Investment Performance

Market Valuation: S&P 500 Cheaper than 2015

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Understanding the Market: The S&P 500 is Cheaper Than in 2015/2016 — July 9, 2017

Headlines and the financial media are again selling the risks posed by high valuations.

The simplest perspective on the expense of the market, and probably the broadest, is the price-to-earnings ratio. 

It’s important to note that high valuations do not imply or cause bear markets – rather they imply lower expected returns.  It’s like buying model houses in a tract neighborhood: pay $50,000 more than your neighbor for the same house and you are highly likely to see a lower rate of return on your purchase than the neighbor that paid $50k less. 

The market is no different.  The best returns come from buying when the market is undervalued, the weakest from the market is overvalued. 

Right now, the S&P is very pricey.  But earnings are rising again, which is one of the reasons the S&P has become less expensive by this ratio that it was in 2015/2016.  Earnings are trending up and have moved above the 2014 EPS high.   

Where is the S&P’s Price-to-Earnings ratio right now?

*Negative P/E ratios have been set to zero. 

It’s easy to see that rising earnings have pushed down the valuations we saw in 2015/2016. 

Current Fair Value for the S&P 500 is about $2060, nearly -15% below Friday’s close price. 

While a 15% premium does not constitute a bubble or an extraordinary investment risk, it does tell investors it may be worth it to look for better opportunities (better expected returns/higher margin of safety) away from the broad market index. 

2nd quarter earnings are fair so far, with a few exceptions, and this trend looks like it will continue into Q4. 

The Fed raised rates at the most recent meeting, but we are still well below historical average interest rates. 

All in all, it’s not a great investment environment, but neither is it terrible.  The economy is likely to keep muddling along.  Low interested rates combined with rising earnings will help drive the markets higher, given time.  But with the S&P so pricey, sector focused investments are probably a better bet.    

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To Smarter Investing,

 

Dak

Dak Hartsock

Market Strategist

ACI Wealth Advisors, LLC.

Process Portfolios, LLC.

Valuations, Stock Returns & Interest Rates

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Valuations, Stock Returns & Interest Rates. June 10, 2017

Before I begin, I thought I’d include a longish quote from The Oracle, to lend perspective –

“Let’s start by defining ‘investing.’ The definition is simple but often forgotten: Investing is laying out money now to get more money back in the future – more money in real terms after taking inflation into account.

Now, to get some historical perspective, let’s look back at the 34 years – to observe what happened in the stock market. Take, to begin with, the first 17 years of the period, from the end of 1964 through 1981. Here’s what took place in that interval:

  • DOW JONES INDUSTRIAL AVERAGE Dec. 31, 1964: 874.12, Dec. 31, 1981: 875.00.

Now I’m known as a long-term investor and a patient guy, but that is not my idea of a big move.

To understand why that happened, we need first to look at one of the two important variables that affect investment results: interest rates. These act on financial valuations the way gravity acts on matter: The higher the rate, the greater the downward pull. That’s because the rates of return that investors need from any kind of investment are directly tied to the risk-free rate that they can earn from government securities. So, if the government rate rises, the prices of all other investments must adjust downward, to a level that brings their expected rates in line.

The increase in equity values since 1981 beats anything you can find in history.” – Warren Buffett in 1999

It sure seems there is a lot of investing wisdom in that quote, right?

Inflation/Interest rates generally headed higher between 1964 and 1981 before Paul Volker, Chairman of the Federal Reserve, started to drop the hammer on inflation in October 1979 and doubled the Fed Funds rate over the next 4 months.  In the 2 years following, inflation rates fell from over 14% to under 5%, and the Fed Funds rate fell from 19% to under 9%, setting up the greatest and most enduring bull run in history.

For clarity, Blue is the effective Fed Funds rate, red is inflation, green is the stock market in the form of the Wilshire 5000.  The impact of lowered interest rates is pretty clear.

Nice to know, but what can that do for me today?

Here’s a more recent Buffett quote – “Measured against interest rates, stocks are actually on the cheap side compared to historic valuations.  But the risk always is interest rates go up, and that brings stocks down.”

How? You might be asking. We’ll get to that in a minute.  But first, was Buffett just blowing smoke?  After all, words are one thing, action another.

Buffett spent around $18 billion on Apple stock in the last year and a half.  That’s a reasonable bet on where he sees interest rates going, at least in the next few years.

I happen to agree.  As I’ve said several times, my view is lower rates for longer.  For interest rates to approach historical averages (Y Charts says that’s 6.1% on the 10-year Treasury) the economy must strengthen.  A lot.

In my view, GDP growth would basically need to double.  I just don’t see any way that can happen in the near term.  So, lower for longer.  My best guess right now is 5 years (or more) below a 3.5% Federal Funds rate, and about the same before we see a 10-year Treasury above 5%.

So, are stocks overvalued?  Some of them, yes.  Some not.  But interest rates are just above historical lows, and that’s supportive of the stock market.

Exactly how do lower interest rates have such an impact on stock valuations?

There are many formulas and concepts available to understand the value of a stock and the impact of interest rates, but as we are looking at things through the lens of Buffett’s tremendous investing brain, let’s use one of the concepts near and dear to his heart – the quick and dirty intrinsic value formula of his chief mentor, Ben Graham.

V = EPS x (8.5 +2g) x 4.4 /  Y

V = Intrinsic Value

EPS = the company’s most recent 12 month earnings per share

8.5 = the appropriate PE ratio of a company that expects 0 growth

g  = the long term (five years) growth estimate

4.4 = the average of high grade corporate bonds in his era (3.6% in our era)

Y = the current yield on 20-year AAA corporate bonds (we’re going to use 10 year Treasuries at 2.2%)

 

Let’s have a look at Apple with current interest rates in play, speculating they will endure for at least a few years more.

Apple EPS = $8.57

Apple consensus 5-year earnings growth (“g”) = 10.12%

3.6% average yield high grade corporate bonds

2.2% 10-year Treasury yield

V = 8.57 x (8.5 + 2(10.12)) x 3.6 / 2.2

= $403.04 projected intrinsic value.

 

The notion here is that at some point, ideally in about 5 years, Apple’s price will reflect its intrinsic value.  There is no doubt in my mind this number was part of Buffett’s process in deciding to buy Apple.  However, it was assuredly NOT the only part.

Even Graham said that this simplified formula shouldn’t be used as the only criteria to decide to invest/not invest, but it is an informative tool to show what can happen to stocks when interest rates rise (or fall).

Now, let’s have a look at see what impact rising interest rates might have on Apple’s intrinsic value.  Let’s use the 6.1% historical 10-year rate from Y Charts.  Let’s pretend investment grade corporate bonds are yielding 1.4% more than Treasuries, just as today.

Apple EPS = $8.57

Apple consensus 5-year earnings growth (“g”) = 10.12%

7.5% average yield high grade corporate bonds

6.1% 10-year Treasury yield

V = 8.57 x (8.5 +2(10.12)) x 7.5 / 6.1

= $302.83 projected intrinsic value, a value reduction of 25%!

 

It’s clear interest rates can have a tremendous impact on stock value.

It’s also clear why Buffett was comfortable spending $18 billion on Apple stock at around $100 per share.

Lastly, it’s an unambiguous statement about his expectations for interest rates, at least for the next several years.

Will he be right?  I certainly hope so.  I’ve been on the same page as Buffett a couple times (Precision Cast Parts and Apple) and it would be great if we were both right here, too.

In sum, with interest rates very low on a relative basis, growing earnings, and no recession currently on the horizon the market can be expected to move higher over the intermediate term (2 – 5 years) – which probably means investors will get more money back in the future in return for dollars invested today.

That doesn’t mean the market is going up tomorrow – I’m about as good at predicting where the market will be 6 months or a year from now as Buffett, which means marginal to no good (barring recession).  But current conditions still favor stocks over bonds.  That is likely to continue until conditions change.

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To Smarter Investing,

Dak

Market Strategist

ACI Wealth Advisors, LLC.

Process Portfolios, LLC. 

This is an illustration and is not a recommendation to buy Apple.  Price paid has an impact on expected returns, and the Graham Formula is just one of many ways to evaluate a stock investment.  ACI uses nearly 2 dozen investment/financial models and several modes of research to identify and evaluate stocks for the Durable Opportunities Portfolio.    Disclosure: ACI owns Apple in the Durable Opportunities Portfolio.

Q3 2016 Performance & Q4 Market Outlook

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Q3 Performance Update including Year-to-Date Results and 4th Quarter Outlook. October 16, 2016

Out of respect for everyone’s time and interest, I’ve included a quick “executive” summary below and also front loaded the video with the key numbers. Those wanting a little more detail can stick around for the whole video. My market outlook for the remainder of the year and early 2017 begins at 9:15 in the video. You may use the video player controls to skip ahead.

  • 3/6 Portfolios beating their benchmarks.
  • 2/6 portfolios beating the market.
  • All portfolios positive, 5/6 with good relative performance.
  • Market Income continues to shine.
  • Earnings in Pharmaceuticals/Healthcare may be setting up those sectors for a post election cycle rally if the broader market earnings strengthen, as currently anticipated.
  • It’s make or break for earnings this quarter. This is likely to have ramifications for the market.
  • We may have entered a corrective phase on 10/11/2016. Absent recession or a fall in earnings, this should be viewed as a buying opportunity.
  • Impact of election uncertain.

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Video below.

To Smarter Investing,

Dak Hartsock

Market Strategist

ACI Wealth Advisors, LLC.

Process Portfolios, LLC.

Process Portfolios 1st Half Summary & 2nd Half Outlook

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ACI Process Portfolios: 1st Half 2016 Performance & 2nd Half Outlook

The video below has the most important information in the first minutes including performance details. The video player has controls to allow you to fast forward, pause or repeat whatever section of the video is most relevant to you.

 
 
Executive Summary

  • 3/6 portfolios beat their benchmarks
  • 2 portfolios beating the market
  • Strong performance in Market Income and Full Cycle Portfolios
  • Adjustments to Durable Opportunities in 2nd half of 2015 working
  • Core Equity still lagging due to biotech, pharma, healthcare, but showing it may overtake market quickly if election rhetoric on industry softens or market stabilizes for a few months
  • Recession Probability Indicator still suggesting stable investing environment
  • Performance details are minutes 2:19 – 5:50 in video
  • Color on portfolios occurs in minutes 5:51 – 10:40
  • 2nd Half Outlook is 10:41 – 14:32

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To Smarter (and more transparent) Investing,

Dak Hartsock
Chief Market Strategist
ACI Wealth Advisors, LLC
Process Portfolios, LLC

Q1 2016 Quarterly Update and Market Outlook

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Q1 2016 Year-to-Date and Market Outlook Update

The video below reviews performance for all 6 Process Portfolios year-to-date through April 15, 2016 and also includes an updated Market Outlook near the end.

2016 saw the worst January in at least a generation and a return to higher levels of volatility thanks to central bank actions that seem to be increasingly opaque to many market watchers. I’ve been fortunate in that the Fed hasn’t done anything far distant from my expectations, at least so far. We’ve also seen the financial media predictably stoking fear and the usual parade of media guests short on data but long on opinion.

Regardless, careful students of the markets have seen a number of signs that suggest we may see smoother waters later in the year, as long as the economy does not move onto a recessionary footing.

Overall, reasonable performance with 4 of 6 portfolios beating the benchmarks, and 3 of 6 outpacing the broad market. Most portfolios have managed to do so with less risk than investing in an index fund. It’s fair to say it’s been a very good quarter for the 3 portfolios that clocked a 4%+ return, 2 with substantially less risk than buying an S&P 500 index fund. That’s a nice result for such a tumultuous period.

The video below features the executive brief and results updates in the first 4 slides. Feel free to use the video player’s tools to skip ahead to what you are interested in. Thereafter there is a little more “color” on each portfolio followed by an updated Market Outlook. Rounding out the periphery of the presentation are descriptions of each ACI Process Portfolio, including risk management.

This video concludes with the always exciting regulatory disclosures, which seem to get longer by the day. We can thank the admirable solidarity law school graduates in government demonstrate with their private sector compatriots, constantly striving to make sure their fellows on the other side of the fence have plenty of work.

As I know everyone loves to read the disclosures, I’ve had our theme music looped at the end to give you an even better reading experience.

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Warm Regards,

Dak Hartsock
Chief Market Strategist
ACI Wealth Advisors, LLC.
Process Portfolios, LLC.

Market Beating Portfolios – Performance Update October 2015

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Market Beating Portfolios – Performance Update November 2015

The video below reviews performance for all 6 Process Portfolios for the month of October as well as year-to-date results. For reference, I’ve include a table of 2015 year-to-date performance for the major indices & asset classes above the video player. It hasn’t been an easy year, but Process Portfolios live portfolios and designed models have managed to achieve reasonable performance for less risk than owning an index fund, and in some cases have also provided considerably better results. Not too shabby.
 

Asset Class Updates October _2016


 
 
Click table to enlarge.

 
 
 
The video below is organized so that bottom-line oriented people will get what they are looking for in the first 3 or so minutes and those interested in a bit more detail can stick around for the discussion. Portfolio descriptions including risk management available at the end of the video.

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Warm Regards,

Dak Hartsock
Chief Market Strategist
ACI Wealth Advisors, LLC.
Process Portfolios, LLC.

ACI Selected for 2015 Wealth & Money Management Awards

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My investment firm, ACI Wealth Advisors, has been selected as a 2015 Wealth & Money Management award winner by Wealth and Finance International Magazine in two categories. It’s nice to get this kind of recognition, especially considering the caliber of the other winners.

Details below.

Award

Wealth and Finance International, a print and online magazine dedicated to providing fund managers and institutional and private investors around the world with the latest industry news across both traditional and alternative investment sectors, has named ACI Wealth Advisors as an award winner for two categories in 2015.

2015 Wealth & Money Management Awards
From Wealth & Finance International: From asset managers to private bankers, financial planners to family offices, the 2015 Wealth & Finance International Wealth & Money Management Awards are dedicated to uncovering and promoting the work and achievements of the very best the financial services community has to offer.

The awards are all about the individuals, firms and departments whose dedication and commitment in all aspects of the role have seen them achieve stellar results for their clients, whether assisting with managing their wealth, planning for the future of their business or their family or providing more general – but no less vital – advice.

The selection and judging process is rigorous and far reaching and we have welcomed nominations from and on behalf of firms throughout the world, from the smallest niche practices to the largest and most powerful global corporations. It is of great importance to us that, throughout every step of the awards process, we do everything we can to ensure that those who do go on to win one of these highly sought after prizes have been chosen purely on merit and based only upon the votes received, the further evidence supplied and our own in-depth in-house research.

Click the award graphic centered above to learn more.

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Warm Regards,

Dak Hartsock
Chief Market Strategist
ACI Wealth Advisors, LLC.
Process Portfolios, LLC.

July 2015 Portfolio Performance

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July 2015 performance update on 3 of our Portfolios: Core Equity, Full Cycle, and Market Income. Market Income in particular continues to lead with year-to-date results about 50% higher than the S&P 500. Kind Regards — Dak Hartsock, Chief Market Strategist: ACI Wealth Advisors, LLC., Process Portfolios.

If you’d prefer not to view the video in entirety, you can scroll ahead to whatever segment you are most interested in.

Core Equity Portfolio: 1:01
Full Cycle Portfolio: 4:36
Market Income Portfolio: 6:48
Summary & Current Forecast: 8:49

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Warm Regards,

Dak Hartsock
Chief Market Strategist
ACI Wealth Advisors, LLC.
Process Portfolios

Portfolio Performance Updates June 2015

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I’ve split the June update so you can watch whichever video is of most interest. Each report is designed to help get you thinking about how to structure smarter investments including a quick survey of how to think about risks, margin of safety, and other key concepts utilized by the most successful investors.

Year-to-Date Market Income has turned in about 3x the performance of the S&P 500 with less risk.

Warm Regards,

Dak Hartsock
Chief Investment Strategist
ACI Wealth Advisors, LLC.
Process Portfolios

Understanding Performance & Risk in Your Investments

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Understanding Performance & Risk in Your Investments
The video below is a performance summary video from one of the Process Portfolios I manage, called the Market Income Portfolio.

It’s a solid portfolio – stable, consistent but not spectacular, light on risk versus just plunking down your dollar on an index fund or funds. A great illustration for discussing how to think about risk and performance.

Enjoy, share, and shoot me any questions or comments via email or the contact page. If you have a great question, I’ll post it and the response for everyone to benefit from.

See below and enjoy.

© Copyright 2015
Dak Hartsock

Check out the background of this investment professional on FINRA's Brokercheck --> http://brokercheck.finra.org/
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Investment Management

For ACI, investment management begins with understanding and actively managing risk for our clients and partners.  We do this through smarter investments built on low cost, highly liquid and diversified investments rather than expensive financial products.

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RETIREMENT INCOME PLANNING

Understanding the needs of investors seeking stable results for portfolios greater than $500,000 is a core strength of ACI.  One of the most important things we do is help your investments to create stable income while generating sufficient growth to meet your future demands and the needs of those you care for. 

ACI uses customized planning and software to create retirement income plans to meet the specific needs of each of clients while providing confidence, flexibility, and cost efficiency.

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FINANCIAL PLANNING

Success in any endeavor comes from hard work, vision, and planning. We can help you create a more confident future by working with you, your CPA, your tax and estate counsel to make sure that when the tomorrow becomes today, you are where you want to be.

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Market Income

This portfolio invests in a basket of highly liquid Index or Sector securities and sells off atypical returns in exchange for a premium on a rolling basis. That’s a fancy way of saying we take the bird in hand and let someone else have the two in the bush.  We buy sectors that are undervalued relative to the rest of the market or vs. their historical value ranges which reduces downside risk vs. the broad market.  Typically out-performs in bear markets, neutral markets and mild bull markets.   while under-performs strong bull markets.

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Core Equity

Invests in diversified components of the financial markets and broad economy by targeting sectors which demonstrate the greatest potential for a consistent range of multi-year returns, while offering a risk adjusted investment profile equal to or lower than the broad markets.  Our research tells us which sectors demonstrate the greatest potential for consistent multi-year returns while offering greater risk efficiency than the broad markets.  We invest on an “Outcome Oriented” basis – meaning we have a good idea what the returns over time will be at a given purchase price.

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Durable Opportunities

This portfolio invests in companies possessing a Durable Competitive Advantage.  Such companies are likely to be around for decades, easing the concern of principal return.  DCA companies often suffer less in bear markets and usually lead recoveries.  These companies allow ACI to build portfolios with minimum expected returns that can be in the mid-single digit range over any 3-5 year period which can provide long term stability partnered with long term growth in equity.

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Full Cycle

This portfolio is derived from the ground breaking work in ‘risk parity’ by Ray Dalio, arguably one of the top 10 money managers in history and founder of Bridgewater Associates.  The Full Cycle portfolio is built on the allocation models Ray designed to provide the highest potential risk adjusted returns possible through all phases of the economic cycle.  Bridgewater’s “All Weather” fund was designed for pension funds and other large institutional investors that needed to earn stable returns with stable risk, and has been closed to new investors for years.  At the time the fund closed, the All Weather Portfolio had a minimum required investment of $100 million.

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Equity Builder

This is a risk management overlay which helps build and protect accounts by collecting small premiums against held positions on an opportunistic basis during correcting markets.  EQB seeks to collect an extra 2% – 5% per year against the cost of underlying investments.  While primarily targeted at increasing account equity, EQB gives an extra layer of protection to capital during periods of higher volatility.

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Fixed Income

Diversified, broad exposure to fixed income ETFs and best of breed no load funds including core fixed income components such as Government, Corporate or MBS, municipals, and unconstrained “Go Anywhere” funds.

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ACI Investment Team

 

Dak Hartsock; Investment manager with over 15 years of experience with securities & securities options. Dak has worked full time in the financial markets since 2007. He has more than a decade of operating experience as a business owner & developer, with substantially all personal net worth invested in ACI. He is a graduate of the University of Virginia.

Robert Hartsock; MBA. Bob has over 30 years of senior management experience in diverse markets, products and businesses. He brings an exceptional record that includes management roles in two Fortune 500 companies and leadership of 7,500+ employees. Bob’s career features a specialization in identifying and fixing management and operational problems for multiple companies including leading over a dozen acquisitions, private placements and a public offering. He is uniquely positioned to provide ACI with highly relevant C-Level management perspective. Bob provides operational & macro perspective on investments ACI undertakes for client portfolios. Bob holds degrees from University of Illinois and University of Washington.

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Email dhartsock@aciwealth.com if you have additional questions or concerns regarding the site’s privacy policy or use the form provided on the contact page.

This web site reflects the opinions of Dak Hartsock and is not intended to offer personalized investment advice. Information regarding investment products, strategies, and services is provided solely for educational and informational purposes. Other information provided on the site, including updates on the Recession Probability Indicator (“RPI”) are presented for educational purposes and are not recommendations to buy or sell securities or solicitation for investment services.

Dak Hartsock does not provide personalized investment advice over the internet, nor should any information or materials presented here be construed as personalized investment or financial advice to any viewer. Mr. Hartsock is not a tax advisor and investors should obtain independent tax advice regarding investments. Neither Dak Hartsock, ACI Wealth Advisors, nor any affiliated persons or companies accept any liability in connection with your use of the information and materials provided on this site.

Dak Hartsock is a Series 65 licensed and registered Independent Advisor Representative with ACI Wealth Advisors, LLC (“ACI”). ACI is a Registered Investment Advisor (“RIA”), registered in the State of Florida and the State of California. ACI provides asset management and related services for clients in states where it is registered, or where it is exempt from registration through statute, exception, or exclusion from registration requirements. ACI is in no way responsible for the content of DakHartsock.com nor does ACI accept any responsibility for materials, articles, or links found on this site. A copy of ACI’s Form ADV Part 2 is available upon request.

Market data, articles, blogs and other content on this web site are based on generally-available information and are believed to be reliable. Dak Hartsock does not guarantee the accuracy of the information contained in this web site, nor is Mr. Hartsock under any obligation to update any information on the site. Information presented may not be current. Any information presented on this site should not be construed as investment advice or a solicitation to buy and sell securities under any circumstances.

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Model & Performance Disclosures

Disclosures Regarding Investment Performance Reporting in compliance with Rule 206(4)-1(a)(5).

Visit http://www.dakhartsock.com/process-portfolios-historical-performance/ for historical performance of ACI’s Process Portfolios.

Market Income Portfolio
1. The performance of the broad market over the same time periods is included for both model and live portfolio to help investors understand market conditions present during the period examined by the model and during live investment.
2. Listed Index models and graphs do NOT include transaction, fund or Advisor Management fees as the index model is not available for investment. Live portfolio results include all fees, including Advisor Management fees.
3. Model results do NOT reflect reinvestment of dividends or other earnings. Actual results reflect limited reinvestment of dividends and other earnings, but do not reflect the impact of any applicable taxes which vary by investor and account type (deferred account vs. taxable, etc.).
4. Investing involves risk, including risk of loss and/or principle. While the Index model has historically shown reasonable performance versus the S&P 500 on a risk adjusted basis, there is no guarantee that will continue into the future. Market Income is designed to provide reasonable returns for less risk than the broad market on a risk adjusted basis, and while the firm believes model portfolios are capable of continued outperformance on this basis, there is no guarantee they will do so. Comparisons with the S&P 500 are included to help the average investor understand how an investment in Market Income may differ from investment in an index fund such as an S&P 500 index fund.
5. The model for Market Income is the Chicago Board of Exchange S&P 500 Buy/Write Index or “BXM.” BXM has historically displayed less volatility than the S&P 500 and Market Income. BXM cannot be directly invested in. Market Income does not exactly follow the BXM index model – the mechanics of closing and opening positions differ – BXM opens, closes or rolls positions on the same day every month regardless of the profit or loss in a position – Market Income generally, but not always, waits until after expiration before transacting. Market Income will also close or roll ahead of expiration if the position has a high percentage of profit present in order to capture that gain. Options are generally sold again within a week of the closure of the prior position, but not always, and often new position may be opened the same day the prior position is closed.
Benchmark and index comparisons are made on a best available basis – meaning that both the index model and live performance are believed to be compared with market and the closest possible benchmark for simplicity of comparison. However, there is no guarantee future volatility will be either less than, equal to, or greater than the volatility experienced in the model or the S&P 500 although the firm invests with an eye on reduced volatility vs. the S&P 500.
6. The model portfolio (BXM) utilizes the S&P 500 as its basis. Market Income differs from BXM in that the underlying securities are primarily selected on the basis of “relative” value. This simply means that sectors are compared with one another and Market Income generally invests in the sector or sector(s) trading at the greatest discount or the smallest premium relative to its historical average valuation. Other factors are also considered including sector earnings growth and expected return versus other available sector instruments. Advisor believes this gives Market Income a higher margin of safety than repeatedly investing in the S&P 500 on a rolling basis without regard to value or prevailing economic conditions, while preserving liquidity.
7. The BXM model on which Market Income is based is a non-traded index. As such, results do not represent actual trading or investment and do not reflect any impact that material economic or market factors may have had on the advisors decision making if advisor had been managing live money during the period the model covers, including transaction, fund, or management fees.
8. Market Income also differs from the BXM model in that Market Income seeks to reduce investment during recessionary economic periods while BXM stays invested regardless of economic or market conditions. Advisor believes this will better protect capital vs. BXM model but is materially different than staying invested in all market conditions. This action may cause Market Income to have reduced participation in markets that continue to move up despite Advisors reduction in investment.
9. Advisor clients have experienced results that exceed the performance of the model to date. There is no guarantee Market Income will continue to outperform BXM in the future regardless of Advisor efforts to do so.

Core Equity Portfolio
1. The performance of the broad market over the same time periods is included for both model and live portfolio to help investors understand market conditions present during the period examined by the model and during live investment.
2. Model is a historical back test and includes brokerage and fund fees but does NOT include Advisor Management fees which vary by account size, but in general reduce annual performance by approximately 1.5%. Live portfolio results include all fees, including Advisor Management fees.
Historical back-test means the model portfolio has been tracked on a backwards looking basis prior to the beginning of live investments in order to establish historical risks and results for investment in this portfolio. Back testing has certain inherent limitations as detailed in item #7 below.
3. Model results reflect regular investment of dividends or other earnings. Actual results reflect limited reinvestment of dividends and other earnings.
4. Investing involves risk, including risk of loss and/or principle. While the back tested Core Equity model has historically shown desirable performance versus the S&P 500 on a risk adjusted basis, there is no guarantee that will continue into the future. Core Equity is designed to provide reasonable returns for the same or less risk than the broad market on a risk adjusted basis, and while the firm believes model portfolios are capable of continued outperformance on this basis, there is no guarantee they will do so. Comparisons with the S&P 500 are included to help the average investor understand how an investment in Core Equity may differ from investment in an index fund such as an S&P 500 index fund.
5. The model for Core Equity is built of highly diversified, highly liquid sector and index securities, most frequently low cost ETFs. Core Equity live portfolios do not exactly follow the Core Equity model – variances in investor contributions, withdrawals, and risk tolerances result in measurable drift from the model. Over time, client accounts come closer in line with the Core Equity model.
Core Equity live portfolios may differ from the Core Equity model in an additional material way; when valuations on certain sectors become overly stretched versus their historical average valuations, the Advisor may reduce exposure to those sectors in favor of a sector position which is priced in a more reasonable range in comparison to it’s typical historical valuation. Periodically, Core Equity may allocate a small but measurable percent of assets (up to 5%) in volatility linked instruments in an effort to better manage the portfolio.
These factors may result in greater or less than model performance over time.
Benchmark and index comparisons are made on a best available basis – meaning that both the index model and live performance are compared with market and other benchmarks the
Advisors believe to be suitable for simplicity of comparison. However, there is no guarantee future volatility or performance will be either less than, equal to, or greater than the volatility or performance experienced in the model or the S&P 500 although the firm invests with an eye on reduced volatility vs. the S&P 500.
6. Core Equity invests in diversified components of the financial markets and broad economy by targeting sectors or indices which demonstrate potential for a consistent range of multi-year returns, while seeking a risk adjusted investment profile equal to or lower than the broad markets. These sectors contain a range of equity stocks with an equally broad range of characteristics – some sectors are present in the Core Equity portfolio due to their historically defensive nature, some are present due to their historical growth characteristics, some are a blend of the spectrum between. The intent is to provide a balanced equity portfolio suitable for most investors as an S&P 500 index fund replacement but which seeks lower risk while experiencing, on average, a greater return than an S&P 500 index investment.
7. The Core Equity model results do not represent actual trading or investment and do not reflect any impact that material economic or market factors may have had on the advisors decision making if advisor had been managing live money during the period the model covers, including transaction, fund, or management fees as detailed above in item #2.
8. Core Equity live portfolios also differ from the Core Equity model in that Core Equity seeks to reduce investment during recessionary economic periods while the Core Equity historical model stays invested regardless of economic or market conditions. Advisor believes this will better protect capital vs. model but is materially different than staying invested in all market conditions. This action may cause Core Equity live portfolios to have reduced participation in markets that continue to move up despite Advisors reduction in investment.
9. Advisor clients have experienced results that slightly lag the performance of the model to date. This lag is due to a number of factors, primarily the fact that different clients allocate different dollar amounts to Core Equity at different times. In general, the longer a client has been fully allocated to the Core Equity portfolio, the closer it is to model performance.
The benchmark for Core Equity (The S&P 500) has historically displayed greater volatility (risk) than the Core Equity model or live Core Equity portfolios. This may or may not be the case in the future.

Market Momentum Portfolio
1. The performance of the broad market over the same time periods is included to help investors understand market conditions present during the period covered by live investment.
2. Listed comparison Index graphs and statistics do NOT include transaction, fund or Advisor Management fees. Live portfolio results include all fees, including Advisor Management fees.
3. Actual results reflect limited reinvestment of dividends and other earnings, but do not reflect the impact of any applicable taxes which vary by investor and account type (deferred account vs. taxable, etc.).
4. Investing involves risk, including risk of loss and/or principle. While the closest benchmark for Market Momentum has historically shown reasonable performance versus the S&P 500 on a risk adjusted basis, there is no guarantee that Market Momentum that will continue such performance into the future. Market Momentum is designed to provide reasonable returns for less risk than the broad market on a risk adjusted basis, and while the firm believes the portfolio is capable of outperformance on this basis, there is no guarantee it will do so. Comparisons with the S&P 500 are included to help the average investor understand how an investment in Market Momentum may differ from investment in an index fund such as an S&P 500 index fund.
5. The closest benchmark for Market Momentum is the Chicago Board of Exchange S&P 500 Buy/Write Index or “BXM.” BXM has historically displayed less volatility than the S&P 500 and Market Income. BXM cannot be directly invested in. Market Momentum differs in key ways from BXM – the mechanics of closing and opening positions differ – BXM opens, closes or rolls positions on the same day every month regardless of the profit or loss in a position – Market Momentum targets closing or rolling positions based on technical factors including trend support and resistance. Market Momemtum will also close or roll ahead of expiration if the position has a high percentage of profit present in order to capture that gain. Options are generally not sold again until the underlying investment has moved into an area of resistance but not always; new position may be opened the same day the prior position is closed.
Benchmark comparisons are made on a best available basis – meaning that live performance is believed to be compared with the closest possible benchmark for simplicity of comparison. However, there is no guarantee future volatility will be either less than, equal to, or greater than the volatility experienced in the model or the S&P 500 although the firm invests with an eye on reduced volatility vs. the S&P 500. Market Momentum , like BXM, is an options writing strategy seeking to reduce investment volatility and improve risk adjusted returns for investors.
6. The model portfolio (BXM) utilizes the S&P 500 as its basis. Market Momentum differs from BXM in that the underlying securities are primarily selected on the basis of “relative” value. This simply means that sectors are compared with one another and Market Momentum generally invests in the sector or sector(s) trading at the greatest discount or the smallest premium relative to its historical average valuation. Other factors are also considered including sector earnings growth and expected return versus other available sector instruments. Advisor believes this gives Market Momentum a higher margin of safety than repeatedly investing in the S&P 500 on a rolling basis without regard to value or prevailing economic conditions, while preserving liquidity.
7. The BXM model on which Market Momentum is compared is a non-traded index. As such, results do not represent actual trading or investment and do not reflect any impact that material economic or market factors may have had on the advisors decision making if advisor had been managing live money during the period the model covers, including transaction, fund, or management fees.
8. Market Momentum also differs from the BXM model in that Market Momentum seeks to reduce investment during corrective or recessionary economic periods while BXM stays invested regardless of economic or market conditions. Advisor believes this will better protect capital in comparison to BXM but such action is materially different than staying invested in all market conditions. This action may cause Market Momentum to have reduced participation in markets that continue to move up despite Advisors reduction in investment.
9. Advisor clients have experienced results that exceed the performance of the benchmark to date. There is no guarantee Market Momentum will continue to outperform BXM in the future regardless of Advisor efforts to do so.

Durable Opportunities Portfolio
1. The performance of the broad market in the form of the Dow Jones Industrial Index over the same time periods is included for live portfolio comparison to help investors understand market conditions present during the period covered by live investment.
2. The Index results do not include brokerage, transaction, or Advisor fees. Live portfolio results include all fees, including Advisor Management fees.
3. Actual results reflect limited reinvestment of dividends and other earnings.
4. Investing involves risk, including risk of loss and/or principle. Portfolios compromised of companies matching the profile of those selected for including in Durable Opportunities have historically displayed superior risk adjusted performance to the Index, but there is no guarantee that will continue into the future. Durable Opportunities is designed to provide investment in companies that firm believes meet a stringent set of criteria firm believes reduces the likelihood of permanent capital impairment while allowing investors to participate in investment in companies firm believes will stand the test of time and provide superior long term returns. While the firm believes the portfolio is capable of outperformance on this basis, there is no guarantee it will do so. Comparisons with the Dow Jones are included to help the average investor understand how an investment in Durable Opportunities may differ from investment in a concentrated index fund such as a Dow Jones Industrials index fund. Durable Opportunities is not restricted to investment in industrial companies or in companies with a specific level of capitalization, unlike the Dow Jones.
5. Durable Opportunities is primarily a value driven strategy; when valuations in holdings become overly stretched versus their historical average valuations, the Advisor may reduce exposure to those holdings by either liquidation or hedging, and may re-allocate funds into a holding which is priced in a more reasonable range in comparison to it’s typical historical valuation. Periodically, Durable Opportunities may allocate a small but measurable percent of assets (up to 5%) in volatility linked instruments in an effort to better manage the portfolio.
Benchmark comparisons are made on a best available basis – meaning that live performance is compared with the benchmarks the firm believe to be suitable for simplicity of comparison. However, there is no guarantee future volatility or performance will be either less than, equal to, or greater than the volatility or performance experienced in the Dow Jones Industrials although the firm invests with an eye on reduced volatility vs. the Dow Jones Industrials Index. 6. Durable Opportunties invests in companies firm believes to possess a Durable Competitive Advantage. Such companies are likely to be around for decades, easing the concern of principal return. DCA companies often suffer less in bear markets and usually lead recoveries. These companies allow ACI to build portfolios with minimum expected returns that may be in the mid-single digit range over any 3-5 year period which may provide long term stability partnered with long term growth in equity. There are no guarantees the strategy will be successful in this endeavor.
6. The Durable Opportunities portfolios also differ from the benchmark comparison in that Durable Opportunities reduce investment by hedging or raising cash during recessionary economic periods while Dow Jones Industrial Index reflects 100% investment at all times regardless of economic or market conditions. Firm believes this will better protect capital vs. model but is materially different than staying invested in all market conditions. This action may cause the Durable Opportunities portfolio to experience reduced participation in markets that continue to move up despite Advisors reduction in investment.
7. Advisor clients have experienced results that have lagged the performance of the benchmark to date. This lag is due to a number of factors, primarily the fact that the current high valuation investing environment has made it difficult to identify companies that fit the parameters of Durable Opportunities at a desirable valuation level. Different clients allocate different dollar amounts to Durable Opportunities at different times, which has also impacted the performance of the overall portfolio.

Full Cycle Portfolio
1. The performance of the broad market over the same time periods is included for both model and live portfolio to help investors understand market conditions present during the period examined by the model and during live investment.
2. Model is a historical back test and includes brokerage and fund fees but does NOT include Advisor Management fees which vary by account size, but in general reduce annual performance by approximately 1.5%. Live portfolio results include all fees, including Advisor Management fees.
Historical back-test means the model portfolio has been tracked on a backwards looking basis prior to the beginning of live investments in order to establish historical risks and results for investment in this portfolio. Back testing has certain inherent limitations as detailed in item #7 below.
3. Model results reflect regular investment of dividends or other earnings. Actual results reflect limited reinvestment of dividends and other earnings.
4. Investing involves risk, including risk of loss and/or principle. While the back tested Full Cycle Portfolio model has historically shown desirable performance versus the S&P 500 on a risk adjusted basis, there is no guarantee that will continue into the future. Full Cycle Portfolio is designed to provide reasonable returns for the same or less risk than the broad market on a risk adjusted basis in all phases of the economic cycle by holding risk weighted non-correlated assets, and while the firm believes model portfolios are capable of continued outperformance on this basis, there is no guarantee they will do so in the future. Comparisons with the S&P 500 are included to help the average investor understand how an investment in the Full Cycle Portfolio may differ from investment in an index fund such as an S&P 500 index fund.
5. The model for the Full Cycle Portfolio is built of diversified, liquid sector and index securities, most frequently low cost ETFs and low cost funds. The live Full Cycle portfolio does not follow the Full Cycle model exactly – variances in investor contributions & withdrawals result in measurable drift from the model. Over time, client accounts come closer in line with the Full Cycle model.
Full Cycle live portfolios may differ from the Full Cycle model in an additional material way; when valuations on certain sectors become overly stretched versus their historical average valuations, the Advisor may reduce exposure to those sectors in favor of a comparable position which is priced in a more reasonable range in comparison to it’s typical historical valuation.
These factors may result in greater or less than model performance over time.
Benchmark and index comparisons are made on a best available basis – meaning that both the index model and live performance are compared with market and other benchmarks the
firm believes to be suitable for simplicity of comparison. However, there is no guarantee future volatility or performance will be either less than, equal to, or greater than the volatility or performance experienced in the model or the S&P 500 although the firm invests with an eye on reduced volatility vs. the S&P 500.
6. Full Cycle invests in diversified components of the global financial markets and broad economy by balancing risks with non-correlating or reduced correlation assets in opposition to one another each of which is designed to prosper in some phase of the economic cycle and intended to offset reduced or poor performance in other portfolio holdings.
7. The Full Cycle model results do not represent actual trading or investment and do not reflect any impact that material economic or market factors may have had on the advisors decision making if advisor had been managing live money during the period the model covers, including transaction, fund, or management fees as detailed above in item #2.
8. Full Cycle live portfolios also differ from the Full Cycle model in that the live portfolio may be rebalanced more or less frequently depending on prevailing market conditions. While firm believes this difference positions portfolio for improved risk adjusted performance, it is not clear that this difference results in clear over or under performance versus the Full Cycle model.
9. Advisor clients have experienced results that slightly outperform the performance of the model to date. This outperformance may or may not persist. In general, the longer a client has been fully allocated to the Full Cycle portfolio, the closer it is to model performance.

Fixed Income Portfolio
1. The performance of the broad bond markets over the same time periods is included to help investors understand market conditions present during the period covered by live investment.
2. Listed comparison Index graphs and statistics do NOT include transaction, fund or Advisor Management fees. Live portfolio results include all fees, including Advisor Management fees.
3. Actual results reflect limited reinvestment of dividends and other earnings, but do not reflect the impact of any applicable taxes which vary by investor and account type (deferred account vs. taxable, etc.).
4. Investing involves risk, including risk of loss and/or principle. While the closest benchmark for Fixed Income has historically shown reduced volatility and reasonable performance versus many classes of fixed income investments, there is no guarantee that Fixed Income that will continue such performance into the future. Market Momentum is designed to provide reasonable returns for less risk than the broad market on a risk adjusted basis, and while the firm believes the portfolio is capable of outperformance on this basis, there is no guarantee it will do so. Comparisons with US Aggregate Bond Market and PIMCO Total Return are included to help the average investor understand how an investment in Fixed Income may differ from investment in an alternative index or fixed income fund.
5. The closest benchmark for Fixed Income is the Pimco Total Return Fund. Fixed Income differs in key ways from BOND – including selection of underlying investments and reduced diversification. Benchmark comparisons are made on a best available basis – meaning that live performance is believed to be compared with the closest possible benchmark for simplicity of comparison. However, there is no guarantee future volatility and performance will be either less than, equal to, or greater than the volatility and performance experienced by the benchmark although the firm invests with an eye on out performance.
6. The benchmark may include securities not contained in Fixed Income, and vice versa. Fixed Income currently holds significantly more cash than PIMCO Total Return Fund, a situation likely to continue in the near future. This action may cause Fixed Income to have reduced participation in markets that move up despite Advisors reduction in investment.
7. Advisor clients have experienced results that lag the performance of the benchmarks to date. There is no guarantee Fixed Income will continue to outperform benchmarks in the future regardless of Advisor efforts to do so.

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