AAII - Los Angeles Strategic Investing Group June 6, 2015 RGB Capital Group LLC 14677 Via Bettona #110, San Diego, CA 92127 858-367-5200 www.rgbcapitalgroup.com
This workshop is presented by Robert Bernstein for educational purposes only. The information presented is not intended to reflect any participant s financial situation, goals or risk tolerance. Participants should consider the content in this workshop in context of their own personal financial situation. This document does not constitute an offer to sell or a solicitation to buy a security, and is not an offer to provide any specific investment advice. Past performance is not necessarily indicative of future results and is subject to adjustment and revision. Changes in equities markets, interest rates, exchange rates, economic conditions, political conditions and other factors may influence future model performance. RGB Capital Group may also periodically change its investment strategies, objectives and asset allocations. RGB Capital Group performance history is based on composite data prepared in accordance with the Global Investment Performance Standards (GIPS) since the inception of RGB Capital Group in August 2009. Performance data prior to August 2009 represents performance of models by Robert Bernstein as an individual investor. Individual account results may vary from RGB Capital Group composite data due to timing of investments, deposits, withdrawals, fee structure and actual securities used. Performance results reflect all trading costs and margin interest, where applicable, and advisory fees. For the RGB Capital Group Conservative models, advisory fees are deducted starting in August 2009. If advisory fees were deducted for the entire time period, performance results would be lower. Performance information is not audited. Securities held in the RGB models are subject to change without notice. Any references to past returns are not indicative of future performance and are subject to adjustment and revision. Individual account results may vary from RGB Capital Group models due to timing of investment, amount of investment and actual securities used. Most data and charts are provided by www.fasttrack.net. For questions about this document please contact: Rob Bernstein 858-357-5200 rob@rgbcapitalgroup.com 2
Rob Bernstein President, RGB Capital Group LLC Licensed - Series 65 Prior Work Experience a) Senior Manager, Deloitte & Touche b) Chief Information Officer Newland Communities M.B.A., Finance and Accounting, William E. Simon School of Business, University of Rochester B.A., Quantitative Economics and Decision Sciences, University of California, San Diego Certified Public Accountant (CPA) inactive status Member, National Association of Active Investment Managers President, American Association of Individual Investors (AAII) San Diego Chapter Board Member and Finance Committee Chair Serving Seniors 3
RGB Capital Group Conservative Model vs. S&P 500 8 Years (12/31/2006 12/31/2014) 101.6% 45.2% Annualized Return Standard Deviation Max Draw Down RGB Model 9.17% 0.89% 3.7% S&P 500 4.77% 6.43% 56.8% Past performance is not an indication of future results. 4
Low Volatility Reasonable Returns Selective Use of Leverage Risk Management RGB Capital Group Investment Approach Past performance is not an indication of future results. 5
Low Volatility Past performance is not an indication of future results. 6
Reasonable Returns Past performance is not an indication of future results. 7
Selective Use of Leverage Conservative Levered (CL) Conservative Unlevered (CU) Selective use of margin on low volatility portfolios can have a positive impact on returns without dramatically increasing risk. 8
Risk Management Rule #1: Avoid Steep Losses The exponential impact of portfolio losses has a direct impact on the ability to create wealth. 9
Risk Management RGB Capital Group Conservative Model vs. S&P 500 8 Years (12/31/2006 12/31/2014) The Flash Crash 4/23/2010 7/2/2010: RGB Model: -2.28% S&P 500: -16.0% 101.6% 45.2% Annualized Return Standard Deviation Max Draw Down RGB Model 9.17% 0.89% 3.7% S&P 500 4.77% 6.43% 56.8% The Financial Crisis 10/9/2007 3/9/2009: RGB Model: -0.3% S&P 500: -56.8% The Debt Ceiling Debate 4/29/2011 10/3/2011 RGB Model: +1.43% S&P500: -19.4% Past performance is not an indication of future results. 10
What is Risk? Which line is more risky? Why? 11
How Can We Measure Risk? Standard Deviation Standard deviation is a measure of volatility; volatility implies risk. Assuming two investment choices that were expected to provide the same return but one has a fraction of the expected risk, which investment would you select? Standard deviation has some limitations. 12
Limitations of Standard Deviation A constant return line is shown as a straight line on a log chart. By definition, a constant return line has a standard deviation of 0%. Standard deviation does not account for the strength of a trend. 13
Limitations of Standard Deviation Standard deviation does not differentiate between upside and downside volatility. It is best to measure standard deviation in context of something else (i.e. return). 14
Risk vs. Reward 12/29/1989 12/31/2014 Past performance is not an indication of future results. There is a trade-off between risk and return. As investors, we can control the amount of risk we expose ourselves to but we cannot control returns. For a given level of risk, we should strive to achieve as much return as possible. 15
Drawdown A Measure of Downside Volatility -0.90% -0.25% -0.21% -0.64% Maximum Drawdown -4.95% Most investors are concerned with downside volatility. Drawdown (or retracement) measures the % price decline from a peak to a trough. The maximum drawdown for WVCCX from 07/31/2013 09/30/2013 was 4.95%. Drawdown does not measure the duration of the decline. 16
Ulcer Index vs. Ulcer Performance Index Ulcer Index (UI) is a measure of downside volatility that considers drawdown and duration. A lower UI value represents less volatility. The Ulcer Performance Index (UPI) combines drawdown, duration and trend strength into a single calculation. The higher the UPI the better the risk- adjusted return. 17 Risk Measure VFSIX OHYAX UI 0.33 1.13 UPI 10.66 23.00 Annualized Return 9.0% 31.5%
A Top-Down Investment Approach Business Cycle Market Breadth Market Indices Tracking the Market a) Market Watch List b) Global Watch List Identifying Investment Opportunities Setting Stops 18
Market Watch List Bond and Income Categories US Treasuries Corporate Bonds Floating Rate Bonds Junk Bonds Muni Bonds High-Yield Muni Bonds Mortgage-backed Securities Emerging Market Debt Inflation Protected Bonds Preferred Securities Equity Categories Aerospace-Defense Banking & Financials Biotechnology Construction Consumer Discretionary Consumer Staples Energy Growth Healthcare Industrials Insurance Large Cap Materials Mid Cap Real Estate Small Cap Technology Telecommunications Transportation Utilities Value 19 Foreign Categories Japan Europe Asia Pacific (ex-japan) Latin America Emerging Market Commodity Categories Agriculture General Metals Precious Metals Capitalization Categories Large - Cap Mid Cap Small Cap Style Categories Growth Value The purpose of monitoring the market watch list is to identify those segments that are trending up that best meet your risk and return objectives.
Filtering for Better Risk-Adjusted Returns An Example Year-To-Date (12/31/2014 5/20/2015) Annual Maximum Standard Description YTD Return Return UI UPI Draw Down Deviation Bond/Inc - Floating Rate 2.62% 7.01% 0.1 51.73-0.30% 0.35% Foreign - Japan 18.07% 54.66% 1.09 48.62-3.44% 3.90% Bond/Inc - Preferred Securities 2.99% 8.03% 0.25 25.17-0.85% 0.55% Equity - Healthcare 13.30% 38.78% 1.95 18.96-5.37% 4.25% Equity - Biotechnology 20.97% 64.83% 3.95 15.95-10.82% 7.20% Foreign - Europe 11.59% 33.36% 2.07 15.24-5.65% 5.13% Bond/Inc - Junk 3.18% 8.57% 0.45 15.21-1.41% 0.71% Equity - Aerospace-Defense 8.50% 23.89% 1.73 12.81-4.42% 3.84% Equity - Mid Cap 6.44% 17.79% 1.26 12.67-3.24% 3.61% Equity - Growth 6.98% 19.38% 1.41 12.51-3.18% 3.73% Foreign - Asia Pacific (ex-japan) 7.73% 21.58% 1.68 11.77-4.47% 3.55% Equity - Construction 8.58% 24.14% 2.16 10.36-4.96% 4.50% Foreign - Emerging Market 9.10% 25.67% 2.32 10.32-6.09% 4.49% Equity - Consumer Discretionary 5.98% 16.47% 1.56 9.43-3.60% 3.83% Equity - Technology 6.47% 17.90% 1.9 8.48-4.05% 4.08% Equity - Small Cap 5.41% 14.82% 1.66 7.88-4.07% 3.98% Equity - Consumer Staples 4.31% 11.71% 1.47 6.74-3.92% 3.18% Equity - Large Cap 4.20% 11.41% 1.45 6.63-3.52% 3.59% Equity - Telecommunications 4.32% 11.74% 1.87 5.34-4.14% 3.63% Equity - Materials 5.12% 14.00% 2.76 4.43-5.57% 4.11% Bond/Inc - Emerging Market Debt 2.15% 5.75% 0.93 4.26-2.90% 1.58% The Market Watch List, sorted by UPI, shows the best risk-adjusted returns filtering to the top. 20
Global Watch List Symbol Description ADRA Asia 50 ADR(BLDRS) ADRD Develp Mrkt 100 ADR IxFd(BLDRS) ADRE Emerg Mrkt 50 ADR IxFd(BLDRS ADRU Europe 100 ADR(BLDRS) EEM MSCI Emerg Mrkt IxFd(iShr) EFA MSCI EAFE Index Fund(iShr) EGPT Egypt Index Fund(MrktV) EPP MSCI Pacific xjapan Ix Fd(iShr) EWA MSCI Australia IxFd(iShr) EWC MSCI Canada Index Fund(iShr) EWD MSCI Sweden Index Fund(iShr) EWG MSCI Germany Ix Fd(iShr) EWH MSCI Hong Kong Index Fund(iShr) EWI MSCI Italy Index Fund(iShr) EWJ MSCI Japan Index Fund(iShr) EWK MSCI Belgium Invt Mkt IxFd(iShr EWL MSCI Switzerland Index Fd(iShr) EWM MSCI Malaysia Index Fund(iShr) EWN MSCI Netherlands InvMk IxFd(iSh EWO MSCI Austria IxFd(iShr) Symbol Description EWP MSCI Spain Index Fund(iShr) EWQ MSCI France IxF(iShr) EWS MSCI Singapore Index Fund(iShr) EWT MSCI Taiwan Index Fund(iShr) EWU MSCI United Kingdom Ix Fd(iShr) EWW MSCI Mexico Invst Mkt IxFd(iShr EWY MSCI South Korea Index Fd(iShr) EWZ MSCI Brazil Index Fund(iShr) EZA MSCI South Africa Index Fd(iShr EZU MSCI EMU Index Fund(iShr) FEZ Euro STOXX 50(SPDR) FXI China LargeCap(Shr) IEV Europe(iShr) ILF Latin America S&P 40 IxFd(iShr) RSX Russia(MrktV) THD MSCI Thailand Invst Mk IxFd(iSh TUR MSCI Turkey Invest Mkt IxFd(iSh VGK European(Vang) VPL Pacific(Vang) VWO Emerg Mrkt(Vang) By comparing the different geographic areas to the domestic markets (i.e. S&P 500) we can determine how the different markets are performing on a risk-adjusted and relative basis. 21
Setting Stops A stop is a pre-determined point at which you will sell a security. The purpose of setting stops is to protect your capital by taking the emotion out of your trading. Types of stops: Moving Average Stops Technical Stops Be consistent with your use of stops. Having a stop and acting upon the stop when triggered is more important then the actual stop itself. 22
Using Moving Averages with Low Volatility Funds A B Timed drawdown (A B) is very predictable. Total drawdown (A C) is not predictable. D 50-day Moving Average E C Timed drawdown is the % decline from a peak to the point it crosses the moving average; total drawdown is the % decline from a peak to a trough prior to crossing above the moving average. Timed drawdown for HY (A B) is 1.2%; a lot better than the total drawdown (A C) of 31.4%. Timed drawdown for HY using a 50-day MA for the last 24 years is generally between 1%-3%. Whipsaws or unprofitable trades (i.e. D E) are a cost of protecting capital. 23
Other Low Volatility Investment Examples Timing with a 50-Day Moving Average 1/3/2006 5/14/2015 Investment Annualized Return Standard Deviation Maximum Draw Down Switches Per Year Floating Rate Bonds 7.85% 0.48% -2.12% 2.03 Junk Bonds 12.10% 0.80% -2.98% 2.78 Muni Bonds 5.81% 0.63% -3.01% 4.06 High Yield Muni Bonds 9.32% 0.66% -4.15% 2.99 Emerging Market Debt 9.11% 1.11% -4.71% 5.98 24
Moving Averages Not Useful for Most Funds 50-day Moving Average Volatile funds do not make good candidates for moving average timing. Equity, index, market sector, global, commodity and other funds are better suited for trend line analysis. 25
Support, Resistance & Trendlines T1 Useful for More Volatile Investments R1 R1 T2 S1 S1 Support (S1), resistance (R1) and trendlines (T1, T2) are simply tools that help us visualize the trend of a fund. There is always risk when investing; however, using trendline analysis we can identify breakouts and breakdowns to reduce our risk. 26
Setting Stops with Trendline Analysis US Dollar Index ETF (UUP) An Example S1 / R1 A B T1 UUP was in a strong uptrend since mid-2014. From July 2014 to the peak, UUP increased a little over 24%. Through the use of trendline analysis investors can exit close to the peak. There is no right exit point. The stop you set will depend on your tolerance for risk. One reasonable stop at point B would result in a decline from the peak (A) of less than 4%. At the end of May 2015, support (S1) became resistance (R1). 27
Risk-Adjusted Returns Ability to Identify Low Volatility Opportunities As investors, we want to be able to reduce risk and increase returns. This can be done by identifying asset classes with appropriate risk/reward characteristics. Moving from the S&P 500 (red line) to a lower volatility strategy (green line) reduces risk and increases returns. What if you apply timing techniques (blue line)? Consider using margin (purple line). 28
Seeking Better Risk-Adjusted Returns July 25, 2015-9 a.m. noon Veteran s Memorial Complex Join us for a complimentary investment training session that will include discussions on: Managing Investment Risk including details on the Ulcer Index (UI) and Ulcer Performance Index (UPI) Creating Low Volatility Strategies including identification of funds and establishing entry and exit points. Using Margin to enhance returns on low volatility portfolios We will also provide examples of how you might have avoided steep losses during previous market declines. Coffee will be provided Invite a guest that might benefit from the discussion.