The Blumenthal Viewpoint: November 30, 2012

The Portfolio Construction Game Plan for 2013

Before we begin, I must caution you – this Viewpoint is a long one.  It has to be.  There is significant trouble ahead and it can be managed. So print this out, get a cup of coffee and read.  Afterward, please send me your questions and share your thoughts.

Two years ago it came down to Michigan or Penn State.  Brianna held her decision to the last day and ran to me to tell me the news.  “Dad, I’m going to Michigan”.  As I gave her a great big dad hug she quietly whispered in my ear, “surprise, I’m going to Penn State”.  I couldn’t hold back the smile on my face.

Over the years I have done my very best to brainwash my kids to all things Penn State.  Blankets, jerseys, hats, mugs, car stickers – you name it.  I graduated in 1983 and remain one of those crazed Penn State fans.  It is in my blood, though Michigan wasn’t a bad alternative.

Her freshman year began in crisis.  The news was painful and the emotion ran high.  Penn State was in its own deep recession of sorts.  Today, the storm clouds have lifted somewhat and life is moving on.  Brie is now a sophomore finance student and fortunately her economic lights are turning on.

We talked recently about the Fiscal Cliff.  “Dad,” she said, “What is going on?”.  I did my best to explain and told her that the Fiscal Cliff is a rain storm in comparison to the series of hurricanes that remain ahead.  I told her, ‘we humans will get through this financial crisis and that we are working towards a better secular destination’.  I added, ‘you and your friends moved through an unimaginable crisis.  We’ll all get through this one as well’.

We stopped our conversation short of the bigger issues.  I didn’t have to heart to tell her that our government is spending $5 trillion a year more than it is taking in.  We are printing currency to buy government debt and the government is using that money to cover their excess spending.  We owe more and more and combined with unfunded entitlements our debt to GDP (what we produce as a country) is now 105%.

We are in a debt spiral of unprecedented proportion and so is the balance of the developed world.  Like Penn State, we’ll hurt and we’ll heal.  We will get to the other side of this mess but there is no easy fix or quick end around.  The world has a major problem to solve.

We will arrive at a better destination however; it will be a rough and bumpy journey along the way. In the midst of the global mess, my hope today is to leave you with a sense of optimism as well as a sense of urgency.  I believe we are in a secular period that requires active risk management and more creative portfolio solutions.

If I’m wrong about the period ahead, and I hope I am, returns will likely be lower than normal.  If I’m right about the period ahead, not only can you grow your clients’ wealth, you have an outstanding opportunity to grow your enterprise.

My optimism isn’t about economic crisis (the next recession is unavoidable); my optimism is that there is a way to walk through the crisis and shine.  It requires a shift in thinking and a well prepared game plan.

I would like to first touch on some of the key points I see ahead and go into specific detail on a portfolio game plan that I favor over traditional 60/40.  I just don’t believe we are back in an environment just yet where 60/40 will excel.  In fact, I think it will get wiped out once again in the next storm.

I believe an investment strategy should involve three components:

1)      Realistic expectations and a forward view

2)      A collection of investment assets that has collectively lower risk than any individual asset

3)      Discipline to execute the game plan.

The game plan is relatively simple: proactively hedge your long equity exposure (I talk about this in Trade Signals), become more tactical with your fixed income exposure (rates are just too low to offer important risk diversification) and build a broad mix of important non-correlating risk diversifiers in your tactical/trading/alternatives bucket.

Think 30/30/40 as opposed to 60/40.  You can always shape the weightings up and down as the markets present opportunities.  The broader idea is to expand the investment mix and find strategies that can make money in both up and down trending periods.  I present a specific portfolio below and discuss the math used and my forward thinking that lead to the creation of the portfolio.

Ahead of us is a difficult global recession, bankruptcy and debt restructuring.  The easiest path appears to be the creation of new currency units and that is the path the world’s major central banks have chosen.  There will be unintended consequences.  The systemic imbalances are simply too large.

60/40 Forward Expected Returns

We are in an investment environment that offers historically low traditional investment returns.  I attended a seminar about a year ago and a research analyst from Research Affiliates, Rob Arnott’s shop, presented a slide showing the forward 10-year expected return for the popular 60/40 traditional stock/bond portfolio.  Today, the projected return is the lowest in 14 decades with Expected 60/40 Returns over the next 10 years to be just 4.26%.  See Chart 1.

Chart 1:  Expected Returns

As of September 18, 2012, the Beginning S&P 500 Dividend Yield was 1.94%, the real Long-Term EPS Growth was 1.7% and Implied Inflation was 2.27%.  Added together gives a 10-year forward Expected Equity Return of 5.91%.   If you take 60% of 5.91% and 40% of the 10-year Treasury yield of 1.8% (the yield on September 18, 2012), you get 4.26%.  Sources: Robert Shiller, Federal Reserve, BEA, Research Affiliates

An expected return of 4.26% less a 1% investment management fee equals just 3.26%.  This is how the majority of the industry is allocated.  4.26% is the lowest projected forward 10-year return in the last 14 decades.  As in 140 years.  Of course, past performance does not guarantee future performance but I don’t like the odds and wouldn’t want to bet against it.  Low dividends, low implied inflation and low bond yields offer low historic returns.  It is as simple as that.  60/40 is in trouble.

My forward view

First, as I present my thoughts, please know that I am not making a recommendation for you to buy or sell any security but rather present research that opens the door to a deeper discussion.  I have no idea as to your clients’ specific needs, risk level, time horizon and investment goals.

My broad view is that we remain in a long-term secular bear environment and that the equity market upside will be constrained as we struggle with the weight of excessive debt, excessive regulation, increased taxation, irresponsible spending and unmanageable entitlements.  Too much debt impacts growth; and today’s low yields and modestly high valuations simply don’t support attractive forward 10 year return expectations.  4.26% over 10 years is not good enough.

We are not alone as the balance of the developed world remains stuck in the same debt trap.  Unfortunately, the response from governments is to punt and print more money.  That is exactly what the U.S., ECB, Bank of Japan, and China are doing.  Never before has this happened all at the same time.

For now it is a debt deflation spiral, however, we have planted the seeds for future inflation and hyperinflation lurks as a crisis risk.  Rising commodity prices reduce profit margins and rising food and energy prices squeezes an already tapped out consumer.

With a QE3 of more than $40 billion per month and estimates for the total size of anywhere from $250 billion to $2 trillion, the magnitude of the Fed’s plan is simply stunning.  While this provides a temporary solution for an aching economy, the only thing printing money does for sure is weaken currency.  A portfolio can be positioned to profit and it can be positioned to hedge the assets exposed to the risk.

Our opponent is DEBT and it is a worthy one.  We have spun ourselves into a bond bubble of mass proportion.  It is the Hurricane Sandy of hurricanes.  Circling at sea, while we see it on our satellite, we can protect ourselves.  My view, similar to the Tech storm in 2000 and the Housing storm in 2008, is that this one too will be big.  I hope I’m wrong, however, put up the plywood anyway.  Portfolio risk management should be part of your focus.

I know it sounds heavy and depressing but I see it as simply a time to get prepared.  There are some straight forward strategies to hedge the risk and even profit if positioned correctly.  It is time to think differently.  I had strong returns from 2000 trough 2002 by trading in and out of high yield exposure gaining 25% when the S&P lost 38% and tech lost 73%.

Source: CMG Research.  Bloomberg data.  CMG HY actual account performance net of fees.

In 2008, we faired relatively well and were positioned to take advantage of a great rally in 2009.  Note too that the S&P needed a 100% gain to catch up to CMG HY while the Nasdaq needed a 470% gain to catch up and this assumed CMG HY stayed flat.  The magic in the gift of compounding math is to minimize loss.

Sure, past performance doesn’t guarantee anything.  The point I am trying to make is that there are solutions out there that have the ability to profit.  Don’t get depressed; find and add an important mix of strategies which are not dependent on a one directional bull market up move in a low 60/40 potential return environment.

Risks: General views and how to trade the opportunities

Getting specific, following are what I believe to be probable outcomes in the coming few years.  I bullet point some potential risks and offer some ideas.  Further in this piece, I include a 30/30/40 portfolio “for discussion purposes only” that includes my views shaped into the portfolio.

As you read, think about how much exposure to any single risk might make sense and which portfolio assets might need to be periodically hedged.  If you want to get rich, you will need to take highly concentrated bets.  Please know that this discussion is about proper investment portfolio management with the goal of growing and preserving your wealth.

Let’s look at three components:

1)     Risks and opportunities

2)     Define Modern Portfolio Theory

3)     Build a highly diversified and well constructed portfolio that includes a number of non-correlating risk diversifiers

My views on specific risks and how to trade the opportunities they present. 

• Overall, I see lower expected returns and larger more frequent tails.  It is a period that requires actively hedging long directional risk exposure and adding meaningful allocations to investments that have the ability to profitably navigate the period ahead.
• Very slow growth – we remain in the age of deleveraging.
• A high probability of a recession in 2013.  One much deeper than 2008.  Equity markets decline approximately 40% in recession.  I favor reducing and/or risk protecting long equity exposure (for example: writing covered calls against your long equity positions and buying put options with entries timed to Excessive Investor Optimism and exits timed to Excessive Investor Pessimism – see Trade Signals for more information)
• I believe interest rates will be range bound in 2013 with the 10-year Treasury yield moving between 1.5% and 2.25%; however, the historically low yields offer little return against inflation (running at over 2% according to CPI and over 5% according to the pre-Clinton CPI calculation method.  Source: ShadowStats.com).  The potential reward of today’s 1.63% 10-year Treasury note yield is not worth the risk of rising inflation and rising interest rates.
• There was Tech, then Real Estate and now the great Bond bubble.  Rates are simply too low and the risk of rising inflation and interest rates is high.  The Fed has its foot on the monetary pedal, manipulating rates lower.  Deleveraging and the Fed will keep rates range bound and low for now, however, investors have their chips “all in” fully loaded in bonds and bond funds and don’t believe they can lose money.  The fact is they can.
• I like the short Treasury bond trade but feel it is still a little too early to put this hedge/trade in place.  I believe it may be the single best low risk, high reward trade since the sub-prime short.  My best guess to implement will be in the coming recession (sometime in 2013).  I’m watching for a breakdown in the bond charts.
• Bond positions pose the single biggest risk to your advisory business model.  Should interest rates rise just 3% to 5.82%, the principal value of the Treasury bond will decline 42% and I don’t believe they will be able to withstand the pressure.

• There is still time to educate your clients and get them prepared.  The Treasury bond yielded over 5% just four years ago.  The above chart shows what will happen for every 1% rise in rates.
• Supply/demand imbalances in agriculture favor higher agriculture prices.  I also like water and other natural resources.
• I believe that there is no stopping the continued currency manipulation by the EU, BOJ, U.S. and China outside of a crisis.  The seeds are planted for inflation and perhaps surprisingly significant inflation.  We are in a global “race to debase”.   This isn’t normal or healthy.  Expect to hear more about currency wars in the days ahead.
• Fiat currency destruction will ultimately lead to a new currency structure at some point in the not too distant future.  This favors gold, silver and other commodities as a new currency will likely be backed by a basket of hard assets.  Certain currencies will likely benefit against the developed currencies.  On my list are Canada, Australia, New Zealand, Singapore, Mexico and Brazil.  I like commodity rich Canada relative to the dollar.
• The U.S. remains the cleanest shirt in the ugly currency contest.  I like short yen as both a defensive hedge and outright directional bet.  The dollar remains a “safe haven” for now.
• Gold provides the best hedge against inflation.  I see gold moving much higher.
• I believe a significant foreign bank failure is probable in the immediate future and the derivative exposure will hit us here in the U.S.  A Lehman-like risk remains elevated here at home.  Derivatives remain “financial weapons of mass destruction”.  Another hedge idea is to short (or buy out of the money put options) the weakest of the largest U.S. and global banks either as a directional bet and/or a hedge on long equity exposure.
• I likely see U.S. energy independence within ten years, which favors long-term energy exposure.   I would be patient here and look to aggressively add energy exposure into the next recession/market crisis.
• REITs and other hard assets do well in inflationary periods.  I like them now.
• I believe we remain in a long-term secular bull market for commodities and a long-term secular bear market for equities.  I believe the secular equity bear ends with PEs below 10.  Today GAAP Normalized PE based on actual reported earnings is 19.6 (red box and arrow below).  Source: NDR 10-31-2012

• We can continue to have very slow economic growth and still see rates and inflation rise.  I believe that to be the most probable outcome.
• When investors get educated on what is coming there will be less desire to hold near zero yielding money balances and the movement of money (velocity of money) will accelerate.  The selling of bonds will drive rates higher.
• For now the newly created money is papering over the unmanageable debt.  I believe it will end in crisis.  Like sub-prime real estate in 2006 and tech in 2000, the current imbalances are significant and expanding.  Few saw it then.  Few desired to believe it was possible.  Few see and understand the problems before us today.
• Is it going to happen? I’m in the “highly probable” camp.
• In sum, I see lower expected forward returns and fatter and more frequent risk events (“fat tails”).  We are in a deleveraging, low growth period driven by a world coming to grips with unmanageable debt and deficit spending that simply cannot be sustained.  This is a period in time that favors active equity hedging and the inclusion of a broader set of risks that offer the ability to make money in both up and down trending stock and bond markets.  It can be done.  Solutions and opportunities exist.  Find them.
• Risk: I believe every investment is a “risk”.  Putting money in a vault in your house is a risk (theft).  Putting your money in short-term Treasury Bills is a risk (loss of spending power against rising inflation).  Risk is ever present in everything.  The idea is not to avoid risk but to combine multiple risks in a way that builds a broadly diversified investment portfolio that has “collectively lower risk”.

Modern Portfolio Theory and Correlation defined

Let’s take a look at two important definitions and then talk about ideas you can use today to shape a broadly diversified and balanced portfolio.

1. Modern Portfolio Theory: Today, the concept of Modern Portfolio Theory is well received, however, the financial industry has largely interpreted (or misinterpreted) this definition to mean 60% stocks and 40% bonds.  This is certainly not what Markowitz, the father of MPT, advised.  Here is his definition:  MODERN PORTFOLIO THEORY is “a mathematical formulation of the concept of diversification in investing, with the aim of seeking a collection of investment assets that has collectively lower risk than any individual asset.”
2. Correlation: Correlation is the math I use to see how a set of individual risks behave against each other.  Specifically, we are looking for investments that we believe can perform over the period ahead and do so in a way that they do not rise and fall together at the same time.  “Seeking a collection of investment assets that has collectively lower risk than any individual asset.”

What is your competition doing?

To begin the portfolio construction discussion, I thought I’d look to see what your competition is recommending.  I went on Vanguard’s website and answered a few simple questions.  Note: Schwab, TD and Fidelity offered largely the same traditional stock bond mix.

I’m 51 years old and checked the box that said I have 15 years to retirement (though I really have no plans to retire) and checked another box answering that I need to live off of my investments for 15 years after retirement.  I answered that I can stand moderate downside price pressure and that I’m not prone to sell out in times of crisis.  I was advised the following 80/20 mix:

The entire industry is built around the concept of Modern Portfolio Theory.  I don’t think the Vanguard Total Portfolio recommendation given to me comes anywhere close to “a collection of investment assets that has collectively lower risk than any individual asset”.  Thus, the single greatest opportunity I have seen in 30 years for you to grow your business.

The 80/20 portfolio above or the standard 60/40 that most people have is going to get hit once again and will likely produce just 4.26% per year over the next ten years.  That is not good enough.  Investors will be upset and will move to the advisor with a better portfolio game plan.

Further, 60/40 will be bumpy along the way.  Can an investor stay the course or will he continue to buy and sell at the wrong time?  If my recession view is correct, a 40% market decline on the $400,000 exposed to Vanguard equities means a loss of $160,000.  The very small yield I’m earning on the 20% to fixed income is not going to help.  Can the individual investor stay the course?

I put together the following portfolio as a beginning point of discussion for a large advisor client of ours.  I am largely sharing that discussion with you in this Viewpoint piece today.  As I expressed to the advisor, let’s walk through some ideas as I am well aware that he/you have your favorite funds and ETFs so please know that this is for discussion purposes around portfolio construction and not a specific recommendation for you to buy or sell any security.

The idea is to put together a combination of risks with the goal to produce a portfolio that can not only enhance return but it can also reduce overall portfolio risk.  I believe you can target the return and risk profile by changing exposures in such a way as to meet your individual client’s needs and goals.

In the portfolio below, I am willing to accept a modest risk as measured by standard deviation of about 10 and produce an annual return of 8% and invest the assets over a 10-15 year time horizon with little need of current income.

With the understanding of Modern Portfolio Theory and Risk Correlations in mind, the goal is to create a mathematically diversified total portfolio that includes a diverse group of non-correlating risks and incorporates my forward view.

Next is the portfolio I favor over the traditional 60/40.  Take a look at the mix and then we’ll go into some of the important math around correlation that helped me shape the construction of this portfolio:

30% Equities:

• 10% Vanguard Total Stock Market Fund (hedged periodically with put options)
• 5%  Vanguard International Stock Market Fund (hedged as above)
• 15% CMG Opportunistic All Asset Strategy (a tactical risk management focused strategy)

30% Fixed Income:

• 15% Vanguard ST Bond Fund (be patient and wait for higher rates)
• 15% CMG Managed High Yield Bond Program (a tactical risk management focused strategy – I have managed this strategy for more than 20 years)

40% Trading Strategies – Alternatives

• 10% Gold (both a hedge against inflation and a directional risk bet)
• 5% Agriculture (both a hedge against inflation and a directional risk bet)
• 5% REIT (both a hedge against inflation and a directional risk bet)
• 5% Currency Trading Strategy (tactically long or short G10 currencies)
• 5% Short Yen ETF (both a hedge against inflation and a directional risk bet)
• 5% Scotia Growth S&P Plus Program (tactical long or short S&P 500 Index exposure)
• 5% SR Treasury Bond Program (tactical long or short government bonds)

Again, it is important to note that the portfolio I share is built around the principles of MPT with the objective to combine “a collection of investment assets that has collectively lower risk than any individual asset”.  It is a broadly diversified investment approach and not a get rich big bet approach.

Understanding correlation:

The way to mathematically compare a “collection of investment assets” is to understand their mathematical correlation.  Following is the definition of correlation:

Remember that Modern Portfolio Theory is “a mathematical formulation of the concept of diversification in investing, with the aim of seeking a collection of investment assets that has collectively lower risk than any individual asset.

Does the Vanguard recommendation meet this definition?  No.  Here is the correlation math on the Vanguard portfolio, provided by Vanguard.  Note the extremely high correlation to the S&P 500 index.  Mathematically they advised the following:

• The Vanguard Total Stock Market Index has a 1.00 correlation to the S&P 500 Index.
• The Vanguard Total International Index has a 0.93 correlation to the S&P 500 Index.
• Both have a 0.93 correlation to each other.

In English, 93% of the equity portion of Vanguard’s recommended portfolio is dependent on the S&P 500 as it and the two equity funds both rise and fall together. Vanguard didn’t recommend diversification.  They mathematically gave me a bet that is directionally tied to the top 500 U.S. companies.  The two funds, while seemingly broadly diversified, simply rise and fall together at the same time.  This is not diversification and comes no where close to Markowitz’s MPT.

Harvard, Wharton and Yale do not construct their portfolios in such a highly concentrated way, nor should you.

Further, can the investor stay the path through the next recession and another 40% stock market decline?  I have my doubts.  If $500,000 drops to $340,000, I don’t think most will “stay the course”.  The Vanguard recommendation is a highly concentrated, highly correlated bet.

I believe a better solution is to include a broadly diversified set of risks including risks that can gain in different market environments.  Vanguard, while simple in construction, is a portfolio I would like if interest rates were high, dividends high and valuations low.  That just isn’t the case today.  I’d further like it if we were in a period of declining regulation, declining taxation and declining interest rates.  That just isn’t the case today either.

30/30/40

Finally, with all that footing behind us, let’s talk about how to build “a collection of investment assets that has collectively lower risk than any individual asset”.  The next chart is a correlation matrix that compares the monthly return streams of the various investments in my 30/30/40 portfolio against each other.  What we are looking for are investments that can make money but do it at different times.

I realize your eyes are about to fog over in looking at the next chart, however, hang with me as I walk you through the chart.  It is pretty simple if you know where to look and this is where it starts to get good.

In the portfolio creation process, ideally we are looking to combine risks that do not correlate with the stock market and the bond market and we are looking for risks that have the ability to profit in both up and down markets.  Once we have identified the various risks, we are additionally looking for risks that don’t correlate to each other, thus, furthering diversification.  I’m not saying don’t own the Vanguard fund, I’m saying own it together with something that is uniquely diversified and together they are better than either is alone.

When I look to include a new asset or investment strategy into a portfolio, I first look at its correlation to the S&P 500 Index.  As you look at the correlation chart, take a look at line 14 S&P 500 TR (total return) Index (marked by the long dark blue horizontal arrow).  Look across that row and look for numbers between -0.5 and +0.5.  Remember, we are looking for risks that do not rise and fall together at the same time.

Breaking down the chart

When I started on Merrill Lynch’s Option’s Arbitrage desk in 1984, I never thought that I’d be a guy who loved charts.  Goober stuff for sure.  Now I realize how important the math can be.  Yes, Brianna, your father is a proud quant goober.  Ok – I hope I can make this interesting.

1. As your eyes move across line 14, note the small red arrows.  They indicate non-correlating risks.  If you follow over to the right where I noted Gold in red, you can see that Gold has a 0.12 correlation to the S&P (where #14 and #12 cross).  From a mathematical perspective, these two asset risks do not correlate with each other and offer better diversification when combined together than the individual security risk they present on their own.
2. Looking further across line 14, you see the first red arrow is a reading of -0.02.  This is where the S&P 500 is compared to the Vanguard Short-Term Bond Index (where #14 and #4 cross on the chart).  The next red arrow is where the S&P is compared to the SR Treasury Bond Program (#5) and has a -0.11 correlation to the S&P 500 (see where #14 and #5 intersect).
3. Here are some other observations from the correlation chart: The S&P 500 has a 0.15 correlation with one of my favorite currency trading strategies (where #14 and #10 cross) and has a -0.16 correlation with the Scotia Growth S&P Plus Program (where #14 and #9 cross).
4. Once you have identified the strategies which are non-correlating to the S&P 500, then look to see how those strategies correlate with each other.  The goal is to find a mix of risks that are not only non-correlating to a directionally biased stock market but are also non-correlating to each other.  I like the idea of building a very solid and broadly diversified lineup of tactical/trading/alternative strategy risks and then weave the balance of our forward thinking to shape the final portfolio.
5. Not only am I looking for them to have no correlation (less than +0.50) to the equity market, I want them to have no correlation to each other.  I believe this is where the portfolio returns can be enhanced and risk reduced.
6. For example: Look at the -0.06 of the Currency Trading Strategy to the Scotia strategy (where #10 and #9 cross).  If you believe they can both drive return, then I offer that these investment risks add value to your portfolio not only as risk diversifiers to the S&P but also to each other.  There is important research that shows that if you combine 15 non-correlating risk streams together you can reduce your overall portfolio risk by 80%.  It is in this thinking that we are creating a neutral core.
7. Another way to view the chart is to focus in on just one row or column.  For example, take a look at #2 from the top of the chart down to the bottom and #12 looking across the row from the left to the right.

Ultimately the goal is to enhance the total portfolio return and reduce risk as measured by standard deviation.  A more predictable reward tied to a more predictable risk.  I like to call this Enhanced Modern Portfolio Theory though I’m sure Markowitz will tell you that this is what he defined long ago.

If your clients are looking at Vanguard or they are thinking about following the Fidelity “green arrow” or they are looking to Schwab, TD, the wirehouses or independent advisors, I believe they are getting investment advice that is similar to the Vanguard mix suggested to me and presented to you.

Everywhere, everybody is giving the same advice.  Think differently.  60/40 is not enough; it is over simplified and highly concentrated.  If I’m wrong in my recession and future inflation views, I still believe I have created a portfolio that can perform.  As for 60/40, I just don’t believe the historical low forward return expectations will allow an investor to stay the course.  Money will be in motion seeking your stronger solutions.

Build a portfolio that combines many non-correlating risk diversifiers that can outperform 60/40 whether you or I are correct or incorrect in our market views.   I favor 30/30/40 as a better definition of a balanced portfolio today.  Modern Portfolio Theory didn’t fail the last 12 years; the failure occurred in the construction process.  The risks were too concentrated because the solutions were unavailable to most investors.  Today the solutions exist for all investors.

The explosion of investment products, and all the noise that surrounds them, makes finding right-fit portfolio solutions a challenge.  Technology on the major platforms has expanded and there are many funds and strategies available for you to simply place into existing portfolios.  The tools exist and the access is easy.

I have been in the investment business for nearly 30 years.  I know my forward economic outlook can either leave you running for a stiff drink or turning with excitement.  I am a huge optimist at heart and share with great passion that I have never seen a better opportunity for you to grow your business and most importantly help the clients that you serve.

The last picture I leave you with is the growth of the 30/30/40 portfolio I presented.

It is hypothetical, of course, and net of CMG management fees related to the strategies I included in the portfolio.  Please know that no one investor has this particular asset mix.  The idea here is to further a discussion about what can be and is built around the idea that there is opportunity for return in a low expected return environment.  I believe you can build portfolios that can enhance return and reduce downside risk.  Shape it in a way that meets your return/risk objectives.

Personally, I have all of my money invested in various tactical risk focused trading strategies.  I also own gold in my 401k.  I invest with a five-plus year time horizon and I am not shaken during periods of less than desired performance.  I have been in this space for a very long time.  In fact, I like to add to strategies when they are out of favor.

I realize that it is impossible to build an investment advisory practice that is 100% allocated to tactical/trading/alternative strategies.  How do you face your client when the equity market goes straight up and systematic and momentum strategies lag behind?  So many investors tend to chase into what worked yesterday and out of what is not working today.  That is a bad plan.  Thus I favor the total portfolio construction game plan built around the principles of Modern Portfolio Theory.

We are here to be a resource for you.  We have the internal research and technology support to help you through this portfolio creation process.  Of course, we have strategies we would like you to consider, but there are certainly many others available to you.  Talk to our guys.  We know the space.  Importantly, find non-correlating risks and shape them in a way that creates a strong portfolio.

If you have any questions or comments, please know how much I appreciate your communication.

I am endlessly optimistic about all that remains ahead and wish you continued outstanding success.

With kind regards,

Steve

 

Stephen B. Blumenthal
Founder & CEO
CMG Capital Management Group, Inc.
1000 Continental Drive, Suite 570
King of Prussia, PA 19406
steve@cmgwealth.net
610-989-9090 Phone
610-989-9092 Fax

IMPORTANT DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk.   Therefore, it should not be assumed that future performance of any specific investment or investment strategy (including the investments and/or investment strategies recommended and/or undertaken by CMG Capital Management Group, Inc (or any of its related entities-together “CMG”) will be profitable, equal any historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. No portion of the content should be construed as an offer or solicitation for the purchase or sale of any security. References to specific securities, investment programs or funds are for illustrative purposes only and are not intended to be, and should not be interpreted as recommendations to purchase or sell such securities.

Certain portions of the content may contain a discussion of, and/or provide access to, opinions and/or recommendations of CMG (and those of other investment and non-investment professionals) as of a specific prior date.  Due to various factors, including changing market conditions, such discussion may no longer be reflective of current recommendations or opinions.  Derivatives and options strategies are not suitable for every investor, may involve a high degree of risk, and may be appropriate investments only for sophisticated investors who are capable of understanding and assuming the risks involved. Moreover, you should not assume that any discussion or information contained herein serves as the receipt of, or as a substitute for, personalized investment advice from CMG or the professional advisors of your choosing. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisors of his/her choosing.  CMG is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice.

This presentation does not discuss, directly or indirectly, the amount of the profits or losses, realized or unrealized, by any CMG client from any specific funds or securities. Please note:  In the event that CMG references performance results for an actual CMG portfolio, the results are reported net of advisory fees and inclusive of dividends.  The performance referenced is that as determined and/or provided directly by the referenced funds and/or publishers, have not been independently verified, and do not reflect the performance of any specific CMG client. CMG clients may have experienced materially different performance based upon various factors during the corresponding time periods.

CMG Absolute Return Strategy Fund and CMG Tactical Equity Strategy Fund: Mutual Funds involve risk including possible loss of principal. An investor should consider the Fund’s investment objective, risks, charges, and expenses carefully before investing. This and other information about the CMG Absolute Return Strategy Fund^TM and CMG Tactical Equity Strategy Fund^TM is contained in each Fund’s prospectus, which can be obtained by calling 1-866-CMG-9456. Please read the prospectus carefully before investing. The CMG Absolute Return Strategy Fund^TM and CMG Tactical Equity Strategy Fund^TM are distributed by Northern Lights Distributors, LLC, Member FINRA. NOT FDIC INSURED. MAY LOSE VALUE. NO BANK GUARANTEE.

Hypothetical Presentations:  To the extent that any portion of the content reflects  hypothetical results that were achieved by means of the retroactive application of a back-tested model, such results have inherent limitations, including: (1) the model results do not reflect the results of actual trading using client assets, but were achieved by means of the retroactive application of the referenced models, certain aspects of which may have been designed with the benefit of hindsight; (2) back-tested performance may not reflect the impact that any material market or economic factors might have had on the adviser’s use of the model if the model had been used during the period to actually mange client assets; and,  (3) CMG’s clients may have experienced investment results during the corresponding time periods that were materially different from those portrayed in the model.  Please Also Note: Past performance may not be indicative of future results.  Therefore, no current or prospective client should assume that future performance will be profitable, or equal to any corresponding historical index. (i.e. S&P 500 Total Return or Dow Jones Wilshire U.S. 5000 Total Market Index) is also disclosed. For example, the S&P 500 Composite Total Return Index (the “S&P”) is a market capitalization-weighted index of 500 widely held stocks often used as a proxy for the stock market.  Standard & Poor’s chooses the member companies for the S&P based on market size, liquidity, and industry group representation.  Included are the common stocks of industrial, financial, utility, and transportation companies.   The historical performance results of the S&P (and those of or all indices) and the model results do not reflect the deduction of transaction and custodial charges, nor the deduction of an investment management fee, the incurrence of which would have the effect of decreasing indicated historical performance results. For example, the deduction combined annual advisory and transaction fees of 1.00% over a 10 year period would decrease a 10% gross return to an 8.9% net return. The S&P is not an index into which an investor can directly invest. The historical S&P performance results (and those of all other indices) are provided exclusively for comparison purposes only, so as to provide general comparative information to assist an individual in determining whether the performance of a specific portfolio or model  meets, or continues to meet, his/her investment objective(s).  A corresponding description of the other comparative indices, are available from CMG upon request. It should not be assumed that any CMG holdings will correspond directly to any such comparative index. The model and indices performance results do not reflect the impact of taxes. CMG portfolios may be more or less volatile than the reflective indices and/or models.

In the event that there has been a change in an individual’s investment objective or financial situation, he/she is encouraged to consult with his/her investment professionals.

Written Disclosure Statement. CMG is an SEC registered investment adviser principally located in King of Prussia, PA. Stephen B. Blumenthal is CMG’s founder and CEO. Please note:  The above views are those of CMG and its CEO, Stephen Blumenthal, and do not reflect those of any sub-advisor that CMG may engage to manage any CMG strategy.  A copy of CMG’s current written disclosure statement discussing advisory services and fees is available upon request or via CMG’s internet web site at (http://www.cmgwealth.com/disclosures/advs).