Forecasts & Trends : Investing Strategies

The Case for High-Yield Bonds

Gary D. Halbert — Tue, 15 Sep 2009 21:34:00 GMT

IN THIS ISSUE:

"Junk Bond" Basics
High-Yield Bond Whitepaper
by Steven D. Landis, CFP
Is the Party Over for 2009?
Introducing the Columbus High-Yield Bond Program
Performance Evaluation
Conclusions

Introduction

High-yield bonds, or "junk bonds" as they are widely known, have become the subject of quite a bit of attention in recent months. That's because, as of August 31st, the Barclays and Merrill Lynch high-yield bond indexes have jumped over 40% in value so far in 2009. This makes the S&P 500 Index's year-to-date return of only 14.97% as of August 31st paltry in comparison.

Returns of that magnitude have not escaped the notice of investors. Inflows into high-yield bond mutual funds have been at or near record levels since March, based on information from AMG Data Services, a mutual fund tracking firm. However, the question is whether the good times in high-yield bonds will last.

I certainly don't pretend to be an expert on high-yield bonds, but I have found that the cyclical trends in the high-yield market often do lend themselves to being traded by an active money manager. Though "junk bonds" carry with them the reputation for being risky (and they are), we have found a professional money manager who has produced an enviable track record with low historical drawdowns.

This week, I'm going to feature Sojourn Financial Strategies, LLC and its co-founder, Steven D. Landis, CFP. I'll begin by reprinting excerpts from a whitepaper on high-yield bonds that Steve has authored. This paper does an excellent job of explaining the opportunities available in high-yield bonds, and whether or not it's too late to participate in the junk bond rally that began earlier this year.

I'll then finish up by presenting Steve's Columbus High-Yield Bond (CHYB) Program. Just to whet your appetite, this actively managed strategy has produced an annualized return of over 10% since its inception in 2002, with a maximum drawdown of only -6.14%. Year-to-date, the CHYB Program is up over 24% as of the end of August. Past performance, however, is not necessarily indicative of future results.

Junk Bonds 101

Most of us realize that high-yield bonds are called "junk bonds" because they carry a much higher risk of default than government or high-grade corporate bonds. As a result, these bonds tend to carry a higher rate of interest in order to compensate investors for taking on a greater risk of default. Like all bonds, high-yield issues tend to be affected by the interest rate climate. However, what you may not know is that the value of a high-yield bond can also be affected by the health of the economy and stock market.

It just makes sense that a better economic environment sometimes reduces a junk bond's default risk, since the issuing corporation may be less likely to default in a good economy. As a result, the spread between the effective junk bond yield and a risk-free (Treasury) rate closes, and the underlying bond becomes more valuable.

Of course, the skill in managing high-yield bonds or junk bond mutual funds comes in knowing when to be in the market and when to move to cash. Since 2002, Steve has shown us that he has the methodology in place to make these decisions with a high degree of accuracy. However, before getting into the details of his program, I want to reprint excerpts from his recent whitepaper on high-yield bond investing.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

QUOTE:

Investors Ready for a New Way to Invest in High Yield Bonds
By Steven D. Landis, CFP®

High yield bonds have been around for longer than most of us can remember. Anybody who was born earlier than 1960 can recall the days of Ivan Boesky and Michael Milken, the highly creative and somewhat dubious creators of "junk bonds" (the more-to-the-point term for high yield bonds). Eventually, their actions, not the junk bonds, landed the boys in jail for a short time. It should be noted that never was there (then or now) anything illegal about the use of the junk bonds, but their criminal activity, in part, contributed to the bad reputation sometimes attributed to high yield bonds.

In this paper, the terms high yield bonds, junk bonds, and "junks" will be used interchangeably and will have the same meaning and reference. These terms apply to loans that are made to higher risk, corporate borrowers of money. High yield bonds had been in existence long before Boesky's and Milken's involvement in the early 1980s. During the early part of the 20th century General Motors, U.S. Steel, and other well-known corporations borrowed money that, at that time, was considered higher-risk debt. If that debt were issued today, it would be considered to be a junk bond.

Fast forward to today and we find that more than $500 billion (a half-trillion dollars) defines the magnitude of the high yield bond market. Its explosive growth is the result of two factors: 1) more companies needing capital; and 2) the availability of investors who are willing to take more risk in return for a higher yield on their investment.

Bond Ratings

Bonds are rated based on the probability of the borrower defaulting on the bond, that is eventually failing to meet the terms of the bond covenant. The highest quality bonds, those with the greatest probability of paying back the loan principle and interest, are rated AAA. As the chances of a bond default increases, the lower the rating on the bond, as illustrated in Table 1 below.

Table 1.
Bond Rating vs. Default Risk

Standard & Poor's Rating	Grade	Default Risk
AAA	Investment	Lowest Risk
AA	Investment	Low Risk
A	Investment	Low Risk
BBB	Investment	Medium Risk
BB, B	Junk	High Risk
CCC, CC, C	Junk	Highest Risk
D	Junk	In Default

So we can see that the two terms used to describe these bonds, high-yield and junk, come from two features of the bonds: 1) High-yield refers to the increased interest rate that accompanies the bonds; and 2) Junk refers to the low quality of the bond.

Risks of investing in high yield bonds

In 2007, investors and the public became intimately familiar with the sub-prime consumer mortgages and their risk to lenders (and ultimately the economy, in general). The results of consumers overextending themselves by borrowing more debt than they could repay, under terms that were unfavorable, eventually resulted in a near-collapse of the consumer mortgage market. Investors in those sub-prime mortgages soon found their investments suffering tremendous losses. Meanwhile, the ability to sell out of those investments became more and more difficult due to a lack of buyers. A similar scenario also played out in the high yield bond market in which holders of low-quality debt saw their investments lose a substantial percentage of its original value.

A fact of life is that consumers with low credit scores must pay high interest rates when they borrow money. This higher interest rate compensates the lender for the increased chance of the borrower defaulting on the loan. Likewise, corporate borrowers with a lower credit rating have an increased probability of defaulting on their loans and pay lenders accordingly. Those who loan money to these corporate borrowers demand to be compensated for the extra risk they take in making these loans. Should a default occur, the bondholders stand in line with all the other creditors of the company, hoping to get back some portion of their money. The lower the quality the bond, the less chance there will be assets that can be used to pay back creditors. The increased interest rate compensates the lender, at least in part, for this additional risk.

The result is that those entities that lend money to higher risk borrowers, via junk bond offerings, receive a higher interest rate than if they had been lending money to higher quality (lower risk) borrowers. To illustrate this difference, consider that over the past twenty or so years, high yield bonds have paid an interest rate of 3-9% (with an average of 6%) per year more than that of U.S. Treasury bonds. This difference is known as the "spread." In early 2008 the average default rate on junk bonds was about 1.1%. However, as the economy continued to sour the default was expected to increase to around 5.2%. Compare this with an average, long-term default rate of about 4.9% (according to John Lonski, chief economist of Moody's.)

An additional risk of junk bonds is their lack of liquidity. Liquidity refers to the ease of trading the instrument in the marketplace. The author of this paper also refers to liquidity as "how quickly one can sell an investment and convert it to cash". Junk bonds are not traded as freely as, say, government bonds. Thus, the liquidity of high yields is significantly lower than that of high quality debt, which leads to higher costs of trading and selling at one's desired price. All of these factors combined result in the higher interest rate that is attached to junks.

Why Invest in High-Yield Bonds?

Unlike normal bonds, that are greatly influenced by fluctuations in interest rates, junk bonds are less affected by interest rate movement. This is because junks generally have higher interest rates and have, generally, shorter maturities. In fact, junk bonds are affected more by overall economic changes (expansion or contraction) than changes (increase or decrease) in prevailing interest rates. This is because the quality of a junk bond is most affected by the strength of the company issuing the bond.

If the company's profitability increases (since the issuance date of the bond), the quality of their bonds increases. For an investor in a junk bond, this is an almost-perfect scenario: One in which a junk bond with a high interest rate becomes a quality bond with a high interest rate (this being the result of the formerly high risk borrower becoming a low risk borrower).

For example, ABC Corp. had a debt rating of "B" and issued a bond at 12%. Meanwhile, AAA-rated debt was paying 4%. Sometime following issuance of this debt, ABC Corp. enjoys a return to profitability and its debt rating is upgraded to "A". The result is that holders of those old ABC Corp. bonds now hold A-rated debt that is paying 12%! This, in turn, makes the underlying bond more valuable since investors are willing to accept a lower rate of interest on debt issued by a stable company.

How to Invest in High-Yields

In my opinion, investing directly in individual junk bonds should be left to the wealthy and institutional investors. In fact, the majority of investors in junk debt are institutional…mutual funds, pension funds, hedge funds, and others. This, however, does not suggest that investing in junks is only for the wealthy. Most all investors can get involved with junk bond investing by investing in mutual funds that specialize in them.

By investing in a mutual fund that specializes in junk bonds, an investor can take advantage of a professional fund manager. Additionally, the investor will be able to reduce risk via the diversification that mutual funds offer. (A typical mutual fund will hold as many as 200-400 bonds, all of which are owned, on a pro rata basis, by investors in the fund.)

Keep in mind, though, that investing in a mutual fund does not mean that the investor has no risk. Like the bonds held by the fund, a mutual fund can gain or lose value. Plus, in the event of a slowing economy, high yield bond mutual funds can lose significant value. So, for anybody considering an investment in high yield bond funds (or for that matter, any mutual fund) consider your tolerance for and ability to withstand potential losses.

An Improvement on Buy-and-Hold Bond Investing

As much as we really like investing in high-yield bond funds, they have one major flaw. That flaw is that there are times in which high yield bonds (and mutual funds investing in them) will get absolutely annihilated in a bear market. The years 2007 and 2008 are the most recent examples of this. In 2008, the majority of high yield bond mutual funds lost more than 20% of their value. Worse still were those funds that lost more than 50% of their value!

Risk-averse investors may find themselves asking: "Is there a way to invest in high yield bond funds without the risk of losing money in a down market?" Fortunately, the answer is, "Yes, there is." There are any number of advisers whose role is to actively manage money for their clients. (The author of this paper is among those who manage money for investors who want to invest in high yield bond funds.) The goal for most of these advisers/managers is to be invested in a security/market when it's gaining in price and to sell that security/market before its price goes down too much.

If the adviser is able to do this buying and selling successfully (and we emphasize "IF"), then that adviser's clients/investors would be able to make more profit while taking less risk. By reducing the losses during time periods in which high yield bonds are losing money (1998-2002 and 2007-2008) one can dramatically improve the potential for long-term profits.

Is the Party Over for 2009?

At this point, readers of this paper are either eager to invest in high-yield bond funds or skeptical and not interested in the increased risk. For those who are tempted to invest in the high-yield bond market, a question arises: "How much profit is left after the big run junks have had this year?"

It goes without saying that we have no idea how much more high yields can offer. But we can offer a look at three possible scenarios:

Scenario 1. The Economy Improves. If the economy continues to improve, profits of most corporations will rise. At the same time, we would expect profits of many issuers of high yield debt to improve. If this scenario does, in fact, occur then we would expect high yield bonds to continue increasing in price. (Additionally, bondholders would continue to receive interest payments from those bonds.)

Scenario 2. The Economy Sours. If the economy begins to worsen, then corporate profits will likely be depressed. At the same time, profits of issuers of high yield debt would probably suffer. In this scenario, the prices of high-yield debt would probably begin to fall. The buy-and-hold investor would suffer losses to his/her investment. Investors who use skilled, successful active managers have a great probability that their adviser/manager would sell their junk bond fund and invest their money in the safety of a money market fund. This move to safety would preserve the value of investors money.

Scenario 3. The Economy Muddles Along. If the economy becomes listless and neither grows nor contracts, there is the possibility that high-yield bond prices could stagnate. That is, prices would neither rise nor fall. It would be extremely rare for this to continue for an extended period of time, but let's assume it does. In such a situation, the investor neither gains nor loses money on his/her investment principle. However, he/she could continue to reap profits in the form of high interest income being generated by the bonds.

So, looking at the three possible scenarios, the only one that we would expect to pose a threat of significant loss is Scenario #2, specifically for the buy-and-hold investor. The investor who uses a skilled, active adviser/manager has a significantly greater chance of avoiding losses during a "down market". [There are no guarantees, of course. GDH]

In summary, we contend that high yield bond mutual funds can be an extremely attractive way to invest, though subject to substantial losses during falling markets. Furthermore, we believe that investing in high yield bond mutual funds can be an even more attractive method of investing, if managed under the guidance, direction, and oversight of an experienced and skilled adviser.

Steven D. Landis, CFP®
Sojourn Financial Strategies, LLC

References:

Glenn Yago. "Junk Bonds." The Concise Encyclopedia of Economics. 2008. Library of Economics and Liberty. Retrieved December 20, 2008 from the World Wide Web: http://www.econlib.org/Library/Enc/JunkBonds.html
John Waggoner. USA Today. February 7, 2008.
"Junk Bonds: Everything You Need to Know". Investopedia®

END QUOTE

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

The Columbus High-Yield Bond Program (CHYB)

As Steve made clear in his whitepaper, active management of high-yield bond mutual funds can potentially allow investors to participate in both capital gains and coupon returns, while also moving to the sidelines during times of downward price pressure. This ability to move to cash in downward trending markets is very important, especially considering the aggressive nature of high-yield bond investments.

It might come as a disappointment that the CHYB Program is up "only" 25.01% so far in 2009 as of August 31, considering that the Barclay's High-Yield Credit Bond Index is up over 40% over the same period of time. However, this analysis is very short-sighted given that historical drawdowns in the Barclay's Index have exceeded -33%, while the CHYB's worst-ever drawdown has been limited to just over -6%.

The value of minimizing losses becomes even more apparent when looking at the rolling 5-year returns as of August 31. The CHYB Program has a 5-year annualized return of 8.94% while the unmanaged Barclays Index has managed an annualized return of only 5.27%. Again, the ability to move to cash in downward trending markets can make a significant difference in long-term returns, though there are no guarantees. And remember that the CHYB returns are net of all fees and expenses.

The Columbus High-Yield Bond Trading Strategy

Steve's proprietary trading model uses technical indicators to determine the high-yield bond market's potential future movements. However, Steve goes one step further by analyzing the technical indicators unique to each of the high-yield bond mutual funds he uses. Like many other active money managers, Steve will sometimes use specialized high-yield bond index funds. However, he also uses traditional high-yield bond funds when his system tells him they have the best potential for future gain.

Doing this allows him to combine his market timing expertise with the bond selection expertise of the mutual fund manager. Plus, traditional high-yield bond funds typically pay a higher "coupon" rate of return than specialized index funds.

As a general rule, the CHYB Program invests in only one mutual fund at a time, though future growth may require him to use two or more funds. Client accounts will either be 100% in a high-yield mutual fund or 100% in cash (money market); there are no graded investments or partial positions taken.

The CHYB trading model does not use leveraged funds nor does it use specialized inverse funds that provide a net "short" exposure to the high-yield bond market. However, Steve may use such inverse funds as a hedge under certain conditions. Best of all, Steve's strategy employs the use of trailing stop orders that close out trades should losses exceed a pre-determined percentage. In winning trades, these stop-loss orders ratchet up with gains, providing the potential to lock in any positive returns over and above the stop-loss trigger percentage.

If I had to describe our observations of Steve's trading model, I'd have to use the term "patience." Steve does not employ any discretion in his trading, so he will allow the system to stay in cash as long as necessary until the high-yield bond market environment improves. For example, the CHYB Program was in cash for much of 2008, which is why it ended the year with only a 2.9% loss rather than a drop of over 26% as was the case in the Barclays High-Yield Credit Bond Index.

Performance Evaluation

The goal of the CHYB Program is not necessarily to "beat the market" over the short run, but rather to participate in market gains while also managing risks. From the historical performance statistics provided below, it is evident that Steve has attained this goal in the past, though past performance cannot guarantee favorable future results:

Performance Statistics
(Net of all fees and expenses)

PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
(Please see Important Disclosures below.)

The CHYB Program is available through the Purcell Advisory Services platform. Accounts are held at Trust Company of America (TCA), an independent trust company located in Denver, Colorado. Clients have online access to their accounts via the TCA website. Both TCA and Purcell issue quarterly statements and TCA produces year-end tax reports. TCA charges a custodial fee of 1/10th of one percent (ten basis points) of the account balance.

The minimum account size for the CHYB Program is $50,000 per account. Management fees are billed quarterly in advance based on the following annual percentages for various sized accounts:

First $500,000	2.50%
$500,000 to $1 million	2.25% (entire account)
$Over $1 million	2.00% (entire account)

It is important to remember that all performance information provided above is net of both the management fee and custodial fee charged on the accounts.

Conclusions

We have been offering the Columbus High-Yield Bond Program for over three years now, and I continue to be impressed with the way it can participate in market gains and then move to the safety of the money market fund when the risk of loss becomes too great. I also like the fact that it is a non-discretionary system, which is an important factor when the model has been in cash for an extended period of time.

Over the years, I have seen money managers disregard their trading systems when they signal to be in cash for weeks or months. Overriding a trading system can also result from clients calling to ask why they are paying a fee to sit in a money market fund. Steve stuck to his guns during the extended cash position in 2008, and we haven't heard many clients complaining about having lost only 2.9% for the year when the stock and high-yield bond markets were in free-fall.

While you may have missed much of the move in high-yield bonds so far in 2009, I think Steve makes a good case for investing in this program now. Since we recommend this program for investors with at least a three-to-five-year time horizon, we feel that the CHYB Program's combination of market participation and risk management is a fit for the less aggressive portion of your portfolio. As always, be sure to read all offering materials and Important Disclosures before making a decision to invest.

If you would like to learn more about the Columbus High-Yield Bond Program or any of our other risk-managed AdvisorLink® investment programs, please feel free to give one of our Investment Consultants a call at 800-348-3601 or click on the following link to complete one of our online request forms. If more convenient, drop us an e-mail at info@halbertwealth.com or visit our website at www.halbertwealth.com to learn more about this and our other actively managed investment strategies.

Special Reminder about the "All They'll Need to Know" Booklets

As I mentioned a couple of weeks ago, we have now exhausted our supply of the end-of-life planning resource entitled "All They'll Need to Know." You can, however, still obtain a copy of the "All They'll Need to Know" booklet directly from Emerson Publications. I have negotiated a discounted price on both the printed and electronic versions of the booklet which you can access by clicking on the Emerson Publications website link below:

http://emersonpublications.com/index.php?pr=ATNTK-Halbert&nosessionkill=1

I am making this valuable resource available as a service to my readers and I do not share in any part of the purchase price of either version of the booklet. This discount is available for a limited time only, so I suggest that you take advantage of this offer as soon as possible.

Wishing you profits,

Gary D. Halbert

IMPORTANT DISCLOSURES: Halbert Wealth Management, Inc. (HWM), Sojourn Financial Strategies, LLC (Sojourn), and Purcell Advisory Services, LLC (Purcell) are Investment Advisors registered with the SEC and/or their respective states. Information in this report is taken from sources believed reliable but its accuracy cannot be guaranteed. Any opinions stated are intended as general observations, not specific or personal investment advice. Please consult a competent professional and the appropriate disclosure documents before making any investment decisions. Investments mentioned involve risk, and not all investments mentioned herein are appropriate for all investors. HWM receives compensation from the Advisors in exchange for introducing client accounts. For more information on HWM or any other Advisor mentioned, please consult their respective Form ADV II, available at no charge upon request. Any offer or solicitation can only be made by way of the Form ADV Part II. Officers, employees, and affiliates of HWM may have investments managed by the Advisors discussed herein or others.

As benchmarks for comparison, the Standard & Poor's 500 Stock Index and the Barclays High Yield Credit Bond Index (which both include dividends) were used. Both represent unmanaged, passive buy-and-hold approaches, and are designed to represent their specific market. The volatility and investment characteristics of these indexes may differ materially (more or less) from that of this program, and these Indexes cannot be invested in directly. The performance of the S & P 500 Stock Index and the Barclays High Yield Credit Bond Index is not meant to imply that investors should consider an investment in the Columbus High-Yield trading program as comparable to an investment in the "blue chip" stocks that comprise the S & P 500 Stock Index or the high yield investments that comprise the Barclays High Yield Credit Bond Index. Historical performance data from inception through December 2005 represents a tracking account managed by Steven D. Landis and audited by MoniResearch, an independent corporation, Steve Shellans, President. Performance from January 2006 forward is from an actual account in Purcell Advisory Services Columbus High-Yield Bond Program. Since all accounts in the program are managed similarly, the results shown are representative of the majority of participants in the Columbus High-Yield Bond Program.

Purcell utilizes research signals purchased from Sojourn, an unaffiliated investment advisor. The signals are generated by the use of a proprietary model developed by Sojourn, with the objective of providing superior risk-adjusted returns using high-yield bond investments. Assets in the program are allocated 100% to the appropriate high-yield mutual funds or 100% to the money market according to the purchased research signals. Statistics for "Worst Drawdown" are calculated as of month-end. Drawdowns within a month may have been greater. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

When reviewing past performance records, it is important to note that different accounts, even though they are traded pursuant to the same strategy, can have varying results. The reasons for this include: i) the period of time in which the accounts are active; ii) the timing of contributions and withdrawals; iii) the account size; iv) the minimum investment requirements and/or withdrawal restrictions; and v) the rate of brokerage commissions and transaction fees charged to an account. There can be no assurance that an account opened by any person will achieve performance returns similar to those provided herein for accounts traded pursuant to the Columbus High-Yield trading program.

In addition, you should be aware that (i) the Columbus High-Yield trading program is speculative and involves risk; (ii) the Columbus High-Yield trading program's performance may be volatile; (iii) an investor could lose all or a substantial amount of his or her investment in the program; (iv) Purcell will have trading authority over an investor's account and the use of a single advisor could mean lack of diversification and consequently higher risk; and (v) the Columbus High-Yield trading program's fees and expenses (if any) will reduce an investor's trading profits, or increase any trading losses.

Any investment in a mutual fund or money market fund carries the risk of loss. Mutual funds and money market funds have their own expenses which are outlined in the fund's prospectus. An account with any Advisor is not a bank account and is not guaranteed by FDIC or any other governmental agency. Returns illustrated are net of the maximum annual management fee of 2.5%, custodial fees, underlying mutual fund management fees, and other fund expenses such as 12b-1 fees. Dividends and capital gains have been reinvested. Management Fees are deducted quarterly, and are not accrued on a month-by-month basis. They do not include the effect of annual IRA fees or mutual fund sales charges, if applicable. Individual account results may vary based on each investor's unique situation. No adjustment has been made for income tax liability. Performance for individual accounts may differ materially (more or less) from the results illustrated. The results shown are for a limited time period and may not be representative of the results that would be achieved over a full market cycle or in different economic and market environments.

More On Teaching Your Kids To Save & Invest Wisely

Gary D. Halbert — Tue, 07 Jul 2009 20:11:44 GMT

IN THIS ISSUE:

First, My Own Story About Saving
Teaching Your Kids The Importance Of Saving
Motivating Your Kids To Save
Finding Ways For Kids To Make Money
Get Your Kids Involved In Investing
"Gifting" Money Or Assets To Your Kids

Introduction

At my company, we often have the opportunity to speak with our clients' adult children. In some cases, the adult children are fairly knowledgeable about investing, but in most cases, they are not. It seems to us that talking to their children about how to invest their money must be uncomfortable for many parents. That's unfortunate because the learning curve in investing can be expensive, and years of compounding can be lost.

Given that this issue is so important, we will revisit some of the key points on teaching your kids how to save and invest, such as how to encourage your kids to save more, how to teach them to invest, how you can transfer assets to your kids and minimize estate taxes, and at what (children's) ages you should leave your inheritance to your kids and more.

Many of you will want to save this E-Letter on saving and investing and encourage your children or grandchildren to read it. I will write what follows in my usual easy-to-understand style that even a well-educated teenager can comprehend. So feel free to reprint this letter and share it with others you feel it may help.

First, My Own Story About Saving

I grew up in a lower middle class family in the country outside of Lubbock, Texas. Like many young kids, I dreamed of one day being rich. My parents encouraged me to do well in school so that I could grow up to be a doctor or lawyer or some other profession that would afford me a better lifestyle than their own. And they taught me to save.

I don't recall exactly how they did it, but they continually encouraged us to save. I do remember that my father always had a stash of "emergency money" whenever unexpected events popped up. Even though he didn't make that much money at his job, he always found a way to put away a few hundred bucks in his stash every month. That roll of hundreds looked like a fortune to me as a kid! I wanted one for myself, and this motivated me to save early on.

My parents always encouraged me to work and make money, even as a child. From the time I was about 10 years old, I worked at a neighborhood horse stable after school, on the weekends and in the summers. I did everything from cleaning stalls and shoveling horse manure to grooming horses to teaching other kids to ride horses. I loved the work – it made me feel more like an adult. But more than that, I loved having my own money.

By the time I was a teenager, I had saved enough money to buy a couple of young colts each summer. Over the fall and winter, I would saddle-break them and teach them to become barrel racing horses, and then I would sell them the next summer, usually to the city girls who boarded their horses at the stable where I worked. I made a handsome profit on each horse I sold.

One of the things my parents always told me is that I would have to pay for my own car, when that day came, and this was a big incentive for me. When I turned 17, I had my Dad drop me off at the local car dealership I had selected in Lubbock, Texas. I went in, looked around, and decided which new car I was going to buy. When I told the salesman I wanted to buy the car, he told me I would need to get my dad or mom to come in. I told him I didn't think so. I pulled out a roll of one-hundred dollar bills and told him what I was willing to pay. About an hour later, I drove out in my first new car.

In the summer of my senior year in high school, I got a job driving a bobtail truck back and forth between Lubbock and Amarillo. The pay was good for those days. I was able to keep that job even as I attended college at TexasTechUniversity, and it paid for most of my college education. The only time I didn't work, at least part-time, during college was the year I spent earning a Masters Degree in International Business. I took out a loan from a local bank to enable me not to work and get my Masters in one year.

Teaching Your Kids The Importance Of Saving

It is my opinion that, as parents, we have an obligation to teach our kids about saving and financial matters in general. I believe that teaching our kids about saving and financial matters is just as important as teaching them about honesty and integrity, and even sexual matters. Yet, as is the case with sex, many parents are uncomfortable teaching their kids about financial matters.

I believe this is a big reason why we have had a savings crisis in America. In 2005, the national savings rate fell to ZERO, down from a high of over 10% in the early 1980s. In more recent years, the national saving rate actually fell into negative territory before the trend began to reverse itself in 2008 in the wake of the credit crisis. The point is, if we are going to educate our kids about the importance of saving, we must not only teach them, but we must also practice what we preach. Kids whose parents don't save are not likely to be good savers either.

Motivating Your Kids To Save

My wife, Debi, and I have two kids, a son 19 and a daughter 17. There are many ways to motivate kids to save, especially young kids. For a variety of reasons, our kids are voracious savers as I will discuss below.

Probably the most common way parents encourage their kids to save is by paying them a weekly "allowance." Parents can encourage the kids to save some of their allowance each week or month, or they can require them to do so, and in what percentage.

Debi and I wanted to create a better incentive for our kids to work and save than an allowance (in fact, we never gave them an allowance). As soon as our kids were old enough to understand saving, we agreed to MATCH whatever they saved from the money they earned. If they bring us $20 to put in their savings account, we match it and deposit $40 in the account. You can set the "match" at any level you want, not necessarily 100% as we do.

We made it clear from the beginning that this was their money, in their own separate accounts, but once they put money into the savings account, they could not spend it without our approval. We do allow them to keep "spending money" outside the savings account for day-to-day expenses, etc. We told them from the beginning that their savings would one day be used to buy a car, pay for college expenses, etc.

As a result of this arrangement, both kids were eager to find work they could do to make money, both at our property and for neighbors. As noted above, they quickly became very serious savers. Best of all, they have never asked to make a withdrawal from their savings accounts to purchase anything, and they are very frugal even with their spending money.

Matching what your kids save may not be right for you. Also, not all kids can stay focused on a long-term financial goal like a car. If this is the case, you can use shorter-term incentives of many different types. There are many ways to encourage and motivate kids to work and save money. I will recommend a very good book later in this E-Letter that has many additional ways to encourage your kids or grandkids to be good savers.

Finding Ways For Kids To Make Money

In order to motivate young kids to save, you also have to find ways for them to make money. Early-on, Debi and I made it clear to our kids what types of chores around the house and the property were "unpaid" as a member of the family, and which chores we would pay them for. We live on several acres on Lake Travis (outside of Austin), and have a boat dock on the water, so there are always lots of chores, yardwork and maintenance the kids can do to earn money. They also do work for other people from time to time.

A few years ago, the senior vice-president at my company approached me and asked if the marketing group could hire my son to do some computer analysis for them during the summer. He is quite the math/computer whiz. I agreed but added that he must work for them, not me, and that he was to receive no special treatment or favors for being my son. He quickly proved that he could crunch numbers and analyze money managers' performance data faster than anyone on our staff. Best of all, he saved almost all of the money he made, and the staff asked him to return the next summer.

You might be thinking that our situation is unusual in that Debi and I own the business and therefore have the ability to "make" work for our kids. But the fact is that our company needed some part-time computer help, and we would have likely hired some other young person to do the work. And this leads me to the next point.

Lots of companies can use some part-time or full-time help in the summers. Most teenagers these days have good computer skills that could land them a better part-time job than working in most retail outlets, mowing lawns or other common summer jobs. Have your kids or grandkids consider mailing flyers and resumes to nearby businesses advising them of their skills and availability.

There are some inexpensive books on the subject of finding summer work for teenagers:

Better Than a Lemonade Stand by Bernstein & Huberg
Teen Dream Jobs by Nora Coon
Fast Cash For Kids by Bonnie & Drew Noel

Get Your Kids Involved In Investing

Once your kids have a handle on saving money, the next step is to teach them how to start investing their savings. Unfortunately, many of my kids' friends know absolutely nothing about investing. Many know very little about the stock markets, the bond markets, mutual funds, etc. In addition to motivating them to save, and providing ways for them to work and make money, it is also very important to teach them about investing. Here too, I believe it is an obligation of the parents to teach their children about investing.

There are various ways to get your kids involved with investing. By all means, you should share with them your philosophy on investing and explain why you hold the investments you do, and in what proportions. Teach them how to read account statements. Explain to them what brokers and Investment Advisors are and what they do. Teach them about stocks, bonds, mutual funds, etc., etc.

There are two really good books I would recommend to you as parents or grandparents. The first book – Kids & Money by Jayne Pearl - is simply outstanding as a guide for parents in teaching their kids about saving and investing. One of my all-time favorites is The Wealthy Barber by David Chilton, an excellent book you should have your teenage (or older) children read. Both are available on Amazon.com.

How & When Kids Should Begin Investing

There are differing opinions on when to have your kids actually start investing their own money. Kids are really smart these days, and my view is that you can let them begin investing in their mid-teens, if you have taught them adequately. While kids should keep most of their money in a risk-free savings account of some kind, don't be afraid to let them invest some of it in the stock market.

However you and your kids choose to get started in investing, you must teach them that any non-guaranteed investment carries some level of risk, and that losses will occur from time to time. It is important to discuss – in advance – what levels of losses are acceptable, and what levels are not. In fact, if large losses result, this can actually turn kids off to investing in anything that carries any level of risk. So, make sure they understand that they are investing for the long, long haul.

Some parents actually let their kids take a crack at picking individual stocks. However, since kids are not likely to have any more success picking individual stocks than most adults do, I generally do not recommend this approach. Rather than picking individual stocks, or following a broker's advice, I recommend having your kids invest in equity mutual funds, after having educated them about the value of professional management and diversification.

There are, of course, thousands of equity mutual funds out there, and it can be difficult to decide which funds your kids should invest in. Fortunately, there are services like Morningstar (www.morningstar.com) and others that can help you with fund selection. Of course, there are many companies like mine that will give you direction in selecting the mutual funds in which to invest.

"Gifting" Money Or Assets To Your Kids

Being in the investment management business, we get questions every year from clients who are trying to help their kids or grandkids learn to save and invest wisely. One of the most common observations along this line is: "I would really like to help my kids with investing, but they just don't have enough money to get started."

This is all too true. Most young families just make ends meet and don't have the savings to start an investment program when they really need to. Along that line, another very common comment we hear is: "I would love to give them the money to get started, but I worry they would just blow the money on wasteful things."

Yet there are ways to gift money to your kids or grandkids that are not only earmarked for certain financial expenditures (college, medical, etc.), but can be targeted for investments that will serve them well later in life. And there are ways you can increase the odds that money you gift to your kids or grandkids will be used for the purposes you desire.

I will talk more about that below, but first let's explore the basics of the gift tax exclusion. Current tax law allows that you can gift up to $13,000 per year to a child, grandchild, or anyone, with no tax consequences to either the donor or the recipient. As noted above, a husband and wife can give $13,000 each, or a total of $26,000 a year, with no tax consequences for the donor(s) or recipient(s).

The annual gift tax exclusion is one of the most popular ways that wealthy individuals transfer a portion of their estates to their heirs over the years prior to their deaths, thus reducing the significant estate taxes their heirs will have to pay. Gifting has the double benefit of helping those you love and reducing estate taxes that go to the government.

I'm surprised that more families don't take advantage of the gift tax exclusion. My wife, Debi, and I gift the maximum to our two kids – currently $13,000 per parent or $26,000 a year to each kid. We gift this money each year into trusts that we have set up for each of our kids.

Gifting: Control Is The Issue

One of the requirements of the gift tax exclusion is that the beneficiary must have ownership and control of the assets that are gifted. This is a big deal when considering gifting $13,000-$26,000 (perhaps annually) to a child, grandchild or other person(s). Generally speaking, if you gift it, the money becomes theirs, and it is possible that they can just blow the money on wasteful spending if they want.

This is one reason why many people do not elect to take advantage of the gift tax exclusion, as far as I can tell in talking to estate tax attorneys. But there are ways – directly and indirectly - to effect control of the assets gifted to a child or grandchild. If the child is a minor, the gifts can be made to a trust which can designate what the money may be spent for, such as college, medical expenses or whatever.

As noted above, Debi and I have established trusts for each of our children, and these trusts are where we make our annual contributions. Trust laws vary among the states, so I won't get into what type of trusts may be best in your particular situation, but this can be a very good way to transfer assets to minor children and maintain control over those assets, at least until they reach legal age, or whatever age you specify in the trust(s).

In some states, minors do not have the right to execute a contract, and thus cannot own stocks, bonds, mutual funds, annuities and life insurance policies in their own names. In such cases, parents cannot simply transfer assets directly to their minor children, but instead must transfer the assets to a trust. The trust(s) can be a private trust you establish for your kid(s) with the help of an attorney, or a custodial account such as a UGMA or UTMA account, both of which can hold securities.

The Uniform Gift to Minors Act (UGMA) established a simple way for a minor to own securities without requiring the services of an attorney to prepare trust documents or the court appointment of a trustee. The terms of UGMAs are established by state statute instead of a trust document. The Uniform Transfer to Minors Act (UTMA) is similar, but also allows minors to own other types of property, such as real estate, fine art, patents, etc., and for the transfers to occur through inheritance. Whether you use an UGMA or UTMA is determined by the state you live in (most states now use UTMAs).

To establish a custodial account, the donor must appoint a custodian (trustee) and provide the name and social security number of the minor. The donor irrevocably gifts the money to the trust. The money then belongs to the minor but is controlled by the custodian until the minor reaches the age of trust termination. The age of trust termination is 18 to 21, depending on the state and whether it is an UGMA or an UTMA. The custodian has the fiduciary responsibility to manage the money in a prudent fashion for the benefit of the minor. Custodial accounts are most often established at banks and brokerages.

The bottom line is that gifting is a great way to transfer assets to those you love without tax consequences. But there must be a high degree of trust involved. If you do elect to form trusts, be sure to consult with an attorney that is familiar with the laws of your state.

Gifting To Adult Children

As noted above, you can gift to minors by establishing trusts in which the donor(s) can maintain control of the assets. But there is also a way to gift to adult children which can also be effective, at least in my experience.

Consider gifting them an investment account. Here is one way it can work. Let's say you are the parents or grandparents of an adult child. The two of you agree to gift $26,000 (or some lesser amount) to your adult child or grandchild. But you only agree to gift the money if it goes into a specified investment account. And you may agree to gift another $26,000 in the following year (or years) if things go as planned.

This approach is only advised if you have a good relationship with the adult child (or whomever you wish to help). It should be laid out carefully at the onset that this investment account is indeed a long-term program, and that the money should be kept in the account and not withdrawn for expenses, spending, etc.

For donors who have the where-with-all to gift for more than one year, the main gamble is really the first year in regard to adult children. You make it clear that if they maintain the investment, rather than spending the money, you may (at your discretion and under certain specified conditions) continue to make gifts in future years. This provides a huge incentive for the beneficiary to keep the money in the investment account. If they don't, you simply stop the gifts beyond the first year. Sounds simple, but it can be very effective.

This method of gifting will also create a big incentive to the child or grandchild to become more knowledgeable about investing in general, which is what you want. If they get into investing, that means they'll likely get more serious about saving, cutting expenses, building wealth, etc.

As always, the best course of action depends upon your individual situation, so it's important to seek out the advice of a qualified tax professional or estate planning attorney before pursuing any gifting strategy.

Conclusions

I believe that as parents, we have an obligation to teach our children the importance of saving. Likewise, we need to find ways that our kids can work and make money to add to their savings. And in my view, we also have an obligation to teach them how to invest wisely, whether they are teenagers or adult children.

You may want to consider funding investment accounts for your children, whether they are minors or adults. You may want to consider "gifting" money to your kids or grandkids (or others), as discussed above. The IRS gifting limit was increased from $12,000 in 2008 to $13,000 in 2009. So a husband and wife could gift a total of $26,000 a year to a child, or anyone for that matter.

In the case of minor children or grandchildren, you may want to consider using an UGMA or UTMA depending on the state you live in. Like most investment firms, my company accepts UGMAs and UTMAs. This is a great way to transfer assets.

Finally, I generally I recommend only professionally managed investment programs, especially for minors. Minors (and for that matter, most adults) need help in selecting and monitoring their investments. If you would like more information on doing so, be sure to contact us. We have professionally managed programs that only require $25,000 to invest.

I hope this week's information helps. Feel free to share this information with anyone you feel will benefit from it.

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES:

Teach Children To Save Resources
http://www.aba.com/ABAEF/teachchildrentosave.htm

Is Obama planning a second stimulus package?
http://online.wsj.com/article/SB124692229711302683.html

How to Recover From the Bear Market

Gary D. Halbert — Tue, 14 Apr 2009 20:05:16 GMT

IN THIS ISSUE:

Editors Note – The Fed Bails Out Insurance Companies
The Case for Aggressive Allocations
Third Day Advisors
Scotia Partners
Combining Both Programs

Editor's Note - Bailouts for Insurance Companies

Just hours after I sent you last week's E-Letter which alerted you to the serious financial troubles among the nation's largest insurance companies, the Treasury Department announced that TARP bailout monies will now be available for insurance companies. As I indicated, the insurance companies have desperately lobbied for bailouts, and now it looks like they will get them, at least for those that have recently bought up banks or other chartered financial institutions to qualify. I can't say I'm surprised.

Stay tuned as your insurance company may soon be controlled by the Obama administration, along with the banks, General Motors and who knows what else will follow.

Introduction

When you write a weekly E-Letter such as this one that goes out to over one million people, you can expect to get criticized from time to time. After all, people who disagree are more likely to respond than those who agree and appreciate the information provided – nothing new about that – especially since some of my weekly commentaries are devoted to political issues which are almost certain to draw responses from those who disagree with my conservative views.

Recently, however, I have received some criticism from a few readers regarding the fact that I include discussions about the investment programs that my firm recommends in these E-Letters. This comes as somewhat of a surprise, since this E-Letter is provided free of charge, and no one is forced to read it. Still, some readers insist that I should not write about the investment programs I believe in, as to them it somehow taints the integrity of the E-Letter.

I could not disagree more, especially given that we have just witnessed one of the most severe bear markets in history and two bear markets in less than a decade. The active management investment programs I recommend have served to significantly reduce losses in this bear market, and thus they are more relevant than ever. I can only guess that the criticism is coming from those who don’t want to be reminded that their buy-and-hold, low fee portfolios were recently gutted (50% or more) by the Bear Market Express.

This aversion to investment topics may also be indicative of how so many have been misled for so long, and feel they must now stay the course and hope that the market returns to its historical norms. They may make adjustments to their overall portfolio but, as I see it, this is tantamount to rearranging the deck chairs on the Titanic. Of course, everyone is entitled to their opinions.

My firm, on the other hand, is offering a lifeboat to those mired in the clutches of buy-and-hold strategies that have not only failed to meet their investment needs, but in many cases, have resulted in huge losses that have pushed investors even further away from their eventual goals. The reason I mention the investment programs we recommend is that I firmly believe that they offer a viable alternative to some of the failed buy-and-hold strategies that have been so prevalent in the marketplace for many years.

Apparently, many of you are coming around to my point of view regarding active investment strategies that have the flexibility to move to cash or hedge long positions in bear markets. We were pleasantly surprised when about 300 of you who read this E-Letter registered for our March 25 Webinar with Scotia Partners and hundreds more have viewed the recorded version on our website since then. And we have seen the largest influx of new clients and new money in many years in just the last 3-4 months, sadly thanks to the bear market.

Even some mainstream financial advisory firms are now dipping a toe in the active management waters. I am amused at some of the commercial ads that urge investors to come in and visit with an investment counselor to learn of “new” strategies for the current market. In all likelihood, you’ll learn about some of the same strategies I’ve been recommending for almost 15 years.

So, let it be known that from time to time I will continue to discuss how active management strategies can fit into your portfolio. This week, I will revisit two of the money managers that we recommend. You can either read on and see how these two managers have made money this year, despite the bear market, or settle back in your buy-and-hold deck chair and disregard the remainder of this week’s E-Letter. It’s your choice.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Aggressive Programs May Help Recovery

As I have mentioned many times in this E-Letter, the goal of basic active management is to attempt to move to cash in down markets to reduce portfolio risk. However, some investors seek out programs that use leverage or can go both net long and net short in the market for the aggressive portions of their portfolios.

In such programs, the potential for profit (or loss) exists no matter what the market’s direction. As I have written before, I characterize this type of program as being one where the best defense is a good offense. Unfortunately, many of these programs are available only to wealthy investors through hedge funds.

Fortunately, there are aggressive investment programs that are open to virtually any suitable investor. In light of how many retirement portfolios have been decimated by two bear markets in less than a decade, even moderate investors may want to consider having an aggressive investment or two in their overall portfolio. Of course, these allocations should be only a small portion of the assets, but it IS possible to include small allocations to aggressive investment programs and still end up with an overall moderate-risk portfolio.

With that in mind, I’ll spend the remainder of this E-Letter highlighting two aggressive money managers that you have previously read about in these pages. In the discussion below, I’ll briefly summarize the strategy employed by each manager as well as update their performance information.

After that, I’ll show how a combination of these programs might be a viable alternative for aggressive investors who want to diversify their portfolios by including two leveraged, long/short active management strategies. If you would like to learn more about active management strategies in general, see the link to my Absolute Return Special Report in the Conclusion section below.

Third Day Advisors Long/Short Programs

Back in January of 2005, I first introduced Third Day Advisors and its founder, Ken Whitley. The original Third Day program we recommended was the Aggressive Strategy, which allowed aggressive investors the ability to have a leveraged long and short exposure to the Nasdaq 100 Index. Over time, Ken has applied his signal to other market indexes, but all are based on the same underlying trading model.

Ken’s money management strategy is a proprietary blend of momentum, trend-following and overbought/oversold indicators. There are ten basic indicators that Ken uses to analyze the market, with a number of sub-indicators that also factor into each trading decision. Each indicator “votes” on whether to be long, short, or neutral in the market. The model is 100% mechanical, though Ken does reserve the right to override his system’s signals in the case of a national emergency.

Depending upon the market index, Third Day selects among index mutual funds available from the Rydex family of mutual funds. These funds are part of the Rydex Dynamic class of funds that seek to provide investment returns that correlate to 200% of the daily performance of the underlying index. Separate funds are provided for positive and negative (inverse) correlations.

The Third Day investment strategy does not currently employ any traditional stop-loss techniques to automatically exit losing trades. To limit risk, Ken varies his allocation based on the relative strength of his trading signal and market volatility. As a general rule, his allocations may range from a low of 15% to a high of 100% of the account value, depending upon the program. However, maximum allocations are rare and Ken’s various programs are projected to be in cash (money market fund) an average of 42% of the time in any given year based on historical performance.

The lack of a formal stop-loss trades and frequency of trading are additional reasons why Third Day’s investment programs should only be considered for the aggressive portion of an investor’s portfolio, where high volatility and significant periodic drawdowns can be tolerated.

Performance Evaluation

Both the Third Day Aggressive Strategy and S&P Plan have turned in strong performance so far in 2009. As of the end of March, the Third Day Aggressive Strategy posted a gain of over 13% for the first quarter of 2009, while the S&P Plan gained 11.20% over the same period of time. This is even more impressive when compared to the S&P 500 Index which was down over 11% (including dividends), even after an impressive March rally. Of course, past performance is not necessarily indicative of future results.

The Third Day Aggressive Strategy has the longest track record of all Third Day programs with actual trading beginning in November of 2001. This strategy trades the NASDAQ 100 Index, which is often seen as a proxy for the high-tech market sector. Over the course of our experience with this program, we have seen that the heavy high-tech weighting of this particular stock index results in it sometimes deviating from the direction of the overall market. Therefore, investors who elect the Aggressive Strategy should do so with the knowledge that it may be more of a tech sector program than one that is based on the broad market.

In light of the tech sector concentration in the Nasdaq 100 Index, Third Day also began to apply its trading signals to other market indexes. In 2006, the Third Day S&P Plan began actual trading. After watching its performance for a while, we began recommending it to our clients who wanted an active management strategy based on more of a broad-market stock index. Though the S&P Plan had a shorter actual track record than the Aggressive Strategy at the time, we were comfortable recommending this new program because we knew it was traded based on the same signal that Ken Whitley had been producing since 2001.

The actual performance information below provides detailed monthly returns and time window analysis for both the Aggressive and S&P Plan programs. This format will help you to more easily compare the two Third Day programs based on their actual performance. Keep in mind that all of the performance information shown is net of management fees and expenses.

Please see Important Notes at the end of this E-Letter.

As you evaluate Third Day’s performance, it should become clear to you that Ken’s Aggressive Strategy performed much better in the 2000 – 2002 bear market than in the most recent market downturn. Based on our research, we feel that this difference is largely due to a “disconnect” between the tech-heavy NASDAQ 100 Index and the broad market stock indexes.

Third Day’s S&P Plan, on the other hand, was better able to maintain more value during 2007 and 2008 than the Aggressive plan, again owing to the fact that this program is based on the broad market S&P 500 Index rather than the NASDAQ 100 Index. Remember, however, that past performance is not necessarily indicative of future results.

While we would like to have seen the S&P Plan pick up more gains from inverse (short) trades during the worst of the bear market, we have realized that Ken’s trading model is not as adept at handling high-volatility markets as are other programs, such as the Scotia Growth S&P Plus Strategy that I will discuss below.

However, we feel that the Third Day S&P Plan may be a good alternative for the aggressive portion of your portfolio when the market eventually bottoms out and volatility decreases. Also note that both the S&P Plan and Aggressive Strategy have posted double-digit gains as of the end of March. Past performance, however, does not guarantee future results.

The minimum investment for the Third Day program is $50,000 and it is custodied at Rydex Investments. You can obtain more detailed information about Third Day’s strategy and performance on our website at the following link:

http://www.halbertwealth.com/advisorlink/thirdday.php

At this link, you can also learn about an even more aggressive Third Day program called the Ultra Aggressive Strategy. This program also trades the tech-heavy Nasdaq 100 Index, but does so with trade allocations that can be as high as 100% of the account value. As always, read all descriptive and disclosure information on these programs before deciding to invest.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Scotia Partners – Riding the Waves of Volatility

As I mentioned earlier, Third Day’s investment programs experienced difficulty when faced with the high volatility that has characterized this bear market. Scotia Partners’ investment programs, on the other hand, have seemed to almost embrace the increased volatility, performing much better in the bear market than during the previous rally phase of the market.

In 2008, the Scotia Growth S&P Plus Strategy gained over 77% net of fees and expenses, when the S&P 500 Index fell 37%. So far in 2009, the Growth S&P Plus Strategy has posted a gain of over 28% as of March 31, while the S&P 500 Index is still under water. Since its inception in August of 2004, the Growth S&P Plus Strategy has produced an annualized return of 38.83% as of the end of March, while the S&P 500 Index can muster only a negative 4.76% over the same time period. Past performance, however, cannot guarantee future results.

Based on our daily monitoring of Scotia’s performance and trading, we feel that its success has come largely due to portfolio manager Cliff Montgomery’s trading strategy that seeks to trade only on those days that offer the best statistical probability of success. Otherwise, he’s content to sit on the sidelines in the money market awaiting the next opportunity.

Scotia’s Growth S&P Plus investment strategy is a combination of two proprietary trading models developed by Scotia’s owner, Cliff Montgomery. The objective of the strategy is to provide positive returns regardless of market conditions, with significantly reduced risk due to limited market exposure. Of course, there are no guarantees that Scotia can continue to achieve this objective.

Using technical analysis, the basic model seeks to determine a long-term market trend (6-12 months) for the S&P 500, which then sets the overall direction for any trades. Once the long-term trend is identified, the intermediate-term trend is then determined using similar analysis. Only when the intermediate and long-term trends are in agreement will the basic model issue a trading signal.

With the overall market trend identified, the basic model looks for short-term movements against the trend. In other words, the strategy seeks to take advantage of the possibility of a “reversion to the mean.” Cliff’s model views a contra-trend market movement as an opportunity, since future market action should move back in line with the overall trend. Thus, Cliff describes his model as being trend-following in the long term, but contrarian in the short term.

In addition to the basic trading model, the Scotia’s Growth S&P Plus program also incorporates a proprietary overbought/oversold indicator that overlays the basic model. This added signal seeks to identify long or short trades that have a high probability of success, without regard to the direction of the long-term trend indicator. Accordingly, this overlay generally results in more trades per year than would be possible under the basic model.

The Growth S&P Plus Strategy is exceptional in that it has historically been in the safety of a money market account over half of the time and trades only on days when Cliff’s proprietary strategy indicates chances are optimal for a gain. As I have said in the past, this is one of the most interesting trading strategies I have ever seen, and it has certainly done extremely well in a market environment reeling in the wake of the subprime/housing meltdown. Remember, however, that past performance does not guarantee future favorable results.

Like the Third Day programs, Cliff’s methodology is 100% mechanical with no discretionary input, and no provision for Cliff to override any trading signal. However, unlike Third Day, the Growth S&P Plus Strategy does not make graduated or partial investments. Instead, the model will be 100% long in the Rydex S&P 500 2X Strategy Fund, 100% short in the Rydex Inverse S&P 500 2X Strategy Fund or 100% neutral (money market), depending upon the signal.

Because of the selective nature of the trading models, the Growth S&P Plus Strategy has historically been in the safety of a money market fund approximately 65% of the time. Scotia does not employ any formal stop-loss techniques to limit risk other than the relatively short duration of trades. If a trade makes money, the model automatically retreats to cash. If a trade loses on its first day, the model may stay long or short for an additional day. However, if even one indicator disagrees with the others, the model exits the market and goes to cash.

The performance information below tells the whole story. As you review this information, again remember that all numbers are actual returns and are net of fees and expenses, and that past performance cannot guarantee favorable future results.

Please see Important Notes at the end of this E-Letter.

As you evaluate Scotia’s performance, you see that its performance has increased dramatically since mid-2007. If you superimpose a graph of the CBOE Volatility Index (VIX), you will find that Scotia’s jump in returns coincides with a big jump in market volatility, as measured by VIX.

Initially, we thought that this might be an indication that Scotia’s programs were somehow “short-biased,” meaning that they entered into predominantly short trades, which would be favorable in a bear market. However, such a bias would be detrimental in a bull market, so we analyzed the individual trades to determine if there were any bias patterns. Our findings were significant:

Over the period of time from the inception of the Scotia S&P Plus Strategy (August of 2004) through December of 2008, Scotia had the following trading history:

165 Long Trades vs. 113 Short (Inverse) Trades
Win/Loss Ratio – Long Trades - 72%
Win/Loss Ratio – Short Trades - 65%
Win/Loss Ratio – All Trades - 68%
(Past performance does not guarantee future results.)

As you can see, there were actually more long trades than short trades, and a higher number of long trades were successful. The conclusion to be drawn is that Scotia’s Growth S&P Plus Strategy does not appear to have any specific long or short bias. However, because of the increased volatility generally associated with bear markets, such periods have the potential to produce greater relative performance than bull market periods.

The minimum investment for the Scotia Growth S&P Plus Strategy is $25,000 and funds are also held at Rydex Investments. You can obtain more detailed information about Scotia’s programs, including a less aggressive option known as the S&P Moderate Growth Strategy, on our website at the following link:

http://www.halbertwealth.com/advisorlink/scotia.php

As I noted above, literally hundreds of my readers have heard Cliff Montgomery personally explain the specifics of Scotia’s money management strategy via our recent webinar. If you missed it and would like to watch and listen to the full webinar discussion (including all charts), click on the link below:

http://www.halbertwealth.com/webinar/sco20090325/scotiawebinar.php

A Combination Approach

As you have no-doubt observed as you reviewed the above performance information, returns in any given time period can be significantly different – even among aggressive investment alternatives that are traded in a similar manner. Third Day’s Aggressive program did better than Scotia during some years in the up markets between 2003 through 2006, but not in others. Scotia has outperformed Third Day during the volatile bear market that began in 2007, but who knows how long this increased volatility may last?

If we had a crystal ball and could know exactly what kind of market environment to expect in the coming months and years, it would be easy to determine which of these programs to include in your portfolio. However, since we don’t have a crystal ball and most of the “experts” have been horribly inaccurate in their forecasts of what market conditions to expect, we have to find another way to take on the possibility of changing market environments.

If you feel that Scotia and/or Third Day would be suitable for a portion of your portfolio and are within your risk tolerance, I suggest that you consider combining the two programs within your aggressive portfolio allocation. While the past performance of these programs cannot guarantee success, we have seen that each has shown the ability to excel during certain types of market environments. Plus, these programs are not correlated with each other, with an R-squared value of only 0.02.

I would like to be able to provide a hypothetical illustration of these two programs together, but the disclosures necessary to do so would be too onerous in an already long E-Letter. Suffice it to say that, in some cases, combining programs can produce a smoother performance with lower drawdowns. While it’s granted that no combination would outpace Scotia’s recent performance, it is also important to realize that no market environment lasts forever, which is why it’s important to have a combination of programs in a diversified portfolio.

While it is difficult in this E-Letter setting to illustrate a combination approach, you can get an idea of how a combination of these two programs would behave by contacting one of our Investment Consultants at 800-348-3601 or by e-mailing info@halbertwealth.com. Plus, our Consultants can also show you how to incorporate less aggressive actively managed programs into your portfolio.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Conclusions

I hope that by now you have seen that allocating a percentage of your portfolio to aggressive investment programs may help you to recover from the ravages of the bear market. Just keep in mind that aggressive allocations are not suitable for everyone and that such allocations should be kept to a small percentage of the overall portfolio, especially for moderate-risk investors. Never take on more risk than you should in an attempt to quickly recover all of your investment losses.

If you would like to receive more information about any of the programs I have discussed this week, give one of our Investment Consultants a call at 800-348-3601 or e-mail us at info@halbertwealth.com. You can also request information via our online request form. We also have other programs more suitable for less aggressive investors, so be sure to ask about them as well.

If you would like to learn more about active management strategies in general, I invite you to download my Absolute Return Special Report. This informative document explains the difference between active and passive management in much more detail, and also provides expanded descriptions of active management strategies you may want to consider for your own portfolio.

I hope that my discussion of the various actively managed programs available to you through my company is of benefit to you. I realize that some may not be in a position to invest right now, but it’s still important to know about these strategies for the future. We sometimes get calls from long-time readers who suddenly find themselves the recipients of a retirement plan rollover, inheritance, proceeds from the sale of a business or other large lump sum and are glad that they learned about active management before they had the money to invest.

In closing, I want to make it clear that my comments regarding complaints are not in any way an indication that I do not appreciate your feedback. I and my staff go over every response generated by my E-Letters, and I always appreciate your thoughts, concerns and questions. However, in regard to discussing the active management strategies we recommend, I feel it necessary to be outspoken for a number of reasons.

First, I feel that these strategies embody some of the best active managers in the country, and all have undergone our strict due diligence review before being recommended. Second, my firm has been evaluating and recommending active money managers for close to 15 years, so we’re not the new kids on the block. Keep this in mind when your buy-and-hold broker has a sudden revelation about active management strategies.

A final reason that mentioning these programs is important is that the financial media are now catching on that investors are leaving buy-and-hold strategies in droves. In some respects, that’s good. However, it also concerns me because some investors may become the victim of scam artists or enter into investments they don’t understand, all for the promise of making up all of their losses.

It’s a dangerous world out there for the investor, and there is no shortage of individuals who would be more than happy to separate you from the remainder of your nest egg. Therefore, to the extent that I can prevent that from happening, I feel it is my duty to do so and I make no apologies for it. As always, please read the Important Notes and disclosures that follow my signature below.

Offering hope for investors bitten by the bear,

Gary D. Halbert

IMPORTANT NOTES: Halbert Wealth Management, Inc. (HWM), Scotia Partners, Ltd. (SPL), Third Day Advisors, LLC (“TDA”) and Purcell Advisory Services, LLC (PAS) are Investment Advisors registered with the SEC and/or their respective states. Information in this report is taken from sources believed reliable but its accuracy cannot be guaranteed. Any opinions stated are intended as general observations, not specific or personal investment advice. Please consult a competent professional and the appropriate disclosure documents before making any investment decisions. Investments mentioned involve risk, and not all investments mentioned herein are appropriate for all investors. HWM receives compensation from PAS and TDA in exchange for introducing client accounts. For more information on HWM, SPL, TDA or PAS, please consult Form ADV Part II, available at no charge upon request. Any offer or solicitation can only be made by way of the Form ADV Part II. Officers, employees, and affiliates of HWM may have investments managed by the Advisors discussed herein or others.

As benchmarks for comparison, the Standard & Poor’s 500 Stock Index (which includes dividends), the NASDAQ Composite Index and the NASDAQ 100 Index represent unmanaged, passive buy-and-hold approaches. The volatility and investment characteristics of these benchmarks may differ materially (more or less) from those of the Advisors and these Indexes cannot be invested in directly. The performance of the S & P 500 Stock Index, the NASDAQ Composite Index and the NASDAQ 100 Index is not meant to imply that investors should consider an investment in these trading programs as comparable to an investment in the “blue chip” stocks that comprise the S&P 500 Stock Index or the stocks listed on The NASDAQ Stock Market that comprise the NASDAQ Composite Index or the 100 NASDAQ stocks that comprise the NASDAQ 100 Index. Historical performance data represents actual accounts in programs named Scotia Partners Growth S&P Plus, Third Day Aggressive Plan and Third Day S & P Plan, custodied at Rydex Series Trust, and verified by Theta Investment Research, LLC. Since all accounts in these programs are managed similarly, the results shown are representative of the majority of participants in each of these programs. The signals are generated by the use of proprietary models developed by Scotia Partners and Third Day Advisors with the objective of participating, on a leveraged basis, in trading days with the highest probability of success. Statistics for “Worst Drawdown” are calculated as of month-end. Drawdowns within a month may have been greater. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. Mutual funds carry their own expenses which are outlined in the fund’s prospectus. An account with any Advisor is not a bank account and is not guaranteed by FDIC or any other governmental agency.

In addition, you should be aware that (i) these programs are speculative and involve a high degree of risk; (ii) the trading programs’ performance may be volatile; (iii) an investor could lose all or a substantial amount of his or her investment in these programs; (iv) Purcell Advisory Services (for Scotia) and Third Day Advisors will have trading authority over an investor’s account and the use of a single advisor could mean lack of diversification and consequently higher risk; and (v) the trading programs’ fees and expenses (if any) will reduce an investor’s trading profits, or increase any trading losses.

Returns illustrated are net of the maximum management fees, custodial fees, underlying mutual fund management fees, and other fund expenses such as 12b-1 fees. Management fees are deducted quarterly, and are not accrued on a month-by-month basis. They do not include the effect of annual IRA fees or mutual fund sales charges, if applicable. No adjustment has been made for income tax liability. Dividends and capital gains have been reinvested. Money market funds are not bank accounts, do not carry deposit insurance, and do involve risk of loss. The results shown are for a limited time period and may not be representative of the results that would be achieved over a full market cycle or in different economic and market environments.

More Buy-And-Hold Myths Debunked

Gary D. Halbert — Tue, 24 Mar 2009 20:39:27 GMT

IN THIS ISSUE:

Another Flawed Buy-And-Hold Theory
A More Realistic Analysis
Putting The NAAIM Study In Perspective
The Elusive Bear Bottom
The Recovery Fallacy

Introduction

For years, I have written about the frequent misleading arguments put forth to keep investors in buy-and-hold investments. I am pleased to say that such articles, such as my recent March 3 E-Letter highlighting a misleading Investors' Business Daily article, have been well received by readers and the feedback has been very positive.

The information I have provided over the years allows you to ask critical questions when confronted with these one-sided arguments. In fact, I have even heard from brokers and other financial professionals who now "see the light" in regard to actively managed programs and want to know how to access actively managed strategies for their clients.

Unfortunately, this has not slowed the flood of misinformation being distributed by the usual suspects in an effort to support buy-and-hold investment strategies. It seems that the more I write about skewed articles, studies, etc., the more examples I see of them being generated by Wall Street and the brokerage community to sway unsuspecting investors.

I recently received an e-mail from a major mutual fund family promoting the buy-and-hold concept. While I am not at all surprised that a mutual fund company would be trying to keep investors in their funds, I was disappointed to see that the argument used was a very old, and thoroughly discredited line of reasoning known as "don't miss the best days in the market."

I'm not going to disclose the company that published the e-mail I received, but it really doesn't matter. You can look in the archives of virtually any major brokerage firm or mutual fund family and likely see similar titles. As I pointed out in the March 3 E-letter, it's in their best interests for you to stay invested, even though doing so may not be in your best interest. Thus, you need to look out for your own best interest when you deal with them.

In this week's E-Letter, I'm going to (again!) debunk the flawed argument of missing just the best days in the market. After that, I'm going to take on those who are calling an end to the bear market. Since the new lows in early March, the stock market has rallied. Naturally, Wall Street's cheerleaders are saying that we've hit the bottom and are now on our way back up out of the hole we've dug. Perhaps we have, but they've been wrong before – lots of times – as I will point out.

After that, I'll debunk yet another Wall Street myth that is based on accurate historical data, but is really just another misleading way to convince investors to stay in the market at all times. In the end, I hope that you will feel empowered to resist and even counter the seemingly endless sales pitches, media interviews, articles and other sources of misinformation that seek to hang on to the buy-and-hold message despite the clear evidence that such programs simply don't always work.

If you've read this far, then read what follows very carefully. Traditional investment providers and mutual fund families are making my long-held case against buy-and-hold in spades, even though they don't know it!

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Another Flawed Buy-And-Hold Theory

As I have frequently mentioned in recent E-Letters, Wall Street's media and advertising machines are still trying to defend buy-and-hold and disprove the value of active management. I noted back in January that I had received an e-mail from a prominent mutual fund company that continues to perpetuate one of the worst examples of Wall Street's misguided conventional wisdom. Not only was the material significantly dated, but it also presents a buy-and-hold argument that I have thoroughly discredited a number of times.

The story goes like this: Historically, much of the stock market's upward moves are concentrated in a relatively small number of market days (which is true). Thus, they allege, if following a market timing strategy takes you out of the market on those days, then your returns will suffer dramatically. Therefore, they maintain that it is important that you stay in the market at all times so that you will not miss these good days.

The e-mail I received had an attached file that presented their bogus argument in full color. Pulling S&P 500 Index performance information (including dividends) from 1988 through 2007, the illustration showed that the S&P 500 Index had an annualized return of 11.82%. However, if you missed just the 10 best days of performance over that 20-year span, your return would drop to 9.20%, a reduction of over 22%.

Missing more of the best days means even lower returns. For example, if you missed the 40 best days in the market over that 20 year period, your annualized return would fall to only 3.77%, a reduction of over 68%. Thus, Wall Street's conventional wisdom reasons if you want to maximize your returns, you must stay in the market so that you don't miss the good days.

While the numbers quoted in the sales piece are accurate, this analysis is obviously skewed to fit the viewpoint of the buy-and-hold crowd, but they hope you won't notice. For example, the first major flaw is the time period covered. This e-mail hit my mailbox in early December of 2008, long after some of the worst stock market losses in history. Yet, the best-days analysis only goes through the end of 2007, just a little over two months after the market had hit new highs.

Being in the financial services business, I can understand having to use information that is provided as of a certain cut-off date, since the number crunching required to produce the piece is considerable. However, to send a marketing piece with information as of 12/31/07 when the market has subsequently melted down is, in my opinion, misleading to the extreme.

The National Association of Active Investment Managers (NAAIM), of which my firm is a member, is a trade association of money managers specializing in active management strategies, including market timing. Each year, NAAIM publishes its own study in regard to missing the best days in the market. However, NAAIM's version provides a much more balanced analysis, as I will discuss in more detail below.

Since the e-mail I received was so dated, I used NAAIM's study to get a better idea of the updated numbers. It is important to note that NAAIM's study measured performance over a longer time period – from January 1984 through December 2008 – and excluded S&P 500 Index dividends. However, the basic outcome is the same.

NAAIM's analysis found that a constant investment in the S&P 500 Index (excluding dividends) would have resulted in an annualized return of 7.06%, evidence of the effects of the 2008 market meltdown. However, if you missed just the 10 best days in the market over this period of time, your annualized return would drop to only 4.10%. This is a decrease of 42% – even worse than the analysis for the time period ending in 2007. As you increase the number of days missed, the differential becomes greater, to the point that if you missed the 40 best days in the market, your annualized return would actually be negative.

On its face, you might think NAAIM's study actually supports the buy-and-hold position, but you have to first consider another major weakness of the buy-and-hold argument. The next and most obvious flaw to an informed reader is that the analysis assumes that an active manager would be OUT of the market on all of the best days, but IN the market on all of the worst days. Unfortunately, many investors buy this argument hook-line-and-sinker without thinking to ask the question, "What happens if you miss the bad days in the market?"

This is a very critical point, so let's bring it out into the light!

Using numbers from the same NAAIM analysis discussed above, let's reverse the assumptions and see what happens. Instead of missing the good days in the market, let's say that a market timing Advisor allows you to miss only the worst days in the market. Over the 1984 through 2008 time period, NAAIM's analysis shows that if you missed just the 10 worst days in the market, your annualized return would have been 11.23% vs. the 7.06% Index return.

That's a 59% better return! Compared to the 42% reduction in return we get when missing the 10 best days, we find that missing the bad days in the market is actually more significant than missing the good days in regard to the effect on returns. Now that's impressive! I'll bet your buy-and-hold broker never told you that. As you increase the number of worst days missed, the numbers get even better, resulting in a return of 17.59% if you missed the worst 40 days in the market over this 25-year period of time.

Of course, this analysis is as flawed as the first one, since it assumes that the Advisor is smart enough to be out of the market on all the worst days, but in the market on all of the best days. We, at least, are willing to point out the fallacies in both arguments.

A More Realistic Analysis

Since both sets of performance numbers discussed above are skewed to fit one approach or the other, neither is useful to the knowledgeable investor. However, NAAIM's study also covers what would happen if an Advisor missed BOTH the best and worst days in the market over the 25-year period. The results are pretty amazing.

If you missed the 10 best and 10 worst days in the market, the resulting return would have been 8.15%, as compared to the 7.06% S&P 500 Index return.

As the number of best and worst days missed is increased, the percentage return stays essentially the same. For example, if the best and worst 40 days are all missed, the annualized return would have been 8.82%, still almost 2% better than the S&P 500 Index return over the same time period. The table below shows the effect of missing various combinations of best and worst days in the market over that 25-year period. Compare these numbers to the S&P 500 Index annualized return of 7.06% over the same period of time:

If you missed just the best:	Your return fell to:
10 days	4.10%
20 days	2.15%
30 days	0.54%
40 days	-0.93%
If you missed just the worst:	Your return rose to:
10 days	11.23%
20 days	13.80%
30 days	15.83%
40 days	17.59%
If you missed best and worst:	Your return was:
10 days	8.15%
20 days	8.58%
30 days	8.61%
40 days	8.82%

(Source: NAAIM, Inc., based on an analysis performed by Hepburn Capital Management, LLC, 805 Whipple St., Suite D, Prescott, AZ 86301. This data is for illustrative purposes only and is not indicative of the actual performance of any investment. S&P 500 Index returns do not reflect reinvested dividends.)

Thus, while the average annual return percentages showed the results of the recent bear market, the basic result stayed the same: missing bad days in the market can more than compensate for missing out on the good days. Even when the general direction of the market was downward, missing out on the worst declines still proved effective in enhancing performance.

Putting The NAAIM Study In Perspective

While it may be the goal of every active money manager to be in the market only on the good days and out of the market on all of the bad days, we all know that such a perfect system doesn't exist. Over the course of writing this E-Letter through the years, I have discussed that the ultimate goal of market timing, in my opinion, is not necessarily beating the market, but to attempt to control the downside risk of being in the market.

I base my opinion upon studies such as those done by the Dalbar organization that demonstrate the negative effect of emotional trading upon investors' long-term returns. We all know how it is when we lose money on an investment. Should we stay the course, bail out and go to cash, or move to something that seems to be performing better?

The above analysis by the NAAIM organization shows the value of being out of the market on the worst days, even if you miss some or all of the best days. That's because the worst days are often far worse (in terms of percentage loss) than the best days are good.

For my company, the practical application of this information is to seek out professional active money managers who are able to miss more bad days than good days and thus provide added value over and above the management fees they charge. Quite frankly, even most professional active managers can't accomplish this, but there are some who have done so and it's our job to find the ones who can.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

The Elusive Bear Bottom

As I noted in last week's E-Letter, it is interesting to me just how giddy Wall Street and the financial media have become at the prospect of a renewed bull market with the nice rally we've seen over the last week or so. While we are nowhere near out of the woods yet, in my opinion, you wouldn't know that from listening to the talking heads on the financial shows.

As you might imagine, those who promote buy-and-hold investment strategies are also experiencing a brief reprieve from the steady drop in their products and portfolios. With a string of market gains at least partially fueled by the Fed's announcement that it will be buying about a trillion dollars worth of debt, happy days are indeed here again. Or so it would seem.

I found myself wondering just how many analysts, journalists, talking heads, etc. have predicted an end to the current bear market over the past year or so, only to be treated to additional losses.

The steady stream of bottom calls reminds me of an old auto repair commercial. It told the story of an unfortunate driver who had to take his car back many times to get a simple repair done. The first time, the mechanic declared that the car was "better than new." The next time, he said it was "much better than new." After a third shot at the same repair, the mechanic declared it to be "much, much better than new." I think you can get the picture.

The same kind of situation seems to be going on in the stock market. Every time the stock market hits new lows, we hear that it is a much, much stronger bottom than before, and should mark the point at which stocks will now begin to rise again. Of course, it seems that, just like the driver in the ad, we are eventually met with disappointment (not to mention additional losses) as the market sets yet another new low.

To illustrate how a market bottom is much, much harder to call than you might think, I have listed below predictions by major analysts and commentators calling a market bottom. For reference, the most recent dip in the S&P 500 Index took it down to 676 on March 9th and the Dow Jones Industrial Average (Dow) hit 6547 on the same date. Compare that to the stock market levels on the dates of these selected bottom callers:

In January of 2008, well-known perma-bull Abby Joseph Cohen predicts that the Dow will reverse its recent downturn and be at 14,750 by the end of the year. At this point, the Dow was not yet in an "official" bear market, and Ms. Cohen evidently thought it wouldn't get there. The Dow started 2008 at 13,265, so Ms. Cohen's prediction was for a gain of over 11%.
On March 17, 2008, the demise of investment banking and brokerage giant, Bear Stearns, led some analysts to declare a "Bear Stearns Bottom." CNBC market maven Jim Cramer declared that the bear market had been tamed, and one-third of the respondents to a CNBC poll declared that they thought the worst was behind us. The Dow was then at 11,972.
On July 31, 2008, Jim Cramer, undaunted by his previous erroneous call, announced that the Dow's July 15, 2008 low of 10,962 would be the bottom of the bear market. His reason, among others, was that negativity was so high that he thought the market had reached "capitulation." As Cramer put it, "Bye, bye bear market."
On October 9, 2008, professional stock trader Tony Oz declared that the market was near a significant bottom. The title of his article was "If We Aren't Near A Bottom, Find A Cave & Buy Guns." The Dow closed at 8579 on October 9th.
On November 20, 2008, the Dow posted a new low of 7552, which prompted some analysts to again declare that the bear market was dead. This call became even louder as the low continued to hold on into 2009. However, the Dow eventually broke through the 7552 low on February 27, 2009.
Finally, many investors thought that the New Year (accompanied by a new presidential administration) would somehow bring about a "hope" rally in the stock markets. It didn't. At the end of 2008 the Dow stood at 8776, yet it continued to fall even further until hitting 6547 on March 9th, its lowest level yet during the current bear market.

And these are just a few of the many incorrect market calls that some refer to as "false bottoms." If nothing else, the above list shows that some very smart analysts with extensive experience in the stock market can be very, very wrong when it comes to calling the market bottom. Unfortunately, many people follow the sage advice of these individuals, resulting in significant losses in their buy-and-hold investment strategies.

Just think, anyone who thought Abby Joseph Cohen was right in early 2008 witnessed a further drop of 6718 points in the Dow from the first of January 2008 when the Dow was at 13,265 through the market's most recent bottom of 6547 on March 9, 2009. That's a percentage drop of over 50%. Unfortunately, many buy-and-hold investors also saw their own investments fall by that much or more during this period of time.

The Recovery Fallacy

The importance of the above market bottom discussion becomes apparent when you consider another bogus argument often used by the buy-and-hold crowd to sell the supposed superiority of that strategy. Specifically, proponents of buy-and-hold strategies claim that one reason that you should not try to "time the market" and move your assets to cash occasionally is that you'll miss out on the early phase of the new bull market.

They then provide statistical analyses to show that most gains are concentrated in the early phase of a bull market, so if you are on the sidelines, it is highly unlikely that you will get back in the market in time to capture any of these gains. Their solution? Stay invested at all times and you'll be sure to be in the market when it eventually turns around.

It might surprise you that I agree with the statistical analyses used in this argument. After all, historical market action is what it is, so the pace of historical gains following the end of bear markets is a matter of fact. Of course, bear market rallies (aka: sucker rallies) also often shoot up quickly, only to return to lower levels later on. However, let's assume that it is correct to assume that much of the rebound in stock prices is concentrated in the early part of a new bull market.

The problem is that this argument is valid only if you are contemplating cashing out when the bear market is at or near its actual bottom. And as we have discussed in this article, it's not always easy (read: impossible) to tell exactly when or where the bottom will occur. Even so, if you get out of the market at the very bottom, then it is very likely that you'd miss out on a significant part of any subsequent market rally.

However, buy-and-hold supporters never discuss how much more you might lose if you're not, in fact, near the bottom of the market when you decide to cash out. Take the above situation where the Dow fell an additional 6718 points after Ms. Cohen made her incorrect call for a market rebound in 2008. This drop represents a 50.6% reduction in the value of the Index, and many unfortunate investors took that same downward ride.

Thus, the fallacy of this buy-and-hold fairy tale is that they don't tell you how much additional loss you may have to incur before the real market bottom and a new bull market begins. And then, there's the matter of the "mathematics of recovering losses." As I have noted in past E-Letters, a loss of 20% requires a 25% return just to get back to break-even. A 50% loss requires a 100% return and so on. Read on and you'll find out how important this is to your investment well-being.

So, how much would investors have "suffered" had they gone to cash just when Ms. Cohen said that it was safe to be in the market? Let's say that an investor moved to cash despite Ms. Cohen's advice in January of 2008. The buy-and-hold crowd would say that he was unwise, since his cash position would likely miss out on the gains concentrated in the early part of the next bull market. Oh really?

Using the Dow as a proxy for an investment portfolio, our sample investor who moved to cash in January 2008 missed out on a further 50.6% drop in value. That doesn't sound unwise to me! Plus, the mathematics of losses of 50+% dictate that a buy-and-hold investor would need a gain of over 102% just to get back to the position he was in by going to cash in January of 2008.

In other words, this investor could stand to miss out on the first 102% of a new bull market's gains before he would be worse off financially than had he not gone to cash at all. Do you think that this investor might recognize that a new bull market is under way sometime before the markets post gains of 102%? I think so, especially if he is using a professional active money manager (no guarantees, of course).

Just for fun, I thought I'd compare where the market indexes were on the dates of the incorrect market bottom calls listed above, and see how much more the market dropped after that using the March 9, 2009 low of 6547. Then, I calculated the amount of return necessary to get back to that point. The result will be an analysis of just how much return you could have missed out on in the early stages of a market rally and still not been harmed.

Date	Dow Position	Additional Loss to March '09 Low	Gain Required to Break Even
January 1, 2008	13,265	6718 (50.6%)	102.6%
March 17, 2008	11,972	5425 (45.3%)	82.9%
July 15, 2008	10,962	4415 (40.3%)	67.4%
October 9, 2008	8579	2032 (23.7%)	31.0%
November 20, 2008	7552	1005 (13.3%)	15.4%
January 1, 2009	8776	2229 (25.4%)	34.0%

The most obvious lesson learned from this analysis is that going to cash during a bear market may not be as dangerous to your portfolio as the buy-and-hold crowd says. As the above table represents, the potential to lose more money before an actual market bottom occurs very effectively debunks the idea that missing out on early market gains in a renewed bull market is a reason to stay invested. While it's true that investors who went to cash on any of the above dates may also miss out on future gains, the figures show that they can well afford to miss out on at least part of the rebound.

The next, and most important, lesson is that using a professional active manager may actually improve your chances to maximize gains in a renewed bull market. The goal of active management is not just getting out of the market at the right time, but also knowing when to get back in. While no active management strategy is perfect, the goal is to move out of the market as it goes down, and then get back in during the early stages of a new bull market. If successful, the end result would be better portfolio performance than if you had stayed in buy-and-hold investments. Of course, no one can guarantee that this goal will always be met.

A recent publication by Fidelity Investments notes that the stock market has typically bottomed out approximately half-way through a recession. Since the stock market tends to anticipate economic recovery, it usually starts rising before the recession is over. According to Fidelity, over the course of the past 14 recessions, the median return between the stock market's lowest point and the end of recessions has been 25.2%, which supports the claim that gains are concentrated during the early months of a new bull market.

Of course, Fidelity concludes that this level of return during the early part of a renewed bull market should convince you to stay invested no matter what. However, considering that only one of the entries in the above table requires a return of less than 25% to break even, I think the Fidelity study shows that it may be worth the risk to jump out of the market from time to time, even if you miss the first "false bottom."

The result is clear – going to cash during a bear market is probably going to be more harmful to your broker or mutual fund company than it might be to your portfolio.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Conclusions

The question now becomes whether the March 9th low was "THE" bottom, or just one of a series of recurring lows that may or may not mark the end of the bear market. I wish I knew the answer, but I'm one of the rare breed of analysts who will admit that I don't have a clue as to when the bear market may end. As this is written, the market is rising based on the hope that Treasury Secretary Geithner's recent disclosures will bring an end to the credit crunch. Maybe the buyers are right, but then again, maybe they're wrong.

As far as advice, if you are in a buy-and-hold portfolio and have been riding the market down since October of 2007, you might want to see if this rally has legs before jumping out of the market. While I still believe that active management is the way to go, I also don't see any reason to bail out during an upswing, even if it may be short-lived. However, I'd be ready to move to cash at the first signs of weakness.

On the other hand, if you have been on the sidelines in cash for a while and are wondering whether now is a good time to get back into the market, I recommend that you give our actively managed strategies a look before deciding what to do. All of our money managers use time-tested strategies to let them know when to get back into the market, and when to stay out. And some even have trading models that can even make money in down markets.

Whether we have or haven't hit the market bottom, I'm glad that I have most of my money being invested by professional active money managers. As a result, I don't worry about how my portfolio is positioned in the current economic and market environment. If you would like to learn more about these strategies, feel free to give one of our Investment Consultants a call at 800-348-3601, send us an e-mail at info@halbertwealth.com, or visit our website at www.halbertwealth.com.

Finally, I hope that you are enjoying these E-Letters in which I debunk some of the skewed and misleading studies produced by Wall Street firms to convince you to buy investments and hold them indefinitely. While some of the reasoning employed in these articles and marketing pieces are laughable, the losses incurred by investors swayed by these faulty arguments are not.

Hopefully, you have already taken my advice over the years as to the perils of buy-and-hold investing, and you have not incurred all of the historic losses over the past year or so. In any event, you may have friends or relatives who might benefit from this information. Therefore, feel free to forward this E-Letter to anyone you feel may benefit. It might open their eyes to some of the misleading arguments used to promote buy-and-hold strategies.

Hoping we can help you in these tough times,

Gary D. Halbert

SPECIAL ARTICLES:

The Deception Used by Fund Managers to Keep You Fully Invested in Their Funds
http://www.protectyournestegginretirement.com/investment-risk/deception-used-by-fund-managers

The Toxic Assets We Elected (excellent read)
http://www.realclearpolitics.com/articles/2009/03/political_malfeasance_and_the.html

Don't Forget About Inflation
http://www.forbes.com/2009/03/23/inflation-deflation-fed-opinions-columnists-ppi-cpi.html

A Eulogy For Buy-And-Hold Investing

Gary D. Halbert — Tue, 27 Jan 2009 21:33:53 GMT

IN THIS ISSUE:

News Flash - Buy-And-Hold Is Dead
Or Is It?
The Bottom Line
Actively Managed Programs That Work
Niemann Equity Plus - Master Of The Universe
Scotia Partners - The Best Defense Is A Good Offense

Introduction

In my November 11, 2008 E-Letter, I claimed that buy-and-hold investing might soon be a thing of the past following the catastrophic stock market losses late last year. In light of a second bear market within eight years that has (again!) decimated the retirement savings of the Baby Boom generation, it's not much of a stretch to think the investment strategy that allowed the whims of the market to lay waste to investors' portfolios would be cast aside.

However, buy-and-hold investment strategies are not going gently into that good night. While the financial media has been buzzing with stories of how buy-and-hold is dead, other stories are, like Mark Twain, claiming that the news of its death is greatly exaggerated.

Proponents of asset allocation have even trotted out 81-year-old Harry Markowitz, the creator of Modern Portfolio Theory (MPT), to defend the faith. You may recall that Markowitz won the Nobel Prize in Economic Sciences in 1990 based on his MPT work. However, you may also recall that in my May 24, 2005 E-Letter I documented that Mr. Markowitz did not utilize MPT when investing his own portfolio.

Since 1995, I have been advising my clients to include active management strategies, and especially those that can move to cash or hedged positions when the market drops like a rock. Whether you call it buy-and-hold, asset allocation, passive or index investing, MPT or whatever, the end result is that your investment strategy requires you to ride out bear markets and the potentially huge swings in the market such as we've seen recently.

Let me state this as candidly as possible: If you are trusting Modern Portfolio Theory to help you reach your investment goals, I think you will continue to be disappointed. Whether you are constructing your own portfolios on the Internet or using one of the many brokers or advisors who have no other alternatives to show you, MPT has major flaws that have long been identified, but generally dismissed by Wall Street due to factors I'll discuss later on.

I also believe that there are powerful vested interests in the financial services industry that are seeking to keep asset allocation on life support. This week, I'm going to discuss these forces and tell you why you need to reject their tired old theories. In addition, I'm going to tell you what some brokers who were previously under buy-and-hold's spell are doing, and why you should take notice.

Finally, I'm going to highlight two of the programs that I wrote about last year and let you know how they did. While past performance cannot predict future results, I'm pleased to report that the Scotia Growth S&P Plus Strategy turned in a 77%+ return in 2008. Most impressive, however, is the Niemann Equity Plus Program that has beaten every mutual fund in the universe of funds available to individual investors, based on our risk and return analysis. The details on these programs should astound you, but first, let's give buy-and-hold the burial it deserves.

Buy-And-Hold Is Dead

According to the Investment News publication, a recent survey of 750 millionaires by the Chicago-based Spectrem Group indicated that two-thirds said their advisors did a poor job of managing their investments, and are looking for alternatives. While buy-and-hold is offered under a variety of names, the idea of leaving your investment portfolio to the whims of the market is going the way of the dodo.

This death has not been swift nor has it been merciful, but it has been long expected. Experts have questioned MPT's buy-and-hold strategy almost since it was first promoted, claiming that it was lulling investors into a false sense of security based on historical relationships among asset classes that may or may not continue into the future. However, a strong bull market generally kept these shortcomings from coming to light, at least until the last eight years or so.

The poor performance of buy-and-hold portfolios during the last two bear markets has been a major factor in calling the strategy into question. However, another important factor is that the advantage of low correlation among certain asset classes so highly touted by proponents of asset allocation can be significantly reduced in severe bear markets.

Correlation is a term used to describe the relationship among various types of investments. If different classes of stocks go up in unison, they are considered to be positively correlated. If one goes up when the other goes down, they are negatively correlated. The goal of MPT and asset allocation is to diversify a portfolio among asset classes that have low or no correlation. In theory, this would give an investor a measure of risk management, since not all investments should go up and down together.

However, recent bear markets have shown that correlation tends to increase during declining markets. Thus, the end result has been that correlation is low during bull markets when investors don't need it, but begins to disappear in bear markets when it would be useful.

If MPT buy-and-hold programs had such obvious faults, why did it take so long to die? I think there are a number of reasons for this, including the following:

The financial services industry has invested millions of dollars in research, software, websites, training and marketing pieces that depend upon MPT and asset allocation. To give up on asset allocation would mean scrapping all of this expensive effort, and I don't think that's going to happen.
Sadly, MPT asset allocation programs are all that some investment professionals know how to sell. The concept makes sense to them, has won a Nobel Prize, provides diversification and the software noted above makes it relatively easy to hand a professional looking proposal to a prospective client. What's not to like (other than the performance, of course)?
Some brokers may be open to active strategies, but may be restricted by their broker/dealer organizations from selling such programs unless they are in the form of an approved mutual fund. Since many broker/dealers have been convinced that market timing doesn't work, active managers sometimes can't even get in the door.
This may come as a surprise, but the move to actively managed strategies has also been hampered by the fact that most actively managed programs don't work. We have reviewed literally hundreds of actively managed investment programs over the years, and only a select few have ever been recommended to our clients. I believe that with effective due diligence, appropriate active managers can be found, but those who fail reinforce the idea that market timing and other active management strategies don't work.

Finally, advisors touting MPT strategies are trying to keep clients by claiming that the market is now set up for another bull phase, and that pulling out (or staying out) of the market will make you miss the gains. Actually, this may be true, but it is important to remember that major market indexes had just risen back to their April 2000 levels when WHAM, they were hit again by the subprime bear market. How many rides on that roller coaster do you want to take?

I dare say that many of those investors holding fancy MPT proposals with Monte Carlo simulations showing they have a high percentage chance of meeting their investment goals are now wondering, "How do I get there from here?" How indeed.

Face it, MPT in whatever shape or form has failed many of the Baby Boom generation who needed it to work for them the most. Many are now approaching retirement with decimated portfolios, and are tired of hearing Wall Street's same old buy-and-hold mantra. If buy-and-hold isn't dead, it should be.

Or Is It?

As I noted above, I have read a number of articles recently claiming that buy-and-hold is not dead. Some of these articles use what can best be called "Clintonian" definitions of buy-and-hold. Some have tried to redefine buy-and-hold by calling it "diversification." Others claim that MPT and asset allocation are not really buy-and-hold strategies, since portfolios are periodically rebalanced. Another article even said that one critic of buy-and-hold was really referring to market timing. Now that's a long shot!

I find it very interesting that those who defend MPT are now trying to recharacterize it as the ultimate in diversification. Perhaps that's because diversification is a cornerstone of investing, and everyone pretty much agrees that it's important (even me.) So, if they can equate MPT and diversification, criticizing MPT would be like speaking against baseball, Mom and apple pie.

However, MPT is not the only way to achieve diversification. In fact, putting all of your money into an asset allocation program only provides diversification among asset classes; it does not diversify your portfolio among different investment strategies. Plus, some of the benefits of asset allocation, such as non-correlation, break down in bear markets.

And then there are the tired old arguments about how most of the market's upside is concentrated into just a few days, and that missing those days would negatively affect your return. I just recently received an e-mail from a mutual fund using this old argument as a reason for shareholders to keep their money in their fund. Sorry, but as I have pointed out numerous times in this E-Letter, this is a bogus argument because it assumes you are out of the market all of the best days, but still in the market on the worst days.

An article written in October of 2008 took on those who said buy-and-hold was dead. It quoted Wharton professor and author, Jeremy Siegel, who said "That's about the craziest thing I've ever heard!" He comes to this conclusion, no doubt, from his analysis of 200 years' worth of US stock market returns that shows staying invested in the stock market over a long period is the most effective strategy for creation of wealth.

The problem is that, from an academic standpoint, the long-haul is entirely feasible. In the real world, however, the long-haul may be far too long for investors to wait for their retirement goals to be met. The article gives additional reasons that buy-and-hold is not dead, including:

You can't time the market. Actually, I'll agree with this one in that most investors cannot time the market on their own. That's why I only recommend investment programs where professionals call the shots, and even they aren't perfect.
Warren Buffett is buying. Wow, what an investment recommendation. You should buy an MPT strategy because Mr. Buffett is now buying. Note the date on the article, and then look at what happened in November of 2008. Mr. Buffett lost money. Plus, Mr. Buffett does not buy MPT programs, but rather individual companies that he feels may have value in the long run. Thus, this argument is meaningless to the average investor.
Bargains abound. In the business world, something is a bargain only if you know its true value. Unfortunately, some market analysts equate low price to equity or some other measure as being a bargain. However, just because a stock's or mutual fund's value is lower than it was in the past does not alone mean that it's a bargain. Again, note that the article was written in late October of 2008 and remember what happened in November. I guess those bargains got even better.

The Bottom Line

The bottom line is that it's not likely that buy-and-hold strategies will cease to exist. There are just too many Wall Street entities that have a vested interest in seeing them continue. At the same time, however, I think that the siren song of buy-and-hold is going to be less and less attractive to investors who have seen two bear markets decimate their portfolios over just the last eight years.

The proof is that investors are increasingly moving away from simplistic buy-and-hold strategies modeled on Modern Portfolio Theory. Those 78 million Baby Boomers we always talk about have now experienced two major bear markets just as they are entering the time they can start thinking about retirement. Just like the famous quote, they are now more concerned with the return of their money than the return on their money.

In addition, there are now many stock brokers and broker/dealers who are seeking out alternatives to buy-and-hold strategies in order to better serve their clients. In talking with the active money managers we recommend, they state that the single largest source of new interest in their programs is coming from the brokerage community that once shunned their services.

Actively Managed Strategies That Work

If buy-and-hold strategies do meet their demise, the past decade will likely be credited with being a nail in their coffin. Despite high returns during the tech bubble, and during the 2003 - 2007 market rally, major stock market indexes (and many buy-and-hold investors) are roughly where they were ten years ago. Financial journalists call it a "lost decade," and the reality of the situation is that many investors have not been able to meet their investment goals.

In the remainder of this E-Letter, I'm going to focus on two money managers we recommend, and how they have performed over time. One investment, the Niemann Capital Management Equity Plus Program, will be evaluated over the past 10 years. Another, the Scotia Partners Growth S&P Plus Strategy will be evaluated over a shorter period of time, since it does not yet have a 10-year track record.

I wrote about both of these programs in 2008, so I feel an update is in order. Plus, these two programs offer different perspectives of actively managed programs - one moves slowly in and out of the market, while the other trades frequently using 2X leverage. Together, they allow you to have a glimpse into the world of active investment management and evaluate these strategies for your own portfolio.

From an editorial standpoint, I am sometimes asked why I limit my comments to just one or two programs in the E-Letter. The answer lies not in relative performance, but in the amount of disclosures required for each program. Regulatory rules require that we provide certain important disclosures for each program we feature in the E-Letter. I agree that these disclosures are necessary and important, so to keep the E-Letter to a manageable size, we limit the number of programs we feature in any given issue.

However, we are more than happy to provide performance information for every program we currently recommend. The information can be found on our website, along with detailed descriptions of each strategy. Just click on the following link to see performance information on all of the various actively managed investments we recommend within our AdvisorLink® Program.

Niemann's Equity Plus Program - Master of the Universe

When reading articles in financial publications about a "lost decade," I thought it would be interesting to evaluate some of our programs with long-term track records and compare them to the universe of mutual funds. I have seen some comparisons of investments to the top 100 mutual funds by size, but I thought it would be interesting to see how our Advisors fared compared to ALL mutual funds.

I had my staff run some mutual fund searches on our Morningstar Principia software using performance data as of 12/31/2008 with the Niemann Equity Plus Program as baseline. First, however, I eliminated mutual funds with super-high minimum investments available only to institutional investors. I also restricted the search to Morningstar's "Distinct Portfolios," which eliminates multiple share classes for the same fund. We then searched for mutual funds with 10-year average annualized returns greater than Equity Plus' 10.56%, net of all fees and expenses. According to Morningstar, there were 92 such funds in existence out of a total universe of more than 7,700 mutual fund "Distinct Portfolios."

However, return alone is not all we're looking for. Risk management is a big part of what Niemann offers, since it will move to cash or hedged positions during down markets. As you know, we use "peak-to-valley drawdown" as one way to determine an investment's overall risk. However, Morningstar does not provide drawdown information on mutual funds. Therefore, I used the Equity Plus 2008 performance of -11.4% as a proxy for drawdown in our Principia search.

Using the additional 2008 performance criterion, we found that there was only one non-institutional fund of the 92 noted above that could boast a 10-year annualized return greater than Equity Plus' 10.56%, while also keeping losses to less than -11.4% in 2008. The one fund that beat Niemann's Equity Plus program using the Morningstar filter was the MFS Emerging Market Debt Fund (a bond fund). Thus, Niemann's Equity Plus Program showed that it beat all equity mutual funds in the Morningstar database for the last 10 years, using our search criteria and restrictions. Past results do not guarantee future performance.

However, we weren't done yet. Recall that we use drawdown as a risk-analysis measure in all of our programs. Now that we had narrowed down the universe of mutual funds to a single candidate, we used another of our mutual fund analysis tools to obtain the maximum drawdown of the MFS Emerging Market Debt Fund. We found that this fund has a maximum drawdown of over 33%, while the Niemann Equity Plus Program has limited its worst drawdown to -18.06%.

Thus, when considering 10-year annualized return, 2008 calendar-year performance and maximum drawdown, the Niemann Equity Plus Program beat the entire universe of mutual funds in the Morningstar database. Now that's impressive long-term performance. Past performance, however, is not a guarantee of future results.

While other time periods will likely render different results, I believe the 10-year time window is important for the Niemann program since it encompasses two different cyclical bear markets. While no one knows what the future holds, the ability to deliver a double-digit annualized return over 10 years, coupled with holding drawdowns to -18.06% or less is just the kind of performance we have come to expect from money manager Don Niemann. As always, there are no guarantees for the future.

As noted above, Niemann has been able to produce these returns by utilizing its ability to move to cash or hedge long positions in downward markets, yet the critics still say that "market timing" doesn't work. Well, yes it does if you can find a successful manager like Niemann.

Now it's your turn. Compare Niemann's 10-year annualized return of 10.56% and 2008 performance of -11.4% to your current mutual funds or investment portfolio. To help you with your mutual fund investments, click on the following link to access the Business Week Mutual Fund Scoreboard website. Just enter your fund name or ticker symbol in the box and hit enter. You will then be shown detailed performance information on your fund, including a 10-year return number. Then, compare it to the Niemann Equity Plus performance. You really should do this! Here's the link:

http://bwnt.businessweek.com/mutual_fund

For more information on the Niemann Equity Plus Program and performance, please click on the following link to access our Niemann Equity Plus Advisor Profile. If you would like for us to send you an Investor Kit on this program that contains the Advisor Profile plus documents necessary to establish an account, just click on the link for our Niemann online request form, or give one of our Investment Consultants a call at 800-348-3601.

Be sure to read all of the Important Notes and disclosures that follow my signature at the end of this E-Letter in regard to the above performance statistics. Also, keep in mind that the universe of mutual funds on the Morningstar database consists of a wide variety of different types of funds and strategies, many of which are different from those utilized by Niemann.

Scotia Growth S&P Plus - The Best Defense Is A Good Offense

As I mentioned earlier, Niemann's approach to the market is more of a slow and steady strategy, which I feel has been a big key to its success over time. However, this type of investment strategy is also subject to losses during the early part of a bear market, since it gradually moves to cash or hedged positions rather than moving to neutral all at once.

In contrast, there are actively managed mutual fund programs that seek to make money in both up and down markets using specialized funds that "short" the market. In addition, some investors like to up the ante by seeking out programs that not only go long and short, but do so on a leveraged basis. I characterize this type of program as being one where the best defense is a good offense.

One of the best leveraged, long/short mutual fund programs we have ever come across is the Scotia Growth S&P Plus Strategy. We first introduced this program to our E-Letter audience in June of 2008, and it has received a great deal of attention. However, when you look at Scotia's performance over the entire year, it's nothing short of amazing. Past performance is not necessarily indicative of future results.

Scotia's owner and portfolio manager, Cliff Montgomery, has developed a proprietary strategy that was able to navigate the difficult market we experienced in 2008. While the S&P 500 Index lost 37% during 2008 and the Nasdaq Composite dropped over 40%, the Growth S&P Plus Strategy gained over 77%, net of all fees and expenses. While Scotia's past accomplishments cannot guarantee favorable future results, I do think the way Cliff approaches the market merits your consideration.

And that's not all. Though we are early in the year, our Growth S&P Plus test account has already posted a gain of over 13% as of the close of business on January 23rd, while the S&P 500 Index has lost 7.89% (excluding dividends) and the Nasdaq Composite has fallen over 6% during the month. Of course, there's no guarantee that Scotia will end the month with a double-digit gain, but it does show that the Growth S&P Plus Strategy has continued to exhibit the potential to navigate these volatile markets.

As noted above, Scotia trades in and out of the market frequently, and typically is only in the market for a few days at time. And again, the critics say market timing doesn't work. My clients and I know it works, especially if you can find a money manager like Scotia.

It is also important to note that the extreme market volatility in late 2008 caused Scotia to post a worst drawdown of -29.37%. While this was in line with our expectations for the program, it further emphasizes that this program should only represent a small percentage of your overall portfolio, and is generally best suited for aggressive investors.

You can access additional performance information and a full description of Scotia's investment strategy by clicking on the following link to the Scotia S&P Plus Advisor Profile. Or, you can learn more about Scotia's money management strategies by viewing a recording of our recent hour-long online webinar found at the following Internet address:

http://www.halbertwealth.com/webinar/sco20090114/scotiawebinar.php

And again, be sure to read all of the Important Notes and disclosures that follow my signature at the end of this E-Letter. If you would like to obtain an Investor Kit complete with the documents necessary to make an investment in the Scotia Growth S&P Plus Strategy, please click on this link to access the Scotia Online Request Form, or call one of our Investment Consultants at 800-348-3601.

Conclusions

The weaknesses of asset allocation have long been known by those of us who have studied it closely and followed the markets. Today, it is encouraging to see that more and more investors and financial professionals are picking up on buy-and-hold's weaknesses. However, I believe the financial services industry has far too much invested in software, sales material and training to allow MPT, asset allocation and other versions of buy-and-hold to slip into the obscurity they so richly deserve.

Even so, many in the brokerage community are reaching out to active money managers in order to have an alternative that won't likely follow the market indexes on their roller coaster ride. This is not conjecture, but the results of conversations with our recommended money managers who are seeing a huge increase in demand for their services from former bastions of buy-and-hold strategies.

In a recent E-Letter, I touched upon this issue and asked what some brokers know that you may not know. The answer to that question is that they know asset allocation doesn't always work. As a result, many brokerage firms are now seeking out alternatives, often led by their brokers whose clients are demanding a new approach to the market.

The fact that some brokers are now looking into actively managed programs might be an indication that it's time for you to consider these strategies for your own portfolio. We can help. We have a 10-year head start on the due diligence and analysis required to select active money managers for our clients. If you are interested in these strategies, I encourage you to give us a call at 800-348-3601, send us an e-mail at info@halbertwealth.com, or visit our website at www.halbertwealth.com.

Wishing you profits,

Gary D. Halbert

P.S. - We often receive questions from prospective clients about how Halbert Wealth Management fits into the equation. Quite simply, we are responsible for the search, evaluation and marketing of third party money managers on behalf of our clients. In the above article, I said that most active managers are not successful in their efforts, so it is our job to separate the wheat from the chaff and offer our clients only those Advisors who we believe have the highest probability of continued success. In addition, I have my own money with every Advisor we recommend, so we can monitor the daily performance and trading activity to determine if they continue to meet our expectations.

Professional active managers typically charge annual management fees of 2-2½%, usually billed quarterly. Rather than charging an investment management fee over and above the Advisor's fee structure for the services we provide as some do, HWM negotiates directly with the Advisor and is paid a percentage of its money management fee. So, by using HWM, clients generally pay no more in management fees than if they were to contact the Advisor directly, plus they get the benefit of our ongoing services.

Note that we always present performance information net of all fees and expenses, so you are better able to evaluate whether an Advisor is adding value over and above the fees charged. For answers to more questions about our AdvisorLink® Program, please click on the following link to review our Frequently Asked Questions publication. GDH

IMPORTANT NOTES: Halbert Wealth Management, Inc. (HWM), Niemann Capital Management, (NCM) Scotia Partners, Ltd. (SPL) and Purcell Advisory Services (PAS) are Investment Advisors registered with the SEC and/or their respective states. Some Advisors are not available in all states, and this report does not constitute a solicitation to residents of such states. Information in this report is taken from sources believed reliable but its accuracy cannot be guaranteed. Any opinions stated are intended as general observations, not specific or personal investment advice. Please consult a competent professional and the appropriate disclosure documents before making any investment decisions. Investments mentioned involve risk, and not all investments mentioned herein are appropriate for all investors. HWM receives compensation from NCM and PAS in exchange for introducing client accounts. For more information on HWM, NCM, SPL or PAS please consult their respective Form ADV Part II and Niemann's Annual Disclosure Presentation, 2007, available at no charge upon request. Any offer or solicitation can only be made by way of the Form ADV Part II. Officers, employees, and affiliates of HWM may have investments managed by the Advisors discussed herein or others.

As benchmarks for comparison, the Standard & Poor's 500 Stock Index (which includes dividends) and the NASDAQ Composite Index represent unmanaged, passive buy-and-hold approaches. The volatility and investment characteristics of the S&P 500 and the NASDAQ Composite Index may differ materially (more or less) from that of the Advisors, and these Indexes cannot be invested in directly. The performance of the S&P 500 Stock Index and the NASDAQ Composite is not meant to imply that investors should consider an investment in these trading programs as comparable to an investment in the "blue chip" stocks that comprise the S&P 500 Stock Index or the stocks listed on The NASDAQ Stock Market that comprise the NASDAQ Composite.

Comparisons to the universe of mutual funds in Morningstar is not meant to imply that an investment in Niemann is comparable to each or any of these different mutual funds, most of which have different strategies and investments than those used by Niemann's Equity Plus program. The comparison is made for informational purposes only.

Historical performance data for Niemann is provided by the Advisor in compliance with the Global Investment Performance Standards (GIPS). Performance figures presented include all actual, fee-paying fully discretionary accounts in a composite. See the Annual Disclosure Presentation, 2007 for more details. Historical performance for Scotia represents actual accounts in a program named Scotia Partners Growth S&P Plus custodied at Rydex Series Trust, and verified by Theta Investment Research, LLC. Since all accounts in the program are managed similarly, the results shown are representative of the majority of participants in these programs. The signals are generated by the use of a proprietary model developed by Scotia Partners, which is then traded by Purcell Advisory Services. Statistics for "Worst Drawdown" are calculated as of month-end. Drawdowns within a month may have been greater. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. Any investment in a mutual fund carries the risk of loss. Mutual funds carry their own expenses which are outlined in the fund's prospectus. An account with any Advisor is not a bank account and is not guaranteed by FDIC or any other governmental agency.

In addition, you should be aware that (i) the trading programs are speculative and involve risk; (ii) the trading programs' performance may be volatile; (iii) an investor could lose all or a substantial amount of his or her investment in the programs; (iv) the use of a single advisor could mean lack of diversification and consequently higher risk; and (v) the trading programs' fees and expenses (if any) will reduce an investor's trading profits, or increase any trading losses.

Returns illustrated are net of actual management fees, custodial fees, underlying mutual fund management fees, and other fund expenses such as 12b-1 fees. Returns for Scotia are deducted in full quarterly, and not accrued month-by-month. They do not include the effect of annual IRA fees or mutual fund sales charges, if applicable. All dividends and capital gains have been reinvested. Some Funds also charge short-term redemption fees and excess transaction fees (Special Fees), which are billed to shareholders at the time of the event causing the fee. Money market funds are not bank accounts, do not carry deposit insurance, and do involve risk of loss. The results shown are for a limited time period and may not be representative of the results that would be achieved over a full market cycle or in different economic and market environments.

In selecting Funds in which to invest using various analytical tools, Niemann considers the nature and size of the fees charged by the Funds. Niemann's objective is to select a Fund only if Niemann believes the Fund's performance, after all fees, will meet Niemann's performance standards. Consequently, Niemann may select Funds, which have higher or lower fees than other similar Funds, and which charge Special Fees. When deciding whether to liquidate a Fund position, Niemann will take into consideration any Special fees which may be charged. Niemann may decide to sell a Fund position even though it will result in the client being required to pay Special Fees.

"Buy-And-Hold" Bites The Dust - Now What?

Gary D. Halbert — Tue, 11 Nov 2008 20:54:52 GMT

IN THIS ISSUE:

Economic Overview
The Conventional Wisdom Was Wrong
The Shortcomings Of Index Investing
Are Low Fees The Key To Investment Success?
Risk Management Is Crucial

Introduction

In the newsletter business, it's rewarding to see market action reinforce the advice you have been giving in your publication. Ever since I started writing this E-Letter, I have warned of the perils of passive "buy-and-hold" investing in general, and "index investing" in particular. While adherents to these strategies like to trot out long-term charts and graphs supporting their case, I have always warned that passive investing can result in major losses at just the wrong time from the investor's perspective.

However, I have to admit that being right rings hollow in the aftermath of the carnage we have seen in the US stock market since its peak in October of 2007, and especially over the last month or so. It is estimated that over $8 trillion of investor value has been lost in the US equity markets since then, and no one knows how long the bear market may continue. Many Baby Boomers are now realizing that their passive investments have incurred huge losses at a time when capital preservation is far more important to them.

How did we ever get to the point where buy-and-hold became investment gospel? It's as if investors were convinced that it's OK to stay on the track and get hit by an oncoming bear-market train, since a bull-market train going the other direction would soon bring them back to where they were before, and eventually higher over the long term. Yet it has always made sense to me to step off the tracks (go to cash or hedge) to avoid oncoming trains altogether.

Many investors are now feeling as if their portfolios have been hit by a train and it's uncertain if and when one going the other direction (bull market) may come along. Since many of the highest investment balances were held by Baby Boomers nearing retirement, it's an even worse train wreck because they lack the lengthy time horizon that may be necessary for the market to regain recent large losses.

This week, I'm going to revisit the issue of passive investing, and especially index investing. I'll discuss why I think they became so popular, and why I continue to recommend actively managed programs that have the potential to reduce risk during market meltdowns. First, however, I'm going to give you an overview of the latest economic forecasts I am seeing. Let me warn you, the news is not good.

Economic Picture Getting Darker

Every economic forecasting group that I read has downgraded its predictions over the last few weeks in light of the plunge in the global equity markets in October. As noted last week, 3Q GDP was estimated at -0.3% (annual rate), and that estimate is likely to be downgraded later this month. Most forecasters are now predicting that 4Q GDP will be down at least 1-2%.

While forecasts earlier in the year suggested that the economy would rebound to positive growth in the second half of next year, such forecasts have all but disappeared. Now, there is a general consensus that the US economy will be negative for at least several more quarters to come. Specifically, that this will be the worst recession since the Great Depression. All of the sources I trust believe that it will take several years to work out of this financial crisis.

It remains to be seen if the stock markets have seen the bottom. In any event, most forecasters I respect believe that once the stock markets have bottomed, they will move into a broad, multi-year trading range. No one I respect is predicting a "V" bottom or a quick return to a bull market.

This is precisely why we need to revisit the problems associated with passive, buy-and-hold investment strategies. These strategies got killed over the last year, especially the last month or so, and are not designed to do well in a broad trading range, which could persist for the next several years. Fortunately, there are alternatives.

The Conventional Wisdom Was Wrong

The basics of passive investing are relatively simple. You put your money into a diversified portfolio, usually based on "asset allocation" strategies, and leave it there during good and bad market cycles. Armed with reams of historical data, the conventional wisdom was that including multiple asset classes in a portfolio would protect investors during all types of market conditions. While changes are made periodically to rebalance allocations or adjust for advancing age, the portfolio is largely a "set it and forget it" instrument, so the theory goes.

The historical data also suggested that most hands-on mutual fund managers were not adding value above and beyond what the broad market indexes could provide, so mutual funds tied to various market indexes were developed to offer a low-cost alternative to actively managed mutual funds. However, back in December 2005, I wrote an E-Letter about the potential drawbacks of passive index investing:

"'Index investing' is growing like wildfire among investors today…And it's no wonder why. The allure of a simple, low-cost investment strategy tied to market indices that have been shown to grow over long periods of time sounds irresistible…The main problem is that Wall Street's ad machine is only telling half of the story. They often use historical time periods that are far longer than what most people have to invest, and they also fail to disclose how much an investor might lose in a bear market or major correction."

To illustrate, during the 2000 - 2002 bear market, the S&P 500 Index lost over 44% of its value, and the Nasdaq Composite fared even worse, losing over 75%! Unfortunately, however, neither investors nor Wall Street learned a lesson about how fickle the market can be, and at the worst possible times.

Thus, even with those huge 2000 - 2002 market losses fresh on their minds, investors still flocked to index investing as if there would never be another bear market or correction. I think there were several reasons for this, including:

Having just been through a major bear market caused some of them to think that the worst was over, and that the market would now over-perform in order to get back to historical long-term averages. Unfortunately, they failed to study history, which shows that, since 1952, bear markets have occurred an average of once every five or so years, so we were actually due for a bear market.

The market's action during 2003 through 2006 seemed to confirm index investors' convictions that happy days were, indeed, here again. The S&P 500 Index gained 28.68%, 10.88%, 4.91% and 15.79% in 2003 through 2006, respectively. This annualized return of 14.74% over those four years compared favorably to the 10% to 12% touted as the long-term average stock market return, so "reversion to the mean" became the watchword of the day.
Though 2007 saw the first warnings of the subprime crisis, the Dow and S&P 500 market indexes still managed to hit all-time record highs in October of 2007. Investors were convinced that this, too, shall pass and stayed invested.
The bear market of 2000 - 2002 also claimed another victim, and that was the average mutual fund manager. Unfortunately, all active management strategies seemed to be lumped into the same category by the financial media and Wall Street firms. No difference was made between an active mutual fund manager and specialized strategies such as market timing, sector rotation, long/short or a variety of other active management techniques. Wall Street even promoted flawed statistics to support their point, as I noted in my June 21, 2005 E-Letter.
Investors were subjected to so many different investment opinions and theories that many of them just didn't know which way to turn. They were paralyzed by all of the conflicting information out there. I call it "information overload." Thus, they chose the option that seemed to be the simplest, plus it was supported by Nobel Prize Winning theories. How could they possibly go wrong?
Since most index investing used asset allocation strategies based on the work of Nobel Laureate Dr. Harry Markowitz, many investors felt that using multiple asset classes including bonds and international investments would protect them in a bear market. Another big plus was that the financial services industry found Markowitz's theories relatively easy to incorporate into computerized portfolio modeling programs, resulting in highly effective proposal presentations.

Unfortunately, we have learned that the subprime crisis spared no asset class as it ravaged global stock and bond markets. The traditional correlation among asset classes broke down, which is often the case in severe bear markets.
Finally, fees became one of the major selling points of passive index investing, especially among the financial media (more about this later on). I now find it interesting that some members of this same financial media are now declaring that "buy-and-hold is dead." How convenient to be able to change your story to fit the times.

Over the course of my 30-plus-year career in the investment business, I have found that most investors' goals are very simple. They want to put their money into investments that are: 1) reasonably safe; 2) have the potential to earn a reasonable rate of return; and 3) will not suffer large losses along the way. While these goals are relatively simple, how you invest to achieve them is not a simple process.

However, the investment industry is always willing to create products to fill investor demands, some of which are based on the conventional wisdom of the day. For those wanting a simple solution, the financial services industry created a number of different "one-size-fits-all" investment products, with index investing being one of the most popular.

They even created "target-retirement" and "lifestyle" funds that incorporated asset allocation so that investors need only know the year they wanted to retire in order to select the "right" investment. I guess you could call this the ultimate in conventional wisdom portfolios.

Chinks In The Index Investing Armor

Before I discuss some of the arguments against index investing, let me say that I am a big fan of both index mutual funds and ETFs. I feel that the ability to "buy the index" has changed the investing landscape in a number of positive ways, though I don't always agree with proponents of buying and holding index funds. Several of the Advisors whose programs I recommend use index mutual funds to facilitate their active management strategies, so I am a big fan.

That being said, I have often advised against combining index funds and asset allocation programs as the sole investment strategy in an investor's portfolio. The reason for this is within the passively managed nature of the index fund. Index funds, by their very nature, will not exit positions and move to cash during bear markets or downward corrections. An index fund will follow its underlying index, even if it dives right into the dirt (or gets hit by a train).

Index fund proponents say that this is no problem - just diversify among a variety of index funds covering various stock and bond asset classes, and everything will be OK in the long run. I can best illustrate this strategy using an investment offer I once received from a financial Advisor back in 2005. While the information is somewhat dated, the shortcomings are the same today as they were then.

The Advisor recommended only "index" funds allocated among a variety of selected funds based on traditional asset allocation principles. The Advisor went on to illustrate the performance of a set of index funds over a 25-year period of time from 1979 through 2004. The performance was excellent, especially as compared to fixed rate investments like CDs and fixed annuities.

The Advisor's implication was clear: the market indexes will do well over long periods of time, so all you need to do is invest in his special blend of index funds and you'll be just fine. Since the time period included returns during the bear market of 2000 - 2002, it would seem that his argument would have been fair, right?

Sorry, but I'm still not convinced. Here are just a few of the fallacies of this Advisor's argument, in my opinion:

It assumed the next 25 years will be the same as the last 25 years. Let's see, did 78 million Baby Boomers retire in the last 25 years? Were we afraid of terrorist attacks on our major financial centers prior to 2001? Will Medicare and Social Security costs be the same percentage of government spending in the next 25 years as they were in the last 25 years? And, of course, had we experienced a housing and subprime mortgage crisis resulting in a global credit crunch, massive Wall Street bailouts and a stock market meltdown? (Hint: "NO" is the appropriate answer to all of these questions.)
The 25-year time period cited as an example doesn't necessarily correspond to any individual investor's actual time frame. What if an investor's time frame had them needing their money for retirement in September of 2002 at the bottom of the bear market? I doubt index investing would have met with much praise at that point in time. Fast forwarding to the present, what if a retiree needs money NOW?
It doesn't hurt your argument when you choose a 25-year period that just happens to include the longest bull market in history, along with a stock market bubble in the go-go 90s. Let's roll the clock on back a bit. What if we chose a period of time from 1966 through 1982? Over this 16-year span of time, the stock market went nowhere.

Even Vanguard's John Bogle, the father of index investing, has pointed out that "each and every comparison we see is period-dependent." This means that the time period you choose can greatly affect the outcome of your analysis. I have written about this before, but it is especially important in regard to index investing.
Finally, historical analysis of stock market returns does show that stocks increase in value over long periods of time. Yet, there are many shorter periods in which stocks do poorly, or even lose money. Investors are often confronted with glossy charts and graphs illustrating stock market performance data over 25 years, 50 years and even 75 years. Yet, few people trying to make investment decisions today have a 50 or 75-year time horizon!

Let's look at the timelines. The youngest of the Baby Boomers are now nearing age 45, at which time they will have 20 years until retirement at 65. A 50-year-old has only 15 years, and at 55, you're looking at only a decade to accumulate wealth. Are there lots of 10-year periods during which the major market indexes did poorly? You bet there are, and we're in one of them right now!

So, you have to ask yourself, what historical 10-year period will the next 10 years be like? Don't know? Neither do I, and neither do economists, financial planners, mutual fund managers, or anyone else.

Because of these shortcomings, I continue to believe active management strategies with a historical track record of having provided reasonable returns with reduced risks are more appropriate for many investors than buy-and-hold index investing. Some of the financial media are now agreeing with me, but where were they in 1995 when I first began to recommend these active management strategies to my clients?

Do Low Fees = Good Investments?

One facet of investing where the index proponents have been successful is that of fees. Many investors will automatically reject any investment with expenses greater than those of an index fund. They have bought into the idea that active management doesn't pay, so they are not willing to pay higher fees for the expertise of an active manager. They use fees as a simple way to eliminate alternatives from their investment radar screen.

Unfortunately, this simple criterion can eliminate many qualified alternatives. After all, do you drive the least expensive car? Why not? Don't all cars offer you a mode of transportation? Do you shop for the least expensive doctor, lawyer or dentist? Those who do many times find out exactly why they charge fees below the going rates.

The important thing is not always what fees are being charged, but how the investment program has performed net of all fees and expenses. Many people will pay more for a product or service if they can see, hear, or feel added value, and investments should be no different.

Now, however, the focus on low fees is coming back to haunt many investors. For example, the Vanguard S&P 500 mutual fund has one of the lowest fees around, at only 0.15%, but according to the Vanguard website, this fund had a year-to-date loss of 32.87% as of the end of October.

At the same time, the Niemann Equity Plus Program that I have featured in this E-Letter had a year-to-date loss of only 10.85%, net of Niemann's 2.3% annual fee. Would you pay an additional 2.15% fee to shave over 22 percentage points off of your losses right now? I'll bet you would! (Past performance is not necessarily indicative of future results. Niemann's October 2008 performance is an estimate and may vary. Be sure to see Important Notes at the end of this E-Letter.)

It gets even better - since the inception of the Niemann Equity Plus program in November of 1996, it has produced an annualized return of 12.25%, again net of all fees. Over the same period of time, the Vanguard S&P 500 Index mutual fund has produced an annualized gain of only 4.32%, also net of fees. Again, the lower fee alternative produced an inferior return to the higher-fee actively managed program. Of course, there are no guarantees it will always do so.

Obviously, we have other programs that have higher and lower returns than the Equity Plus Program, but this comparison does show that relying on fees alone can be detrimental to your investment returns, even in comparisons spanning over a decade. Of course, there are no guarantees.

Finally, there are some financial services companies that extol the virtues of low fees to "retail" investors, while at the same time offering hedge funds to their wealthy clients. As you probably already know, hedge funds carry some of the highest fees of any investment vehicle.

So, if high fees are such a bane on the investment industry, then why have wealthy individuals flocked to hedge funds as never before? The answer is that there are some (albeit few) money managers who are able to provide value over and above their fees in the form of consistent risk-managed returns. This is the type of money manager we look for to recommend in our AdvisorLink® Program.

What About Risk Management?

As I noted above, many investors seek investments that are: 1) reasonably safe; 2) have the potential to earn a reasonable rate of growth; and 3) will not suffer large losses along the way. My biggest problem with index investing is that it can fail all three of these tests, and the recent market meltdown is a good case in point.

On the first issue of safety, you could say that index investing passes this test in one sense because there is little likelihood of losing money through embezzlement or fraud. However, safety can mean more than protection from fraud. One example is in regard to a type of mutual fund that has been getting a lot of attention lately. There are some new index funds that allow investors to "short" the market, or participate in a fund that generates double the movement of the underlying market through 2-to-1 leverage.

As the stock market has been hit by loss after loss, these funds are looking very attractive. Investors who have moved to these funds brag of outsized performance, and will continue to do so as the markets continue to go down. However, when the markets do turn around, the leverage and short position will begin to work against the investor. And since much of the gain is concentrated in the early days of a new bull market, losses could be big and quick.

Thus, while the ability to short the market and use leverage offer a lot of flexibility, they can also offer a lot of additional risk. Unless managed by a competent professional using a disciplined strategy, I consider participation in leveraged and short funds little more than gambling. You might win big, but you can lose just as big, and may never be able to recover your losses.

As for the second test of the potential to earn a reasonable rate of growth, index investing proponents would say that index funds pass this test with flying colors, considering the historical long-term return of the stock market. However, as I have shown in this article, stock market returns are very period-dependent. The shorter your investment time horizon, the better the chance that index funds will provide results below their long-term average. In fact, there have been examples in the past where the stock market has gone virtually nowhere for 10, 15 or even 20 years.

On the final qualification that the investment program not suffer large losses along the way, index investing fails miserably. Since there is no active management of the underlying portfolio, the investor is destined to rise and fall with the markets. During the past bear market of 2000 - 2002, the major market indices had some tremendous drawdowns in value, with the S&P 500 losing over 44% of its value, and the Nasdaq Composite Index losing over 75%!

In the current bear market, drawdowns have not yet accumulated to the low points experienced during 2000 - 2002, but they are very close. As this is written, the S&P 500 Index is approximately 40% below its October 2007 peak. The last bear market drawdown bottomed out in September of 2002, so that's two 40% drawdowns in six years. No wonder many retirees are saying they're "done" with the stock market.

My staff and I have personally talked to a number of investors who needed their money for retirement during this time, only to find that a large part of their investments' values had vanished into thin air. Even if I were sold on the value of index investing over the long haul, I would still not recommend it to my clients simply because of this last shortcoming.

Conclusions

I would like to believe that the latest market mayhem will spell the end of one-size-fits-all index investing, but I know better. Wall Street has sunk far too much money into literature and software to let the concept die a peaceful death. Just as we saw index investing take off after the 2000 - 2002 bear market, I expect to see it marketed heavily once the market starts to come back from the current low point.

Oh yes, some of the marketing material will be changed to reflect the subprime debacle, but I will bet that the industry will attempt to explain the current market malaise away by saying it's a "market aberration" that won't happen again because of improved regulatory scrutiny that is almost certain to come. Thus, Wall Street will attempt to skip over this bump in the road and do what they do best - marketing.

One of the primary reasons I agreed to write this weekly E-Letter in the first place was the hope that I might be able to make a difference by countering some of the expensive marketing efforts launched by the major Wall Street firms and large mutual fund families. In this way, I can share some of the insights I have been able to gain from my 30+ years in the investment industry. To that end, I hope that I have provided some information this week that will help you resist the siren song of index investing in the future.

Through the years, many of my readers have sought out some of the investment programs my company offers, but many have not. While I'm the first to admit that some of our programs did a better job of limiting risk than others, almost all have been successful in holding risks to less than those of the S&P 500 Index, which is what they are designed to do. Plus, we have a couple of programs that have actually made money during the down market. Past performance, however, cannot guarantee future results.

If you are among those who have put off checking out our risk-managed investment programs, perhaps the current market meltdown will convince you it's time to take a look. Just give one of our Investment Consultants a call at 800-348-3601 or complete our online information request form. You can also find out more about these programs and the strategies they employ on our website at www.halbertwealth.com.

Wishing you a market bottom,

Gary D. Halbert

SPECIAL ARTICLES:

The Death of Buy and Hold
http://www.cnbc.com/id/27651174

The Specter of Deflation
http://www.realclearpolitics.com/articles/2008/11/the_specter_of_deflation.html

What lower oil prices mean for the world
http://www.ft.com/cms/s/0/5c238848-af5d-11dd-a4bf-000077b07658.html?nclick_check=1

IMPORTANT NOTES: Halbert Wealth Management, Inc. (HWM) and Niemann Capital Management, (NCM) are Investment Advisors registered with the SEC and/or their respective states. Some Advisors are not available in all states, and this report does not constitute a solicitation to residents of such states. Information in this report is taken from sources believed reliable but its accuracy cannot be guaranteed. Any opinions stated are intended as general observations, not specific or personal investment advice. Please consult a competent professional and the appropriate disclosure documents before making any investment decisions. There is no foolproof way of selecting an Investment Advisor. Investments mentioned involve risk, and not all investments mentioned herein are appropriate for all investors. HWM receives compensation from NCM in exchange for introducing client accounts to the Advisors. For more information on HWM or NCM, please consult HWM Form ADV Part II, NCM Form ADV Part II and Niemann's Annual Disclosure Presentation, 2007, available at no charge upon request. Any offer or solicitation can only be made by way of the Form ADV Part II. Officers, employees, and affiliates of HWM may have investments managed by the Advisors discussed herein or others.

As benchmarks for comparison, the Standard & Poor's 500 Stock Index, the Vanguard S&P 500 Index and the NASDAQ Composite Index (which include dividends) represent an unmanaged, passive buy-and-hold approach. The volatility and investment characteristics of the S&P 500, the Vanguard S&P 500 Index and the NASDAQ Composite Index may differ materially (more or less) from that of the Advisor. The performance of the S & P 500 Stock Index, the Vanguard S&P 500 Index and the NASDAQ Composite is not meant to imply that investors should consider an investment in the Niemann trading program as comparable to an investment in the "blue chip" stocks that comprise the S & P 500 Stock Index and the Vanguard S&P 500 Index, or the stocks that comprise the NASDAQ Composite. Historical performance data is provided by the Advisor in compliance with the Global Investment Performance Standards (GIPS), except for the month of October 2008, which is an estimate which has not been verified for GIPS compliance. The actual final performance number for October 2008 could change significantly from the estimate. See the Annual Disclosure Presentation, 2007 for more details on GIPS performance. Statistics for "Worst Drawdown" are calculated as of month-end. Drawdowns within a month may have been greater. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. Any investment in a mutual fund carries the risk of loss. Mutual funds carry their own expenses which are outlined in the fund's prospectus. An account with any Advisor is not a bank account and is not guaranteed by FDIC or any other governmental agency.

In addition, you should be aware that (i) the Niemann Equity Plus trading program is speculative and involves risk; (ii) the Niemann Equity Plus trading program's performance may be volatile; (iii) an investor could lose all or a substantial amount of his or her investment in the program; (iv) Niemann will have trading authority over an investor's account and the use of a single advisor could mean lack of diversification and consequently higher risk; and (v) the Niemann Equity Plus trading program's fees and expenses (if any) will reduce an investor's trading profits, or increase any trading losses.

Returns illustrated are net of actual management fees, custodial fees, underlying mutual fund management fees, and other fund expenses such as 12b-1 fees. They do not include the effect of annual IRA fees or mutual fund sales charges, if applicable. All dividends and capital gains have been reinvested. Performance is based on actual fee-paying, fully discretionary accounts in a composite. Individual account performance may differ from the composite. No adjustment has been made for income tax liability. Some Funds also charge short-term redemption fees and excess transaction fees (Special Fees), which are billed to shareholders at the time of the event causing the fee. All of these fees are in addition to Niemann's advisory fees. In selecting Funds in which to invest, Niemann considers the nature and size of the fees charged by the Funds. Niemann will select a Fund only if Niemann believes the Fund's performance, after all fees, will meet Niemann's performance standards. Consequently, Niemann may select Funds, which have higher or lower fees than other similar Funds, and which charge Special Fees. When deciding whether to liquidate a Fund position, Niemann will take into consideration any Special fees which may be charged. Niemann may decide to sell a Fund position even though it will result in the client being required to pay Special Fees. Money market funds are not bank accounts, do not carry deposit insurance, and do involve risk of loss. The results shown are for a limited time period and may not be representative of the results that would be achieved over a full market cycle or in different economic and market environments.

Who's Making Money In This Crazy Stock Market?

Gary D. Halbert — Tue, 10 Jun 2008 18:42:52 GMT

IN THIS ISSUE:

Recent Market Volatility Difficult To Navigate
Scotia Partners, Ltd. – Our Latest Find
A Leveraged Long & Short Equity Strategy, With A Twist
Impressive Results In Recent Volatile Market Environment
Hedge Fund-Like Strategy For Only $25,000

Introduction

Over the last year or so, we have experienced an increase in market volatility that has proven to be difficult for many investors and investments to weather. A Wall Street Journal article from earlier this year documented how from 2004 through 2006, the Dow Jones Industrial Average had only one day with a gain or loss of over 2%. In 2007, amid concerns over the subprime mortgage bust, the bursting of the housing bubble and the credit crisis, this number rose to 14!

In fact, last Thursday and Friday were good examples of this volatility. After an impressive gain of 1.9% in Thursday’s trading, the S&P 500 Index reversed course and lost over 3% percent the very next day. However, as the WSJ article noted, this level of volatility is nothing new. And in fact, the current market volatility is relatively tame compared to the bear market of 2000 – 2002.

Such recurring market uncertainty is one reason that I decided over 10 years ago to seek out professional money managers who have established successful historical track records using active management strategies. In volatile markets, investors are often hit with conflicting messages from the gloom-and-doom crowd who says “the end is near,” and the buy-and-hold crowd who counsels “this, too, shall pass.” I continue to believe that active management strategies can offer investors an effective option for dealing with virtually any kind of market environment.

That’s why I am especially pleased this week to be able to introduce you to an Advisor who has not only posted an enviable track record over the past 3½ years, but has also shown the ability to not only survive the market’s recent volatility, but to thrive in it. The Advisor is Cliff Montgomery, CFA, founder of Scotia Partners, LTD. and its Growth S&P Plus Strategy has now been added to our list of recommended actively managed investments.

While past performance cannot predict future results, Scotia’s 12-month gain of over 90%, and year-to-date gain of 32.56% is a testament to a trading strategy that has been able to tame the market’s recent volatility. These are real numbers for real accounts and are net of all fees and expenses. Scotia’s trading model is different than any I have ever analyzed, and I’ve seen a lot of trading systems in my 30+ year career.

As we review Scotia’s Partners’ strategy and performance this week, you will see numbers that will likely look better than those of any other investment alternative you may have seen. Keep in mind that Scotia’s money management system is an aggressive program which uses leverage with both long and short positions. It is therefore not suitable for all investors. Past performance is not necessarily indicative of future returns.

Volatility And Your Investments

It is now quite clear that the stock markets have moved to a higher level of volatility since the beginning of the subprime crisis last year and the subsequent bursting of the housing bubble. And, it remains to be seen how long this period will last. Unfortunately, few sources of financial and investment information take the time and effort to discuss just what volatility is, and why it can be bad, or good, for your portfolio.

“Volatility” means the measure of the uncertainty of the returns on any particular investment, or even in regard to the market as a whole. This uncertainty about the direction and magnitude of market returns moves higher and lower over time. In periods of low volatility, the markets may move up or down in a seemingly orderly fashion, without many unexpected events. But in periods of high volatility, as we have seen over the last 12-18 months, the markets can experience very large moves in one direction one day, and reverse course the next.

While there are a variety of ways to calculate, evaluate and try to predict volatility, it still comes down to trying to “know the unknowable.” Even so, the financial services industry has come up with ways to measure market volatility, with the best-known of these indicators being the Chicago Board Options Exchange (CBOE) Volatility Index, or “VIX” for short. This index seeks to measure the expectations of near-term volatility based on the prices of S&P 500 index options. The thought is that, since options represent an expectation of future price movements, then measuring the magnitude of such expectations can shed light on possible future volatility.

The following chart shows the movement in the VIX since 1990:

As you can see in the above chart, volatility is a regular, recurring feature in the stock markets. More importantly, we see that periods of high volatility can last for several years, as was the case from 1998 to 2003. While we do not know how high volatility may get in the near future, or how long it may persist, a growing number of analysts I respect believe this period could last for several more years.

One interesting thing about the market’s most recent bout of volatility is that it has proven to be very difficult to trade, even for some seasoned active managers that fared well during the 2000–2002 bear market’s even higher level of volatility. Space does not permit me to go into some of the various theories for why the markets have been so difficult to navigate over the last couple of years. Suffice it to say that many previously very successful money managers are scratching their heads as to why their systems have not worked over the last 12-24 months.

As a result, my staff and I have combed through the various money management databases, looking for active money managers who have shown the ability to invest successfully in this very tricky market environment. Specifically, we looked for managers that have shown the ability to manage money in both high and low volatility markets. As you will read below, Scotia Partners is one of the few success stories, and that is putting it mildly!

Scotia Partners, Ltd.

Scotia Partners, Ltd. was founded in 2006 by Clifford J. Montgomery, CFA. Cliff graduated from Messiah College in Grantham, PA with dual degrees in Environmental Science and Accounting but has spent most of his working career in the financial services industry.

Early in his career, Cliff worked as a mutual fund trader for a medium-sized SEC Registered Investment Advisor. After that, he became a research analyst at Theta Investment Research, LLC, a firm that his father, Paul, had established. At Theta, Cliff had the opportunity to witness how different market environments affected the performance of different types of money management strategies. He also began to notice how some active money managers were “whipsawed” by market action, especially during periods of high volatility.

Cliff reasoned that there should be some way to build a trading model that would issue trading signals only on days when there was the greatest probability of success and stay in the safety of a money market account the rest of the time. Ideally, such a system would trade both long and short, and use leverage to enhance returns.

With that in mind, Cliff began researching how markets and trading systems worked with the goal of producing his own active management strategy. In 2003, Cliff finalized his basic trading model and began trading it in real time with real money. He soon found that during periods of low volatility, his program did well. More importantly, in high volatility markets, his model actually did even better. I can tell you, this is very rare. As always, past performance does not guarantee future results.

Over time, Cliff continued to enhance his trading model and in 2004, began actively trading his Growth S&P Plus Strategy. In 2006, Cliff established Scotia Partners, Ltd., as a Registered Investment Advisor with the State of Pennsylvania so that he could offer his programs to investors. Cliff chose the name “Scotia” because it reflects his Scottish heritage. Cliff notes that his family motto, “Garde Bien,” which means “Watch Well,” serves as a reminder of the approach Scotia takes to managing client money.

Ever seeking to increase his investment analysis skills, Cliff received the prestigious Chartered Financial Analyst (CFA) designation in 2005. With so many professional designations available in the financial services business, investors sometimes can’t tell which are meaningful and which are not. I can attest that the CFA certification is one of the most challenging financial professional designations in the investment industry, and is a distinction shared with many successful mutual fund managers and noted market analysts.

The Scotia “Growth S&P Plus” Strategy

Investors familiar with alternative investment strategies, such as hedge funds, often seek out programs that can go both long and short in the market. In such programs, the potential for profit exists no matter what the market’s direction. Some also seek out leveraged programs that offer greater potential gains (or losses) per dollar invested, especially in volatile markets. Unfortunately, many such programs are available only to wealthy investors, but the Scotia Growth S&P Plus Strategy offers both long/short trading and 2X leverage without the barriers to entry found in many hedge funds.

The Growth S&P Plus investment strategy is a combination of Cliff’s basic trading model plus a proprietary overbought/oversold indicator that overlays the basic model. The objective of the strategy is to provide positive returns regardless of market conditions, with significantly reduced risk due to limited market exposure. Of course, there are no guarantees that Scotia can continue to achieve this objective.

Using technical analysis, the basic model begins the process by seeking to determine a long-term market trend (6-12 months) for the S&P 500, which then sets the overall direction for any trades. If the long-term trend is determined to be bullish, only long S&P positions will be taken. If the overall trend is gauged as bearish, the basic model will only take short S&P positions.

Once the long-term trend is identified, the intermediate trend is then determined by plugging S&P 500 Index prices into several different technical indicators over different time intervals within a 2-4 week time period. If the intermediate trend is in agreement with the long-term trend, the basic model is eligible for positioning on either the long or short side of the S&P. If the intermediate trend is not in agreement with the long-term trend, then the model will remain in the safety of a money market account.

With both long-term and intermediate trends identified, the basic model then looks for short-term movements against the trend, to potentially take advantage of the probabilities in favor of “reversion to the mean.” In other words, Cliff’s model views a contra-trend market movement as an opportunity, since future market action should move back in line with the overall trend. Thus, Cliff describes his model as being trend-following in the long term, but contrarian in the short term.

But there is yet one more wrinkle to Scotia’s Growth S&P Plus program. Cliff has also developed a proprietary overbought/oversold indicator that overlays the basic model. This added signal seeks to identify long or short trades that have a high probability of success, without regard to the direction of the long-term trend indicator. Accordingly, this overlay generally results in more trades per year than would be possible under the basic model.

The Growth S&P Plus Strategy is exceptional in that it has historically been in the safety of a money market account over half of the time and trades only on days when Cliff’s proprietary strategy indicates chances are optimal for a gain. Again, this is one of the most interesting trading strategies I have ever seen, and it has certainly done extremely well in a market environment reeling in the wake of the subprime/housing meltdown. Remember, however, that past performance does not guarantee future favorable results.

Cliff’s methodology is 100% mechanical with no discretionary input, and no provision for Cliff to override any trading signal. In addition, the Growth S&P Plus Strategy does not make graduated or partial investments. Instead, the model will be 100% long in the Rydex S&P 500 2X Strategy Fund, 100% short in the Rydex Inverse S&P 500 2X Strategy Fund or 100% neutral (money market), depending upon the signal. These Rydex S&P 500 Index funds seek to provide investment returns equal to 200% of the daily performance of the underlying S&P 500 Index, with the S&P 500 2X Strategy providing a leveraged long exposure and the Inverse S&P 500 2X Strategy providing a leveraged short exposure.

Historically, the strategy has averaged approximately 65 round-trip trades per year, and has been in the safety of a money market fund approximately 65% of the time. Scotia does not employ any formal stop-loss techniques to limit risk other than the relatively short duration of trades. If a trade makes money, the model automatically retreats to cash. If a trade loses on its first day, the model may stay long or short, but if even one indicator disagrees with the others, the model exits the market and goes to cash.

Performance Evaluation

To say that Scotia’s track record is one that attracts a lot of attention would be an under- statement. As of May 30, the Growth S&P Plus Strategy had a 12-month gain of over 90% and a year-to-date increase of 32.56%. While past performance doesn’t guarantee future results, these numbers are hard to ignore. However, we feel that the real story is how Scotia’s trading model has been able to be effective in the volatile markets of 2007–2008, when many other previously successful trading systems failed miserably.

You will note that the Scotia growth chart below shows a more modestly sloping growth line from its inception to apprx. June of 2007, at which time the growth line took a much steeper upward angle. When comparing this chart to the VIX chart above, we see that the higher level of growth coincided with an increase in the market’s volatility, brought on by the subprime fiasco and subsequent bursting of the housing bubble.

As a result, we essentially split Scotia’s track record into two parts and scrutinized each using our various investment analysis software. As noted above, Scotia’s performance during the market volatility that began around June of 2007 has been spectacular. As I noted in the Introduction, Cliff’s cautious approach to money management not only survived, it thrived.

Since we know that the market goes through cycles of high and low volatility, we also analyzed Scotia’s performance prior to June of 2007 to see how Growth S&P Plus might perform in more “normal” market conditions. We were pleased to find that, between its inception in August of 2004 and May of 2007, the Growth S&P Plus Strategy produced an annualized gain of 12.84% with a maximum month-end drawdown of only -7.36%.

Since any long-term investment horizon is likely to include periods of both high and low volatility, Scotia's strategy would appear to give investors the potential to do well in either type of market environment. However, if you believe as I do that the stock market will continue to be volatile over the next few months or even longer, the Growth S&P Plus Strategy may be exactly what your portfolio needs now.

Though the worst month-end drawdown is a relatively tame -7.36%, Cliff says that potential drawdowns in the Growth S&P Plus program can be -20% or more based on his analysis and testing. This, again, confirms that this program should only be considered by investors with an aggressive risk tolerance.

Since its inception in August of 2004, the Scotia Growth S&P Plus Strategy has proven its ability to navigate past periods of both high and low market volatility by posting an annualized return of 29.35% through May 30, 2008, net of all fees and expenses, with a worst-ever month-end losing period (or “drawdown”) of –7.36%. See the actual performance history in the tables below for more comparisons and detailed monthly returns. Also note that there are no guarantees of favorable future performance.

In short, dear readers, I have not seen a real performance record like this in a long time!

Performance Statistics
(Net of all fees and expenses)

PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
Please see Important Notes at the end of this E-Letter.

While Scotia’s performance is very impressive by itself, it’s even more so when compared to the S&P 500 Index’s annualized return of 8.43% and the Nasdaq 100 Index’s annualized return of 7.86% over the same period of time. While past performance is not necessarily indicative of future results, it’s clear that Cliff’s high-probability approach to money management has been effective in the past, especially when faced with highly volatile market conditions.

Since Scotia’s Growth S&P Plus Strategy has numbers that are sure to attract attention, it is important to note that this investment may be most suitable for aggressive investors who are comfortable with using leverage and a long/short exposure to the S&P 500 Index. You should only consider this program if you have a three-to-five-year investment horizon and are comfortable possibly spending a large amount of time in a money market account, awaiting the next high-probability trading opportunity.

Even though Scotia’s Growth S&P Plus Strategy has been in the market less that half the time and has delivered outstanding results with limited losing periods, this is an aggressive investment and should only be considered by investors who are comfortable with taking on significant investment risk. Cliff counsels his direct clients to invest no more than 20% of their portfolios into this program, as he feels the recent big run-up in performance may not be sustainable.

The Trading Platform

Cliff has outsourced administrative tasks to Purcell Advisory Services, a Registered Investment Advisor in Tacoma, Washington that we also work with. Purcell provides back-office support for his trading activities, allowing him to concentrate on market analysis and the generation of a trading signal. Cliff communicates his trading signals daily to Purcell, and they execute the trades and maintain client accounts. Purcell is highly experienced when it comes to providing back-office operations for professional money managers, and currently does so for a number of Investment Advisors nationwide.

Because of this outsourcing, the Halbert Wealth Management due diligence team has also subjected Purcell Advisory Services to a full review of their administrative capabilities and internal controls, including an on-site visit to their offices in Tacoma, Washington. We are happy to report that they passed our due diligence review with flying colors.

Cliff shares offices with his father, Paul, and Theta Investment Research. As a result, Paul is very familiar with the trading strategy, and provides an ample level of backup should Cliff be unable to trade for any reason. Purcell also serves as an extra measure of backup so that trades could be unwound if both Cliff and Paul were to become incapacitated, or in the case of a regional disaster, power outage or Internet disruption.

All accounts are held in individual accounts at Rydex Funds, and clients have online access to their accounts via the Rydex website. Both Rydex and Purcell issue quarterly statements, and Rydex provides year-end tax reporting for those investing through non-retirement accounts.

Since this program has the potential to trade frequently, investors in taxable accounts may have to deal with “wash sales” and short-term gains. Given the actual performance numbers of late, it may be well worth any tax disadvantages. Even so, it may be most suitable for IRAs and other tax-qualified retirement accounts. The Growth S&P Plus program may also be managed within no-load, low-cost variable annuity products available through Purcell that can help to address the negative tax consequences of frequent short-term trading in a non-retirement account.

Scotia’s minimum account size is $25,000. Management fees are billed quarterly in advance, based on the following schedule:

First $100,000	2.50%
$100,001 to $1 million	2.25% (entire account)
Over $1 million	2.00% (entire account)

Conclusions

The Scotia Growth S&P Plus Strategy can be a very attractive option for investors who understand the risks and want to diversify their portfolios by adding an investment that has both leverage and a long and short exposure in the market. As noted above, the program has an annualized return of 29.35%, net of all fees and expenses, with a worst-ever month-end drawdown of only –7.36%.

Yet the most impressive thing about this program is that it has shown outstanding results during the last 12 months, gaining over 90% during a time when other money managers found it difficult to stay above water. Keep in mind that past results are not necessarily indicative of future performance, and you should not expect the same return over the next 12 months.

And you can access Scotia’s Growth S&P Plus Strategy for a minimum investment of only $25,000, which is important for investors with smaller portfolios who want access to an investment option that uses both leverage and a long/short trading strategies.

Our analysis has also shown that Scotia’s historical returns show little or no correlation to the major stock market indexes, or to other Advisors I have written about in this E-Letter. Thus, the Growth S&P Plus Strategy may be an ideal complement to the other actively managed investments offered under the Halbert Wealth Management AdvisorLink® Program. For more information on the Growth S&P Plus Strategy, visit our website at www.halbertwealth.com.

If you believe, as I do, that market volatility could continue to be high, or go even higher, and that the equity markets will face some tough times in the next several years, then I suggest that you take a serious look at Scotia’s very successful program. Having the potential to make money in a very volatile market may prove extremely important over the next few years.

If you have any questions or would like to talk to one of our experienced Investment Consultants about whether this program may be suitable for a portion of your portfolio, please give us a call at 1-800-348-3601, or e-mail us at info@halbertwealth.com. You can also request additional information, including paperwork to establish an account, by going to our online request form. Also be sure to read the Important Notes about this investment program following my signature below.

Very best regards,

Gary D. Halbert

IMPORTANT NOTES: Halbert Wealth Management, Inc. (HWM), Scotia Partners, Ltd. (SPL), and Purcell Advisory Services, LLC (PAS) are Investment Advisors registered with the SEC and/or their respective states. Information in this report is taken from sources believed reliable but its accuracy cannot be guaranteed. Any opinions stated are intended as general observations, not specific or personal investment advice. Please consult a competent professional and the appropriate disclosure documents before making any investment decisions. There is no foolproof way of selecting an Investment Advisor. Investments mentioned involve risk, and not all investments mentioned herein are appropriate for all investors. HWM receives compensation from PAS in exchange for introducing client accounts. For more information on HWM or PAS, please consult Form ADV Part II, available at no charge upon request. Any offer or solicitation can only be made by way of the Form ADV Part II. Officers, employees, and affiliates of HWM may have investments managed by the Advisors discussed herein or others.

As benchmarks for comparison, the Standard & Poor’s 500 Stock Index (which includes dividends), and the NASDAQ Composite Index represent unmanaged, passive buy-and-hold approaches. The volatility and investment characteristics of these benchmarks may differ materially (more or less) from that of the Advisor. The performance of the S & P 500 Stock Index and the NASDAQ Composite Index is not meant to imply that investors should consider an investment in the Scotia Partners Growth S & P Plus trading program as comparable to an investment in the “blue chip” stocks that comprise the S&P 500 Stock Index or the stocks that comprise the NASDAQ Composite Index. Historical performance data represents an actual account in a program named Scotia Partners Growth S&P Plus, custodied at Rydex Series Trust, and verified by Theta Investment Research, LLC. Since all accounts in the program are managed similarly, the results shown are representative of the majority of participants in the Scotia Partners Growth S&P Plus. The signals are generated by the use of a proprietary model developed by Scotia Partners. Statistics for “Worst Drawdown” are calculated as of month-end. Drawdowns within a month may have been greater. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. Mutual funds carry their own expenses which are outlined in the fund’s prospectus. An account with any Advisor is not a bank account and is not guaranteed by FDIC or any other governmental agency.

In addition, you should be aware that (i) the Scotia Partners Growth S&P Plus program is speculative and involves a high degree of risk; (ii) the Scotia Partners trading program’s performance may be volatile; (iii) an investor could lose all or a substantial amount of his or her investment in the program; (iv) Purcell Advisory Services will have trading authority over an investor’s account and the use of a single advisor could mean lack of diversification and consequently higher risk; and (v) the Purcell Advisory Services trading program’s fees and expenses (if any) will reduce an investor’s trading profits, or increase any trading losses.

Returns illustrated are net of the maximum management fees, custodial fees, underlying mutual fund management fees, and other fund expenses such as 12b-1 fees. They do not include the effect of annual IRA fees or mutual fund sales charges, if applicable. No adjustment has been made for income tax liability. Money market funds are not bank accounts, do not carry deposit insurance, and do involve risk of loss. The results shown are for a limited time period and may not be representative of the results that would be achieved over a full market cycle or in different economic and market environments.

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