Asset Allocation Concepts for Investment Management.

The chart comparing our Moderate Model to its proper benchmark index, the markets, an American Funds Model, SEI, DFA, and Warren Buffet's Berkshire Hathaway is mid-page. Spoiler - we cream them all most all the time (on average three out of every four months)

How and Why Asset Allocation is Used to Invest Money

The Most Important Investment Concept to Understand is there are only Three Ways to Manage Money:

1) Market Timing: Whenever one makes an investment decision based on a forecast of a market, asset class, or security going up or down, market timing is being utilized.

2) Security Selection: This is deciding which asset to buy or sell compared to others of the same type. For example, deciding whether to buy a bond or a growth stock would be an asset allocation or market timing decision. Deciding whether to buy AMD or Intel would be a security selection decision. This is because both stocks are in the same asset class. Stock picking is the most common form of security selection. As you'll see on the chart below, even the world's best stock picker, Warren Buffet, can't compete with asset allocation strategies.

3) Asset Allocation: The art and science of how money gets divided up between different asset classes to lower risk and increase returns. This is also known as optimizing an investment portfolio, making it more efficient.

Asset classes are how different types of investments are categorized to distinguish them from one another. For example, CDs, bonds, stocks, gold, and real estate are different in terms of risk, reward, taxation, and income.

All three methods can be used simultaneously in making one investment decision.

The focus of this page is only on asset allocation. We hire mutual fund managers to time markets and select securities (and think individual investors should too).

Asset Allocation Helps and Saves You in many Ways

· You don't always realize more return by assuming more risk in the Real World. Most of the time, when you assume more risk, you just lose more money. Asset allocation allows more control over how much return you'll probably get in exchange for assuming more risk.

· Asset allocation is the only non-derivative technique you can use to reduce risk (lower overall portfolio volatility), increase income, and get better returns, all at the same time. It's the only one of the three ways of managing money that reduces risk. The other two methods greatly increase risk.

For example, if the S&P 500 goes down 20%, you'll probably be down less than 15%. This is because you'd have less exposure to stocks when you hold other asset classes. If you're a stock picker or a market timer, chances are you'll be down over 25%.

· Even though using asset allocation eliminates the need for you to time markets and pick securities, it still has to be done by someone. That's the mutual fund manager's job. They have the armies of analysts and millions invested in computers, people, and systems needed to perform these mostly futile tasks. You don't, and that's the point. If you want to compete with them, then you'll lose most of the time. Winning means realizing low risk and great returns, while not having to waste time and money trying to manage money.

· Asset allocation saves you a lot of time. Other than updating mutual funds and quarterly rebalancing, you don't have to pay much attention to investment portfolios. If you really want to minimize time, you can use index funds or index ETFs, which rarely need to be monitored or updated (but still need to be rebalanced).

· Asset allocation saves you grief, worry, anxiety, stress, from losing sleep, and having to be glued to the TV or computer to keep track of the markets and your holdings. There's no need to baby-sit a security, and have access to a phone or the internet, to be ready to trade at all times to avoid losses. Asset allocation allows you to sleep and take real vacations.

· Asset allocation saves you money because you don't have to pay top-dollar for all of the trading costs associated with high-turnover market timing and stock picking. It's the mutual fund managers' job to do all of the trading. You have to pay these mutual fund management fees, but they're much less than you'd pay on your own. They're able to keep their expenses down because of the economies of scale.

· You can still brag at parties that you were smart enough to buy something before it took off. When you hold a diverse portfolio of mutual funds comprised of many asset classes, you're bound to be holding securities of the current fad. Whatever the current hot thing is you'll most always be able to say, "I bought that before it went through the roof!"

· Asset allocation strategies are also great for diversifying and enhancing portfolio income, which is critical during retirement. Maximizing income reduces the need to dip into principal (sell shares). Portfolios will last longer if you can get the spendable income needed to pay living expenses mostly by interest, dividends, and realized capital gains.

· If you're an investment professional, asset allocation saves you from having to pass FINRA Series 7 licensing exam. Our asset allocator systems use mutual funds, so only a Series 6 is required.

· Asset allocation saves you from having to deal with client phone calls when the markets go down. They'll just look up their account values online, see that less than half of their holdings went down, about a quarter went up, and not bother you. They also won't complain that you lost them a ton of money in bad markets, because this would be minimized. Clients tend to call advisors when their portfolio lost more than the markets - which is usually what happens when it's managed using market timing or stock picking. You'll almost always lose less than the markets with a well-allocated portfolio.

· Asset allocation also saves advisors from getting into trading trouble. First, there are no B or C share classes in our mutual fund recommendations, so those red flags will never be raised.

There are also many times fewer trades when you buy and hold mutual funds compared to trading stocks or timing markets. So compliance won't annoy you about excess trading or churning to drum up commissions. Fewer trades result in lower trading costs, less administrative work, and fewer mistakes that need to be fixed.

Next, you can use our mutual fund picks to justify trading to FINRA or BD compliance. It has the reasons for the switches, so if anyone questions your trades you can say, "I'm using this investment management program, and I was just following their recommendations." Once they see what you're doing, they'll leave you alone because compliance loves this type of investment management program.

Once they see that you're fact finding correctly to determine investment risk tolerance (and maybe even using an IPS), they'll not only leave you alone, but may even use you as an example to show others how things should be done. This will put you on their good side, even if you've been on their watch list in the past.

So not only will asset allocation save you time, worry, money, and work; once you start getting better returns with lower risk for your clients, you'll be on everyone's good side. This will help let compliance cut you slack if you ever end up under their microscope. All of this will help keep your U5 clean, which is very important.

The Disadvantages of Asset Allocation

You're going to pay a little more in taxes with asset allocation, because you're going to be making more income and profits. You'll also be realizing less tax-deductible losses.

You won't be the life of the party when the topic is stock trading or market timing. Why? For the same reason the media only focuses on market timers and stock pickers. Because asset allocation is boring! There's literally nothing to talk about other than which asset class is up or down. This is shown on the table below.

You're also guaranteed not to strike it rich if a bet pays off. If something doubles overnight, only that portion of the portfolio that was invested in that asset class will be affected. This is usually less than 15% with asset allocation.

Gambling with a large portion of money (using stocks, margin, derivatives, etc.), and lucking out, is the only way to get rich quick in financial markets. Very few people can do this in efficient markets these days. You've been at it for years, and haven't struck it rich yet. It just gets harder, so why keep trying?

The Four Methods of Performing Asset Allocation
- and -
Links to our Three Asset Allocation Programs

Method #1: The most common method of performing asset allocation is by using pre-determined asset allocation models.

If a mix of asset classes exists before an investor's risk tolerance is determined, then that allocation mix is called a model portfolio. The only life factor that determines which portfolio model to use is risk tolerance category. This is determined by filling out and scoring an investment fact finder.

Most financial professionals make investment models based on what their firm specializes in. Then they just put everyone's money with the same risk tolerance into the same portfolio model. This makes everything easier to manage.

Investor models are the best way to get the concept of how an advisor wants to invest money across to investors. All it takes is explaining a table and a pie chart and telling what historical performance has been.

The problem is that stated performance is just the history of the current recommended investments, meaning they don't account for past trades. This is misleading, because returns are less when past recommendations are accounted for. But because models are the most logical way for advisors to invest money for clients, FINRA and BD compliance will let advisors use them with hypothetical returns, as long as it's done properly. Both our model's hypothetical returns and their actual returns (accounting for past trades) are shown on the first two rows on the table below.

Method #2: Use comprehensive asset allocation software that accounts for all of the life factors needed to match an investment portfolio to someone's life.

Unlike allocation models, which exist before someone is around to invest in them, the investor submits various life factors needed to calculate a custom allocation mix that reflects their life situation. So it's not just using one of a few generic pre-existing model allocations.

Model portfolios only take one life factor into account - investment risk tolerance category. Comprehensive allocation calculators also takes investing risk tolerance into account as the most important factor in determining the mix. But it also uses several more life factors.

It then displays current and proposed portfolio snapshots, and future projections of both current and proposed portfolios. This allows complete control over every aspect of the asset allocation process. Model portfolios only show investment recommendations (the proposed snapshot).

Differences between asset allocation models and comprehensive asset allocation calculator are listed on the product description pages (click a link below to go there).

Method #3: Use asset distribution tools that don't calculate, or recommend, a mix of asset classes. In other words, you're just winging it. Most investment software uses this technique.

It doesn't calculate the recommended mix of asset classes, so using an investment fact finder to determine risk tolerance is not needed. The user is just guessing about both risk tolerance and the allocation mix that matches it.

It's not that common, but it's easy and efficient for financial professionals working with small clients. It's the quickest way to show investors where they are and where the advisor wants to take them, in terms of asset classes and investment vehicles used to fund them.

As long as you're adding viable asset classes, then it's better than doing nothing (and better than trying to pick stocks or time markets).

No rebalancing is needed because there is no recommended asset class mix to reference to.

Method #4: Refine any of the above method's results using portfolio optimization. This is sometimes erroneously referred to as Monte Carlo.

Doing this "correctly" substantially squeezes out risk (as measured by standard deviation), while not compromising returns very much. The more risk is squeezed out, the more efficient the portfolio is said to be per unit of return.

We've been using optimizers since they could run on 386 PCs in the late 80's. They were instrumental in developing both our model portfolios and comprehensive asset allocation software. But we don't use them anymore because it's not needed once you see the same outcomes thousands of times over different market environments, a couple decades, using Real World client money. Read about Portfolio Optimizers and why portfolio optimization is usually more trouble than it's worth

This may help understand: The comprehensive asset allocation software was developed from working with asset-level portfolio optimizers all day for years. Too much work was being done for too little money, so the models were created to have something static to use for smaller clients.

How Asset Allocation Works

Different correlation coefficients between investments are why asset allocation works much better for individual investors than anything else humanity has invented.

When investments move up and down perfectly in sync with each other over a certain time frame, its correlation coefficient is 1. When assets move in the opposite direction with each other, its correlation coefficient is -1. Both of these scenarios never happen. The average is around 0.7. All it takes is for a new asset not to be over 0.9 to add diversification value to a portfolio. This is the core of MPT (Modern Portfolio Theory), which started in the 1950s.

This 21st century's investment environment is a good example. Until Q4 2006, if you were stock picking or market timing in the US equity markets, you were getting poorer in flat-to-down equity markets. If you invested in asset classes that move in semi-opposite directions to the US equity markets (e.g., real estate, gold, or oil), then you've been getting richer.

The point is to hold a balanced mix of asset classes that have both good returns on their own, and go up and down at different times relative to the other assets in the portfolio. Determining which assets classes to hold is an art, a science, and depends on the circumstances and goals of the investor.

The different asset classes can be looked at as ingredients that go into making a pie. Each one individually tastes pretty bad. But when they’re all put together in the right combinations, the result is a yummy pie.

Holding an investment portfolio comprised of asset classes with healthy correlations to each other is just about the only way to reduce risk while still getting the returns that will end up beating the markets.

This is because whenever you check the portfolio's value, there's usually always something that's doing so well, that it keeps the portfolio as a whole from having negative returns, even when the US stock markets are down.

Here's a Word document with screen prints showing how all of the 21 asset classes we use performed during the worst month for the S&P 500 since 1999 (when all of the indices were there). In Sept '02, the S&P 500 lost 10.87%. The only asset classes that lost more were:

MSCI EAFE (Int'l All-cap): -11.04%
Russell 1000 Value Index: -10.49%
NASDAQ 100 Trust (Technology index): -11.65%
Morningstar Information Superhighway Index (Internet Index): -14.27%

The following asset classes made money that month:

Goldman Sachs Commodity Index (Tangibles): +4.57%
BarCap Municipal Bond: +2.19%
BarCap Aggregate Bond: +1.62%
BarCap 1 -3 Year Bond: +0.81%
BarCap 3 Year Municipal Bond: +0.79%
Citicorp Non-$ World Bond (Int'l Bonds): +0.61%

Asset Allocation Facilitates the Ability to Provide Consistent Positive Alpha

Alpha is the risk-adjusted measure of excess return. It quantifies an active investment manager's performance, compared to passive management. The calculations display a number that represents how much the active manager's returns exceed a passive benchmark, adjusted for risk.

In our investment models, alpha is the value of selecting open-ended mutual funds over using benchmark indices to fund the asset classes. Both active and passive models are included in our Model Portfolios. Our Moderate Model's alpha is calculated using the same model funded with appropriate benchmark indices, and is shown on the far right two sheets of the asset allocation calculator demo).

The ability to consistently provide positive alpha for investors is the goal of both investment managers and their clients. Portfolio managers that can provide positive alpha consistently are earning the money investors pay them. Without it, investors are paying and seeing no benefit. This is because they could have just bought no-load index funds or index ETFs and realized more profit, fewer losses, without having to pay anyone.

If an investor is realizing investment returns less than the markets, then the portfolio manager is probably providing negative alpha. In this case, the investor is paying the advisor to lose money by utilizing inefficient investment management strategies. Unfortunately, most investment managers do not provide consistent positive alpha.

Asset allocation provides the framework for beating the markets on two fronts. First, the different correlation coefficients between the asset classes, and then funding the asset classes with indices, lowers risk without sacrificing returns. This is usually enough to beat the S&P 500. Comparing the third and 15th rows on the table below shows this.

Next, this is given an added boost when open-ended mutual funds are used that outperform their benchmark indices. When this makes more money than the same investment strategy using indices, it provides positive alpha. This is shown in the fourth row of the table below.

Many investment strategies beat the markets here and there in the short run. What's extremely difficult to do is outperform the markets and provide positive alpha, most all of the time, and more than two years in a row. Asset allocation using mutual funds is the only investment strategy that has the capability of doing this. The 20th row on the table below shows how well we've done this since 1999.

Using the Table of Historical Investment Returns Below

As you can see on the table below, active management in the environment of pure asset allocation usually outperforms passive management. This is shown in the fourth row. That's all that's needed for investment portfolios to outperform the US-based equity market indices, like the S&P 500. This is shown in the 20th row.

The longer the time frame, the more meaningful the comparisons are. The one-month figures are very volatile, and jump around from one extreme to the other. The five-year and since inception columns are the most important time frames to compare.

The bottom line for this past month is if you'd invested $10,000 in the S&P 500 since inception of 1/1/99; you'd have around $8,964. If you'd invested $10,000 in our Fee-Based Moderate Portfolio Model (and followed the directions), you'd have around $20.371. This 127% difference translates into having more than twice the income to spend during retirement. For investors managing their own money, the 1.1% annual investment advisor fee would not have been deducted from the model portfolio's performance (a non-realistic assumption made just to show the difference). The difference would have then been $22,828 vs. $8,964, resulting in having 155% more money.

For those the like to compare things properly, if you'd invested $10,000 in the same Moderate Model funded with indices (and didn't pay the 1.1% annual management fee) since inception of 1/1/99, you'd have around $13,620 vs. $22,828 in our Moderate Fee-Based Model; which is a 68% difference. This shows the value of our monthly-updated mutual fund recommendations.

The best fitting moderate investment model comprised of only American Funds would have returned around $12,456 since 1/1/99. This 83% difference compared to our Fee-Based Moderate Model shows how American Funds has consistently underperformed. This translates into having a little less than twice the income to spend during retirement.

On the mutual fund recommendations page, you can see how our mutual fund recommendations have performed compared to their proper benchmark indices. All 21 asset classes that we screen mutual funds for are listed and updated monthly. The asset class name is given, and then below it is the name of its proper benchmark index. The rows below each asset class/index are the current returns for our current open-ended mutual fund picks. As you can see, our mutual fund screening process is usually able to select mutual funds that consistently outperform their benchmark indices.

An explanation of how returns are calculated is in the model directions.

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More on why Asset Allocation works better than Market Timing or Stock Picking

If you like adrenaline pumping all the time over investments, and realizing returns that are less than the S&P 500, then market timing and stock picking is for you.

The biggest reason people do this is because it's fun to play on Wall Street. Some advisors just need their jobs to be exciting more than they need to make a stable income and realize good returns for their clients. It's an exhilarating ego-boost to make a lot of money being correct on a stock bet. You feel like you've just won a sophisticated high-tech battle in an intellectual war with people that thought they were smarter and better than you. To these warriors, using mutual funds is not only too boring; it's just resigning to join the herds of plodding commoners. It's also fun to gamble in Vegas, and you know how that usually ends up.

The tortoise and hare analogy fits well here - where the tortoise (asset allocation) is slow and boring, but eventually wins over the exciting fits and starts of the hare (market timing or stock picking).

Why can't making low-risk money be fun and exciting? In order to make exciting money using market timing or stock picking techniques, you need to show a net profit on four decisions: You need to sell something (#1 - what to sell out of assets currently held) at the right time (#2), to drum up money to make new purchases (#3 - what to buy) at the right time (#4).

Usually a "mistake" is made on one of the four decisions, and those losses negate gains on the correct decision(s). On top of that, one needs to make a major market timing call weekly to keep up with events. Then on top of that, you have to subtract all of the trading costs, administrative costs, and taxes. If all of that weren't true, then someone would have figured out how to make market timing or stock picking work by now, and they would be on TV every day.

Markets are the sum of millions of people reacting to random daily news by trading securities. Because nobody can predict the news, and nobody can predict the future no matter what techniques, strategies, or computer models they use. That's why you'll never see the same investment guru on TV for more than a few years. It's usually the one that got lucky recently. When their luck runs out, they're replaced.

Even gurus like Jim Cramer that have their own TV show are just guessing. On the first week of March 2008, he said to not sell Bear Stearns, after reading a concerned viewer's letter which read, "Should I be concerned about Bear Stearn's in terms of liquidity problem, and get my money out of there?" Cramer replied in his usual tirade, "No no no! Bear Stearns is fine.... Don't move your money from Bear, that's just silly...." The stock went from $80 to $2 overnight one week later (and was $171 a year before). Five days before this rant, "Bear Stearns is not in trouble! The Bear franchise, you know what, for $69 I'm not going to give up the thing. And I just think that this one has a very big upside and a very limited downside here." And seven weeks before it went belly-up, "I'm asking people watching this video to buy Bear Stearns. Now Bear Stearns acts much better than it should... now that's just intuition. And I don't want to put much faith into intuition, but I have had good intuition over 29 years of investing."

Then in 2008, the legendary Warren Buffet, supposedly the "Greatest investor ever," lost over 90% of his Berkshire Hathaway's money in less than a year.

These are the "best" stock pickers ever, so think how well your local Joe Blow stock picker is going to do.

As you can see on the chart below, even the world's best stock picker, Warren Buffet, can't compete with asset allocation strategies.

This is also why media gurus are usually mutual fund managers (and are CFA Charterholders). Only large institutions like these have the resources needed to have any chance at profiting on all four trades simultaneously, and have the economies of scale to keep expenses down.

Everyone else is just misleading by hype, and is making you lose money. This is because these gurus are selling after making their public recommendations (the "greater fool theory").

They're basically telling you when to buy, but not when to sell. First the guru buys a ton of stock to make it go up a lot. Then to get on TV, they make something up about how its fundamentals or charts (technical analysis) indicate it's going to go up much more. Then they convince fools to buy it on TV. Then it will go up when these fools buy it, allowing the guru to sell it all at much higher prices. This drives the price lower. All of the fools that bought it from the guru are then left "holding the bag," while the guru locked in large profits. This makes the guru's performance look spectacular, which gets them invited back to the show.

So if you're prone to taking a market guru's advice because you agree with what they're saying, and it's working great at the moment, just wait. Most of the time, it will be around a year before their luck runs out, they've lost a lot of money, and have disappeared from the media. The point is you don't know when their lucky streak will expire.

Try to remember who the big TV financial gurus were a few years ago. How long has it been since they've been on TV? How many were either booted out of the business or went to jail for insider trading or similar infractions? How did their stock tips pan out a year after they recommended them?

Conclusions and Additional Information

Real World results reflect the most infamous asset allocation study.* It concludes that 91.5% of returns come from the asset allocation decision and not the security selection or market timing decisions. In English - The behavior of asset classes, and their interaction with each other, are way more important than choosing the best-performing securities to represent them, or when to trade them.

In other words, it doesn't matter too much that we consistently pick mutual funds that outperform their proper benchmark indices. What matters most is utilizing optimized and efficient asset allocation strategies, and then consistently picking mutual funds that are a close proxy to their asset classes (or just using index funds).

* Gary Brinson, Brian Singer, & Gilbert Beebower "Determinants of Portfolio Performance: An Update," Financial Analysts Journal, July ‘91

Below are a few sites that have detailed empirical research on asset allocation and tables of historical asset class correlation coefficients. Most of the numbers they discuss are generated by portfolio optimization software (AKA efficient frontier software).

http://www.stanford.edu/~wfsharpe/art/stars/stars2.htm

http://www.efficientfrontier.com/ef/996/rebal.htm

http://gummy-stuff.org/correlation.htm

http://www.efmoody.com/investments/correlation.html

The bottom line is that asset allocation works much better for individual investors than anything else ever created. Even if you just fund the asset classes with index funds, you'll most always beat the large market indices. You'll probably also beat whatever the vast majority of rich and famous investment managers are doing with their unlimited budgets and armies of CFA Charterholders picking stocks and timing markets.

More on market timing and security selection.

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There's over $2 billion under self-management these days using these asset allocation tools. We have customers that say they manage over $100 million, and dozens around $10 million, so it's just a guess. There's no way to tell exactly because people just buy the software and we don't know how they're using it.

Other Investment Services

Read about our mutual fund recommendation, screening, and analysis service where you can get professional, unbiased, opinions on just about any open-end mutual fund, with no conflicts of interest.

We have an investment portfolio benchmarking service, where we can help you compare as assess investment performance properly. This is the only way to see how an investment strategy is really working.

Then our asset allocation calculator has a scaled-down investment portfolio statistics calculator that will calculate correlation coefficients between assets (or between portfolios and markets). It costs less than 10% of a real portfolio optimizer. These investment portfolio statistics are shown for the Fee-Based Moderate Model on Portfolio Statistics sheet of the asset allocation demo: Correlation coefficients/Beta/Alpha (Jensen)/R-squared/Treynor Ratio/Sharpe Ratio/Standard deviation of monthly returns/Average/Median/Minimum/Maximum rates of return. Both of these evaluation tools are needed to determine the true performance of an investment strategy.

You can also hire us to build custom or model investment portfolios. We can even make them from the limited investment choices of just one mutual fund family, or those investors are "stuck with" in 401(k) plans, variable annuities, life insurance policies, etc.

We're listed here as one of the top money managers.

Why aren't you taking advantage of this? Send e-mail and if you have an interesting reason, then you may get a freebie.

We keep getting the same questions/comments about our unusual performance, so here's an e-mail paste that will help:

Yes on one hand, the investment performance is remarkable. On the other hand it shouldn't be, because it's exactly what the CFA program teaches. It just so happens that I'm apparently the only CFA Charterholder that practices exactly what's taught. Everyone else went off to get rich being a hedge fund manager or creating derivatives like CDSs that started the current crisis.

What the CFA program teaches in a very small nutshell is this: Individual investors should not be market timing at all, period. Nobody can predict the future, so this is worse than futile. Individual investors should also not be trying to pick stocks (bonds or anything else), unless they have quasi-insider information, like they work there, used to work there, or know someone working there that's not technically an insider that's feeding them accurate and timely info. The only "people" that have enough information, resources, and data to profit by picking stocks (and/or time markets) are large institutions like mutual funds.

So once that huge battle is understood and won (99% of investors are still too dense to get this through their heads), and since there are only three ways to make investment decisions, and the most popular two are taught to be no-no's by the CFA people, there is only one methodology left - asset allocation. So I took that to mean that this is what I should become an expert on, because my biz is managing money for investors in a RIA and financial planning setting (my job as an employee at the time).

What you're supposed to is determine a mix of viable asset classes that fits an individual investor's life, and then either fund it with something very diversified like mutual funds, ETFs, or index funds (the CFA program likes index funds the best, as most people can't even pick open-ended mutual funds well enough to beat an index fund). So the questions then become, how do you determine what asset classes to use and how much? Well, I did it in both the Comprehensive Asset Allocation software and the Model Portfolios using the best asset-level portfolio optimizer, educated guesses, and way too much trial and error. After doing it a million times, I found what works and am sticking with it. I've looked at every else's harebrained investment strategies since the mid-'80s, and found none to be better. I admit I've stolen many ideas from many people (mostly from the hundreds of job interviews I went on), and so I've tinkered with just about everything everyone else has come up with since 1986. The ideas that work, I keep, and the ones that don't, I poke fun at on the site.

Once that war is over, the battle is reduced to what to use to fund the asst classes with? To make a very long story short: Stocks - no, no diversification compared to a mutual fund that may own 100 stocks. Closed-end funds, no - there's no way to screen them to get any predictive value whatsoever because of the large and random premiums and discounts. ETFs, no they are just lame index funds... with fees (and then on top of that, commissions to pay when you buy and sell them. This is all terrible compared to a no-load mutual fund). Index funds, maybe, but the way I pick open-ended mutual funds creams index funds by way too large of a margin about 90% of the time. So all of these questions are now answered - the way I screen and pick mutual funds adds by far the best value to the investment process than anything else I've ever seen, so I'm sticking it with it to the bitter end.

The magic isn't all in the infrastructure (the software), it has a lot to do with finding predictive value in the mutual fund picks (I look at many things, like historical performance, and try to predict that it will keep up long enough to be useful). After millions of trials and errors, I found a way to pick funds that have a one- to two-year predictive value (all funds crap out eventually and have to be replaced, which is why it's critical to keep the subscription going and rebalance. When I say crapped out, I don' t mean it in a smelly sense, but the casino gambling way). It doesn't always work, but the winning picks beat the duds enough to add more long-term value than any other investing strategy I've ever seen (and this is after the "evil internal management and 12b-1 fees" the media loves to whine about - because they have little else to say anymore). Plus every month I learn something new, so the screening process is continually refined and saved, so it gets better all the time. I had a major breakthrough in '07 when I figured out how to get around the software stupidity and lousy data Morningstar maintains. It seems to be working better so I'm sticking with it.

I used to sell these little Morningstar screening filter mcr files that can be used by others in their offline version of Morningstar, but a big NY firm tried to copy my screening process in '03, so I don't sell them anymore. So if the information about how I pick mutual funds is not on this page already, then it's a trade secret now. There's no secrets about the software nor models. Just the opposite, every tiny little detail is explained ad nauseum somewhere on the site. And when you buy the allocation software or model portfolios, nothing is protected, so you can see exactly what's going on. Plus you'll get the same spreadsheet I use to calculate model returns to account for mutual fund switches, fees, rebalancings, and all that since 1/1/99. So you can audit the returns and figure everything out.

Disclaimer: This financial plan software is designed to allow financial planners, investment managers, other financial services professionals, and investors, to demonstrate and evaluate various financial strategies in order to help achieve their clients', or their own financial goals. There are no guarantees that any of the software will perform this function. The investment choices and services on this site are provided as general information only, and are not intended to provide investment, tax, legal, financial planning, or other advice. This site is for information purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any security, which may be referred herein. Mutual fund recommendations made are suggestions only, and customers should evaluate the suitability of each fund for their own holdings on their own or seek professional advice. Consult with your financial, legal, or tax advisor with regard to your individual situation. Toolsformoney.com is not engaged in rendering legal, accounting, tax, or other professional advice. In no event shall Toolsformoney.com be liable to customers for any damages whatsoever, including lost profits or savings, missed gains, or other incidental or consequential damages arising out of the use, or inability to use, any of the software or information obtained from this website. Financial estimates are generated by using many assumptions made by the program, clients, and the user. No person or software program can predict the future with any degree of certainty. No warranty as to correctness is given and no liability is accepted for any error, or omission, or any loss which may arise from relying upon data generated from reports produced by this program. In no event shall Toolsformoney.com be liable to you or any other party, for any special, consequential or incidental damages suffered by you or such other party as a result of any problems that may arise because of the installation or improper use of this software or presentation of reports produced by this software. All reports generated by this financial software are only rough estimates of many possible future scenarios.

Investment Vehicle used (below)	Month of May '09	YTD (31 Dec '08 to 31 May '09)	Last 12 Months	Last 3 Years Annualized Average	Last 5 Years Annualized Average	Last 10 Years Annualized Average	Annualized Average Since Inception of 12/31/98
Fee-Based Moderate Asset Allocation Model Hypothetical, as shown in the demo (which has returns and yields for all 56 models). Investment returns are not linked to account for past mutual fund switches. Returns shown are after 1.1% management fees that an advisor would charge clients	6.83%	14.01%	-13.98%	1.02%	N/A - Some current recommended mutual funds don't have a five-year track record (past trades are not accounted for in the hypothetical model)	N/A - Some current recommended mutual funds don't have a ten-year track record (past trades are not accounted for in the hypothetical model)	N/A - Some current mutual fund selections don't go back that far (past trades are not accounted for in the hypothetical model)
Fee-Based Moderate Model Asset Allocation Actual, with investment returns linked to account for past mutual fund changes, rebalancings, 1.1% management fees that an advisor would charge their, and everything FINRA needed to pass compliance	5.63%	5.13%	-20.80%	0.96%	6.34%	6.46%	6.85%
Moderate Index Asset Allocator Model Same portfolio model as above, but funded with Indices. The difference is the value of active management - or mutual fund screening. No past Index Fund switches to account for. After 1.1% annual management fees that an advisor would charge clients	5.51%	6.14%	-23.03%	-4.49%	1.05%	1.56%	1.87%
Difference between the Actual Fee-Based Moderate Model and the Same Portfolio Model Funded with Indices This is the correct apples-to-apples method of comparing portfolios, and shows the value of active vs. passive investment management from the mutual fund selections	+0.12% (or 2% better)	-1.01%	+2.23% (or 10% better)	+5.45% (or 567% better)	+5.29% (or 503% better)	+4.90% (or 314% better)	+4.98% (or 266% better)
Our Hypo Moderate All-ETF Model After 1.1% annual management fees that an advisor would charge clients	5.67%	4.08%	-23.20%	-4.57%	N/A	N/A	N/A
Our Hypo Moderate All-Index Fund Model After 1.1% annual management fees that an advisor would charge clients	7.17%	5.31%	-19.79%	-2.855	N/A	N/A	N/A
SEI GoalLink Moderate Strategy Fund A (All SEI & DFA values assume to have the same 1.1% annual investment management fees deducted)	3.70%	2.54%	-21.07%	-4.36%	-0.93%	N/A	N/A
SEI GoalLink Tax-Managed Moderate Strategy Model	3.14%	2.84%	-15.10%	-1.08%	0.61%	N/A	N/A
SEI GoalLink Moderate Strategy Allocation Fund "A"	5.38%	1.88%	-30.01%	-6.40%	-1.87%	N/A	N/A
SEI Private Client Moderate Model	3.70%	2.23%	-21.63%	-4.64%	-1.05%	N/A	N/A
SEI Tax-Managed Private Client Moderate Model	3.24%	3.23%	-13.23%	-0.21%	1.17%	N/A	N/A
SEI Asset Allocation Model: Domestic Moderate Growth & Income	3.50%	5.15%	-14.12%	-1.09%	-0.17%	2.19%	N/A
DFA Global 60/40 I Portfolio (their best-fitting Moderate portfolio)	6.14%	7.48%	-18.2%	-1.81%	1.42%	N/A	N/A
Warren Buffett's Berkshire Hathaway, Inc. (BRK-A) Note that the 1.1% annual investment advisor fees are not deducted from BRK-A like they are in our models	-2.55%	-5.18%	-30.71%	-0.25%	0.58%	2.44%	2.58%
Difference between our Actual Fee-Based Moderate Model and BRK-A	+8.18% or 320% better	+10.31% or 199% better	+9.91% or 32% better	+1.21% or 484% better	+5.76% or 993% better	+4.02% or 164% better	+4.27% or 165% better
All American Funds Moderate Model Hypothetical, and after 1.1% annual management fees that an advisor would charge their clients. Front-end loads paid are not accounted for here, so actual returns are about 1% - 5% lower than shown here for AF shareholders	5.46%	8.24%	-21.54%	-3.97%	0.78%	1.85%	2.11%
Difference between our Actual Fee-Based Moderate Model and the American Funds Moderate Model	+0.17% or 3% better	-3.11%	+0.74% or 3% better	+4.93% or 124% better	+5.56% or 712% better	+4.61% or 249% better	+4.74% or 224% better
Market Indices	Month of May '09	YTD (31 Dec '08 to 31 May '09)	Last 12 Months	Last 3 Years Annualized Average	Last 5 Years Annualized Average	Last 10 Years Annualized Average	Annualized Average Since Inception of 12/31/98
DJIA	4.52%	-1.61%	-30.45%	-6.22%	-1.10%	0.02%	1.44%
S&P 500	5.59%	2.96%	-32.57%	-8.24%	-1.90%	-1.71%	-1.05%
NASDAQ	3.32%	12.51%	-29.66%	-6.62%	-2.34%	-3.26%	-2.01%
Russell 2000	3.01%	1.15%	-31.79%	-10.14%	-1.18%	2.68%	3.01%
MSCI EAFE NR USD	11.09%	6.46%	-38.60%	-10.33%	0.23%	-0.59%	-0.62%
BarCap Aggregate Bond Index	0.73%	1.33%	5.36%	6.30%	5.01%	5.88%	5.53%
Difference Between the Actual Fee-Based Moderate Model and the S&P 500 NO 1.1% ANNUAL FEES are subtracted from the S&P500 here, like they are in the actual and hypo Moderate Models. This is not a proper comparison, like what's shown above with the Index Model, but it's popular	+0.04% (or 1% better)	+2.17% (or 73% better)	+11.77% (or 36% better)	+9.20% (or 112% better)	+8.24% (or 434% better)	+8.17% (or 478% better)	+7.90% (or 752% better)