Investment SIGThursday, January 14, 2010

Agenda Market Update Presentation and Discussion on Investment

Diversification Download Demonstration - Ben Anthony Open Discussion on Investment Opportunities

and Cautions Inputs from Attendees:

• Investment Information Exchanges• Preferences for Future Subjects

Investment SIGThursday, January 14, 2010

Agenda Market Update

Market Update

Market Update

• Yahoo Finance • DJIA stock trends

• Vanguard Total Bond Index (VBTLX)

Investment SIGThursday, January 14, 2010

Agenda Market Update Presentation and Discussion on

Investment Diversification

Investment Diversification

Reduce Risk

And Increase Return

Diversification (The Theory)

Modern Portfolio Theory (MPT) Invented circa 1950 by Harry Markowitz

• (He received the Nobel Prize in Economics in 1990)

Told how to combine stocks in a portfolio to give the least risk for the return sought

He found that a portfolio of risky stocks could be purchased in such a way so that the whole portfolio was less risky than the individual stocks in it.

Diversification(More onThe Theory)

The key is to select securities that have correlation coefficients that are less than

one. How can you tell the correlation?

• MPT uses R Squared, Beta, and Alpha to measure this for mutual funds• R Squared of 100 correlates exactly with a

referenced index. A 25 means it is only moves about 25% in the same direction as the index

Diversification(More onThe Theory)

How can you tell the correlation?• MPT uses R Squared, Beta, and Alpha to measure

this for mutual funds• R Squared of 100 correlates exactly with a referenced

index. A 25 means it is only moves about 25% in the same direction as the index

• Beta measures the volatility or degree of movement with the index. A 1.5 Beta means that if the index moves up 10 points, the mutual fund moves up 15 points

• Alpha measures the performance or contribution of a mutual fund manager relative to the indes

Diversification(More onThe theory)

Most important is the allocation of investments according to asset classes such as:• Stocks, Bonds, Cash, Commodities, Real Estate, Gold

Also, next allocate with in the asset classes to:• Geography (Developed and / or Emerging Markets)

• Sectors of the economy

Diversification (The Practice)

Does it work? There are many successful examples of the

application of the MPT since it was developed• Studies show that the volatility of a portfolio of a

single stock portfolio can be reduced 40% by increasing the portfolio to 20 stocks.

• However, the best effect is to mix the most risky with safest investments—especially if they don’t have correlations approaching one.

Diversification(The Practice)

Does it work? One must balance risk and returns. A

totally risk free portfolio will be eroded by inflation over the years

Look for middle ground between asset preservation and potential gain

Diversification(The Practice)

NOTE:

• Although a rising tide floats all boats • A Tsunami will upset nearly all boats and sink

many.

However, even though diversification becomes temporarily thwarted by a financial panic, when markets recover to “normal times” diversification becomes ever more importance to recover your losses in a rational way

Diversification(The Practice)

Does it Work?

• All 12 Morningstar stock sectors suffered double digit losses for 2008 but:• The average Financial stock lost 40%

• The average Health care stock lost 20%

Diversification(The Practice)

Does it work? In the 2008 a Vanguard 500 index

mutual fund lost 37% With a mix of 80 %Vanguard 500 and of

20% the Vanguard Total Bond, a portfolio would have lost 29%

A mix of 60% / 40% would have lost 20%

Diversification(The Practice)

How do you diversify?• Assess your own risk tolerance

• Decide what asset classes are OK for you and what percent to put in them• There are web sites that offer calculators for asset

allocation and comparisons for age standards

Diversification(The Practice)

How do you diversify? (Keep the theory in mind ):• Decide how much to put into bonds

• Decide the amount for equities and which of the 12 Equity Sectors you wish to invest in and in what proportion

• Decide geographically where you want to invest

Diversification(The Practice)

How do you diversify? Some Tools:• You can construct model portfolios in several

web sites to watch the performance hypothetically if you choose.

• The calculators will show your allocation percentages for your portfolio and compare them with standards for your age

Diversification(The Practice)

How do you diversify? Some Tools:• Morningstar has a portfolio X-Ray tool that will

analyze you entire portfolio, including mutual funds and ETFs.

• It will show how many dollars you have in various categories and in every stock in your mutual fund portfolio as well.

Diversification(The Practice)

How do you diversify for a balanced return?• Common mistakes:

• Dividing investments among many stocks or funds that are in the same sector

• If you use advisors or multiple advisors, failing to telling them your total picture may yield a sub optimized diversification

Diversification – 2nd Opinions

Does everyone agree with MPT and Diversification: NO• Warren Buffet: Diversification is protection from

ignorance. Put your eggs in one basket and watch it

• Peter Lynch: Deworsification

• Charlie Munger: Wider investment = mediocre

My Observation about insiders and internal knowledge: Facts do not always predict stock prices.

Investment Diversification

The End

Investment SIGThursday, January 14, 2010

Agenda Market Update Presentation and Discussion on

Investment Diversification Download Demonstration - Ben

Anthony

Download of MLP Data DemoBy Ben Anthony - MSN Money.com

Secto

r

TIC NameRec Price $ $ Current

Distrib

% Yield Expected Return %

Curr Pricechng from

10 02curr yield

A BPL Buckeye Partners LP 3 47.87 3.65 7.62 12.87A CLMT Calumet Spreciaties Products PzA GLP Global Partners LP 2 24.01 1.95 8.12 11.12A HEP Holly Energy Partners LP 2 37.60 3.14 8.35 14.10A KMP Kinder Morgan Energy Partners LP 1 53.36 4.20 7.87 13.87 55.70 2.34 7.54A KMR Kinder Morgan Management LPA MMP Magellean Midstream Partners LP 2 37.42 2.84 7.59 13.59A NS NuStar Energy LP 2 50.81 4.23 8.36 14.86A SXL Sunco Logistics Partners LP 2 58.96 4.16 7.08 15.81A TPP TEPPCO Partners LP 34.42 2.90 8.45 11.70A TLP Transamentalgne Partners LPB APL Atlas Pipeline Partners LP 2 6.98B CPNO Copano Energy LLC 1 17.53 2.30 13.12 14.08 18.82 1.29 12.22B XTEX Crosstex Energy LP 2 5.00B DPM DCP Midstream Partners LP 1 24.36 2.40 9.85 11.82 25.35 0.99 9.47B EROC Eagle Rock Energy Partners LP 2 4.13 0.10 2.42 -91.44B EXLP Exterran Partners LP 2 17.86 1.85 10.36 20.01B HLND Hiland Partners LPB MWE MarkWest Energy Partners LP 1 23.25 2.56 11.01 11.67 23.84

B MMLP Martin Midstream Partners LP

B KGS Quicksilver Gas Services LP

B RGNC Regency Energy Partners LP 1 19.00 1.78 9.37 13.08B NGLS Targa Resources Partners LP 1 18.50 2.07 11.19 14.94B WES Western Gas Partners LP 1 17.51 1.20 6.85 13.41B WPZ Williams Partners LP 2 22.66 2.54 11.21 13.46C BWP Boardwalk Pipeline Partners LP 2 24.84 1.96 7.89 13.69C CQP Cheniere Energy Partners LPC DEP Duncan Energy Partners LP 2 19.45 1.74 8.95 13.95C EPB El Paso Pipeline Partners LP 1 20.31 1.32 6.50 18.50C ETP Energy Transfer Partners LP 1 41.85 3.58 8.58 12.21C EPD Enterprise Products Partners LP 1 27.82 2.18 7.84 14.34

Investment SIGThursday, January 14, 2010

Agenda Market Update Presentation and Discussion on

Investment Diversification Download Demonstration - Ben Anthony Open Discussion on Investment

Opportunities and Cautions

Open Discussion

Any one impressed with any specific stocks, bonds, ETFs?

How about Economic Sectors or Geographic areas?• Energy?

• Utilities?

• New Technology?

Investment SIGThursday, January 14, 2010

Agenda Market Update Presentation and Discussion on Investment

Diversification Download Demonstration - Ben Anthony Open Discussion on Investment Opportunities

and Cautions Inputs from Attendees:

• Investment Information Exchanges• Preferences for Future Subjects

Inputs from Attendees

Emails I send as SIG Information Exchanges:• Feed Back?

• Useful?

• What percent of them do you read?

• Suggestions for improvements?

Any Preferences for special subjects for February 11th?

Candidates:• Utilities Sector Investments

• On line sources of investment information

• Investing in breakthrough technologies

• How to find and evaluate investment candidates

• Exchange Traded Funds vs. Mutual Funds

• Index Mutual Funds vs. Managed Mutual Funds

SEE YOU NEXT MONTH

FEBRUARY 11TH

.