 Index, 75% Bloomberg Barclays U.S. Aggregate Bond Index, 5% Bank of America U.S. 3-Month Treasury Bill Index; Capital Preservation – 40% S&P 500 Index, 55% Bloomberg Barclays U.S. Aggregate Bond Index, 5% Bank of America U.S. 3-Month Treasury Bill Index; Moderate – 60% S&P 500 Index, 35% Bloomberg Barclays U.S. Aggregate Bond Index, 5% Bank of America U.S. 3-Month Treasury Bill Index; Growth – 80% S&P 500 Index, 15% Bloomberg Barclays U.S. Aggregate Bond Index, 5% Bank of America U.S. 3-Month Treasury Bill Index; Aggressive Growth – 95% S&P 500 Index, 5% Bank of America U.S. 3-Month Treasury Bill Index.

Which range of returns would you feel most comfortable with?Time period: January 1, 1986–December 31, 2018

$128,560

$129,100

$132,570

$135,260

$136,910

$108,962

$110,203

$111,176

$111,975

$112,489

$85,700

$75,740 $69,690

$65,630 $63,360

Conservative Capital Preservation

Moderate Growth Aggressive

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

$160,000

$180,000



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INVESTING IN YOUR VALUES: ENVIRONMENTAL, SOCIAL, AND GOVERNANCE (ESG) FACTOR

You’re likely aware of how specific investments in your portfolio relate to your overall financial goals. But did you know that your investments can also reflect your personal values?

Environmental, social, and governance (ESG) investing—also referred to as sustainable investing—allows you to tailor your investments to issues that matter to you most. Going beyond socially responsible investing (SRI), ESG investing incorporates a set of standards, aligning a company’s operations and strategy with principles related to environmental responsibility, social concerns, and corporate governance.

Making your money make a differenceThe idea grew out of a growing awareness of pursuing financial goals while promoting societal well-being. By choosing an ESG/sustainable investment vehicle, you can select companies whose concerns tend to match the issues you care about and avoid companies that operate contrary to your values.

For example, you might choose to invest in companies that promote the:

Environment

• Energy efficiency

• Waste management

• Air and water pollution

• Water scarcity

Social

• Human rights

• Labor standards

• Employee engagement

• Community relations

• Customer satisfaction

Governance

• Board composition

• Executive compensation

• Lobbying activities

• Audit committee structure

• Corruption policies

The investment managers who create and oversee ESG portfolios evaluate companies according to specific values-based criteria. As an investor, you can, in turn, assess an investment vehicle based on its objectives and the filters it employs.

ESG/sustainable featuresESG investing’s most compelling feature is obvious: the ability to put your money to work in support of goals that may also result in personal financial gain. Shareholders of sustainable investments can use their ownership rights to communicate with corporate management—through proposals, meetings, and proxy voting—in an effort to influence policies and decisions. Through this type of pooled activism, sustainable portfolios allow single investors to exert more influence than they typically would have by selecting individual securities.


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INVESTING IN YOUR VALUES: ENVIRONMENTAL, SOCIAL, AND GOVERNANCE (ESG) FACTOR continued

Creating a sustainable portfolio A number of financial institutions offer ESG solutions. In addition, there seems to be evidence of a diminishing divide between institutions and companies that have long chosen to embrace this style of investing and those that haven’t. This stems from a growing social awareness at more and more companies and a willingness to incorporate this awareness in their business plans. Overall, more companies in the ESG space mean more options for investment managers and, ultimately, investors.

Is ESG investing right for you? There are many ways to support social causes without involving your investments. Whether you choose to extend your beliefs to your finances should depend on your personal situation and investment goals. We can explain the benefits and drawbacks of ESG investing and help you make a smart decision—one that’s in keeping with both your personal values and your long-term financial aims.

Investments are subject to risk, including the loss of principal. Because investment return and principal value fluctuate, shares may be worth more or less than their original value. An investment’s socially responsible focus may limit the investment options available to the investment and may result in returns lower than those from investments not subject to such investment considerations.



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telephone: 845.334 · 2019. 11. 25. · securities and advisory services offered through...

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