our beliefs and capabilities
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Securities, advisory services & insurance product offered through LPL Financial and its affiliates, Member FINRA/SIPC.Not FDIC/NCUA Insured Not Bank/Credit Union Guaranteed May Lose Value Not Guaranteed by any Government Agency Not a Bank/Credit Union Deposit Tracking # 429093
Contents
1 Firm and Mission
2 LPL Financial: The Organization
3 Investment Principles
4 Client Discovery
5 Ongoing Consulting and Communication
Investment Presentation
Prepared for: Our Beliefs and Capabilities
March 19, 2012
Prepared by:
LEWIS B WALKER Jr.; CERTIFIED FINANCIAL PLANNER ™LPL Financial
153-17 Cross Island Parkway
Whitestone, NY 11357 | Phone: (718)746-2220
Firm and mission
Building an investment portfolio designed to address your unique long-term goals and financial dreams is a complex process that requires knowledge, skill, dedication and expertise. For investors in today’s ever-changing financial markets, a professional financial advisor can provide expert advice to help you pursue your financial goals.
• Analysis of needs and goals• Asset allocation strategies• Manager selection• Retirement income• Investment strategies• Ongoing monitoring and maintenance of
investments• Ongoing education• Tax management• Long-term capital appreciation• Wealth structuring• Trust services• Education savings programs• Wealth transfers• Socially responsible issues
The importance of financial guidance
needs and goals
tax management
retirement income
portfolio construction
FIRM & MISSION
As your investment partner, we are committed to helping you accomplish your unique financial goals and objectives. After developing a thorough understanding of your risk tolerance and short- and long-term goals, we will work together to create a customized investment portfolio designed for you. In order to accomplish this, we will take you through the investment consulting process, which is designed to help us determine how to best address your financial goals and dreams.
The Investing Consulting Process
Designed For You
1 Discover
2 Recom
men
d
3 Implement
4 Rev
iew
Review
• Quarterly performance reports • Ongoing due diligence of investment managers • Periodic reviews • Investment newsletters • Tax harvesting • Portfolio rebalancing
Implement
• Account opening paperwork • Funding
Discover
• What are your hopes and dreams? • Do you have a high or low tolerance for risk? • Do you have any specific tax considerations? • What is your investment objective? • What is your time horizon?
Recommend
• Investment portfolio recommendations • Customized asset allocation strategies • Wealth management services • Diversification
FIRM & MISSION
What I believe I believe that the goals and dreams of families are important. The pursuit of those goals and dreams is the fabric that has made America great. As a CERTIFIED FINANCIAL PLANNER ™ professional; I am proud to assist in helping families pursue and accomplish their goals. Planning is the essential cornerstone that lays the framework for intelligent financial decision making and financial success. Whether the goal is the education of a child or a financially secure retirement; I believe that having a financial roadmap will create a more proactive and disiplined approach to your pursuits. I believe the process should encompass the following:
• An analysis of your current financial circumstances.• An understanding of your financial goals.• An investment plan that includes analytical, goal based recommendations and a formally defined risk tolerance.• A structure of accountability and review as it relates to your financial pursuits.
I believe that my approach and the collaboration that it creates allows families to focus on the other important aspects of life....their passions and each other.
Practice Summary
Contact Information:
Lewis B. Walker Jr., CFP®
CERTIFIED FINANCIAL PLANNER ™
Financial Consultant
LPL Financial153 -17 Cross Island ParkwayWhitestone, New York. 11357
Phone: (718) 746-2220Email: lewis.walker@lpl.com
Contact Information:
Your total wealth management solution
* Please consult a qualified tax or legal advisor.
FIRM & MISSION
LPL Financial: The Organization
Providing you with advice for life
• Largest independent broker/dealer in the country*• More than $280 billion in assets under management and 2.7 million
client accounts• 20 years of consecutive earnings growth, in both up and down markets• No capital markets, trading, investment bank or proprietary products
About LPL Financial
• LPL Financial registers and supports more than 12,000 independent financial advisors in over 7,000 offices nationwide. LPL Financial was built on the premise that achieving your financial goals depends on unbiased financial advice, timely research and easy access to the investments and services that best fit your specific needs.
• With over 40 years of industry leadership and innovation, LPL Financial serves the growing needs of independent financial advisors and their clients. LPL Financial was formed in 1989 through the merger of two brokerage firms — Linsco (established in 1968) and Private Ledger (founded in 1973).
• Today the firm is a leading diversified financial services company and the nation’s largest independent broker/dealer* with headquarters in Boston, Charlotte and San Diego.
* As reported in Financial Planning magazine 1996 - 2011, based on total revenue.
LPL FINANCIAL: THE ORGANIZATION
Account protections
• Securities Investor Protection Corporation (SIPC) Insurance applies in the event that an SIPC member firm fails financially and is unable to meet obligations to securities clients, but it does not protect against losses from the rise and fall in the market value of investments. LPL Financial’s SIPC membership provides account protection up to a maximum of $500,000 per customer, of which $100,000 may be in cash. For an explanatory brochure, visit www.sipc.org.
• Additionally, through Lloyds of London, LPL Financial accounts have securities protection to cover the net equity of customer accounts up to an overall aggregate firm limit of $750 million, subject to conditions and limitations.
• Balances invested in the Insured Cash Account are protected by Federal Deposit Insurance Corporation (FDIC) up to a maximum of $1.5 million for a single account holder, $3 million for a joint account.
Oversight
• The Private Trust Company, NA an affiliate of LPL Financial is a nondepository national banking association, which is regulated and reviewed by the Office of the Controller of the Currency (OCC).
Account protection and oversight
LPL FINANCIAL: THE ORGANIZATION
LPL Financial Services
Advisor
Client
Advisory Consulting Services
LPL Financial Research
Alternative Investments
Financial Planning Group
The Private Trust Company
Structured Investments
Wealth Management Services
LPL Insurance Associates
Lending Capabilities
LPL FINANCIAL: THE ORGANIZATION
Keeping up with increasingly complex financial markets demands a high level of expertise and extensive resources Experienced team of professionals:
• Members average more than a decade in the investment industry• Assists with designing asset allocation strategies and implementing the
ongoing consulting process• Provides tools and resources to enhance the client investing experience
Innovative investment platforms — Building and maintaining investment strategies to address your goals:
• Strategic Asset Management• Optimum Market Portfolios* • Model Wealth Portfolios• Personal Wealth Portfolios• Manager Select
Partners with LPL Financial Research — Design and assistance with:
• Asset allocation strategies• Portfolio construction and manager selection• Analysis on the markets• Tax management services
Advisory Consulting Services
* The Optimum Market Portfolios advisory accounts utilize the Optimum Funds, a sub-advised family of funds from Delaware Management Holdings, Inc. and its subsidiaries. Delaware Management Company, a series of Delaware Management Business Trust, is the manager and Delaware Distributors, LPL Financial is the distributor of the Optimum Funds.
LPL FINANCIAL: THE ORGANIZATION
LPL Financial Planning Group
We have access to the LPL Financial Planning Group, a dedicated team devoted to helping us structure your investments, answer financial planning questions and implement tax-efficient strategies. The LPL Financial Planning Group has the expertise, tools and resources to help us succeed, including access to a powerful financial planning software called WealthVision. The team routinely designs cases and devises unique planning solutions based on your specific situation.
About WealthVisionWealthVision is a powerful, Web-based wealth-planning tool that offers account aggregation, modular and comprehensive financial goal planning, and an online document storage facility that helps you store and keep track of your valuable files, all accessible through your own personalized website.
LPL FINANCIAL: THE ORGANIZATION
LPL Financial Wealth Management Services
LPL Financial offers a wide range of products and services that are specifically designed to address the goals and needs of affluent clients. Legacy and philanthropic planning — Design and assistance with:
• Donor advised funds • Endowment funds • Pooled income funds • Family foundations • Fiduciary custody services • Charitable remainder trusts
Insurance planning — Design and case analysis for sophisticated strategies from a combination of internal resources and industry experts.
Lending — Margin lending and collateralized loan capabilities.
Financial and estate planning — Effective and long-term wealth management, preservation/enhancement and asset transfer:
• Wealth protection • Tax reduction and potential deferral • Customized estate and inheritance planning • Legacy and business succession planning
Management of concentrated stock positions — Offering options for liquidity, diversification, preservation of capital:
• Hedging, option strategies • Monetization • Diversification, exchange funds
LPL FINANCIAL: THE ORGANIZATION
About LPL Financial Research
LPL Financial Research works continuously to help your financial advisor interpret and adjust to the latest developments in the world’s capital markets.
As the industry’s leading independent brokerage firm*, LPL Financial has no proprietary products to sell, no investment banking relationships to promote, nor any other business conflicts to get in the way of providing unbiased recommendations. The breadth of LPL Financial research coverage — mutual funds, separate accounts, fixed income, exchange traded funds, alternative investments, variable annuity sub-accounts and more — reflects a focus on helping meet the needs of clients, rather than “pushing product” or moving inventories of securities.
The LPL Financial Research team
The LPL Financial Research team consists of seasoned and accomplished industry veterans, comprising one of the largest and most experienced research groups among independent brokerage firms.
The goal of LPL Financial Research is to be your advisor’s trusted partner. In order to be successful, it is critical that all LPL Financial advisors have access superior unbiased investing ideas, timely market perspective, and ongoing support. The delivery of timely, in-depth, unbiased research on varying investment products, asset allocation strategies, and the financial markets is designed to provide your financial advisor with a powerful tool that is a distinct advantage in helping them achieve your financial objectives.
LPL Financial Research
LPL Financial Research
Research Organization
Portfolio Strategy Portfolio Strategy expertise truly sets LPL Financial Research apart from its competitors. LPL Financial Research Analysts determine the asset allocation models based on investment objectives and the strong relationship between risk and return in the portfolios and then select the models and combinations of managers for each portfolio based on a variety of characteristics and corresponding performance in over 300 different market conditions using their proprietary statistical SAT tool.
Investment Manager Recommendations
Investment manager selection and due diligence efforts for mutual funds, money managers, and alternative investment strategies is based on a strong and thorough investment discipline. LPL Financial Research’s recommendations are unbiased. As an independent firm, you and your advisor can be confident LPL Financial Research is making decisions based solely on recommending the best investment option for a specific purpose. The research process combines quantitative and qualitative screening factors and analysis that do not include or consider in any way any financial arrangements or business relationships that may or may not exist between LPL Financial and the manager.
Quantitative Analysis The function of the Research Analytic Group is to perform quantitative analysis, performance measurement, attribution, and appraisal of LPL Financial Research’s recommendations and platforms, while managing the underlying data and application usage of products and services within the team.
Investment and Market Communications
The Investment Strategy Group is focused on delivering timely, efficient, and accurate communication of the team’s investment advice to help you and your advisor stay informed. The ASK Research service desk, a dedicated team of research professionals, is ready to address your financial advisor’s market and investment advice questions.
* As reported in Financial Planning magazine 1996 - 2011, based on total revenue.
LPL FINANCIAL: THE ORGANIZATION
• Provides strategic guidance for the LPL Financial Research group, directs team of analysts and investment professionals providing in-depth research on the global economy and markets, portfolio optimization and construction, mutual funds, separate accounts, fixed income, alternative investments and exchange traded funds
• Served as the Chairman of the Manager Strategy Group Investment Committee at Wachovia• Responsible for all due diligence of third-party investment managers and mutual funds,
including more than 1,200 company meetings and on-site reviews
• Leads the development and articulation of LPL Financial Research’s market and investment strategies, leveraging his expertise in the analysis of global financial markets and asset allocation strategy
• Former chief investment strategist at PNC Wealth Management• Recognized economic strategist• One of “Wall Street’s Best and Brightest” — Wall Street Journal
Areas of expertise:
• Asset allocation• Asset class and sector research• Capital markets analysis• Economic analysis• Investment manager evaluation, recommendations• Overlay services• Portfolio construction• Mutual funds• Separate accounts• Fixed income• Alternative investments• Exchange traded funds• Variable annuity subaccounts
LPL Financial Research team
Burt White,Managing Director and Chief Investment Officer
Jeffrey Kleintop,CFA, Chief Market Strategist
LPL FINANCIAL: THE ORGANIZATION
The Private Trust Company
Key trust facts
A trust is a legal entity that holds assets, such as securities or mutual funds, for the benefit of a person, family, or organization.
When establishing a trust, you designate one or more trustees. A trustee can be an individual, often including yourself, or a bank with a trust charter. By law, your trustee is responsible for:
• Managing and protecting the trust’s assets and seeing they are diversified appropriately • Assuring your wishes are followed and all of your beneficiaries are treated fairly • Ensuring accurate records and accounting for all transactions • Complying with tax reporting regulations • Good planning will prompt the designation of a successor trustee — one who assumes
responsibilities for an individual trustee who becomes disabled or dies. • Unlike a relative, friend or business associate, a professional trustee fields a team of experts
that operates your trust with care and objectivity for as long as you desire.
For more information, visit www.theprivatetrustcompany.com
The Private Trust Company N.A. (PTC) is an affiliate of LPL Financial. PTC manages trusts and family assets for high net worth clients and is licensed in all 50 states under its 1995 national banking charter to administer the trusts and implement the estate plans of affluent families. The bank does not engage in lending or deposit taking; it specializes solely in providing fiduciary solutions.
As its primary mission, PTC provides trust services to clients of LPL Financial advisors as well as to local clients in Cleveland, Ohio, where it is headquartered. PTC is also the custodian of all of the LPL Financial IRA accounts.
LPL FINANCIAL: THE ORGANIZATION
Irrevocable Life Insurance Trusts (ILITs)
Using insurance inside a trust can have a powerful impact on your estate planning strategy. Common client goals achieved by using an ILIT include:
• Helping to avoid forced liquidation to pay estate taxes on an asset a family wants to retain, such as a family business or real estate
• Helping to provide a safety net for potential long-term care needs in later years• Helping to minimize estate tax liability at the time assets transfer to heirs• Helping to offer an opportunity to enhance charitable contributions, in addition to
providing for heirs• Helping to ensure an equitable distribution of assets to heirs • Helping to provide for greater control of assets
LPL Insurance and The Private Trust Company work together to help us implement this powerful planning tool for you.
LPL Financial offers full-service insurance solutions and dedicated support through its life insurance agency, LPL Insurance Associates, Inc. It is able to offer our firm the carriers and products to fulfill all of your fixed and variable life insurance needs with more than 24 quality, name brand companies on its platform.
The full suite of life insurance solutions includes:
• Term life• Whole life• Universal life• Variable universal life
LPL Insurance Associates
LPL FINANCIAL: THE ORGANIZATION
Alternative investments
Alternative investments
• Managed futures• Fund of hedge funds• Private equity• Real estate (REITS, limited partnerships)• 1031 exchange programs• Concentrated equity solutions (Exchange
funds, Collars, Pre-paid forwards)• Oil and gas partnerships • Equipment leasing• Structured products
Complex tax and regulatory requirements can make sorting through and selecting the right investments difficult. We are committed to helping you navigate the world of alternative investments.
LPL Financial provides information and educational materials from key resources, including a dedicated team of consultants, the LPL Financial Research department and product sponsors, to help us determine which alternative investments are the most appropriate options for you.
As investors’ needs become increasingly complex and sophisticated, a growing number of alternative investment products have been introduced. LPL Financial has responded to this need with a range of innovative products designed for formulating, supporting or supplementing specific strategies.
Investing in alternative investments may not be suitable for all investors and involves special risks such as the risk associated with leveraging the investment, potential adverse market forces, regulatory changes and potential illiquidity. There is no assurance that the investment objectives will be attained.
LPL FINANCIAL: THE ORGANIZATION
Products and Services
• Government Agencies• U.S. Treasuries• Mortgage Backed Securities and CMOs• Municipals• Corporates• Structured Products
Customized Reports include
• Strategies to achieve income goals• Portfolio diversification• Bond maturity and income schedule
proposals
Best Efforts Execution
• Before a bond is bought or sold a team of more than 40 fixed income professionals works to make sure best execution standards are met. We work hard to provide the best prices available whether a client is buying or selling bonds.
• Fixed Income Trading’s online execution system shows the combined inventories of dozens of first tier broker dealers, wire houses, middle market and boutique bond shops ensuring that a competitive market place is maintained.
The LPL Financial Fixed Income Trading Team is compromised of professional traders who:
• Build fixed income investment strategies specific to your goals
• Offer unique solutions• Conduct buy and sell orders on a best efforts basis
Fixed Income Trading
FIXED INCOME TRADING
Structured investment products are complicated investments that help provide investment exposure that cannot be accessed through traditional assets, and some protection from downside risk in exchange for the investor’s forgoing some upside potential to achieve that protection. Structured products typically have two components, a note and derivative and have a fixed maturity. Structured products combine traditional investments, such as bonds, stocks and commodities, with financial instruments, including options and swap agreements. The most common structured products are used to gain exposure to an asset class while providing protection at maturity. Principal protection may vary from partial to 100%. If the option (derivative) turns out to be valuable, investors can gain exposure to the upside of the asset class.
Structured investments with tailored terms and a risk/reward profile are designed to help clients:
• Optimize returns and diversify portfolio holdings• Provide leverage• Derive tax efficiencies• Minimize volatility and provide downside protection
JPMorgan, DWS Scudder, HSBC, and Credit Suisse provide new monthly offerings, which may include principal protection, equity indexed notes and more.
Structured Investments
An investment in structured products involves significant risks. Investing in structured notes is not equivalent to investing directly in the underlying indices. No assurance can be given that the investment strategy used to construct any return enhanced structured note will be successful or that the structured notes will outperform any alternative basket that might be constructed from the constituent sub indices. Investment value prior to maturity will be influenced by many economic and market factors that may either offset or magnify each other, including interest rates, the level of the underlying, implied volatility and the time remaining to maturity. Investors should carefully review the risks in the offering documents. Structured products are intended as “buy and hold” investments and may not be liquid instruments prior to maturity.
LPL FINANCIAL: THE ORGANIZATION
Investment Principles
“Behavioral finance scientists have studied investor behavior and concluded investors go through a multi-phase internal process before they decide to react to bad news.”*
Cycle of investor emotions
Optimism
Optimism
Thrill
Fear
Denial
Anxiety
Euphoria
Desperation
Panic
Capitulation
Despondency
Relief
Hope
Depression
Excitement
PricesHigh
PricesLow
*Source: Ken Kivenko, 7/29/05, The Fund Library.Investor Emotion Chart. Source: Index Funds: The 12-Step Program, M.T. Hebner, 2004.Graph courtesy of Goldman Sachs.
INVESTMENT PRINCIPLES
Not having a clearly defined investment objective
Whether building a new house or an investment portfolio, you first need to establish a solid foundation. Gaining an in-depth understanding of your unique financial goals is key to this process. Your personal portfolio investment objective will take into account your risk tolerance and time horizon. Specific strategies can be created to address a single objective or a combination of objectives simultaneously.
Improperly judging risk
In general, the longer the time horizon of your investments, the more risk you can take on. Many investors, fearing even a little amount of risk, focus only on investments that address short-term volatility even though their time horizon may be 20 years or more. The result is a poorly performing portfolio in relation to their investing goals and time horizon.
Being overconfident in a single stock or sector
Relying solely on your intuition or creating attachments to specific stocks or sectors without reading impartial analyses and reports can lead to poor investing decisions. For example, employees of a firm will often make excessively large allocations to their employer’s stock, believing they can better predict the stock price because of their intimate knowledge of their firm. This is not always true, as demonstrated by cases such as Enron.
Not investing globally
A well-diversified portfolio should include assets with low correlation to each other. Some American investors may tend to lean toward domestic securities and avoid global investing opportunities altogether. By investing only in U.S. stocks, you could miss out when foreign stocks perform well.
Being led by your emotions
Every day you hear new theories or speculation about the direction of the stock market from the media, friends, family and coworkers. It can be challenging to sort through differing opinions, filter out the noise and stay focused on your long-term investing goals. Many investors find themselves preoccupied with the fear of investment losses and mistakenly make costly investment decisions.
Paying too much in taxes
Structuring your investments properly by mitigating the effect of taxes on your portfolio can help preserve and ultimately grow more of your investments over time. Not using tax-efficient money managers or strategies where appropriate may cause you to pay taxes unnecessarily.
Common investor challenges
International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not ensure against market risk.
INVESTMENT PRINCIPLES
Why does the average investor underperform?
• Markets have performed well• Individual investors have underperformed
– Wrong decisions, wrong time
0%
2%
4%
6%
8%
10%9.14%
1.01%
2.57%
3.83%
Annualized total returns for 20 years
S&P 500
3-Month Treasury bills
Inflation
Average equity fund investor
Sources: Dalbar 2010 Quantitative Analysis of Investor Behavior Study, S&P 500, Consumer Price Index, Citigroup BIG Treasury Bill (3M). Average stock investor, average bond investor and average asset allocation investor performance results are calculated using data supplied by the Investment Company Institute. Investor returns are represented by the change in total mutual fund assets after excluding sales, redemptions and exchanges. This method of calculation captures realized and unrealized capital gains, dividends, interest, trading costs, sales charges, fees, expenses and any other costs. After calculating investor returns in dollar terms, two percentages are calculated for the period examined: total investor return rate and annualized investor return rate. Total return rate is determined by calculating the investor return dollars as a percentage of the net of the sales, redemptions and exchanges for the period. Indices are unmanaged and cannot be invested into directly. Past performance is not a guarantee of future results.
INVESTMENT PRINCIPLES
Investors chase returns – Wrong decisions, wrong time
Underperformance is a result of investors who buy high/sell low
-60
-40
-20
0
20
40
60
80
-40
-30
-20
-10
0
10
20
30
40
50
Equity Mutual Fund Flow
($ billions
MSCI W
orld Index (%)
MSCI World Index (%)Equity Mutual F und Flow s ($ bil lions)
Jan-
92
Jan-
93
Jan-
94
Jan-
95
Jan-
96
Jan-
97
Jan-
98
Jan-
99
Jan-
00
Jan-
01
Jan-
02
Jan-
03
Jan-
04
Jan-
05
Jan-
06
Jan-
07
Jan-
08
Jan-
09
Jan-
10
Source: Investment Company Institute and Morgan Stanley Capital International 2010.(1) The return on equities is measured as the year-over-
year change in the MSCI All Country World Index.(2) Net new cash flow to equity funds is plotted as a
six-month moving average. Past performance is no guarantee of future results.
(3) MSCI World Index is an unmanaged index which cannot be invested into directly. Past performance is no guarantee of future results.
INVESTMENT PRINCIPLES
% Loss % Appreciation to break even Years to break even at 8% annual return 15% 17.6% 2 years, 1 month 25% 33.3% 3 years, 9 months 35% 53.8% 5 years, 7 months 45% 81.8% 7 years, 9 months
• Constructing a portfolio that helps minimize losses can significantly affect your portfolio value over time.
• To bring a portfolio back to its initial value after a loss takes a return greater than the loss.
• For example — a 15% loss would take an appreciation of over a year of 17.6% to break even. Assuming an 8% annual return, the break even would take 2 years and 1 month.
Your losses hurt more than your gains
Past performance is no guarantee of future results. This is a hypothetical example. Your results will vary. The assumed 8% annual return used does not reflect the deduction of the fees and charges inherent to investing in securities.
INVESTMENT PRINCIPLES
7850
7650
7450
7250
7050
6850
6650
6450
6250
Optimistic Emotion Says to Buy Here
Emotion Tells Investors to Sell Here
“Excitement”
“Euphoria”
“Anxiety”
“Fear”
“Panic”
3/12/97
4/11/97
6/20/97Level of the Dow
Jones Industrial Average
(3/12/97 - 6/20/97)
Headline buzz words detail the emotional rollercoaster that is a market downturn and upswing
The emotional rollercoaster
Source: Zephyr, LPL Financial Research. Past performance is no guarantee of future results. The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries, and widely held by individuals and institutional investors. The Dow Jones is an unmanaged index which cannot be invested into directly. Stock investing involves risk including loss of principal.
INVESTMENT PRINCIPLES
Every year has a reason to say “no”
To invest or not to invest
1960 Russia Down U-2 Plane 1973 Energy Crisis 1986 Dow Nears 2000, Market Too High 1999 Y2K
1961 Berlin Wall Erected 1974 Steepest Market Drop in four decades 1987 October “Mini-Crash” 2000 Tech Bubble Bursts
1962 Cuban Missile Crisis 1975 Clouded Economic Prospects 1988 Economic Growth Slows 2001 Weak Corporate Earnings / Terrorist Attacks
1963 Kennedy Assassination 1976 Russia Launches Sputnik 1989 Invasion of Kuwait 2002 Corporate Accounting Scandals
1964 Gulf of Tonkin 1977 Market Slumps 1990 Gulf War 2003 War in Iraq
1965 Civil Right Marches 1978 Interest Rates Rise 1991 Communism Tumbles with Berlin Wall 2004 Fed Begins to Raise Rates
1966 Vietnam War Escalates 1979 Oil Prices Skyrocket 1992 Global Recession 2005 High Commodities Prices
1967 Newark Race Riots 1980 Interest Rates at All-Time High 1993 Health Care Reform 2006 Dow Hits Highest Level at 11,727
1968 USS Pueblo Seized 1981 Steep Recession Begins 1994 Fed Raises Interest Rates Six Times 2007 Subprime Mortgage Meltdown
1969 Money Tightens, Markets Fall 1982 Worst Recession in 40 Years 1995 Dow Tops 5000 2008 Lehman Brothers Collapses
1970 U.S. Bombs Cambodia 1983 Market Hits New Highs 1996 Dow Tops 6400 2009 National Unemployment Rate Exceeds 10%
1971 Wage and Price Freeze 1984 Record Federal Deficits 1997 Dow Drops 554 Points in One Day 2010 BP Oil Spill
1972 Largest U.S. Trade Deficit Ever 1985 Economic Growth Slows 1998 Russia Long-Term Capital 2011 Greece Bailout
Even through many market conditions, $10,000 invested in the S&P 500 Index in December 1933 would have been worth $1,272,910 by December 2008.
Source: FactSet as of 12/31/10Note: This is a hypothetical example and is not representative of any specific situation. Your results will vary. The S&P 500 Composite Index is an unmanaged index and cannot be invested into directly. Investing in stocks involves risk including loss of principal.The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The S&P 500 is an unmanaged index which cannot be invested into directly.Stock investing involves risk including loss of principal. Past performance is no guarantee of future results.
INVESTMENT PRINCIPLES
Why Patience is a Virtue
Percent of time stocks have provided positive returns (1977 – 2010)
78% Over a one-year
time period
83% Over a three-year
time period
86% Over a five-year
time period
91% Over a ten-year
time period
Negative Returns
Positive Returns
Source: FactSet, LPL Financial Research Note: Based on S&P 500 Monthly Total Return. Average Annual Rolling period returns 1977 - 2010. Past performance is no guarantee of future results. The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The S&P 500 is an unmanaged index which cannot be invested into directly. Stock investing involves risk including loss of principal.
INVESTMENT PRINCIPLES
Consumers feel the worst prior to large gains in the market
Consumer Sentiment S&P 500 Price Gain Over Next Twelve MonthsLess than 60 +23.1%Less than 70 +18.5%Less than 80 +13.1%87 (average) +10.8%Greater than 90 +10.8%Greater than 100 +8.1%Greater than 110 -1.2%
The worse we feel, the better the gains
Source: Bloomberg, LPL Financial. Past performance is no guarantee of future results. Note: In interpreting the consumer sentiment survey, the lower the number, the worse consumer sentiment is. The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The S&P 500 is an unmanaged index which cannot be invested into directly. Stock investing involves risk including loss of principal.
INVESTMENT PRINCIPLES
Often when times are bleak, years that follow show significant total market returns.
Market comebacks
2002-03 / 2003-07Internet bubble/War on terrorism
1973-74 / 1975-76Oil crisis
1940-41 / 1942-45World War II
1929-32 / 1933-36The Great
Depression
2008 / 2009-10The Great Recession
148%
-78%
-17%
100%
-42%
57%
-40%
67%
-38%
39%
-100%
-50%
0%
50%
150%
100%
200%
Market returns after consecutive down years (S&P 500 Index)
Source: JPMorgan Asset Management, Standard & Poor’s. The market returns are represented by the S&P 500 Index return (price only). Returns reflect calendar year returns and not peak to trough. The example is for illustrative purposes only. Past performance is not a guarantee of future returns. Updated as of 12/31/10. S&P 500 is an unmanaged index which cannot be invested into directly. Past performance is no guarantee of future results.
INVESTMENT PRINCIPLES
Despite starting at the “worst times,” markets reward investors
Portfolio begins with $100,000 on:
Portfolio gets as low as: Portfolio Value as of April 2010:
Dec 1972 $58,173 (Sep 1974) $3,316,940Nov 1980 $83,479 (July 1982) $1,911,915Sep 1987 $70,419 (Nov 1987) $603,270Feb 1990 $92,129 (Oct 1990) $555,762Oct 2008 $58,827 (March 2009) $105,674
Benefits of patience
Source: Zephyr, LPL Financial ResearchNote: Past performance is no guarantee of future resultsThe hypothetical portfolio is assumed to be invested in the S&P 500 and does not reflect the deduction of the fees and charges inherent to investing in securities. The S&P 500 index is an unmanaged index and cannot be invested into directly. Your results will vary.Stock investing involves risk including loss of principal.The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The S&P 500 is an unmanaged index which cannot be invested into directly.
INVESTMENT PRINCIPLES
When markets rebound following a bear market, gains are captured quickly. Not being invested when these rebounds begin can lead to not recouping all possible gains.
Market resilience
0 10 20 30 40 50 60 70 80 90
40%
35%
45%
30%
25%
20%
15%
10%
5%
0%
Trading Days From End of Bear Market
03/09/200903/11/200310/08/199810/11/1998
S&
P 500 percentage gain
Source: Bloomberg, LPL Financial Research
Note: Past performance is no guarantee of future results. Stock investing involves risk including loss of principal.
The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The S&P 500 is an unmanaged index which cannot be invested into directly.
INVESTMENT PRINCIPLES
$10,000 invested in the Dow Jones Industrial Average (9/30/87–9/30/07)
For example: By staying fully invested over the past 20 years, you would have earned almost twice as much as someone who missed only 10 of the market’s best days.
Missing the best days of the market can significantly reduce your returns
11.48%$100,000
$80,000
$60,000
$40,000
$20,000
Stayed fully invested
Missed 10 best days
Missed 20 best days
Missed 30 best days
Missed 40 best days
Annualized total return
8.45%
6.30%
4.54%
2.94%
Source: Putnam Investments. Data is historical. The example is for illustrative purposes only. Past performance is not a guarantee of future results. There can be no assurance with respect to predicting market lows. Dow Jones Industrial Average is an unmanaged index which cannot be invested into directly.
INVESTMENT PRINCIPLES
BestW
orst
SmallGrowth51.2%
Small Value41.7%
LargeGrowth41.2%
HFRI40.1%
S&P500
30.5%
LargeValue24.6%
Bonds16.0%
Inter-national
12.5%
Small Value29.1%
HFRI21.3%
LargeValue13.8%
SmallGrowth
7.8%
S&P5007.6%
Bonds7.4%
LargeGrowth
5.0%
Inter-national-11.8%
Inter-national33.0 %
HFRI27.9 %
SmallValue23.9 %
LargeValue18.1 %
SmallGrowth13.4 %
S&P500
10.1 %
Bonds9.8%
LargeGrowth
2.9%
Inter-national
8.1%
LargeGrowth
2.7%
HFRI2.6%
S&P5001.3%
SmallValue-1.5%
LargeValue-2.0%
SmallGrowth-2.4%
Bonds-2.9%
LargeValue38.3%
S&P500
37.6%
LargeGrowth37.2%
SmallGrowth31.0%
HFRI31.0%
SmallValue25.8%
Bonds18.5%
Inter-national
11.6%
LargeGrowth23.1%
S&P500
22.9%
HFRI21.7%
LargeValue21.6%
SmallValue21.4%
SmallGrowth11.3%
Inter-national
6.4%
Bonds3.6%
LargeValue35.2%
S&P500
33.4%
SmallValue31.8%
LargeGrowth30.5%
HFRI23.4%
SmallGrowth13.0%
Bonds9.7%
Inter-national
2.1%
LargeGrowth38.7%
S&P500
28.8%
Inter-national
20.3%
HFRI16.0%
LargeValue15.6%
Bonds8.7%
SmallGrowth
1.2%
SmallValue-6.4%
HFRI44.2%
SmallGrowth43.1%
LargeGrowth33.1%
Inter-national
27.3%
S&P500
21.0%
LargeValue7.3%
Bonds-0.8%
SmallValue-1.5%
SmallValue22.8%
Bonds11.6%
HFRI9.1%
LargeValue7.0%
S&P500
-9.1%
Inter-national-14.0%
SmallGrowth-22.4%
LargeGrowth-22.4%
SmallValue14.0%
Bonds8.4%
HFRI0.4%
LargeValue-5.6%
SmallGrowth-9.2%
S&P500
-11.9%
LargeGrowth-20.4%
Inter-national-21.2%
Bonds10.3%
HFRI-4.7%
SmallValue-11.4%
LargeValue
-15.5%
Inter-national-15.7%
S&P500
-22.1%
LargeGrowth-27.9%
SmallGrowth-30.4%
SmallGrowth48.5%
SmallValue46.0%
Inter-naitonal
39.2%
LargeValue30.0%
LargeGrowth29.8%
S&P500
28.7%
HFRI20.9%
Bonds4.1%
SmallValue22.3%
Inter-national20.7%
LargeValue16.5%
SmallGrowth14.3%
S&P500
10.9%
LargeGrowth
6.3%
Bonds4.3%
HFRI2.2%
Inter-national
14.0%
HFRI10.6%
LargeValue7.1%
LargeGrowth
5.3%
S&P500
4.9%
SmallValue4.7%
SmallGrowth
4.2%
Bonds2.4%
Inter-national26.9%
SmallValue23.5%
LargeValue22.3%
S&P500
15.8%
SmallGrowth13.4%
HFRI11.7%
LargeGrowth
9.1%
Bonds4.3%
LargeGrowth11.8%
Inter-national
11.6%
HFRI10.7%
SmallGrowth
7.1%
Bonds7.0%
S&P500
5.5%
LargeValue-0.2%
SmallValue-9.8%
Bonds5.2%
HFRI-27.7%
SmallValue -28.9%
LargeValue
-36.9%
S&P 500-37.0%
LargeGrowth-38.4%
SmallGrowth-38.5%
Inter-national-43.1%
2008
LargeGrowth37.2%
SmallGrowth34.5%
Inter-national32.5%
S&P500
26.5%
HFRI24.5%
SmallValue20.6%
LargeValue19.7%
Bonds5.9%
2009
• Large Value: Russell 1000 Value Index
• Small Growth: Russell 2000 Growth Index
• Small Value: Russell 2000 Value Index
• International: MSCI EAFE Index
• HFRI: HFRI Equity Hedge Index
• S&P 500: Standard and Poor's 500 Stock Index
20072006200520042003200220012000199919981997199619951994199319921991 2010
SmallGrowth29.1%
SmallValue24.5%
LargeGrowth16.7%
LargeValue15.5%
S&P500
15.1%
HFRI10.5%
Inter-national
8.2%
Bonds6.5%
Sources
LargeGrowth37.21%
• Bonds: Barclays Aggregate Bond Index
• Large Growth: Russell 1000 Growth Index
The Case for Style Diversification
• Some investors fall into the trap of chasing what is hot.• Returns fluctuate in the various asset classes from year to year.• By diversifying and rebalancing regularly, you will be managing your risk and return, without sacrificing potential return.
The Standard & Poor’s 500 Stock Index (S&P 500) is an unmanaged index generally representative of the U.S. Stock Market, without regard to company size. The Russell 2000 Growth Index is an unmanaged index comprised of those Russell 2000 companies with higher price-to-book ratios and higher forecasted growth values. Russell 2000 Value Index measures the performance of those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values. The Morgan Stanley Capital International (“MSCI”) Europe, Australasia, Far East Index (“EAFE”) is an unmanaged index of over 900 companies, and is a generally accepted benchmark for major overseas markets. Index weightings represent the relative capitalizations of the major overseas makers included in the index on a U.S. dollar adjusted basis. The index is calculated separately; without dividends, with gross dividends reinvested and estimated tax withheld, and with gross dividends reinvested, in both U.S. Dollars and local currency. The Barclays Aggregate
Bond Index is composed of securities from Barclays Government/Credit Bond Index, Mortgage-Backed Securities Index and Asset-Backed Securities Index. The Russell 1000 Growth Index is an unmanaged index comprised of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values. Russell 1000 Value Index measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values. Small-cap stocks may be subject to higher degree of risk than more established companies’ securities. The illiquidity of the small-cap market may adversely affect the value of these investments. International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a nondiversified portfolio. Diversification does not ensure against market risk.
INVESTMENT PRINCIPLES
As a result of the market fluctuations of one asset class versus another over a given period, all portfolios drift over time from their original asset allocation. Rebalancing is an essential component of any comprehensive investment strategy and will help you avoid undue shifts in your portfolio due to financial market trends resulting in risk outside of your desired investment objective.
Importance of Rebalancing
40% Bonds
60% Equities
40% Bonds
60% Equities
15% Bonds
85% Equities
In the example above, a slightly aggressive portfolio begins with an asset allocation of 60% stocks and 40% bonds.
If the performance of the investment pushes that mix to 85% stocks and 15% bonds, the portfolio is now riskier than the desired allocation.
By rebalancing, your portfolio could avoid this type of market-driven change and keep it in line with your objectives and risk tolerance.
This example is intended to demonstrate the effects of rebalancing and is not intended to project performance. No strategy assures success or protects against loss. Such strategy may involve tax consequences. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and are subject to availability and change in price. Stock investing involves risk including loss of principle.
Original Allocation Rebalanced PortfolioNon-rebalanced Portfolio
INVESTMENT PRINCIPLES
Potential benefits include:
• Accessibility to professional hedge fund managers whose funds are hard to access• Reduced correlation to stocks/bonds • Attractive risk-adjusted returns• Diversification• Multiple investment styles
Potential risks include:
• Lack of transparency• Additional layer of fees (above hedge fund manager fees)• Fund of hedge funds can be illiquid• May employ leverage• May employ aggressive tax strategies that may pose tax risks for investors and require
filing extensions
What is a fund of hedge funds?A fund of hedge funds invests in a portfolio of different hedge funds to provide broad exposure to the hedge fund industry and to diversify the risks associated with a single investment fund. Funds of hedge funds managers select hedge funds and construct portfolios based upon their selections.
They are actively managed portfolios of investments that use advanced investment strategies, such as leveraged, long, short and derivative positions, in both domestic and international markets with the goal of generating high returns (either in an absolute sense or over a specified market benchmark).
Fund of hedge funds
Alternative investments may not be suitable for all investors and should be considered as an investment for the risk capital portion of the investor’s portfolio. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses. Long positions may decline as short positions rise, thereby accelerating potential losses to the investor. Derivatives/options are not suitable for all investors and certain options strategies may expose investors to significant potential losses such as losing entire amount paid for the option.
INVESTMENT STRATEGY AND PROPOSAL
You might consider a fund of hedge funds if you are:
• Not concerned with liquidity of investment• Seeking diversification, rebalancing or reduction of volatility in their portfolios• Looking for professional money management
The value of fund of hedge fundsFund of hedge funds show low correlation to traditional investments and may offer the potential for capital preservation in down markets, thereby improving the portfolio’s risk/return profile and reducing its overall volatility.
Fund of hedge funds strategyIf you are a long-term investor with no immediate need for liquidity, investing a portion of your portfolio in a fund of hedge funds may be a suitable investment choice for you. With a fund of hedge funds, you will have access to quality hedge fund managers and you can benefit from an investment that has low correlation to the equity and fixed income market, with the potential for capital appreciation.
Fund of hedge funds
Alternative investments may not be suitable for all investors and should be considered as an investment for the risk capital portion of the investor’s portfolio. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses. Long positions may decline as short positions rise, thereby accelerating potential losses to the investor. Derivatives/options are not suitable for all investors and certain options strategies may expose investors to significant potential losses such as losing entire amount paid for the option.
INVESTMENT STRATEGY AND PROPOSAL
Potential benefits include:
• Professional management• Lack of historical correlation with almost all
other investment classes• Potential to profit in advancing markets and
declining markets, since they can hold both long and short positions
• A way to increase portfolio diversification beyond what other common stocks and fixed income securities can offer by themselves
• Exposure to broad, global markets
Potential risks include:
• Futures and forward trading is speculative and leveraged, and can be volatile
• Trading occurs on foreign exchanges which could mean higher risk
• Futures and forward markets can be illiquid or disrupted
• Diversification does not assure a profit or guarantee against loss in a declining market
• Limited ability to liquidate investment units (monthly)
What is a managed futures fund?A managed futures fund is a pool of money from various investors. Professional managers, known as commodity trading advisors, specialize in trading futures and forward contracts, and invest the money pool using a proprietary trading system, or a discretionary method, that may involve going long or short in futures contracts in areas such as metals (gold, silver), grains (soybeans, corn, wheat), equity indexes (S&P futures, Dow futures, NASDAQ 100 futures), soft commodities (cotton, cocoa, coffee, sugar), foreign currency and U.S government bond futures.
Managed future funds
Alternative investments may not be suitable for all investors and should be considered as an investment for the risk capital portion of the investor’s portfolio. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.
INVESTMENT STRATEGY AND PROPOSAL
You might consider a managed futures fund if you are:
• Not concerned with liquidity of investment• Seeking diversification, rebalancing or reduction of volatility in their portfolios• Looking for exposure to a wide range of global markets
The value of managed futures fundsManaged futures funds show negative correlation to other asset classes, meaning that its investment performance is independent of other investments.
Managed futures strategyInvesting a portion of your portfolio in a managed futures fund may be a suitable investment for you if you are a long-term investor with little need for liquidity. Managed futures funds are an investment that has low-correlation to the equity and fixed income market, with potential for capital appreciation and exposure to broad, global markets.
Managed future funds
Alternative investments may not be suitable for all investors and should be considered as an investment for the risk capital portion of the investor’s portfolio. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.
INVESTMENT STRATEGY AND PROPOSAL
Potential benefits include:
• Professional management• Dividend yields typically higher than other equities• Long-term capital appreciation• Diversification from common stocks and fixed income• Flexible tax treatment by claiming depreciation
A Real Estate Investment Trust (REIT) is an alternative to direct ownership of real estate. An investment in a REIT allows small investors to share in the many benefits associated with real estate while reducing the overall risks that accompany property ownership.
What is a non-traded REIT?
Investing in real estate/REITs involves special risks such as potential illiquidity and may not be suitable for all investors. There is no assurance that the investment objectives of this program will be attained.
INVESTMENT STRATEGY AND PROPOSAL
You might consider a non-traded REIT if you are:
• A long-term investor (investment horizon of 10-15 years or more)
• Not concerned with the liquidity of an investment
• Seeking income and/or capital appreciation• Seeking diversification, rebalancing, or
reduction of volatility in your portfolio
Benefits of diversification* (low correlation)
Non-traded REITs show a low or negative correlation to other asset classes over long periods, meaning that the investment performance is independent of other investments. This low correlation means that when other investments are down, non-traded REITs may continue to perform. Simply put, low correlation can help contribute to less volatility in an investment portfolio.
LPL Financial offers access to a broad non-traded REIT platform that includes some of the highest quality sponsors in the market.
The value of non-traded REITs
Investing in real estate/REITs involves special risks such as potential illiquidity and may not be suitable for all investors. There is no assurance that the investment objectives of this program will be attained.* There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not ensure against market risk.
INVESTMENT STRATEGY AND PROPOSAL
• Shares in a non-traded REIT are generally considered illiquid until the REIT’s exit strategy either returns investors’ principle or lists on a public exchange. No public market exists for shares of common stock of a non-traded REIT. Even if investors can sell their shares through a secondary market, it is likely that they will have to sell them at a significant discount from the public offering price.
• The REIT may not achieve its desired diversification or investment objectives, or be able to pay dividends.
• The shares may be worth more or less than the offering price.• If the value of the assets in which the fund invests declines, investors’ shares may
lose value.• The REIT could be vulnerable to economic and geopolitical conditions. For example, a
REIT that invests in the office sector may be negatively affected by an economic downturn that leads to tenant defaults or vacancies.
Risks with non-traded REITs
INVESTMENT STRATEGY AND PROPOSAL
Client Discovery
The first and most important step in the investment consulting process is Discovery. We will help you clearly identify your short- and long-term investing goals, tolerance for risk and wealth management needs. Perhaps you have always wanted to purchase a second home, start a new business or establish a charitable foundation. Whatever your needs may be, we can help you get there by defining your investment objectives and then customizing a portfolio designed to address your unique situation.
Defining your needs and goals
Discovery About You
What are your hopes and dreams?
Are there investments you’d like to avoid as a matter of principle?
What are your income needs?
Do you have any specific tax considerations?
What sort of risk and return characteristics are you looking for?
Do you have any short-term cash needs?
What other investments do you have?
What has your experience been with other financial advisors?
Designed For You
1 Discover
2 Recom
men
d
3 Implement
4 Rev
iew
CLIENT DISCOVERY
Your investment objective is based on many factors, including your financial situation, income needs, time horizon and tolerance for risk. Common investment objectives are Aggressive Growth, Growth, Growth with Income, Income with Moderate Growth and Income with Capital Preservation.
Your investment objective
Risk
Return
Income with Capital Preservation
Income with
Moderate Growth
Income with
Moderate Growth
Growth with Income
Growth with Income
GrowthGrowth
Aggressive Growth
• Need for capital preservation and current income
• No focus on growth• Lowest tolerance for risk• Shortest investment horizon
• Need for current income• Moderate focus on growth• Low tolerance for risk• Short/intermediate investment
horizon
• Equal focus on growth and current income
• Moderate tolerance for risk• Intermediate investment horizon
• No need for current income• Focus on aggressive growth• Highest tolerance for risk• Long investment horizon
CLIENT DISCOVERY
What is core and satellite investing?
INVESTMENT STRATEGY AND PROPOSAL
• Core and Satellite investing is an enhanced approach to portfolio construction that can provide anorganized framework for building better portfolios.
• In this approach, traditional core investments provide a strong portfolio foundation, while non-traditional satelliteinvestments can help investors widen their opportunity set.
STRATEGIC SATELLITES
ALTERNATIVE SATELLITES
THE CORE U.S. Large Cap StocksInternational Large Cap
US BondsGlobal Investment Grade
Bonds
Private Equity
Hedge Funds
Private Real Estate
Commodities
High Yield Debt
Emerging Markets Equity
Emerging Markets Debt
International Public Real Estate
International Small Cap Equity
U.S. Public Real Estate
Key Takeaway: As investors work toward important life goals, Core and Satellite investing can help determine whatsecurities to select, how to combine investments, and how to potentially dampen overall portfolio volatility.
Source: GSAM Global Portfolio Strategies Group.
How satellites potentially lower overall portfolio volatility
INVESTMENT STRATEGY AND PROPOSAL
• A well-diversified mix of satellite investmentshas historically been less volatile than largecap US stocks.
• The reason is that, historically, satellitereturns have not moved in tandem with thebroad stock and bond markets or withother satellites.
Key Takeaway: Adding satellite investments to a portfolio can help enhance portfolio return potential and lower potential risk-critical given ongoing uncertainty and turbulence in traditional stock and bond markets.
Source: Ibbotson EnCorr and GSAM. Past performance is not indicative of future results, which may vary. The Combined Satellite portfolio comprises an equal 12.5% weight for each of the eight satellite asset classes shown. Other combinations of satellites would have resulted in higher annualized volatilities. Based on monthly benchmark index returns from January 1994 to December 2010. Volatility is represented by standard deviation and numbers are based on the following indices: Emerging Markets Equity – MSCI Emerging Markets (unhedged), Commodities – S&P GSCI Index, US Real Estate – DJ Wilshire RESI, International Real Estate – FTSE/NAREIT ex-US Real Estate, International Small Cap – S&P/Citi EMI World ex US (unhedged), Emerging Markets Debt – JPM EMBI Global Composite , Global High Yield – BarCap Global Hi-Yield Index, US Large Cap – S&P 500. See page 7 for index definitions.Index figures reflect the reinvestment of dividends but do not reflect the deduction of any fees or expenses which would reduce returns. Investors cannot invest directly in indices
Annualized Asset Class Volatilities (1994 - 2010)
15.7%
10.7%
12.5%
13.4%
17.6%
20.4%
21.8%
22.6%
24.5%
Large Cap US Stocks
Global High Yield
Combined Satellites*
Emerging Markets Debt
International Small Cap
International Real Estate
US Real Estate
Commodities
Emerging Markets Equity
Why we believe owning more than one satellite is key
INVESTMENT STRATEGY AND PROPOSAL
A single satellite (i.e., Commodities) can be volatile from year to year - but periodic declines are often offset by positiveperformance from other satelliltes. That's why we believe owning a diversified mix of satellites is key.
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Int'l SC 8.5% 27.3% 37.8% 19.8% 12.2% 66.6% 49.7% 10.4% 32.1% 56.3% 42.4% 34.5% 46.7% 39.8% -12.0% 79.0% 28.5%
Commod- ities
5.3% 20.3% 36.9% 12.8% 1.9% 40.9% 30.7% 9.7% 13.7% 53.7% 34.8% 25.6% 35.7% 32.7% -25.9% 58.2% 22.0%
US REITS 1.6% 19.2% 33.9% 10.8% -0.7% 23.5% 12.7% 5.3% 3.8% 45.1% 28.7% 22.1% 32.6% 7.3% -39.2% 45.1% 19.2%
US HY -1.0% 18.5% 26.3% -9.4% -8.1% 19.6% 5.0% -2.4% 2.7% 37.1% 26.0% 18.3% 29.4% 6.2% -46.5% 42.7% 15.1%
EME -7.3% 13.6% 11.4% -11.6% -17.4% 17.3% -5.9% -8.8% -1.4% 29.0% 17.3% 13.8% 11.8% 1.9% -47.7% 29.8% 14.8%
Int'l REITS -18.8% 5.3% 7.2% -14.1% -25.3% 2.4% -10.3% -15.7% -6.0% 22.2% 11.6% 10.2% 9.9% -0.9% -52.0% 29.0% 12.2%
EMD -19.3% -5.2% 6.0% -20.9% -35.7% -3.2% -30.7% -31.9% -7.3% 20.7% 11.1% 2.7% -15.1% -17.7% -53.2% 13.5% 9.0%
S&P 500 1.3% 37.6% 23.0% 33.4% 28.6% 21.0% -9.1% -11.9% -22.1% 28.7% 10.9% 4.9% 15.8% 5.5% -38.5% 26.5% 15.1%
Getting Started: Working with your financial advisor to construct a Core and Satellite portfolio begins with a review of current portfolio structure, a look at asset classes that may enhance progress toward specific investment goals, and discussionof how assets can be divided between “core” and “satellite” strategies.
Source: GSAM, Ibbotson. Based on monthly benchmark index returns from January 1994 to December 2010. Returns are based on the following: indices: International Small Cap –S&P/Citi EMI World ex US (unhedged), Commodities – S&P GSCI Index , US REITS (Public Real Estate) – DJ Wilshire RESI, US High Yield – Barclays Capital US High Yield Index, Emerging Markets Equity – MSCI Emerging Markets (unhedged), International REITS (International Real Estate) – FTSE/NAREIT ex-US Real Estate, Emerging Markets Debt – JPM EMBI Global Composite.See appendix for Benchmark definitions. Diversification does not protect an investor from market risk and does not ensure a profit.Past performance is not indicative of future results, which may vary.
Risk considerations
INVESTMENT STRATEGY AND PROPOSAL
Emerging markets securities may be less liquid and more volatile and are subject to a number of additional risks, including but not limited to currency fluctuations and political instability.
Foreign securities may be more volatile than investments in U.S. securities and will be subject to a number of additional risks, including but not limited to currency fluctuations and political developments.
High-yield, lower-rated securities involve greater price volatility and present greater credit risks than higher-rated fixed income securities.
Investing in derivatives often involves a high degree of financial risk because a relatively small movement in the price of the underlying security or benchmark may result in a disproportionately large movement in the price of the derivative and are not suitable for all investors. No representation regarding the suitability of these instruments and strategies for a particular investor is made.
The currency market affords investors a substantial degree of leverage. This leverage presents the potential for substantial profits but also entails a high degree of risk including the risk that losses may be similarly substantial. Such transactions are considered suitable only for investors who are experienced in transactions of that kind. Currency fluctuations will also affect the value of an investment.
An investment in real estate securities is subject to greater price volatility and the special risks associated with direct ownership of real estate.
Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity.
Alternative Investments such as hedge funds are subject to less regulation than other types of pooled investment vehicles such as mutual funds, may make speculative investments, may be illiquid and can involve a significant use of leverage, making them substantially riskier than the other investments. An Alternative Investment Fund may incur high fees and expenses which would offset trading profits. Alternative Investment Funds are not required to provide periodic pricing or valuation information to investors. The Manager of an Alternative Investment Fund has total investment discretion over the investments of the Fund and the use of a single advisor applying generally similar trading programs could mean a lack of diversification, and consequentially, higher risk. Investors may have limited rights with respect to their investments, including limited voting rights and participation in the management of the Fund.
Alternative Investments by their nature, involve a substantial degree of risk, including the risk of total loss of an investor's capital. Fund performance can be volatile. There may be conflicts of interest between the Alternative Investment Fund and other service providers, including the investment manager and sponsor of the Alternative Investment. Similarly, interests in an Alternative Investment are highly illiquid and generally are not transferable without the consent of the sponsor, and applicable securities and tax laws will limit transfers. There may be conflicts of interest relating to the Alternative Investment and its service providers, including Goldman Sachs and its affiliates, who are engaged in businesses and have interests other than that of managing, distributing and otherwise providing services to the Alternative Investment. These activities and interests include potential multiple advisory, transactional and financial and other interests in securities and instruments that may be purchased or sold by the Alternative Investment, or in other investment vehicles that may purchase or sell such securities and instruments. These are considerations of which investors in the Alternative Investment should be aware. Additional information relating to these conflicts is set forth in the offering materials for the Alternative Investment.
Additional disclosures
INVESTMENT STRATEGY AND PROPOSAL
Emerging Markets Equity: The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. The MSCI Emerging Markets Index consists of the following 21 emerging market country indices: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey.
Commodities: the S&P GSCI Index, a composite index of commodity sector returns, representing an unleveraged, long-only investment in commodity futures that is broadly diversified across the spectrum of commodities.
US Real Estate: The Wilshire Real Estate Securities Index is an unmanaged index of publicly traded REITs and real estate operating companies. The Index is unmanaged and the figures for the Index do not include any deduction for fees, expenses or taxes.
International Real Estate: The FTSE EPRA/NAREIT Developed Real Estate ex-U.S. Index Fund is considered representative of real estate companies and REITS outside the U.S.
International Small Cap: The S&P/Citigroup EMI World ex-U.S. Index is the small capitalization stock component of the Citigroup Broad Market Index (BMI).The BMI is a float-weighted index that spans 22 countries and includes the listed shares of all companies with an available market capitalization (float) of at least $100 million at the end of May each year. Companies are deleted if their float falls below $75 million. Changes are effective before the open of the first business day of July. The EMI ex-U.S. is defined as those stocks falling in the bottom 20% of the cumulative available capital in each country.
Emerging Markets Debt: The J.P. Morgan Emerging Markets Bond Index Global (EMBI Global) is an unmanaged market capitalization Index that tracks total returnsfor U.S. dollar denominated debt instruments issued by emerging market sovereign and quasi-sovereign issuers.
Global High Yield: Barclays Capital U.S Corporate High-Yield Bond Index is an unmanaged market value weighted index composed of fixed-rate, publicly issued, non-investment grade debt
Large Cap Stocks: The S&P 500 Index is the Standard & Poor’s 500 Composite Index of 500 stocks, an unmanaged index of common stock prices
Standard & Poor’s ® and S&P ® are registered trademarks of The McGraw-Hill Companies, Inc. and GSCI™ is a trademark of The McGraw-Hill Companies, Inc. and have been licensed for use by Goldman, Sachs & Co.
Indices are unmanaged and do not reflect any deduction for fees, expenses or taxes. It is not possible to invest directly in an unmanaged index.
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THIS MATERIAL DOES NOT CONSTITUTE AN OFFER OR SOLICITATION IN ANY JURISDICTION WHERE OR TO ANY PERSON TO WHOM IT WOULD BE UNAUTHORIZED OR UNLAWFUL TO DO SO.
Opinions expressed are current opinions as of the date appearing in this material only. No part of this material may, without GSAM’s prior written consent, be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorized agent of the recipient.
This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. Please see additional disclosures.
Although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness. We have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public sources.
Goldman Sachs does not provide accounting, tax, or legal advice. Notwithstanding anything in this document to the contrary, and except as required to enable compliance with applicable securities law, you may disclose to any person the US federal and state income tax treatment and tax structure of the transaction and all materials of any kind (including tax opinions and other tax analyses) that are provided to you relating to such tax treatment and tax structure, without Goldman Sachs imposing any limitation of any kind. Investors should be aware that a determination of the tax consequences to them should take into account their specific circumstances and that the tax law is subject to change in the future or retroactively and investors are strongly urged to consult with their own tax advisor regarding any potential strategy, investment or transaction.
Past performance is not indicative of future results, which may vary. The value of investments and the income derived from investments can go down as well as up. Future returns are not guaranteed, and a loss of principal may occur.
Indices are unmanaged. The figures for the index reflect the reinvestment of dividends but do not reflect the deduction of any fees or expenses which would reduce returns. Investors cannot invest directly in indices.
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© 2012 Goldman Sachs. All rights reserved. Date of First Use: 7/29/11 56787.MF.MED.OTU
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