investments

2016 Stock Market: What You Need to Know

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4 Things You Need to Know About Investing in 2016

We’ve seen a lot of headlines recently, most of them pretty alarming to the average person. Hand in hand with those headlines we’ve seen markets make some of the most substantial short term moves in recent history. In the first 5 market days of 2016 the S&P 500 dropped nearly 6%, the biggest 1 week drop we’ve seen since August 2011 (when the S&P dropped about 11% in 5 days).

The deluge of negative news stories and depressing angles on the global economy and the stock market can be overwhelming and really create the idea that some kind of action has to be taken or something terrible will happen.

Reality, at least at this point, is more than a little bit different.

There are four crucial things serious investors need to understand about the market we face in 2016:
1) The Federal Reserve is less able to suppress market volatility in the short term as they guide to higher interest rates.
2) Market volatility is likely to return to pre-QE levels.
3) Short term market swings in both directions will be larger and occur faster as a result.
4) Bear markets are almost always accompanied by recessions.

#1 answers the “why” of what we are seeing, and #2 and #3 describe the immediate result of #1. #4 is the reason successful investors aren’t going to let the first 3 drive them to take actions that are likely to hurt their investment goals.

As you may have surmised, investors that exited the market in 2011 due to fear missed out on a substantial move up in the market, and a lot more money in their investment accounts.

This is like running out of a building when the lights go on and off for a couple minutes because you are afraid you might die in a fire. Most of the time, lights going on and off don’t mean the building is on fire. Most of the time, smoke means a building is on fire.

Right now, the lights are flickering in the market, but there isn’t any smoke to indicate a recession.

So, how do the most successful investors deal with flickering lights?

According to a recent LPL behavioral finance paper on 5 Common Investor Mistakes, the top 3 things successful investors do differently are 1) They do not react to easily available information (read that as media headlines and the underlying stories, i.e. incomplete information), 2) They basically completely ignore short term performance (including the deluge of messages about short term events in financial markets) and 3) They follow their investment plan, not the herd.

What’s really interesting is that the less successful an investor you are, the more likely you are to act on incomplete information (i.e. headlines and media articles, short term falls in stock prices).

Wealthy, successful investors beat the average investor by a measurable margin year in and year out. They are less likely to panic sell and they maintain long term perspective. That doesn’t mean they buy and hold no matter what, but they are not affected by short term market noise and rarely trade assets for cash except in the face of looming recessionary bear markets and the high probability of serious losses.

Why is that?

The graphic study below was put together by JP Morgan (Bear Markets and Bull Runs). For those that don’t like these graphs and data tables, I’ll put it together for you;

Of the 10 bear markets we’ve seen since 1929;
* 8 included a recession
* 4 saw spikes in commodity prices
* 4 featured an overly aggressive Federal Reserve (2 of those came with recessions)
* 5 had extreme valuation bubbles (3 of which also had a recession)

So, it’s clear the common denominator of bear markets is recession.  Only 2 bear markets occurred without a recession, and they were shorter and shallower than the others.

Bear markets that don’t include recessions last an average of 5 months and drop 30% less. They generally don’t result in catastrophic damage to investment portfolios.

So, where are we now?

As yet;
* There is no recession currently on the horizon
* 1 rate raise in 6 years does not yet make an overly aggressive Fed
* Commodities are crashing
* While valuations are high in some areas they are not in bubble territory in comparison with the past.

So, until one of these situations experiences a material change, the most successful investors will continue to prosper by sticking to their investment plans.

Yes, the lights appear to be flickering. But it pays to wait for smoke before deciding the building is on fire.

Bear Markets and Bull Runs

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Thinking about working with an investment manager at some point? CLICK HERE to learn how my firm and I work with clients.

To Smarter Investing,

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

Is Your 401k Stealing From You?

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Is Your 401k Stealing From You?

One of the most widely used investment accounts is the 401k retirement savings plan. Investors from CEO’s to grocery clerks pay into these accounts as a central part of their retirement strategy. A solid 401k account can be the difference between a satisfying retirement and one filled with financial struggle.

But there are widespread problems in 401k plans, so much so that even the White House is pushing against the hidden fees that are buried in the vast majority of plans.
So, what are these fees and how much damage can they actually do to your account?

There are plan administrator fees, fund management fees, load fees, contingent deferred sales load, redemption fees, and 12b-1 fees. They can add up and do some serious damage.

For the most part, you can’t do anything about administrator and 12b-1 fees but they are typically reasonable even in the worst offending plans, and sometimes the employer covers those expenses anyway.

What you do need to think about are the rest of the fees, which can outrageous.

Redemption fees are usually incurred when you buy an investment in your 401k and then sell it again within a short period of time. The best way to avoid these is to remember that you are investing for retirement and only buy into funds you feel comfortable holding in the account for at least a year.

The biggest problems in 401ks are load fees. These can be as high as 8.5%, but are usually in the 5% range. Regardless, a load fee is something you should never, ever pay if it can be avoided. The majority of that 5% is commission paid to the plan administrator for including the offending fund in your company’s 401k investment options.

The next biggest problem is the management fee, or expense ratio. In some funds, this can run as high as 3%. As a general rule of thumb, if the fund management fee is above 0.75% (or even 0.50%), try to find a less expensive option.

The best way to do that is usually to replace a mutual fund with an Exchange Traded Fund (or “ETF”) that gives you approximately the same exposure to the desired investment.
Let’s look at a specific example – the John Hancock Large Cap Equity Fund A Class shares (“TAGRX”) which are available in many John Hancock administered 401k plans. The front end load fee on this fund is 5%. So, this means that if you put $100,000 into this fund you immediately lose $5,000 to commissions paid to the administrator. The expense ratio of 1.06% is below average for a fund of this type, but still really high compared to alternatives that are probably also in your 401k options. If your investment stays level during the year, this is another $1,000 or so of your money lost to fees for a total approximate fee loss of $6,006 for the year. So the fund has to do at least over 6% for the year just to get you back to break even.

If your plan has John Hancock Funds, it probably also has John Hancock ETFs. The John Hancock Multifactor Large Cap ETF (“JHML”) is comparable to the TAGRX fund above, but has no sales load and an expense ratio of 0.35%. So, total approximate annual fees of $350 for a $100,000 investments vs. up to $6.006. Think about that.

Chances are you rebalance annually. If you are replacing one load fund with another each year, or even every other year, you are costing yourself huge amounts of money in retirement.

What does huge mean?

CASE STUDY: 401k Account – 53 Year Old Senior Executive at a National Food Company
Approximate 401k balance at time of analysis: ~$700,000.

case study

Click graphic to enlarge

9/10 holdings had fees he didn’t know about. He had rebalanced each year for the previous 5 years and as a result was losing about $10,800 a year to unseen fees. Think about that – nearly $55,000 over 5 years lost to avoidable fees.

That’s expensive, but it doesn’t stop there.

Let’s say he stopped buying load funds with high expense ratios and replaces them with lower cost ETFs from here on out.

How much did he really lose from just 5 years of not understanding fees and investment choices in his plan?

Assume:
1) He retires at 65.
2) His account averages 7% a year from this point forward.
A) Year 1 of retirement: $128k in missed gains lost to avoidable fees.
B) Year 10 of retirement: $254k in missed gains lost to avoidable fees.

What if he’d kept rebalancing into the same type funds each year until age 65?
A) Year 1 of retirement: $374k in missed gains lost to avoidable fees.
B) Year 10 of retirement: $736k in missed gains lost to avoidable fees.

This is widespread. Most companies, however well meaning, have these fees in their 401k plans. The bottom line is that the benefits coordinators aren’t investment advisors – they listen to what the plan salespeople tell them, pick the one with a recognizable brand or that they think they understand the least poorly, and move on to their next problem. Looking under the hood on investments isn’t in the job description or in their training.

If the senior executive above hadn’t decided to get his 401k independently evaluated, he probably would have missed out on around $500,000 or maybe more in retirement. That’s a BIG number and it’s why you need to look under the hood on your 401k and understand what’s happening.

If you can’t make sense of your choices or don’t have the time to dig into your plan, talk to someone that can.

These hidden and mostly avoidable fees could be the difference between having a vacation home in retirement or not, or a grandchild going to the college of their choice, or spending a year or two abroad.

It’s your money.

If your portfolio is $300,000 or more, click here to find out what you are paying in avoidable fees and get suggestions that can keep more of your money working for you. Just mention 401k fees in the message box.

As always, if you have questions about this update or just need a little guidance in the right direction, feel free to get in touch.

To Smarter Investing,

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

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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.

Buffett Buying Out ACI’s Largest Holding!

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Buffett Buying Out ACI’s Largest Holding

Precision Castparts announced this morning that it has agreed to be acquired by Warren Buffett’s Berkshire Hathaway for $235 a share, subject to shareholder approval. This is as a validation of the research process for ACI’s Durable Opportunities Portfolio.

Precision Castparts is the largest holding in the Durable Opportunities Portfolio. ACI began buying Precision Castparts in September 2014 and three additional add-on buys were made prior to June 2015. Each ACI buy was below the Berkshire offer price.

Mr. Buffet’s planned acquisition validates the ACI research process for Durable Opportunities and my view of Precision Castparts as a strong company with superior management and predictable growth prospects that will last for decades, providing investors with desirable long term rates of return.

ACI’s Durable Opportunities Portfolio focuses on buying companies that are going to be around for decades, at or below fair value, which feature ever growing equity for shareholders and target expected returns in the low double digit range – reasonable risk for reasonable return.

To learn more about ACI’s managed portfolios, visit www.aciwealth.com/portfolios

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To Smarter Investing,

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

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

Ouch! Stock Market Earnings Fell 15%. Should You Sell? Market Valuation Update: June 2015

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Ouch! Stock Market Earnings Fell 15%. Should You Sell? Market Valuation Update: June 2015
The stock market is driven by valuation, and valuation is driven by earnings. This is how the wealthiest investors think, and they use that thinking to help them manage their investment risk. The term is “margin of safety” and it’s an important concept. Successful investors are searching for that margin of safety, whether they are small investors with a million or two, or a mutual fund with hundreds of billions under management. Big or small, investment success demands the same discipline.

Generally speaking, the higher the valuation versus the historical average valuation, the lower your margin of safety.

There is another side to this coin –“expected return“–it’s the potential reward you may receive for buying at a certain valuation level. The lower the valuation versus earnings, the larger the margin of safety and the larger the expected return.

Add expected return to the dividend payout and you get “total expected return” which is exactly what it sounds like. We’ll have a look at that below.

So what return might you expect if you buy the S&P 500 or Energy Sector right now?

The first quarter of earnings has finished reporting and both the S&P 500 and the Energy Sector had a tough go of it. You might recall the S&P 500 earnings chart I published in the last valuation update. This one looks different.

S&P Quarterly June 2015
XLE Qtrly EPS June _2015

You can see the S&P equal weighted earnings have fallen about 15% from last quarter, beneath the earnings trend line that was established in 2011. For the Energy Sector, it was even worse. Earnings plummeted to levels not seen since 2009.

How does the reduced earnings impact expected returns?

 

S&P 500 CAGR June 2015
XLE CAGR June _2015

In case you were wondering, these returns would be classified as poor. Lame. Sub-par. Some might say downright crappy, even. However, it gets better (a little) when we add in those much needed dividends.

The S&P’s proxy, SPY, pays about a 1.9% dividend at $210 a share.

3 year expected total return for SPY at $210 per share if earnings don’t improve next quarter: about 3.4% compounded annuall.

How about energy? XLE, the Energy Sector proxy, pays about 2.5% dividend at $75 per share.

3 year total expected return for XLK if earnings don’t get better, and quickly: about 1.7% compounded annually.

If you are happy to expect 1.68% a year for buying a basket of stocks, step away from the checkbook and get some help. Now. Yesterday would have been better, but with that thinking tomorrow may be too late.

More seriously, if you are putting money into either the S&P 500 or the Energy Sector at these prices, give it a second think. Buying here is betting that earnings are going to improve strongly in the next couple quarters. Be aware of that. Maybe you should take a look around at some of the other sectors out there. There are 10% + opportunities out there, you just have to look, and know how to look.

So, should you sell? If you just bought at these prices, you might consider putting that money to work elsewhere. If you bought significantly lower, you might be just fine where you are.

Hope this helps. Thanks for stopping in and and please share. Almost every investor can learn something useful here.

And send me your questions. Use the contact page or email me directly: dhartsock at aciwealth dot com. If I didn’t really enjoy helping people understand investments and how the markets work, I wouldn’t spend my time on this blog.

To Smarter Investing — Dak

 

The rest of this post is for those of you that are interested in my personal take on what’s happened to earnings in the S&P and Energy. If all you wanted to figure out is what you may get for investing money in the S&P 500 or the Energy Sector right now, you might as well stop reading here. Nothing for you below.

Still with me?

Okay, here is my opinion. Understand the market couldn’t care less about my view.

We had a big slowdown in the earnings of these two sectors in the first quarter for reasons I won’t go into detail about, but at this point I don’t see the reasons persisting through the next couple quarters. I think we’ll see a re-acceleration in the S&P by 3rd quarter if not the 2nd, and same goes with Energy. The plunge in energy hit the S&P as well as the Energy Sector as the index has a number of substantial energy or energy related companies in it. Several other sectors my firm and I track are doing okay on the earnings front and a couple are doing better than okay.

Right now the Energy Sector is re-allocating capital to make themselves competitive in a prolonged period of $60 – $80 oil. The cratering earnings from the last quarter reflects those adjustments. There will be consolidation in the industry with some of the majors buying some of the smaller companies to increase their growth rate and their field leasing footprint. When the sector emerges from the restructuring, earnings will increase — not at the pace we saw last year, but enough to push expected returns back north of 5% at least.

Those changes will track into the S&P 500 as well.

A quick look at the RPI (Recession Probability Indicator) also tells me that while we’ve seen some risks rising, we are still well within the tolerance of the market to sustain an uptrend, or at least avoid a bear market.

The Fed could bring that to a screeching halt with a couple missteps, but unlike the other 92% of managers CNBC surveyed the other day, I don’t expect the Fed to raise in September. I think December is the earliest. I have a lot of reasons for that, and I may be wrong, but as long as the Fed doesn’t shock the market by raising too early or too aggressively, I think the market motors on. It might chop a bit, but it should grind higher. Sometimes it’s hard to see it, but things are improving. Much more slowly than they should thanks to excessive regulation and the Gov bailouts from previous years, but the track is still upwards.

Questions or thoughts? You know where to find me —>>> Contact Dak

May 2015 RPI Update — Recession Probability Recedes

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Recession Probability Indicator Update: May 2015.

As you may recall from last month’s reading, one of the key components of the RPI recorded a 3rd negative month in a row, an event that has only occurred three times in the last 15 years and two of those occurrences preceded recessionary bear markets.

The RPI indicator has moved back below 20 at this reading, indicating that the investment environment has returned to a stable footing.

This leaves other factors such as fundamental value or tactical/technical factors in charge of the market. For a more detailed analysis of these factors, CLICK HERE.

To review the history of the RPI including monthly readings and an illustration of the potential impact on investments, CLICK HERE.

Is the Market Too Hot, Too Cold, or Just Right? Market Valuation Update: S&P 500

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Do these headlines look familiar?

Is the Stock Market Rocket Out of Fuel?
Buy Stocks, More Room to Run.
Market Way Overvalued.
8-9 Years Left in Bull Market.
You are probably getting tired of seeing headlines like these. I know I am. I took these from various financial media sites over the last 120 days.
Makes zero sense, right?

The reason? When the market is selling off the media usually wants opinions about how the market is under-valued. When it’s heading up, they want to hear that it’s over-valued. This sells ads and drives investor activity, which is good for the financial media and for Wall Street.

Not usually so good for the individual investor.

This series is about getting away from opinions and evaluating the market’s condition based on current and historical facts.

Let’s use the S&P 500 via it’s proxy ETF, “SPY”, offered by State Street Global Advisors.

Both the S&P 500 and SPY are market capitalization weighted, meaning the more the company is worth, the more it counts in the index. The same goes for its earnings. I prefer equal weighted earnings (let’s call these “EWE”) as I think they give a better picture of the broader earnings trends in the S&P 500. Without an equal weight approach, a handful of companies with monstrous earnings and market caps (think Apple and Exxon) could make things seem better or worse than they actually are. All earnings references here are EWE, and price-to-earnings (“PE”) referenced are based on EWE.

For the most recent quarter (ended December 2014) earnings were about 3.1% lower than the previous quarter with trailing twelve month earnings of $19.29. This puts today’s price (April 14, 2015) of $209.50 at 10.86x PE. Trailing twelve month earnings were still rising as of quarter end, which is good. With earnings season upon us, we’ll see if that trend continues.

April 2015 S&P Earnings Trends

Historically, the average 10 year PE for SPY has been 9.7x. At $209.50 SPY is about 12% over the average valuation of the last 10 years, but still well below the valuation peaks of 2008, when interest rates were considerably higher.

Why is this important?
Valuation and average expected return are inversely related, assuming stable earnings growth, etc.. In English, this means that if you buy when the valuation is below the historical average, all things being equal, your expected return is higher, and when you buy high in the valuation range, your expected return is lower.

To determine an expected return range for the S&P 500, my firm looks at over 50 analysis models based on hard earnings and valuation data.

Here is a condensed summary of SPY’s expected return ranges on an EWE basis:

April 2015 S&P Price Outcomes

I condensed this down into 5 central tendencies so it wouldn’t be an unreadable rainbow blob. Regardless, it gives a good idea of the range of possible price outcomes.

I have a preference for investing client dollars when the central tendencies suggest double digit average expected returns. Doesn’t guarantee we’ll get ’em, but why pay $1 today to get $1.03 next year when a little bit of patience and research might turn that $1 into $1.11 or maybe $1.15 instead?

Here is a table of the expected returns given average historical valuation and average historical earnings growth derived from 40 quarters of earnings and valuation data.

SPY April 2015 CAGR 1

So, we now know that the S&P 500 is a bit over priced and that buying here may result in returns that barely keep up with inflation in the near to intermediate term.

What happens to returns if we buy at the average historical valuation?

SPY April 2015 CAGR 2

How about if we buy just 10% below the historical average valuation?

SPY April 2015 CAGR 3

It’s clear why valuation is an important issue when determining when to buy the market (or a sector, or a company) and when it may be wiser to seek better opportunities.

This type of valuation thinking is a major component behind the success of investors like Warren Buffett.

It’s important to understand that interest rates play a role in valuation: lower interest rates support higher valuation, and higher interest rates drive lower valuation. Given current interest rates, and the likelihood they will remain low by historical standards for some time, a 12% premium to average value does not constitute a bubble, nor does it mean the market is greatly over-valued.

But neither does it offer a strong opportunity to make money. When expected returns are in the low to mid single digits, my firm and I look for other sectors or indices that have probabilities of higher returns. All told, we cover nearly 20 sectors and indices. There are opportunities out there; you just have to know where and how to look.

I’ll have a look at the energy sector in the next Market Valuation Update as everyone seems interested in where that’s going.

Feel free to reach out via the contact form or my email if you have questions or post a comment.  I block out time each week to answer emails from this site.

To smart investing,

Dak

Economy Showing Signs of Wear? — Recession Probability Indicator Update April 2015

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RPI Score Moves to 27 from 12

One of the major components of the RPI has recorded it’s 3rd negative month in a row. This has occurred three times in the last 15 years. Two of those occasions marked the beginning of market declines that ultimately became crashes.

The move above 20 creates a “Reduce Risk” signal for money I manage on behalf of clients.

My personal perspective is that this component will flip positive next month and that the other components of the RPI will not confirm the warning, sending the RPI back below 20. However, no one I can recall was calling for a recession and a market crash in February 2001 or January 2008 either.

The RPI is a tool I developed for measuring the strength of the American economy. It is derived from data provided by the Federal Reserve – things like CPI, GDP, productivity, employment, manufacturing activity, retail sales, etc.

Using a simple algorythm, the RPI scores the investment environment from 3 to 75. A score of 20 or above signals a rising likelihood of recession (usually bad for stocks). A move back below 20 after a recession signals a rising likelihood of favorable investment conditions. Most of the time it putters along between 3 and 17.

For a more detailed description and history of the RPI, take a look at the Recession Probability Indicator page under Monthly Features. It may be an eye-opener for you.

Disclosure: Please see Privacy Policy and Disclosure at the bottom of the page to review the terms and conditions of using this site.

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Dak Hartsock

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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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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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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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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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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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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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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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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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