1 Crosby, Daniel. The Behavioral Investor

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1 December 28th, This is provided for informational purposes only and should not be considered a recommendation to buy or sell a particular security. Past performance is no guarantee of future returns. Please see attached disclosures.

2 There are two types of momentum that we use in our analysis. Relative momentum is the first, whereby we compare securities, sectors, and asset classes to one another and sort by strength. The idea is to buy the strongest positions and sell the weakest ones. Time-series momentum (also referred to as absolute momentum) is where we measure the momentum of the price of a security relative to its historical price over time. Securities that exhibit positive momentum over time are expected to continue to demonstrate positive performance. Both relative and time-series momentum have well documented academic support, some of which can be found in our resources section on our website. For the purposes of this writing we are going to focus intently on time-series momentum or the trend of asset prices. Trend-following is a key element of our approach to markets and the analysis of market trends is one of the four key components of our macro framework. We wanted to explain why trends are important to our framework and explain a little more about how we apply trend following in our approach. The idea of following the trend is essentially cutting your losses short and letting your winners run. It is based on the concept of buying what is going up and selling what is going down. Why would such a strategy work in markets? It seems far too simple to be useful. It is rather simple, but we believe that simplicity is beauty in this case. It is our opinion that trend-following, and relative momentum for that matter, have worked historically and will continue to work going forward because of the behavior of market participants. By work, we simply mean provide attractive risk-adjusted returns. Investors are bipolar, and the various behavioral biases that we all fall victim to create price trends. Overconfidence creates a self-fulfilling cycle of price increase when an investor buys a security only to see its price increase, and then becomes overconfident in the securities future prospects and buys more. Herd mentality causes us to buy securities that have already run far past fair value because of our inner fear of missing out. As Dr. Daniel Crosby points out in his book, The Behavioral Investor 1 : As part of our framework, price trends inform us of market sentiment in real time. Through a simple rules-based approach, we are able to ascertain whether market participants are optimistic or pessimistic about the future of the underlying security. A common mistake investors often make is assuming that the crowd is wrong. There is such a halo around being a contrarian these days that sometimes novice investors claim this title too soon. Being early is also called being wrong. The crowd is often wrong at extremes. Other times, it pays to be aligned with the crowd. Picking out extremes is a tough business and this form of timing is more luck than skill in our opinion. We believe that a well defined, simple, rules-based approach to following market trends is a better way to go. 2 1 Crosby, Daniel. The Behavioral Investor WealthShield LLC. All Rights Reserved. This is provided for informational purposes only and should not be considered a recommendation to buy or sell a particular security. Past performance is no guarantee of future returns. Please see attached disclosures. For adviser use only.

3 Take Meb Faber s paper, A Quantitative Approach to Tactical Asset Allocation 2, where he demonstrates how using a simple 10-month moving average (200 day moving average used monthly) could help investors increase returns while reducing risk. Essentially he recommended buying when the S&P closed the month above its moving average, then selling and going to cash when it closed below its moving average. The 10 month moving average was used as a trend filter. When above it, the S&P 500 was in a positive trend, and when below, a negative trend. The idea was to buy when it was going up and sell when it was going down. The results in the paper were impressive. From , the proposed strategy would have returned 10.18% with a standard deviation (volatility) of 11.97%. The S&P 500 buy and hold model would have returned 9.32% with a standard deviation of 17.87%. The paper demonstrated that you didn t need to be contrarian to get better risk adjusted returns. You could invest with the crowd and actually do alright. Trend following success is not isolated to whitepapers and academic literature. There are real track records of traders that have built their careers using this discipline to invest. The SG Trend Index tracks the 10 largest (by assets under management) trend following CTAs (commodity trading advisors) and can be compared to the S&P 500. In the chart below, the grey area chart is the SG Trend Index. The red line is the S&P 500. The chart goes back to December 1999 and illustrates the similar growth between the two indices over that time period. In our opinion, the important thing to note is the volatility difference between the two indices. They may arrive near the same point at the end, but the path is very different. Over this time period, the market (S&P 500) suffered two drawdowns of over 50%. Buy and hold investors would have had to suffer through watching their investments get cut in half, not once, but twice. On the other hand, trend followers (the SG Trend Index) were somewhat impervious to the equity market volatility. 3 Source: Societe Generale 2 Faber, Meb, A Quantitative Approach to Tactical Asset Allocation (February 1, 2013). The Journal of Wealth Management, Spring Available at SSRN: WealthShield LLC. All Rights Reserved. This is provided for informational purposes only and should not be considered a recommendation to buy or sell a particular security. Past performance is no guarantee of future returns. Please see attached disclosures. For adviser use only.

4 In the book, Trend Following with Managed Futures 3, authors Alex Greyserman and Kathryn M. Kaminski analyze a unique data set of 800 years worth of asset price history. Their study demonstrates that This leads us to believe that the SG Trend index illustration above is not an anomaly. So how do we use trend-following in our framework? We track asset classes, styles, factors, countries, sectors, and individual securities relative to their historical prices to determine direction. We also compare offensive assets against defensive assets by analyzing the ratios against their respective historical values over time. This allows us to get a reading on the underlying psychology of market participants at that moment in time. When the positioning is negative in nature, we suggest a risk mitigation posture. When sentiment is positive, we recommend an offensive posture. In the illustration below we show the MSCI All Country World All-Cap Index relative to its 10 month exponential moving average. The MSCI website states that, Therefore, this index should give us a good approximation of a total global market portfolio. Currently, this index is in a negative trend relative to its moving average, which is indicative of negative market sentiment in global equities. MSCI All Country World All-Cap Index 3 Alex Greyserman and Kathryn M. Kaminski, Trend Following with Managed Futures (Wiley, 2014) WealthShield LLC. All Rights Reserved. This is provided for informational purposes only and should not be considered a recommendation to buy or sell a particular security. Past performance is no guarantee of future returns. Please see attached disclosures. For adviser use only. 4

5 A defensive asset, like Gold, can also be compared to its long-term moving average to determine sentiment. In the chart of Gold below, we illustrate that the barbaric relic is currently in a positive trend, climbing above its 10 month moving average recently. When defensive assets are trending positive at the same time that risky assets are in negative trends, market participants seem to be shifting more pessimistic. This psychological shift could just be a flash in the pan or it could signal something more dire, like the end of the growth phase of the business cycle. Gold remains above its 200 day moving average and is up over 1.83% this week. The trend is your friend is a common wall street adage that is foundational to our framework. The good thing is that trend-following and momentum investing are grounded in academic research and behavioral finance. We are confident that as long as human beings are investing in markets, trend-following will remain viable. Right now, global market trends are negative for risk assets and positive for defensive ones. Trend following helps us adapt to changing market dynamics and shifting psychology. This, combined with the other components of our framework (valuations, fed policy, and economic growth), help us stay in tune with our environment and invest accordingly. 3 Alex Greyserman and Kathryn M. Kaminski, Trend Following with Managed Futures (Wiley, 2014) WealthShield LLC. All Rights Reserved. This is provided for informational purposes only and should not be considered a recommendation to buy or sell a particular security. Past performance is no guarantee of future returns. Please see attached disclosures. For adviser use only. 5

6 Past performance is no guarantee of future returns. This is WealthShield s current assessment of the market and may be changed without notice. The visuals shown are for illustrative purposes only and do not guarantee success or certain level of performance. This material contains projections, forecasts, estimates, beliefs and similar information ( forward looking information ). Forward looking information is subject to inherent uncertainties and qualifications and is based on numerous assumptions, in each case whether or not identified herein. This information may be taken, in part, from external sources. We believe these external sources to be reliable, but no warranty is made as to accuracy. This material is not financial advice or an offer to sell any product. There is no guarantee of the future performance of any WealthShield portfolio. The investment strategies discussed may not be suitable for all investors. Before investing, consider your investment objectives and WealthShield's charges and expenses. All investment strategies have the potential for profit or loss. Benchmarks: The index / indices used by WealthShield have not been selected to represent an appropriate benchmark to compare an investor s performance, but rather are disclosed for informational purposes. Detailed information regarding the indices is available upon request. The volatility of the indices may be materially different than that of the portfolio. WealthShield is a registered investment adviser. Registration does not imply a certain level of skill or training. More information about WealthShield including its advisory services and fee schedule can be found in Form ADV Part 2 which is available upon request. This is provided for informational purposes only and should not be considered a recommendation to buy or sell a particular security. Past performance is no guarantee of future returns. Please see attached disclosures. 6