by James H. McBride, President and CEO Efficient investing requires both a plan to

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1 Summer 2015 Patience is a Virtue by James H. McBride, President and CEO Is there anything more difficult in life than waiting for an anticipated result? In today s fast paced modern life we have come to expect almost instant gratification. The advent of our global internet societies have produced expectations of results instantaneously available as part of our daily rituals. One victim of this new world of information is fact, often replaced by opinion, and to that end much of our world is perception not rooted in reality. Efficient investing requires both a plan to economic reality can that long practiced achieve a desired objective and a discipline discipline still work? to follow the plan and make fine-tuning adjustments as current conditions mandate. Currently the world waits for the U.S. Federal Since the 2008 Great Recession, the Reserve to begin raising interest rates. The challenges have become much greater volatility in 2015 markets is created by this for those of us who are retired or about to expectation and it challenges us daily to be retire. A key question for many of us is: how patient, to stick to our longer term plan and to do we secure our future in a time of virtually avoid detours that seem logical today but mask zero return on our most conservative hidden pitfalls that can slow or even prevent investments? Historically we have come us from reaching our objective destination. to expect that as we near retirement we should switch a portion of our investments Continued Inside > from growth-oriented equities to returnoriented fixed income, but in today s

2 the Rapids Federal Reserve Fun Facts #ThatsWhatTheFedSaid The Federal Reserve began holding press conferences in April 2011 and also maintains a YouTube channel, Twitter account and ipad app. THE GAME THAT NEVER ENDS The Fed decides how much money should be printed annually. In 2010, $974 million was printed. In contrast, $30 billion of Monopoly board game money is printed each year. YOU ONLY LIVE ONCE Federal Reserve notes have the following life expectancies: $1 bill: 22 months $5 bill: 2 years $10 bill: 3 years $20 bill: 4 years $50 bill: 9 years $100 bill: 9 years Coins: 30 years READ MY EYEBROW? Former Fed Chairman Alan Greenspan has a poorly veiled tic in his right eyebrow. Investors measured how high he raised it while talking, saying it was a better indicator of whether interest rates were going up. YOU HAD ME AT MEATLOAF! Janet Yellen, who took the helm at the Fed in January 2014, is married to Nobel Prize-winning economist George Akerlof. They fell in love over conversations in the Fed s cafeteria. (source: federal-reserve/fun-federal-reserve-facts-1. aspx) Patience is a Virtue > Continued From Cover History will most likely conclude that the beginning of the Twenty First Century was a watershed time for both the United States and the world. Our world changed forever on 9/11/2001 and that was quickly followed by a war on terror that seems never ending and an increase in our national debt load through numerous governmental stimulus programs (QE#s 1-3). But lest we forget, the recovery from the massive sell-off in the markets has been both fast and historic as all major US markets have recently been at all-time highs. Most investors wait for the correction that must ultimately come. The real question is not if but when. I think it will most likely happen in the fall of 2015, and it seems the markets agree with me as volatility is the predominate feature of When the correction comes however, do we expect to see significant interest rate increases by the Fed? I doubt it. The most likely scenario is that rate increases will be quite modest over an extended period of time. If this happens then we have little to worry about over the next correction period. Certainly a correction of 10% or more will be threatening in the shorter term, but the most likely effect will be as interest rates increase so will the stock markets. I do not see the doom and gloom scenario that some pundits suggest. In the end the adjustment in rates will be good for our economy and for those of us who depend on cash flow to maintain our lifestyles. Longer term investing is all about return for an appropriate amount of risk. Today, as it has been throughout the recovery period since 2008, larger S&P 500 companies paying a dividend of 3% or better offer the best cash flow benefit for retirement investors. Since rates are now at essentially historic lows, fixed income investing comes with a significant degree of increased risk. My recommended formula is to mix a substantial dose of these high-quality equities together with good quality shorter term fixed income and some higher yielding investments in master limited partnerships and real estate investment trusts (commonly known as alternative investments). Each individual case is unique to each client and the best way to choose the asset allocation that is right for you is to consult with your advisor(s). In the end however, a well thought-out plan adjusted to current circumstances has been proven to beat short term responses to changing market conditions.

3 High Falls NEWS NEW WEBSITE & CLIENT PORTAL We recently launched our new and improved website at highfallsadvisors.com and invite you to visit us and take a look around. Within the site you ll notice more detailed information on our people, services, and a few new tools to make your life easier. One of these tools is our new Client Portal, which will provide access to account information such as performance, transactions and other account analytics. See the enclosed Special Supplement for more details. ANNOUNCEMENTS We are pleased to announce that Michael Donnelly, CFP, Vice President, Advisor Services will now take on the role of Lead Portfolio Manager for the Best of Class strategy. Mike will continue to work with James Englert, CFP, EA, Executive Vice President, as Assistant Portfolio Manager on the Market Trends Analysis strategy. DISCLOSURE The views expressed in this newsletter are the opinions of the writers and are not necessarily the opinions of High Falls Advisors. The views represent an appraisal of possible events and there is no guarantee of a particular outcome. All investments involve varying degrees of risk; past performance is not indicative of future results. The investments discussed in this newsletter are not to be considered as specific recommendations of High Falls Advisors. It is important to consult with your advisor before implementing any changes to your portfolio. Nothing in this newsletter should be viewed as tax or legal advice and you should consult your tax professional or attorney regarding your own specific tax or legal situation. Our advisors or members of our tax team, if appropriate, would be happy to meet with you to discuss in further detail the information provided in this newsletter. Securities offered through Leigh Baldwin & Co., LLC Member: FINRA SIPC Accounts carried by: National Financial Services, LLC Member: NYSE Portfolio Manager s Update Interest Rates and Bond Valuations: an Inverse Relationship by James T. Englert, CFP, EA, Executive Vice President The Federal Reserve is pondering what to do with short term interest rates which are used when banks lend to one another. The Federal Reserve has kept these short term rates at or very close to 0% for the last 7 years. This low interest rate policy was put in place as a way to boost the economy after the financial crisis that began in 2008, which has, in turn, made the cost of borrowing money very affordable. This impacts the amount of interest that depositors earn in their savings accounts as well as the interest that investors earn in money market accounts and bond investments. Recent years have seen very low mortgage rates, encouraging the population to purchase homes and/or refinance existing mortgages, and low rates for businesses using borrowed funds to expand their enterprises. Although these factors have helped to increase financial activity and boost the economy, many feel that the Fed policy on short term rates has lasted far too long. While it has been advantageous for borrowers, it has been difficult for investors looking for investments that provide a predictable cash flow. What will happen when the Federal Reserve decides to commence the inevitable increase of short term interest rates? If it is done too quickly, they risk a full reversal of the above issues: the costs of borrowing funds will go up and individuals and businesses are likely to face financial hardships including delays in economic growth, stock and bond market volatility, as well as the potential for a correction in all markets. One issue that is a typical concern for investors is the fluctuating valuation of bonds in a changing interest rate environment. I usually describe the inverse relationship between the two with the following example: Imagine that you have just purchased a US government bond for $10,000 that matures in 5 years, paying you, the bond owner, 5% per year. Every 6 months you will receive an interest payment of $250 and at the end of the 5 year term you will receive the $10,000 that you originally paid for the bond. During those 5 years, the value of that bond will fluctuate, based on prevailing interest rates. As an example, let s say that after the first 2 years of owning the bond, you would like to sell it. In order to do so, you must find a willing buyer who will offer you the market value of the bond. The market value of a bond is determined by comparing it against the existing interest rate for similar bonds with the same remaining term. In our example, your bond has a remaining term of 3 years so your bond with its 5% interest rate will be compared to other bonds with a 3 year term. If other 3 year bonds are paying 5%, you will likely be able to sell your bond for somewhere around your original purchase price of $10,000. If, however, the current rate of a 3 year bond is 4% and your bond pays 5%, you are likely to receive a premium over and above your original $10,000 should you choose to sell it. Conversely, if the current rate of a 3 year bond is 6% and yours only pays 5%, you would likely have to sell it at a discount. Remember in both of these scenarios, however, that if you held the bond for the full 5 years, you would receive your $10,000 principal upon maturity regardless of the direction in which interest rates went throughout the 5 year time period. This is a fundamental reason that we see the valuation of bond mutual funds, since they are composed of portfolios of bonds, begin to go down when interest rates go up. Another factor in bond fund valuation is the duration of the bonds in the portfolio. The longer the term, the more sensitive it will be to interest rate changes. The Federal Reserve policy has caused many investors to seek return in stocks instead of bank deposits and bond funds over the last 7 years. As interest rates rise, these investors may find savings accounts and bond investments more attractive, which may influence them to sell stocks in order to purchase bonds. Volatility in the investment world may be forthcoming as a result of this change. While an increase in volatility may ignite uncertainty and anxiety for investors, it is important to maintain focus on one s financial plan and overall investment strategy. We are always here to help and I invite you to contact your advisor to discuss any specific comments, questions or concerns.

4 Portfolio Manager s Perspective by James H. McBride, President & CEO, Portfolio Manager, Select Sector Portfolio MARKET ACTIVITY While SSP strategies are designed to be essentially buy and hold, we do make periodic portfolio changes to take exceptional gains and prevent exceptional losses. We tend to hold very little in cash reserves and must sell a position if we wish to buy another security. Asset positions are dependent upon their ranking within the business cycle research provided to us quarterly by Fidelity Investments. Fidelity ranks each market segment by business cycle timing: early/middle/late. We also use two other services to compare sector ranking with Fidelity s analysis and form a composite to use in asset selection. Recently the top 3 sectors have been Technology, Healthcare and Consumer Staples. PORTFOLIO ACTIVITY Going forward it s all about when the Federal Reserve will begin raising interest rates and by how much. The bond market selloff in May and June has illuminated the tenuous nature of rate increases on the overall markets. We expect that fixed rate investments will continue to suffer as rates increase and it will be some time before they will be able to return a positive return after accounting for inflation. TACTICS We will employ three specific tactics in all Select Sector Portfolios over the next few months to attempt to offset the impact of these rate increases. 1 We will continue to look for and hold large US company stocks paying dividends of 3% or better. 2 We will continue to favor short term corporate bonds/ treasuries (1-3 year maturities) and longer term (10 + years) municipal bonds. 3 We will continue to utilize high yield investments, particularly REITs and MLPs to enhance overall portfolio cash flows. If a strong market reaction to the eventual rate hikes occurs, we will need to alter our course somewhat. In a recovery phase we always look for good growth stocks to lead the way back. WE RE GOINGGREEN In an effort to be more environmentally conscious, we will be sending future editions of electronically. To be sure you receive your copy, please notify your advisor of any updates to your address on file. We will continue to offer hard copies upon request; please contact your advisor with any questions.

5 The Federal Reserve by Hank Walter Prior to the creation of the Federal Reserve, commonly known as the Fed, the US economy was plagued by frequent episodes of panic, bank failures, and credit scarcity. In 1860, nearly 8,000 state banks were issuing their own currency. FIGURE 1: Annual Total Returns (as of 12/31) 6% 5% 4.18% 4.15% 4% 3% 2.36% 2% 1.36% 1% 0% 0.01% 0.01% 0.01% 0.01% 0.01% 0.00% FIGURE 2: $SPX - S&P 500 Index - Daily OHLC Chart n Op:2,082.11, Hi:2,085.58, Lo:2,057.94, Cl:2, , , , As the industrial economy expanded, the weakness of the nation s decentralized banking system became more acute. A particularly severe panic took place in 1907 that abated only when a private individual, the financier J.P. Morgan, personally intervened to arrange emergency loans for financial institutions. This episode fueled a reform movement, which prompted Congress to establish the Federal Reserve System in The Fed began operations in 1914; last year it celebrated its centennial Source: Yahoo Finance , , , , , , , , , Following the Great Depression, Congress passed the Bank Act of 1935 which established the Federal Open Market Committee (FOMC) as the Fed s monetary policymaking body. The Fed s duties have changed somewhat over time and, as it stands today, are to conduct the nation s monetary policy, supervise and regulate banking institutions, maintain the stability of the financial system and provide financial services to depository institutions, the US government, and foreign official institutions. The Fed s monetary policy is of great interest to investors worldwide as investors tend to hang on every word uttered or written by Fed officials hoping to determine changes in policy that may affect financial markets and their investments. As mentioned earlier, the FOMC is the Fed s monetary policymaking body. It has 12 voting members, including the seven members of the Board of Governors and a rotating group of 5 reserve bank presidents. The FOMC holds eight regularly scheduled meetings each year, but is free to call special meetings at any time. For each session Fed economists analyze regional, national, and international economic and financial conditions. On the final day of each meeting, monetary policy is put to a vote, and following the meeting the FOMC issues a written statement with its assessment of economic conditions, risks to its outlook and policy actions. This is often followed by a press conference with the Fed chair commenting and answering questions. The Fed has various tools to set monetary policy including adjusting the Federal Funds Target Rate and in recent years Quantitative Easing (QE). The Federal Reserve s attempts to boost economic growth through market intervention in recent years have prompted heated debate among economists and lawmakers. How should we measure the efficiency of such monetary policy? Did a three trillion dollar bond-buying program and explicit forward guidance actually reduce unemployment as intended? Do these programs cause inflation? Finally, how will business and consumers react when the Fed starts to raise interest rates? Another frequently heard criticism is that a zero interest rate policy (ZIRP) favors Wall Street at the expense of Main Street. Figure 1 shows the return on a Schwab money market fund at essentially zero for the last 8 years and Figure 2 shows the performance of the S&P 500 index over the same timeframe. The data in these charts say it all, in my opinion. We will end with some recent quotes or comments by Federal officials that may be of interest to investors. Janet Yellen, Fed chair, May 22, 2015: If the economy continues to improve as I expect, I think it will be appropriate at some point this year to take the initial step to raise the Federal Funds rate target and begin the process of normalizing monetary policy. Stanley Fischer, Fed vice chair, May 25, 2015: Sees short-term rates at 3.25% to 4% in three or four years. James Bullard, president of the St. Louis Fed, May 28, 2015: We ve been at the zero bound for a long time here, and it is questionable what effects we are getting from that....

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