Portfolio Management & Analysis

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1 Index Portfolio Monitor, Analysis and Maintenance Page 2 Portfolio Rebalancing Emotional Control Annual Performance Page 3 Detailed Analysis Page 4 Portfolio Risk Level Portfolio Management & Analysis July 2018 Diversification Page 5 Fund Quality Portfolio Management Cost Page 6 The Advantage of a Professional Portfolio Investment Account Tax Documents Page 7 Investor Education Investor Education is Critical to reach your Financial Goals Wealth gives you Freedom and Control of your Life Setup an Auto-Investment Plan to Invest on a Regular Basis in Bull and Bear Markets Create a Diversified Portfolio with the Proper Asset Allocation Purchase Quality Investments Manage your Portfolio Properly PDM Investment Services, LLC A Registered Investment Advisor 5131 Standish Drive, Troy, Michigan * * info@fginvestor.com For complete disclosure see our website 1

2 Portfolio Monitor, Analysis and Maintenance Each quarter you should review your brokerage statements for holdings, asset allocation, cash inflow or outflow, performance and fees. On an annual basis, you should do a complete review on your portfolio and financial advisor. Annual performance, portfolio risk level, diversification, fund quality and portfolio management fees should be reviewed. If you do not track your portfolio performance, how will you be able to make improvements and avoid moving blindly to your retirement goal? Holdings: Do any of the holding need to be sold, decreased or increased? Do any new holding need to be added? Asset allocation: Does your asset allocation need to be rebalanced to the base allocation? Removing or adding cash to the portfolio may require rebalancing. Cash inflow or outflow: Does new money added to the portfolio need to be invested or cash created for withdrawal? Year-to-date performance: Is the portfolio year-to-date performance keeping up with its benchmark? Most diversified portfolios should be compared to allocation benchmarks. Compare your portfolio performance with the appropriate benchmark. The Fidelity Asset Manager xx% are a good place to start for a benchmark. Fees: Are the fees taken out of the portfolio legitimate? Market Analysis What is the general market is doing? What are the strong performing asset classes? Are you invested in the top performing asset classes? Portfolio Analysis Are active managed funds outperforming passive managed ETF s? Are larger portfolios outperforming smaller ones due to added diversification? Did extra cash going into the correction allowed you to purchase funds at lower prices? Did timing of fund changes help or hurt performance? Did implementation of cash addition/subtraction timing can hurt or help performance? Are portfolios with individual stocks outperforming portfolios without individual stocks? Are portfolios with sector funds outperforming smaller ones without sector funds? Are more aggressive portfolios underperforming more conservative ones? Portfolio Rebalancing Rebalancing reduces a portfolio s tendency to drift from its target asset allocation and acquire risk-return characteristics that may be inconsistent with an investor s goals and preferences. For most diversified stock and bond portfolios, annual or semiannual monitoring - with rebalancing at 5% thresholds - is likely to produce a reasonable balance between risk control and cost minimization. If an asset class becomes overvalued, you will be selling when it s up. If an asset class becomes undervalued, you will be buying when it s down. In taxable accounts, consider taxes when rebalancing. Emotional Control Human emotions influence investors in their decision-making process. Investors often behave irrationally, producing inefficient markets and mispriced securities. These mispriced securities create short-term opportunities for the intelligent investor, but hurt the average investor. The ability to buy low and sell high is a numbers game; you have to remove all your emotion. When the indicators tell you to act, you must act. Investing is not an all-or-nothing decision. If you are uncomfortable raising your equity exposure, step in gradually. Create a solid diversified portfolio and stick with it through the ups and downs of the market. Experience and a calm rational decision making process are needed to guide you through volatile markets. 2

3 Annual Performance The appropriate asset allocation for your risk tolerance should be more important than market performance. Is your portfolio outperforming its benchmark? Your portfolio performance for the year can be found on your December brokerage statement, advisor performance report, the custodian website or it can be calculated. Performance can be calculated by using the beginning of the year balance, end of the year balance and making adjustments for cash inflows or outflows. Below are the Morningstar Moderate and Aggressive benchmarks to compare your portfolios with. 2017: Fidelity Asset Manager 70% Moderate Risk Benchmark (FASGX) saw a 18.7% return. 2016: Fidelity Asset Manager 70% Moderate Risk Benchmark (FASGX) saw a 7.1% return. 2015: Fidelity Asset Manager 70% Moderate Risk Benchmark (FASGX) saw a -0.6% return. 2014: Fidelity Asset Manager 70% Moderate Risk Benchmark (FASGX) saw a 5.6% return. 2013: Fidelity Asset Manager 70% Moderate Risk Benchmark (FASGX) saw a 20.1% return. 2012: Fidelity Asset Manager 70% Moderate Risk Benchmark (FASGX) saw a 14.1% return. 2017: Fidelity Asset Manager 85% Moderate-Aggressive Risk Benchmark (FAMRX) saw a 22.3% return. 2016: Fidelity Asset Manager 85% Moderate-Aggressive Risk Benchmark (FAMRX) saw a 7.4% return. 2015: Fidelity Asset Manager 85% Moderate-Aggressive Risk Benchmark (FAMRX) saw a -0.6% return. 2014: Fidelity Asset Manager 85% Moderate-Aggressive Risk Benchmark (FAMRX) saw a 5.9% return. 2013: Fidelity Asset Manager 85% Moderate-Aggressive Risk Benchmark (FAMRX) saw a 25.2% return. 2012: Fidelity Asset Manager 85% Moderate-Aggressive Risk Benchmark (FAMRX) saw a 15.9% return. Other metrics to review are year-to-date, 3-year, 5-year and 10-year performance and the number of years your portfolio outperformed its benchmark over time. The largest contributor to a portfolio s performance is determined by the world stock markets. The second largest contributor to a portfolio s long-term performance relative to its benchmark is an optimal asset allocation. Based on studies, a portfolio s asset allocation contributes at least 70% of a portfolio s performance. Our asset class rating system helps us select a strategic allocation for each year s economic and market conditions. The third largest contributor to a portfolio s long-term performance relative to its benchmark is equity selection. Mutual funds are selected based on our enhanced security selection system employing fundamental, technical and valuation analysis. We look for funds that outperform their benchmark, perform consistently and display a better risk adjusted return than their benchmark. Typical investment strategies produce returns that range from -5% to +5% of their benchmark. Over 70% of investment strategies underperform their benchmark. Index funds and index ETFs perform at their benchmark, better than 70% of investments. The best strategies outperform their benchmark by at least 3% annually over the long term. Performance should always be compared to its benchmark. Alpha and performance consistency are the best metrics used to measure performance. Alpha is the measure of a portfolio s excess return relative to its benchmark. We typically average the alpha of the three, five and ten year periods. An alpha over 2% would be considered good. Performance consistency is the percent of the years a portfolio outperforms its benchmark. A consistency over 70% would be considered good. 3

4 Detailed Analysis On an annual basis, you should do a detailed review on your portfolio with more detailed analysis. The performance from the previous year, portfolio risk level, diversification and the fund quality grades should be reviewed. Strategy, Management and Asset Allocation The investment strategy, management, asset allocation and investments will determine if the performance of an investment will continue. Asset allocation is the highest contributor to performance that you can control. Investment strategies based on time-tested strategies like Modern Portfolio Theory, asset allocation, diversification, enhanced security selection, fundamental analysis, technical analysis, valuation analysis, investor psychology and cycles & seasonality typically produce better returns. Risk & Reward (Modern Portfolio Theory) The best performing strategies over time are the ones that outperform their benchmarks while taking on less risk. The most common metrics used to measure investment risk are beta, standard deviation, maximum downdraft and price-to-earnings ratio. Another important metrics is the Shape Ratio, which measures the risk adjusted return of an investment. Beta is a statistical measure that shows an investment s volatility relative to its benchmark. A beta over 1.4 is considered risky. Standard deviation is a measure that shows an investment s variation from its mean over time. A standard deviation that is 20% higher than its benchmark standard deviation, is considered risky. Maximum drawdown is the most negative year of a portfolio over a select period of time. A drawdown larger than its benchmark is considered risky. Price-to-earnings ratio measures the investment valuation. An investment that is trading at the top end of its long term PE range is considered overvalued and carries more risk. Typically, investments with a PE over 25 are considered risky. Sharpe Ratio s at least 50% better than their benchmark are considered a good risk adjusted return. Portfolio Risk Level Below is a table of the risk levels and their corresponding allocation in stocks, bonds and cash to help you determine the risk level of your portfolio. The percent of the portfolio in stocks, bonds and cash are the largest determinants of the risk level and performance. The most common portfolio is moderate risk with 75% in stocks, 15% bonds and 10% cash. Portfolio Asset Allocation & Risk Table Fidelity Asset Manager Funds 40% FFANX 50% FASMX 60% FSANX 70% FASGX 85% FAMRX 100% PREIX Risk Category INCOME CONSERVATIVE MODERATE CONSERVATIVE MODERATE MODERATE AGGRESSIVE AGGRESSIVE Fund % Stocks / % Bonds & Cash 40% / 60% 50% / 50% 60% / 40% 75% / 25% 80% / 20% 100% / 0% Risk Description Low Low Medium Medium High High Beta, Standard Deviation (5 / 10 year) B=0.8 / x, SD=5 / x B=0.9 / 1.0, SD=6 / 10 B=1.0 / x, SD=7 / x B=1.2 / 1.3, SD=8 / 13 B=1.4 / 1.5, SD=10 / 15 B=1.0 / 1.0, SD=10 / 15 Time Horizon 0 years 0 years 5 years 10 years 15 years 20 years Annual Return (Past 5 / 10 years) 6.4% / x 7.2% / 4.9% 8.2% / x 9.0% / 5.0% 10.4% / 5.1% 14.4% / 6.7% Best Year Return (Past 10 years) 26% 31% 33% 36% 39% 32% Worst Year Return (Past 10 years) -23% -28% -30% -35% -39% -37% The Risk Category, Risk Description and Time Horizon are defined by PDM Investment Services. The other numbers are from Morningstar ending December Beta is volatility relative to the S&P 500 of 1.0 and Standard Deviation is return variation from the mean. Past returns are used for comparison between risk categories only. Future returns may be significantly different and are not guaranteed in the future. 4

5 Diversification You should always keep a well-diversified portfolio with a good mix of asset classes. Diversification reduces risk. Based on Modern Portfolio Theory, a diversified asset allocation portfolio with equities and bonds should outperform the S&P 500 in down markets and over longer periods of time, but may underperform in up markets. Bonds and cash will add some downside protection in the next bear market. Fund Quality Research each mutual fund using Morningstar or another mutual fund rating service. Most on-line brokers offer mutual fund research. Below is a list of criteria to consider when grading a mutual fund. The fund ticker symbol can be found by searching the fund name on Google or Morningstar. Fund Asset Class The base asset classes are Large Cap Growth, Large Cap Value, Mid Cap Growth, Mid Cap Value, Small Cap Growth, Small Cap Value, International, Bond and Money Market. Fund Grade Look for funds with a Morningstar 4 or 5-star rating and a gold or silver rating. Performance Look for funds that outperformed their category by at least 2% annually over the past three, five and ten year periods. Performance Consistency Look for funds that outperformed their category at least 70% of the past 10 years. Manager Look for managers with over 5 years managing the fund, an MBA degree from a top school and a CFA designation. Funds where the manager has over $500,000 of their personal money invested tend to perform better. Strategy Look for funds with sound investment strategies using proven techniques like fundamental and valuation analysis. Turnover Rate Look for funds with less than 40% turnover. Expense Ratio Look for funds with an expense ratio less than 1.1%. Fund Size Look for funds with less than $10 billion of assets under management. 5

6 Portfolio Management Cost Professional portfolio management fees should not exceed 1.2% of assets under management annually. Custodian transaction fees for stocks should be below $10 per trade and mutual funds below $20 per trade. All mutual funds should be no-load. Lower cost strategies tend to outperform higher cost strategies. A mutual fund or investment advisor that charges a 2% management fee has to outperform to overcome the high management cost. Management costs, front-end loads and broker transaction fees are the typical costs associated with investing. An investment with a management fee of less than 1.0% is considered low. Buy only no-load mutual funds. Brokerage transition fees should be less than $10 for stocks and $20 for mutual funds. The Advantage of a Professional Portfolio Design The advantage of a professional portfolio design is proper diversification, strategic asset allocation, enhanced security selection and discipline. Your portfolio is designed to meet your long-term retirement goals based on your risk tolerance and time horizon. Most investors find it difficult to implement and maintain an asset allocation strategy, reducing the likelihood of investment success on their own. Your portfolios should be reviewed at least annually and more often in changing market conditions. Asset Allocation The largest contributor to a portfolio s long-term performance relative to its benchmark is an optimal asset allocation. Based on studies, a portfolio s asset allocation contributes at least 70% of a portfolio s performance. Our asset class rating system helps us select a strategic allocation for each year s economic and market conditions. Equity Selection The second largest contributor to a portfolio s long-term performance relative to its benchmark is equity selection. Mutual funds are selected based on our enhanced security selection system employing fundamental, technical and valuation analysis. We look for funds that provide excessive performance relative to their benchmark, perform consistently and display a better risk adjusted return than their benchmark. 6

7 Investment Account Tax Documents Taxable Accounts Form 1099-DIV Dividend and Capital Gains Distributions Capital Gains from Sales Form 8949-SCH D Capital Gains from Sales Tax Deferred Accounts Form 5498 Form 8949-SCH D Form 1099-R IRA Contribution Form Distributions from Pensions, Annuities and IRA s Capital Gains from Sales 7