Know Yourself: The Four Investment Temperaments

I recently read “The Four Temperaments” by Rev. Conrad Hock,  In it the author describes in detail the good and bad traits of each of the four temperaments: choleric, sanguine, melancholic and phlegmatic.  Everyone has a dominant temperament, and, in the book, you can take a simple test to find your own temperament.  There are also many online sites that allow you to take a test to determine your temperament.  Unlike personality, your temperament never changes with time!

The fact of the matter is we are all emotional.  But we all react in different ways when presented with unintended consequences, surprises, conflict, decision-making etc. (both good and bad).  I started working with clients and their investments back in the early 90’s.  It amazed me how clients reacted differently to the same 20% move higher or the same 20% move lower in the market, even when they had the same risk tolerance.  Most of these reactions were based on perceived expectations correlated directly with their investment temperament.

The chart below shows the emotional rollercoaster ride millions of investors go through from time to time, which may influence investment decision-making.  In many cases the decisions investors make can be quite irrational and detrimental to their long-term portfolio goals.  Many investors don’t have the expertise and certainly not the time or focus needed to make proper investment decisions.

September 2015 edition of ICICIdirect Money Manager Magazine.  Source: Credit Suisse

Behavioral Finance is an amazing topic.  There have been numerous books written and any Economics/Finance major has taken at least one course on this subject.  I won’t turn this into a 50-page thesis, but I would like to explain four investment temperaments I have coined over the last 25 years.  These observations include clients, prospects, family, friends and strangers.

  • Risk Seeker This type of investor wants to make as much money as possible, regardless of risk. This type wants to make make at least as much as the general stock market going up.  On the way down they aren’t happy, but they won’t sell, knowing they will make back their portfolio losses and then some in the future.  They are extremely confident individuals.  A spin-off of the risk seeker is one that has the same objective, however their reaction during large drawdowns is different.  They start to panic, even though they came in with a long-term game plan. They know the risks involved with investing aggressively, but eventually they will sell everything at the worst possible time.
  • Controlled Risk-Taker This type of investor wants to make all the money when the general market goes up but wants to lose very little during drawdowns. Much of their investment portfolio is in equity positions.  These investors are typically well informed on what the general market is doing.  Buy and hold won’t work during periods of large drawdowns, so they employ active management in bad times.  They will quickly reduce portfolio equity exposure at early signs of emotional pain.
  • Preservationist This type of investor wants to make money with much less risk than the stock market. They feel safer with bonds because they aren’t as volatile.  Many investors with this mentality either fear they will run out of money in their retirement years or they want to give it all to their children/grandchildren.  They simply want to be reassured that their principal is still there.  Any growth is a positive.
  • Balancer This type of investor wants to make money in line with stock market returns, but they want downside protection. They know stocks are riskier than bonds and the next bear market will eventually come. They like being in a diversified stock/bond/alternative portfolio.

In late October the S&P 500 gave up all its gains for the year in just a few weeks (see chart below). From the close on October 3rd to the close on October 29th, the S&P 500 fell 9.71%. The Nasdaq 100 Index fell 12.09%, led by one of its largest components, Amazon (AMZN), which fell 21.19%.

Created with  ©, Inc.  All Rights Reserved.

The most common reactions I heard at the end of October were:

“Everything is fine, it’s time to buy more at a discount.”

“Ouch, that hurt. I don’t know if I should sell or hold here.”

“This doesn’t feel good, but at least my exposure was reduced, and I had a diversified portfolio, including bonds.”

“Is this the start of the next Bear market?!?! Is my money safe???”

“We’re still in a Bull market. I’m diversified and this bump in the road is OK.”

“I’ve enjoyed this Bull market, but this is the second time this year I’ve seen a 10% drop.  I think it’s time to be a little more defensive, unless the market has a good rally.”

As stated before, you can see many different reactions to the same 10%+- move in the market.  All these reactions are normal, depending on your temperament.  At Spectrum Financial one of the first things we talk to prospects about is their risk/reward profile.  Investors must be honest with themselves when asked questions like:

  • What is the biggest drawdown you could handle?
  • What are your long-term goals? How long are you willing to invest with us to meet them?
  • What Index(s) will you compare your portfolio to?
  • Is your outlook generally optimistic or pessimistic concerning investing?
  • Do you feel you are an aggressive, moderate or conservative investor?

I tell prospects and clients all the time that there are no wrong answers to the above questions.  If these questions are answered honestly, it’s much easier to customize a client portfolio based on his/her temperament so that expectations are met.  Once allocated, we know we are doing a good job when we see a drawdown in the market like we saw this October and our clients are happy with their return based on their risk/reward expectations.  If a client calls disgruntled, in many cases they aren’t as aggressive/conservative as they thought they were.  We can easily adjust portfolios accordingly.

What type of investment temperament do you have?  Call our office and let us explain our unique investment products and how they can be a great fit for your investment portfolio.


Sentiment is defined within the investment community as investor attitude toward a broad market or asset class.  Following sentiment can be a useful endeavor as a component of risk assessment.  Growing bullishness can help investments rise but overly optimistic attitudes often occur near market peaks.  On the opposite side, bearish attitudes can pressure markets lower, but overly pessimistic or fearful actions can wash out those sellers to set the stage for a recovery.

Sentiment can be measured a number of ways, but most fall under the categories of investor perception surveys or detection of their actual actions.  Surveys can be verbal or online and generally reflect what responders think of the market in an upcoming time frame.  Responders may or may not have acted on their beliefs.

Above is an example of a survey by the American Association of Individual Investors (AAII).  The scale to the right of the survey (lower pane), displays the percentage of the responders with a bullish outlook for the S&P 500 Index over the subsequent six months.   Notice the survey number tends to track the movements of the stock market.  Human nature is such that what is happening now tends to heavily influence perceptions of the future – if it’s bad now, then it will be bad or worse in the future.

Herd mentality can provide the fuel to a rally or sell-off as people’s actions are a natural by-product of their thoughts.

At extremes, the intensity tends to mark turning zones.  Therefore, assessing sentiment can be useful as a contrary indicator but only after determining what qualifies as an extreme.  In the chart above, zones of Excessive Optimism and Excessive Pessimism have been marked.  Excessive optimism has been a worthwhile warning prior to major and minor peaks or at least stagnation.  Excessive pessimism tends to be seen near lows.  Not all market peaks and bottoms are accompanied by sentiment extremes using the AAII survey but when extremes show up, this information may play a role in portfolio adjustment.

As noted, surveys convey investor perceptions but as the saying goes, “actions speak louder than words”.  There are numerous ways to detect sentiment derived from actions taken by investors.  The options market often attracts speculators looking to leverage their ideas of bullish outlooks by way of buying call options or bearish outlooks with buying put options.

Created with TradeStation. © TradeStation Technologies, Inc. All rights reserved.

Put/Call ratios display the number of puts versus the number of calls traded.  A ratio of 1.0 means an equal number of puts and calls are being purchased but that sort of balance is not the norm.  The stock market and investor perception generally have a positive longer-term leaning which tends to have average Put/Call readings around 0.9 or nine puts purchased for every ten calls.  In the chart above, the raw Put/Call is displayed but the zig-zagging raw readings can be too short-term to be useful for most investors.  In the middle pane, a 10-day moving average has been applied to better illustrate the ebb and flow of sentiment.

Sentiment analysis can come from various sources and deal with multiple time frames.  Surveys tend to be longer term while option related sentiment measures tend to be shorter-term.  In mid to late October, weakness in the stock market had survey readings decline but without excessively pessimistic readings.  Fearful or bearish speculators rushed to put options with more intensity than bullish buyers of call options.  That set up overly bearish extremes prior to the early to mid-November rebound.  Keeping tabs on sentiment can assist in keeping emotions in check.  If opinions of market match overly optimistic or pessimistic sentiment readings, then re-evaluation may be in order.  Investors would be wise to not use this information in a vacuum but as a part of a more comprehensive plan.

When you’re away, do your apps play?

Would it make you uncomfortable if your children or your neighbor grabbed your smart phone and started looking around?  Probably not, but what about a complete stranger?  This is often what happens when you download an app from app stores without doing some due diligence.  Many apps ask for you to open doors they have no business accessing.  This can open up your phone to more then just an app you thought you could trust.

Official app Stores vs. third party app stores

Apple® AppStore and Google Play™ are the two biggest official app stores. You can go there to download mobile applications for your iPhone or Android device.

Are they safe?  Apps in the official app stores usually follow strict development criteria. The official stores also test the applications for malware.  This is the safest place to get apps.

Third-party app stores may not use the same level of scrutiny toward the apps they allow to be listed in their app stores. Third-party app stores might offer plenty of safe applications. But there’s also a higher chance they might offer dangerous ones.  Third-party app stores should be avoided as much as possible.

Certain categories of applications were also more likely to contain malware.  Arranged by likelihood:

  1. Lifestyle apps
  2. Music and Audio
  3. Books and Reference
  4. Entertainment
  5. Tools

Grayware apps

Many apps contain grayware.  This is a term used to classify apps that behave in an undesirable manner, but not classified as malicious malware.  A common type of grayware is mobile adware which contains popup ads in your phone’s notification bar.

Symantec reported a 20% increase in grayware application variants recently, for a total of 3,655 types.  Norton research shows that more than 60% of Android apps contain adware or other grayware.  Of these:

  • 63% were found to have leaked the device’s phone number
  • 37% leaked device location
  • 35% leaked installed application information

There are security apps such as Norton Mobile and Trend Micro Mobile Security that can protect your phone from malware and annoying grayware, but perhaps the best thing to do is understand what happens when you install a new app.  Many potentially unwanted app behaviors are written on purpose and documented in the app’s user agreement.  Reading app disclosures and agreements before installing is the best practice.

When an app first installs, it asks you for permissions.  To combat grayware, you should question what an app really needs permission to do.

Does your new weather app really need permissions to access your contacts and calendars?  Often when prompted for access you should just say no.

Permission to Do What?

There are hundreds of types of permissions, and many apps ask for more permissions than they need.  Most people don’t know what they mean. They just enable everything.  This is a bad practice.  You should disable everything unless you know why the app needs it.  The more restricted you keep your apps the safer your data will be.  Here’s a list of a few of the most common permissions:

  • Storage: modify/delete storage contents – apps that store pictures and video will require this.
  • Network communication: full access – many apps need to access the internet, this often relates to ads as well
  • Your location: network-based – weather and travel apps, free games, often contain ads so they can deliver targeted ads based on your location.
  • System tools: prevent device from sleeping – usually means that when you’re using the app, it will keep your phone from going to sleep or from entering into a reduced power mode.
  • Your personal information: read contact data – most social media or messaging apps will request access to your contact information
  • Root: super user access – When an app asks for root access you should seriously consider whether it needs super user access.  Firewalls and backup apps often require root access.  Most apps don’t

Android vs IOS which is safer?

There are millions of apps available for download.  There are twice as many apps on the Google Play store then on the Apple® AppStore.  The number alone at Google Play makes it a more dangerous place to find apps.  If the app is available for iPhone and Android there is a higher probability that it is safer, but no guarantee.

There’s no doubt Android is a bit more of a risk than iOS, but, with the right precautions, it can still be a safe platform. If you must install apps from anywhere on an Android phone, at least do everything you can to ensure they’re safe before you let them loose on your contacts, messages and social media accounts. Install a scanning app such as Norton Mobile Security,  or Google Play Protect and use it wisely on new downloads to prevent any malicious activity.

What about Jailbreaking my phone?

Sometimes an app developer does not play by the rules and the only way to get the app to the public is to recommend jailbreaking your phone.  Jailbreaking your device frees the OS to run unapproved applications.  The process of jailbreaking is legal but it’s not a good practice.   Jailbreaking allows unapproved code, voids your warranty, and can cause stability and security concerns.

Also, if your company issues you a work phone this would generally be prohibited.  Most companies have policies for what you can do with their phone when using it for work.  Unless you’re a tech guru and the risk is worth the reward, jailbreaking is a bad idea.  I refuse to do this on my personal devices.

Is this app Secure?

Apple® AppStore has made it mandatory for all developers to require new apps use a secure connection such as https.   The Android developer platform has also just finalized this process in 2018.   Still, older grandfathered apps exist on app stores that were original approved using unsecure http.  So, check the reviews, and check the date of the last review.  If its 3 years old, perhaps its time to look for a better solution.  Also, it is a good practice to update your apps anytime there is a security update.    A trendy app is no longer great if your connection to their server is compromised on public Wi-Fi.  So, stick to the Official app stores and update your apps often.

Does Spectrum Financial have an app?

I’m glad you asked!  Now would be a great time to download the Spectrum Access app available at both the Apple® AppStore and Google Play™ It’s a secure way for our clients to view

  • Aggregation of all household accounts
  • Account Activity, holdings, and balances
  • Performance Summary
  • Quarterly Statements
  • General tax and beneficiary reports
  • Invoices

A Life of Financial Freedom

The paragraphs below are excerpts from the book, Wealth Conundrum written by Spectrum’s CEO and Head Portfolio Manager Ralph Doudera. In Chapter 10 of his book, Ralph offers his opinion and suggestions for leading a life of financial freedom. If you would like a free copy of the complete book, please contact with your name and mailing information.

Chapter 10: A Life of Financial Freedom

Anyone can achieve a life of financial freedom if they understand how to play the game.

Over the years I have learned not to make it my sole object in life to accumulate great wealth. However, I have achieved some success in discovering wealth-building rules that work even for those not yet ready to begin a lifestyle of giving. I wish someone had told me about them when I started out.

Financial freedom is a common desire of everyone, but like everything else there is a right way and a wrong way to go about it. How you take the journey determines the quality of life you experience once you get there.

Principle 1: Dedicate Your Possessions

Dr. E. Stanley Jones used to say, “A road that perhaps more than any other leads to self-atrophy is undedicated money.”

Principle 2: Start Early

It cannot be emphasized enough the impact that time has on compound interest. Get started early. Don’t wait. If you’re going to need lumber when you are 65, you don’t want to plant acorns when you are 50.

Principle 3: Set Personal Financial Goals

Each person needs to set personal financial goals, and then establish a plan to achieve them. Determine what you want to do with your wealth, how much you will need, and when you will need it. Then begin planning carefully what income streams you will use to produce that wealth.

Principle 4: Pay Yourself Before Spending

The next principle is to “pay yourself” by setting aside some of your income in a separate account before that money becomes accessible for expenses. This could be a retirement or investment account that is not easily accessible, so it does not turn into a “deferred spending” account. I recommend setting aside a minimum of 10 to 20 percent of income for personal investment. Then go ahead and enjoy spending and giving away the rest! This percentage will vary depending on age and family situation, but 10 to 20 percent of income should be a benchmark.

Principle 5: Build Wealth Slowly, And Be Patient

The basic concept of wealth building is to build it slowly. Avoid get-rich-quick schemes. The faster you try to get rich, the quicker you lose money on risky ventures. Each of my newsletters includes a Proverb by one of the wealthiest men who ever lived, Solomon: “Steady plodding brings prosperity, hasty speculation brings poverty.” Proverbs 21: 5

Time is a necessary ingredient for investments to work in your favor. Your investment may start out as small as an acorn, but it increases by a certain percentage each year, and eventually through exponential growth it’s a mighty oak tree. If you stand watching a teakettle, it takes forever to boil, but if you walk away and do something else, before you know it, it whistles!

Every person alive can be financially independent if they take the right actions, and take responsibility for their own destiny.

Investments work the same way. When your money is invested, stop watching it and enjoy life instead of worrying about it every day. Before you know it, the funds will double, and then double again.

Principle 6: Lotteries are For Losers

Lotteries are one of the largest revenue generators for state governments, and participants, in their ignorance, don’t seem to mind contributing. The lottery contributes to the inherited cure of entitlement programs. It plays on the mindset of getting something for nothing. Whenever I see someone buying a lottery ticket, I feel badly for them and wish I could help them understand this principle: Regular saving will make everyone wealth, given enough time, but lotteries are for losers.

Principle 7: Spend Less Than You Earn

This stewardship concept seems simple in theory but plays havoc with our lives when we have a “natural” mindset. Normally, if we have the money and want something, we buy it. We have to help ourselves save by putting some money out of reach.

No millionaire on this planet got that way by spending 100% of the money he or she made.

Principle 8: Record Your Expenses

A key to accountability is keeping track of where you spend your money. When I got my first job, my wife and I kept a logbook where we kept track of every dollar that we spent. I mean literally every dollar. If you don’t know where your money is going, you can’t figure out how to spend less, how to budget, and how to save.

Principle 9: Compound Interest

The two words: COMPOUND INTEREST should be capitalized whenever used together. Compound interest is a secret of wealth that very few people understand. Principal (money), time, and rate of

growth come together in such a dynamic force that if one could live long enough, and maintain a steady growth rate, he would end up with all the money in the world. Did you ever wonder why all the rich people are old?! It’s compound interest!

Albert Einstein said compound interest is the greatest mathematical discovery of all time, not E=mc².

Principle 10: Use IRA and Other Tax-Deferred Investments

A tax deferred investment account is a powerful concept over time. An IRA or company retirement plan is a good idea because earnings on the investment are not subject to taxes as the money grows. (The contributions may also be deductible against current income.) For example, $10,000 placed into an IRA earning 10% interest will be worth $174,000 in 30 years if the earnings are not subject to annual income taxes, but worth only $76,000 if in a taxable account subject to taxation in a 30% tax bracket.

If a college graduate invested in an IRA all the money he or she would otherwise have spent on their first new car, when they turned age 65 they would be a millionaire, even after adjusting for inflation.

Maximize your contributions to any qualified retirement program such as a 401(k), particularly if there is an employee matching contribution. Annuities (both fixed and variable) are a good tax-deferred investment idea. Unlike a qualified retirement IRA, which has contribution limits, there are no limits on how much can be invested in an investment annuity. A Roth IRA also fits in this tax-free category, where funds are not deductible when invested, but grow tax-free, and are also tax-free when paid out. This should be one of the first investments most young people should consider.

Principle 11: Never Borrow To Buy A Depreciating Asset

People who use credit cards to purchase things and pay 12 to 20 percent interest rates will forever live in poverty. My longstanding rule of financial prosperity has always been “never borrow money to purchase anything that does not increase in value.” If you don’t have the money, don’t buy it. Use credit cards only for convenience and pay them off in full each month.

Principle 12: Don’t Buy A Car Until You First Save The Money

One time I was searching the classifieds for a used car and saw an ad looking for someone to take over car payments. When I called and asked how much cash he wanted for the car, he said he didn’t know. He only knew what the payments were, and he probably owed more than the value of the car. Don’t buy a car until you have saved enough money to pay for it. An exception for this may be if the car is used for business to generate income or if needed to get to work, but newer used cars can be cost-effective.

Principle 13: Borrow Money Only For Investments or Home Mortgages

Borrowing funds to purchase higher yielding assets may make sense if you are able to evaluate the risks involved. One example would be purchasing a piece of income-producing property where the income exceeds the debt service. This concept can create wealth if the property appreciates over time.

However, if your tenant moves out, you must assume the risk of making the payments on the loan, as well as potentially watching the property drop in value.

Home mortgage debt may be the one exception that I would suggest to people who are disciplined and able to invest wisely. By taking out a long-term, low-interest, tax-deductible mortgage and by creating a separate side investment fund instead of paying off the mortgage early, you can eventually be in a position to pay off the debt if you choose. Meanwhile, you will be earning income by investing separately with your other funds. Of course, this will only work if you don’t spend the funds and if you earn a higher return on your investments than the interest you are paying for your mortgage.

I recognize that many people may be more comfortable having no debt, as it certainly does give a more secure feeling to have no mortgage payments. But if you have the option of paying off the mortgage at any time, you are not putting yourself into a position of having to make payments from wages. Each person’s financial freedom number is reached when passive income is equal to expenses.

Principle 14: Stay Out Of Debt

Other than exceptions like the investment use of debt noted above, stay out of debt. If you stay out of debt, you will never become enslaved to lenders. There is a Proverb that states, “The borrower is servant to the lender.” Proverbs 22:7. If you are already in debt, you need to work out a plan to get out as soon as possible. Howard Dayton’s book Your Money Counts gives practical methods to do just that. It is a classic guide to earning, spending, saving, budgeting, investing, and giving. I highly recommend it. It also covers important issues such as training your children in these four areas: routine responsibilities, exposure to work, earning extra money at home, and working for others. A small group study is also available with this book in most metropolitan areas in the U.S. through Crown Ministries. Another resource is Financial Peace taught by Dave Ramsey.

Principle 15: Minimize Risk By Diversification

By diversification—using several different investment strategies simultaneously—risk can be significantly reduced. Don’t put all of your investment eggs in one basket. Build a portfolio of diverse investments like stocks, bonds, real estate and possibly other investment vehicles. If you ran a business and made only one product, you would be very vulnerable to market swings. Everything would have to go perfectly. It never does. If you have real estate, diversify geographically. If you live in a town with one factory or the community is heavily depending on one industry or government influence, there may be more risk involved than meets the eye.

Diversify stocks and bonds by various trading strategies. Personally, I have found that “buy and hold” investing subjects me to more risk than I am willing to take, so I have implemented various trading strategies that reduce risk. By doing this I have personally escaped the Bear markets of 1987, 1990, 2002, and 2008 with minimal losses, keeping most of the gains of the prior Bull markets. If you want to send supplies down a fast running river, you can put it all on one big raft, or send it down on five smaller ones. If you lose one, you have four left.

Principle 16: Minimize Losses, Maximize Gains

Don’t be afraid to take small losses. In fact, in my investment business I take many more losses than gains because I keep them small and let the profits run. If you sell your winners too quickly and your losers too slowly, you will eventually end up holding all losers. Remember, if you lose 50% of your money in a bad investment, you need to get a 100% return just to get back to even, so minimizing losses is one of the first principles of wealth building. A 75% loss requires a 300% gain to return to the original investment.

A drawdown is an investment term for temporarily losing money. Everyone has drawdowns, whether they are aware of them or not. Some people think that if they buy a stock that goes down in price that they do not have a loss until they sell it. They are wrong. Markets adjust constantly, and losses are one of the guaranteed aspects of investing.

The key to success is to minimize losses and maximize gains. You will take losses, but keep losses small and gains large is the key to success. Sometimes it is a challenge to find an advisor who can do that for you. Everyone talks about the stock they bought at 5 and sold at 100, but I would guess that this person’s serious money portfolio did not do very well.

I am often asked questions like this: “I lost 25% of my money in a mutual fund retirement account. How do I recover from that loss?” I would answer with this question: “If you bought a house today as an investment that you knew you weren’t going to sell until retirement age, and the appraisal dropped 25% from where you bought it, what would you do?” You would probably buy more, but use a different realtor for advice. I formed Spectrum Financial for the express purpose of investing the money of family, friends and clients the way I would invest my own. I would encourage anyone who may need investment help to refer to the resource section in the back of the book. You can also call our office at 757-463-7600 or visit our website at

Principle 17: Protect Your Wealth With Insurance

Insurance is an important protection against unexpected financial loss. My basic philosophy on insurance is not to insure the small things that you can financially replace, but insure the things that are too big to replace. For example, use larger deductibles and self-insure whatever you can. Insure for a high amount with a larger deductible liability policy.

* Disability Insurance

Is the most important insurance for a wage earner who has not had time to accumulate assets. Many people would never think of not insuring their house or car, but if you lost your house or car, you could replace them if you still had an income. Income replacement due to loss of health is not possible to replace. If you had a goose that laid golden eggs, would you insure the eggs or the goose?

* Life Insurance

Life insurance is needed for families to insure adequate family income through the critical years of education, or maybe to pay estate taxes or other liabilities at death. The debate for term versus permanent insurance will go on forever, but my suggestion is to calculate how much you need, then figure out how much of the need is temporary (term) and how much is permanent (whole life) and get some of both.

* Universal Variable Life Insurance

This is a product that allows you to mix term insurance and whole life investment in one policy. Any extra funds that are paid into the policy in excess of the term cost will go directly to the investment account, which can be directed into an interest-bearing or stock or bond market investment account that will grow on a tax-favored basis.

Actually, life insurance is an efficient tool for passing wealth on from generation to generation. If properly arranged, it can be set up to avoid any estate taxes, and then “reforest” their estate with family-owned life insurance that may be passed tax-free to heirs at death. A qualified financial planner can assist you, particularly one who specializes in charitable estate planning. Anyone who may be subject to estate taxes should carefully consider this very creative area of planning. Estate taxes are not mandatory for a family with creative philanthropic planning techniques.

Principle 18: Consider A Charitable Trust

On my recommendation, my dad has set up a trust that benefits charity and pays income for ten years to his grandchildren during the time they will likely need funds most, during their early marriage years. He is making a gift of appreciated real estate to a charitable remainder trust that can sell it without paying any capital gains tax and invest the proceeds in income-producing stocks and bonds. His grandchildren receive income from the trust for 10 years. After 10 years, his favorite charity receives the balance in the trust. Each year, he gets an opportunity to talk to each of the grandchildren and advise them on how to invest the trust income they are receiving. Meanwhile, he receives an income tax deduction for the present calculated value of the charitable gift. He also removes the asset from being subject to estate taxes at his death. If he dies prior to the ten years, the trust continues to pay income to the grandchildren for the remainder of the ten-year period, and then the charity receives the remainder of the gift.

My dad gives while he is alive so he is able to see what happens with his gift, and he also has the opportunity to interact with his grandchildren every year. He gets both tax benefits and eternal benefits. On hearing about the plan, one granddaughter indicated her desire to take her entire first year payment and put it toward building a church in a Third World country. I jokingly told my dad that I want him to have a big mansion in Heaven because I will be coming to visit with all my kids. There is an upper limit on what an individual can use in a lifetime. Decide how much is enough, then give the rest. Everyone with wealth will eventually make a charitable gift to someone- when they die. Be proactive. Give now.

(end of excerpt)

Financial freedom is something that requires thoughtfulness, discipline, planning and time. These are a few suggestions to achieve financial freedom, and not an extensive list. As an investment firm Spectrum Financial is able to come along side our clients to assist in the management of their wealth- whatever the size. Our job is to minimize losses and maximize gains as best we can so that our clients can pursue their own ideas of what financial freedom means. If you have any questions please do not hesitate to call our office so that we can guide you on your financial journey.

The Next Bear Market….

Photo taken from  Photograph: Alamy

I recently spoke to a prospective client who told me a story of a regrettable decision he made over ten years ago.  His advisor of many years was retiring and recommended that he talk with someone at Spectrum Financial about active management.  He never made the phone call.  Instead, he decided in late 2007 to invest his portfolio with a local advisor who was a good friend of his.  His entire portfolio was invested in an S&P 500 Index fund.  A few months later, in early 2008, his real estate business started slowing down with the weakening economy.  In early March of 2009 his equity portfolio was down over 50%.  His advisor told him everything was going to be just fine, that “these things happen”.

In 2007 there were over 31 million retired workers receiving Social Security checks.  Many of them relied on their investment portfolios to supplement their monthly fixed income checks. Investors have always been told that withdrawing 4-6% annually in retirement is fine to maintain principal.  With the severity of the 2008 market losses, many workers who were ready to retire had no choice but to continue working as their retirement savings were obliterated.  Investors in the S&P 500 at the high in October 2007 nervously watched as the bear market unraveled and then had to wait almost 5 years before their portfolios recovered from the large losses in 2008.  That meant working 5 years longer for many would-be retirees.  That, or retiring with a diminished standard of living.

Notable bear markets over the last 90 years:

  • The Dow lost 90% of its value in the 1929-32 bear market, 30 billion dollars of wealth was lost. It took 25 years for the Dow to regain its 1929 highs. 1
  • The Dow lost 22.6% on October 19th, 1987, “Black Monday”. Five hundred billion dollars of wealth was lost on that day alone in the Dow.  2
  • The Nasdaq declined over 78% in the 2000-2002 bear market. Almost 8 trillion dollars of wealth was lost.  3
  • The S&P 500 fell over 55% in the 2007-09 bear market. The stock market erased $6.9 trillion in shareholder wealth in 2008 alone. 4

Even worse than the situations above were the individual investors who finally sold their equity positions in the most volatile months of 2008, September and October.  There were numerous intra-day losses in the market of over 10%.  Investors capitulated and put their entire portfolios in cash just before the start of the next great bull market.  Many investors stayed out of the market all-together in 2009.  When many finally went back in, they invested in more conservative bond funds that have only had moderate gains in recent years.  Many investors are just now getting back to portfolio values last seen in late 2007.

Fast forward to September 2018.  The S&P 500 Index enters its longest Bull Market ever.  Did I say EVER?  The quote most attributed to Benjamin Franklin “But in this world nothing can be said to be certain, except death and taxes” is almost complete.  If he were alive today he would surely add “and bear markets”.  It’s been over ten years since investors felt any real pain from market losses.  Many prospects I talk to have a distant memory of 2008.  Some seem to think it never happened or will never happen again.  Full-time employees under the age of 32 have never seen anything but a wonderful bull market pushing their retirement accounts higher and higher.

From 1997 to early 2013 the S&P 500 went up and down in a sideways pattern.  Your $100 investment in 1997 was worth $100 in early 2009.  Your $100 investment in January 2000 was worth $100 in early 2013.  This is assuming you didn’t make any redemptions for 10+ years.  As you can see in the chart below, the S&P 500 broke out of this sideways channel about six years ago and hasn’t looked back.  The bad news is that if the S&P 500 has a similar drawdown as the bear markets described above, it will fall back to levels we last saw in 2007 and 2000.  The “lost decade” would then become the “lost two decades” for buy and hold investors.

Created with  ©, Inc.  All Rights Reserved.

There are numerous possible situations that could trigger the next bear market.  A few possibilities are listed below:

  • Current Margin Debt
  • Threat of global war, including nuclear
  • Future elections; change in congress (new economic policies)
  • Bull-market fatigue (currently in longest bull-market ever)
  • Rising interest rates
  • The next “fill in the blank” bubble

One of the most interesting and not talked about in the general chatter is margin debt.  Margin debt is the amount that individual and institutional investors borrow from their brokers against their portfolios.  That current debt is over $650 billion (see chart below).  Leverage like margin debt helps accelerate the market on the way up because it creates new liquidity to buy stocks.  But it is also a great accelerator on the way down, as investors are forced to sell their positions that were bought on margin.  Liquidity dries up and the bears come out of hibernation!  The current margin debt is more than twice what it was just before the 2000-02 bear market!  This is worrisome.

New or soon-to-be retirees need to be aware that the next downturn will come, and they need to be positioned to weather the storm.  At Spectrum Financial our AssetMaxxSM and SecurityMaxxSM services employ active management.  When the market is steadily moving higher we want to participate.  When the market moves lower we want to reduce exposure in our client portfolios and minimize the risk associated with corrections.

I encourage everyone to read our quarterly newsletter “The Full Spectrum”, which can be found on our website On our homepage, use the top navigation bar, click Resources and tab to “Our Newsletter”.  Of special interest related to the topic of bear markets, you can read our late 2008, early 2009 newsletters.  This will give you a better appreciation of our thoughts and actions during bear markets.  As Ralph Doudera said in our January 2009 newsletter, “Bear markets are painful”.  At Spectrum Financial we want to help our clients reduce that pain.


1  Stock Market Crash of 1929 Facts, causes, and Impact, Kimberly Amadeo,

2  Black Monday – the Stock Market Crash of 1987, Jesse Colombo,

3  The Dot Com Bubble Burst That Caused The 2000 Stock Market Crash, Thomas DeGrace,

4  America Lost $10.2 Trillion in 2008, John carney, Business Insider

The Pros & Cons of Robo Advisors

The buzz of robo advisors has been around for some time now, but what exactly is a robo advisor and why would an investor use one? A robo advisor is a technology that takes the place of a human advisor. If you were to invest with a typical financial advisor your process would (for the most part) look like the following:

  • Schedule an appointment to meet with an advisor
  • Meet with an advisor at their offices or on the phone
  • Discuss your financial goals and express your tolerance for risk
  • The financial advisor will propose a plan or portfolio allocation based on that discussion

The time table for that process could take some time. Especially between coordinating schedules. A robo advisor uses technology to facilitate the process above based on your convenience. A robo advisor is a digital platform (on the internet) that provides automation (taking a long process and making it highly automatic through technology) and sometimes algorithm-driven financial services. Technology envelops the process of investing!

Since 2008, there are mainly two different types of robo advisors that have emerged:

(1) Stand-Alone Robo

(2) Hybrid Robo

A stand-alone robo is one that does not use any human interaction at all. An example of a standalone robo is Betterment, or Wealthfront. A hybrid robo is a robo advisor that uses technology but also has human interaction and human involvement in parts of the process. AssetMaxxGO℠ is a hybrid robo advisor. You can also separate robos into different categories based on the underlying investment vehicles (mutual funds, ETFs, stocks, etc.) found in the proposed portfolios or the overall investment styles like either active or passive.

So, what are the Pros and Cons of Robo Advisors?


  • On your own schedule
  • Better accessibility
  • Low cost alternative
  • Low account minimums
  • Efficiency


  • Limited human interaction
  • Lack of active management
  • Possibility of frequent rebalancing
  • Unproven during a down market

In addition to our traditional investment services Spectrum Financial wanted to provide a robo advisor that combatted some of the cons of the other robo advisor offerings while embracing its pros. At Spectrum we define our robo as a hybrid automated investment platform. Hybrid meaning, if you want to talk to us about your portfolio, pick up the phone and we would be happy to talk with you!

One of the reasons Spectrum launched a robo advisor is because of the need in the market place for actively managed portfolios (and mutual funds) in robo technology space. The funds available in AssetMaxxGO℠ are all actively managed. Although the technology found in robo advisors has existed since the early 2000’s for advisors, the technology wasn’t available for individual investors until Betterment came along as the first official robo advisor in 2008. Using Betterment as an example, their algorithmic based portfolio allocations were made up of low cost, target date funds or ETFs meant to reflect the fundamentals of a buy and hold portfolio. Many robos today use buy and hold investment vehicles for the portfolio allocations, which will not protect investments during drawdowns and bear markets, like we saw in 2008 and 2011.

At Spectrum our purpose is to lower risk and manage it to the best of our ability and we do that through active management. The CEO of Spectrum Financial and the portfolio manager for both the Spectrum Funds and the Hundredfold Funds, Ralph Doudera, actively manages the funds daily which means daily active management and daily risk management in your portfolio. Understanding the investments in your portfolio and who is managing them are important- especially when it comes to automated robo advisors. For some investors, a face-to-face hands-on approach is best but for others this new and exciting technology paired with AssetMaxxGO℠’s use of active management, may be a perfect fit.

Rebalancing vs. Active Management

Rebalancing and Active Management are two different concepts with two different objectives. Spectrum’s AssetMaxxSM and AssetMaxxGOSM services employ both. Rebalancing has the goal of keeping a standard asset allocation, or portfolio mix, constant despite the changing market conditions based only on investment objectives and personal profiles. Active Management exists to protect from losses, takes advantage of short term opportunities, and safe guards the portfolio during extreme periods of loss. Spectrum Financial believes in using active management and rebalancing: Rebalance the client account with actively managed mutual funds. We chose to be active investment managers since our inception of managing client assets in 1986. Moving client assets in and out of the market, or from one asset class that is losing momentum to another that is gaining momentum, has allowed us to be successful. Managing risk is priority over making money, and active management allows us to achieve results. The Spectrum Funds and the Hundredfold Select Alternative Fund used in our AssetMaxxSM and AssetMaxxGOSM  services were created by Ralph Doudera and our investment team to be held as a core investment. The Funds are active and constantly being managed to take advantage of market opportunities and safe guard from unnecessary risk.

Understanding Rebalancing

No matter what investment methodology you or your investment advisor choose, your portfolio mix is first defined by your risk tolerance, financial goals and age. Your portfolio mix could look like any one of the following:

  • 60% bonds and 40% equity
  • 50% bonds and 50% equity
  • 25% bonds, 50% equity, 25% alternatives
  • 100% equity
  • 100% bonds

Your allocation truly is personalized to you. Let’s say that your portfolio mix is 60% equity exposure and 40% bond exposure and that was your set allocation for the last 10 years. Over the last 10 years the equity market has greatly outperformed the bond market. Your 60% equity piece would have seen a lot of growth and if your account was not periodically rebalanced your equity exposure could look more like 80% and bond exposure 20%. The higher equity exposure has raised your risk compared to your original 60%/40% allocation. If the opposite happened and the equity market experienced extreme drawdowns while the bond market experienced growth over those 10 years, then going forward you would have less equity exposure and potentially miss out on making more profits as the equity market rallied (or went up). Rebalancing sets parameters on your portfolio and makes sure it stays correctly allocated until your investment objectives and goals change.

  • You have a 60% equity and 40% bond portfolio
  • After the equity market experienced a rally, your portfolio allocation is 68% equity and 32% bond
  • To rebalance your portfolio back to 60% equity and 40% bond, an 8% exchange would take place between the equity exposure and the bond exposure
  • 8% sell of equity exposure would be created and then once settled, 8% buy towards bond exposure would be created

Rebalancing can be set to any number of time periods: quarterly, annually, daily, monthly, etc. The motivation between rebalancing is to keep the same portfolio mix for the client throughout the desired time frame and to somewhat manage risk. Rebalancing, however does not safeguard against losses, bear markets, etc within each asset class (equities, bonds, alternatives , etc). For example, if your portfolio mix was 60% equities and 40% bonds during 2008, the rebalance parameters on your account were annual, and you chose to use index funds or mutual funds not actively managed, here is the loss you may have experienced using only the S&P 500 TR Index as your example of equity exposure and the Lipper High Yield Bond Index as your bond example (you cannot directly invest in an index).

  • $100,000 account is set to a 60% equity 40% bond allocation
  • In 2008, the S&P 500 TR Index experienced a loss of – 37.00 %
  • $60,000 (equity piece) would look like $37,800
  • In 2008, the Lipper High Yield Bond Index experienced a loss of –28.8%
  • $40,000 (bond piece) would look like $28,480
  • Total account value in 2008 would be $66,280
  • Total portfolio performance for 2008 would be – 33.72%, despite “rebalancing” only

Spectrum Financials’ Active Management

Active Management sets parameters on your portfolio and makes sure it stays correctly allocated until your investment objectives and goals change AND protects against extreme losses compared to its asset classes and benchmarks because of the actively managed mutual funds created by Ralph for Spectrum and Hundredfold.

Below is an example of a portfolio using active management in tandem with rebalancing. For this example, 60% of the portfolio’s allocation will reflect an actively managed equity fund and 40% of the portfolio will reflect an actively managed fixed income fund. For more information and performance of these specific funds, please contact our office.

  • $100,000 account is set to a 60% actively managed equity 40% actively managed fixed income
  • In 2008, the actively managed equity fund was down –22.8%
  • $60,000 (equity piece) would look like $46,320
  • In 2008, the actively managed alternative fund experienced a loss of –12.24%
  • $40,000 (bond piece) would look like $35,104
  • Total account value in 2008 would be $81,424
  • Total portfolio performance for 2008 would have incurred less loss at –18.56% !

Using rebalancing and active management together could make your investment experience less volatile. Roller coasters are great for amusement parks but not your investments!

Spectrum and Hundredfold’s use of active management in their mutual funds asses the market on a daily basis and make investment decisions actively to both take advantage of market opportunities and to safeguard client’s assets.

Spectrum exists for one reason: to safeguard our client’s assets while attempting to make them money. We have been managing client assets for over 30 years through all sorts of market environments. Over those 30 years we continually prefect, learn and test the best methods to achieve our client’s goals. Rebalancing and Active Management are different, but when used together they can achieve more than one objective!

Spectrum’s Equity Fund Shines

Spectrum Advisors Preferred Fund (SAPEX) was launched three years ago and has acquired a 5-Star Morningstar Rating Overall and 5-Star Morningstar Rating for 3 years in its fund category, Multi Alternative, made up of 288 funds. (Morningstar disclosure below) This Fund was created for investors who want equity exposure in a fund that can also reduce risk. The goal of the fund is to outperform the equity market in both up and down markets. The research and portfolio construction of SAPEX has allowed this fund to receive its high rating and perform according to its objectives. Spectrum’s research found that understanding the equity market environment is important. The stock market has different personalities in different economic environments. Depending on the market environment, Bear, Bull or Transitional, the Fund will use different “play books”. These market environment types are defined by Spectrum’s investment and research team and are not the common media definitions. The play books have different analysis tools, asset types, speed of trades, and exposure ranges that allow the Fund to be dynamic and adaptive in changing environments.

The chart above illustrates the Fund’s exposure to both stocks and bonds since inception. It had an “up market capture” of 103% and a “down market capture” of 81.5% of its blended stock-bond benchmark. For the first 6 months of 2018, SAPEX had a gain of 6.76% and outperformed the S&P 500 TR Index by 4.11% and outperformed the NYSE Composite TR Index by 7.83%. (See full performance information and disclosures below)

By combining all these strategies into an overall portfolio, the investment team strives to do four things based on the market environment: (1) Select the best stock pickers. (2) Determine how much and what kind of equity exposure to have. (3) Implement bear market strategies to reduce risk in economic recessions. (4) Specific selection of bond and credit investments may be used to add additional return when appropriate. To learn more about SAPEX, please call our office at 757-463-7600 or visit

The performance data quoted represents past performance. Past performance does not guarantee future results. Investment return and principal value will fluctuate, so that shares, when redeemed, may by worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted and assumes the reimbursement of any dividend and/or capital gains distributions. To obtain performance data current to most recent month-end, please call toll free 1-888-572-8868.

Consider these risks before investing: Bond risk, derivatives risk, equity risk, inverse ETF risk, junk bond risk, leverage risk,
management risk, market risk, mutual fund and ETF risk, short position risk, small and medium capitalization risk, and turnover risk. There is no guarantee the fund will achieve its investment objective. You can lose money by investing in the fund. Please carefully review the prospectus for detailed information about these risks.

S&P TR 500 Index is a capitalization weighted index of 500 stocks representing all major domestic industry groups. The S&P 500 TR assumes the reinvestment of dividends and capital gains. It is not possible to directly invest in any index.

*60/40 NYSE Composite/Barclays U.S. AGG. Bond Index: This benchmark gives 60% weight to the NYSE Composite Index and 40% weight to the Barclays U.S. Agg. Bond Index. The NYSE Composite Index (NYA) measures the performance of all stocks listed on the New York Stock Exchange. It includes more than 1,900 stocks, of which over 1,500 are U.S. companies. Its breadth therefore makes it a much better indicator of market performance than narrow indexes that have far fewer components. The weights of the index constituents are calculated on the basis of their free-float market capitalization. The index itself is calculated on the basis of price return and total return, which includes dividends. The Barclays U.S. Aggregate
Bond Index measures the underlying index and performance of the total U.S. investment grade bond market. It is a market value-weighted index that tracks the daily price, coupon, pay-downs, and total return performance of fixed-rate, publicly placed, dollar-denominated, and non-convertible investment grade debt issues with at least $250 million per amount outstanding and with at least one year to final maturity.

Request a prospectus or a summary prospectus from your financial representative or by calling Gemini Fund Services at 855-582-8006 or access These prospectuses include investment objectives, risks, fees, expenses, and other information that you should read and consider carefully before investing. Gemini Fund Services serves as transfer agent to the Fund and is not affiliated with the advisor, subadvisor or distributor.

*© 2018 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. The Morningstar Rating TM for funds, or “star rating”, is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product’s monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars and the bottom 10% receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five- and ten-year (if applicable) Morningstar Rating metrics. The weights are: 100% three-year rating for 36-59 months of total returns, 60% five-year rating/40% three-year rating for 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods.

It’s All Greek to Me: 5 Statistics to Better Understand your Investments

When it comes to analyzing new investment opportunities or your current investment portfolio allocation there is more than just performance to consider. Many of us hire financial advisors or use brokers so we do not have to think about the other important statistics, but knowing just enough and asking your advisors, or even yourself, the right questions is important for safeguarding your investments. After all this is your money, and many times a portfolio represents your financial dreams. The investment world has some confusing terms and complicated statistics. Your broker, financial planner or financial advisor may use words like beta, total return, r-squared or standard deviation. These statistics are often times found on mutual fund and ETF fact sheets. Many times, we just want to know “Did I do well? Did the investment or my portfolio do what it was supposed to do?”. These types of statistics can give you that information and reveal if you took on more risk than necessary. For example, various statistics can identify if your fixed income fund or equity ETF was more volatile than an alternative investment option that had the same or similar return. This blog article introduces and gives a general overview of 5 performance measures/statistics that you should understand when it comes to evaluating your portfolio: total return vs. annualized return, standard deviation, beta, and r-squared.

Total Return vs. Annualized Return- How much did I/it make?

Everyone wants to know: “How well did I do this year?”. A return is calculated by taking the ending value of your portfolio and subtracting it by the beginning value of your portfolio and dividing that number by the beginning value. This can be done for multiple time frames.

If you started with $10,000 in your portfolio and 24 months later the value of your portfolio was $15,000 (assuming no additions or withdrawals) what is your return?

  • $15,000-$10,000 = $5,000
  • $5,000/$10,000= .5
  • Your 24-month return is 50%

The 50% is also called your Total Return for 24 months- not bad! But what is your annualized return? For that calculation, you need to know what your total return was each year that the 24 months represents. This may be an over simplification but illustrates the point.

  • 2016 your portfolio had a total return of 3% and in 2017 your portfolio made 47%
  • 3% + 47% = 50%
  • 50%/2= 25%
  • Your annualized return is 25%!

But wait, did you make 25% each year? No, you did not. Think of your annualized return as your simple average, because that is the way it is calculated. You could make 0% one year and 50% the next year and your annualized return for your portfolio, or for an investment, will be 25%.

Note: Be careful when looking at annualized returns and understand that it does not mean that the annualized return is how much you will make, or did make, every single year.

You should always look at the time frames and the total return numbers per year to get a better understanding of how the investment/portfolio performs. This is also why you should be aware of a few other statistical numbers to better evaluate your portfolio or an investment.

Standard Deviation- How much does the return fluctuate?

The standard deviation of an investment, or your portfolio, is also known as its historical volatility, or fluctuation, in returns. It is a measure of the dispersion of a set of data from its mean. Stated otherwise, taking the average return for that investment how much did the other returns deviate from the average? Let’s use our return example from before and add on some more years.

  • 1 Year Returns: 3%, 47%, 8%, 0%, 2%
  • Total return (16,000-10,000= 6,000/10,000= 60%)
  • Annualized Return= 60%/5years= 12%
  • Standard Deviation= 19.79

What does 19.79 represent? Generally, the smaller the standard deviation the less variance there is to the average return. The higher the standard deviation, the greater the variations to the average return. Our example shows that there is a large difference between the 12% annualized return and the actual total return per year.

If you see a high number, then historically this investment can be very volatile. Depending on your tolerance for volatility and risk this may or may not be important to you.

Always remember, that past performance does not guarantee future results. Also pay attention to the time frame of these statistics. In our example, we based the standard deviation on 1-year calculations. Typically, 3-5-year calculations are used.

Beta- How volatile is the investment compared to its benchmark?

Beta is a comparative statistic, and measures the volatility of an investment/portfolio compared to a benchmark.

*A quick word about benchmarks, if you have invested in a fixed income fund that only invests in municipal bonds do not compare it to the S&P500, compare it to a municipal bond index. The principal is to compare apples to apples. The S&P 500 is an equity benchmark that only represents 500 of the largest companies that are publicly traded. Did you know that there are over 5,000 publicly traded companies that represent just the domestic (US only) equity market? And equities (stocks) are different from fixed income (bonds) in the way these investment products are structured and what influences their value.

Back to beta and how it measures the volatility of an investment compared to a benchmark. Why would you want to know this? Wouldn’t you like to know if you are invested in something that takes on more risk than another investment that has the same return? Beta is another puzzle piece to fully understanding, “How well did I do this year?”.

For this statistic, the market’s (chosen benchmark) beta is set at 1; a higher beta than 1 is considered to be more volatile than the benchmark, while a beta lower than 1 is considered to be less volatile.

Here is an example: If a fixed income mutual fund shows a beta of .83 or 83% as volatile as compared to the Barclays Aggregate Bond Index (benchmark used in this example) over a 3-year period, then it means the volatility was 17% less than the index (less because the beta is lower than 1 and 17% less because 1-.83 is .17). This is an important statistic to understand and know when you would like low volatility in your investments and/or portfolio.

R-Squared- How similar is this investment/portfolio to a benchmark?

R-Squared is a measurement of how closely an investment’s or portfolio’s performance correlates with a benchmark or index. The number can range between 0 and 1. An r-squared of 1 indicates perfect correlation, while a 0 indicates no correlation. For example, if I hold the S&P 500 index ETF my understanding is that it should mimic the S&P500 Index due to the ETF’s stated objective. For this investment I would like to see an r-squared of 1 or a number very close to 1. If I hold an actively managed fixed income mutual fund the r-squared should fluctuate with the fixed income market movements because it is actively managed. R-squared can tell me how the fund’s performance correlates to its benchmark. This is an important statistic to understand and know because it reveals valuable information.

Let’s use our example of the actively managed fixed income mutual fund.

The purpose of an actively managed fund is to lower or limit exposure to downside movements or drawdowns within its investable market, and then to expose the fund, or become invested, when the investable market is rising (this is how you make money after all!).

If the fixed income market is having a drawdown period, or bear market, I would want my r-squared statistic to show very low correlation because that means my returns for that time period are not similar to the market or benchmark. If it was correlated that would mean my investments or portfolio are having a drawdown period too, and that is not good. During a bull market, or a rising market, I would want my r-squared statistic to show a strong correlation because that means my investment’s or portfolio’s return is acting similar to the fixed income market or benchmark.

Know that you need to understand the purpose of your investment (mutual fund, etf, etc.) and its stated objective, and also have a clear understanding for what you want your investment or portfolio to look like and act like.

This will determine how you read and interpret the r-squared statistic.

Understanding what you are invested in and how well you did is very important. This blog article was an introduction to just a few different types of statistics and performance measurements that come in handy in evaluating a potential investment or a group of investments in your portfolio.

Limiting your focus to only performance may mislead or skew your analysis and lead to poor investment choices: either passing up a good investment or investing in a bad one.

The time frames used when calculating these statistics must be understood as well. Investing is personal and subjective. Before you begin investing or analyzing an investment with these statistics, first ask yourself how you would like your portfolio or investments to act. What types of drawdowns are you comfortable with? What types of returns would you like realistic to your personal risk tolerance? After you know what you want and what type of risk you can tolerate, these statistics help guide you to choose the most suitable investments. The statistics and performance measures we covered today were: total return vs. annualized return, standard deviation, beta and r-squared. The statistics on mutual funds or ETFs can change unintentionally overtime as portfolio managers perhaps lose their “mojo” or an investment becomes unsuitable for your current financial objectives. Spectrum monitors and analyzes the changes in these statistics to provide active management which is suitable for the current market conditions.  If you have any questions regarding your current portfolio allocation or would like more information on our products, feel free to give our office a call!

Using the US Dollar to Gain Insight

The US Dollar’s impact on various asset classes had morphed over the years. One that still seems to be relevant is to foreign equities.  One of the impacts is very direct and another is less direct.  The first is simply by way of currency translation.  A strengthening dollar, by definition, means a lower value in the local currency of which the foreign equities may be priced.  A lesser impact, but one still visible, is due to how many foreign economies have a relatively high reliance on commodity-based exports.  An uptrend in the US Dollar can act as a headwind to commodity prices, which in turn, can weigh on the fundamentals of foreign companies as they accept less compensation in their own currency.  Even most chart-focused investors would agree fundamentals make themselves known in the longer-term trends and patterns visible on charts.

US Dollar Index = red
MSCI World Index (ex-US) = green
Commodity Research Bureau Total Return Index = blue

This chart reinforces the concept that the US Dollar does not act as a primary driver of macro trends but can be an influencer of how the trends take shape. “Gusting” periods, in which the US Dollar moves rapidly up or down, tend to have the most obvious impact to the global equity markets as represented by the MSCI World Index ex-US (MXWDU).  Rally phases are not exclusive to falling dollar periods but that tends to be when foreign equities rise with the least amount of volatility.  Rising periods by the foreign equities can be seen during rising US Dollar phases but the effort appears to be much more volatile and labored, like someone walking up a hill during a windy day.  The sharpest declines in foreign equities appear to be when the US Dollar is accelerating higher.  Lower volatility sideways paths in the US Dollar seem to be when foreign markets likely follow broader fundamental influences such as global economic activity.

This chart also shows how commodities, as measured by the CRB Total Return Index, has an inverse correlation to the US Dollar. This blog piece is primary to increase the awareness of the dollar’s impact on foreign equities.  Many foreign, especially emerging markets, often have high levels of reliance on commodity relates industries and commodity exports.  Monitoring changes in the dollar and its impact to commodities can give added color into some of what can influence foreign equities.  Once again, it is important to recognize the correlation as being one over time and not highly rigid during shorter time frames.

Chart-based assessment of the US Dollar can be a useful tool to investors seeking to diversify analysis techniques. Lower relative volatility of the US Dollar may lead investors to insights more difficult to conclude if focusing methods on underlying assets with higher volatility such as commodities and foreign equities.

February 2018 Spectrum Review

The transition from January to February was tumultuous, with volatility spiking 100% in a single day, and the Dow Jones Industrial Average posting its largest one day point drop in history. The panic was short lived however, as equities bottomed mid-month and rebounded sharply. Much of this was attributed to the rising 10-year Treasury yield which hit a 4-year high, and concerns over increased inflation as wage data and CPI (Consumer Price Index) readings came in hot. Declines were seen across the board, impacting not only domestic equity and fixed income sectors, but around the globe including a drop in commodity prices. Investor outlook appears to be edging back to bullish, but the recent shakeup has taken its toll on sentiment.

The sharp correction in the stock market allowed for interesting insights within the bond market. Investment grade bonds, represented in the chart above by the Barclays U.S. Aggregate Bond TR Index, and the US 30-year Treasury Bond Futures often benefit from equity market turbulence as fearful investors seek the relative safety of those bonds classes.  In February, however, that did not occur. This is perhaps due to the perception that a macro change to rising rates could erode the value of these interest sensitive bond classes.  The S&P Leveraged Loan TR Index weathered the February storm well as the class is generally perceived as having the ability to adjust to rising interest rates.  High yield bonds have benefited from low default rates as the growing economy has strengthened corporate balance sheets.  With yield spreads being tight, however, potential investors are currently being less compensated for risk.  This has made high yield bonds more sensitive to interest rate fluctuations, hence the increased volatility over the last twelve months.  Many other bond classes exist beyond what is being displayed in the chart above, but most fall under the same market forces as described.  Few bond categories are currently displaying leadership, but such transitional environments tend to be temporary and new trends will eventually emerge.

The charts above represent several categories within the high yield market. By looking at multiple categories, information regarding risk can be assessed which plays a role within Spectrum strategies.

Products such as the iShares iBOXX High Yield Bond ETF (HYG) and Credit Default Swaps tend to be more sensitive to changes in investor sentiment. Volatility and trends are monitored to assess the odds of a continued bullish outcome.  The yield spread is another measure of investment risk.  Generally speaking, it measures the difference in yield between treasury bonds and high yield bonds.  Spreads widen when investor fear is heightened, sometimes for valid, longer-term reasons, and sometimes for short-lived, more emotional reasons.  A favorable environment is characterized by declining yield spreads. This was the case for 2016.  The trend changed in early 2017 with a shift into a rather tight range and remained that way throughout the year.  An improving economy has been a positive underpinning for high yield bonds but the sideways range in the yield spread has removed one of the formerly favorable characteristics.  That can help explain the continued uptrend in high yield bonds but at a lesser slope.  A break to the upside by the spread, could possibly play a role in defining a more challenging period for high yield bonds.

Our strategies have various requirements before taking positions. The Dynamic High Yield Strategy often takes advantage of the shorter-term opportunities while the High Yield Strategy generally waits for lower volatility and more discernable positive trends.  The Leveraged High Yield Strategy incorporates elements of both.

Major equity indexes around the globe were very volatile in February as crowded trades built on over exuberance gave way to fearful selling. Non-U.S. equities also had the unfavorable influence of a shaky, but upward, bias in the U.S. Dollar.  Macro trends have become questionable, not full bullish and not fully bearish, as most major indexes ended February around the middle of multi-month trading ranges.

SecurityMaxx Strategies – An Inside Look

This strategy became invested in early January but the momentum loss in late January prompted a relatively quick exit by very early February and remained in cash for the remainder of the month.

The strategy began the month with only core positions invested but quickly exited to the safety of cash as risk parameters moved beyond acceptable levels.

This nimble strategy sold to cash very early in February, but oversold readings soon warranted an invested position that remained throughout the rest of the month.

Overall, exposure was reduced in emerging and developed foreign markets but smaller tactical trades were implemented as opportunities arose, primarily in the emerging markets.

The Major Trend Index (MTI) slipped from positive to neutral as a result of weakening in the Momentum/Breadth indicators. If the MTI does not improve to positive, the discipline requires a reduction in stock exposure from the current 60% allocation. If concerns about trade tariffs persist, the current large cap stock bias can shift to small cap stocks that are less impacted by import/export relationships. Current small cap exposure is only 10% of the total portfolio.







Barclays High Yield VL TR Index



All US Domestic Equity Funds (Avg. US Stock Fund)



NASDAQ Composite TR Index (w/dividends)



S&P 500 TR Index (w/ dividends)



MSCI World ex USA TR Index




Barclays U.S. AGG: Bond TR Index is a market capitalization-weighted index comprised of USD-denominated, investment-grade, fixed-rate, taxable bonds. The index includes government securities, mortgage-backed securities, asset-backed securities and corporate securities all with a maturity of greater than one year.

Barclays High Yield VL TR Index includes publicly issued U.S. dollar denominated non-investment grade, fixed-rate taxable corporate bonds that have a remaining maturity of at least one year, regardless of optionality.

S&P/LSTA U.S. Leverage Loan 100 TR Index comprised of the 100 largest bank loans with floating rate coupons.

iShares iBoxx High Yield Corporate Bond ETF (HYG) which seeks to track the investment results of an index composed of U.S. dollar-denominated, high yield corporate bonds.

CDS (Credit Default Swaps) a financial contract whereby a buyer of corporate or sovereign debt in the form of bonds attempts to eliminate possible loss arising from default by the issuer of the bonds. This is achieved by the issuer of the bonds insuring the buyer’s potential losses as part of the agreement.

Standard and Poor’s 500 TR Index (S&P500) is a capitalization weighted index of 500 stocks representing all major domestic industry groups and assumes the reinvestment of dividends and capital gains.

NASDAQ Composite TR Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market, and Capital Market.

All US Domestic Equity Funds: Is an arithmetic average of all US Domestic Equity Mutual Funds, provided monthly by the Wall Street Journal

Russell 2000 Small-Cap TR Index measures the performance of the small-capitalization sector of the U.S. equity market.

MSCI World ex USA TR Index (MXWDU) is a capitalization weighted index that monitors the performance of stocks from around the world other than the US.

Major Trend Index (MTI, developed by The Leuthold Group LLC) is designed to recognize major market trends rather than intermediate moves, combining over 180 individual components to assess the overall health of the stock market. It includes Intrinsic Value Indicators, Supply/Demand Tools, Market Action Tools, Attitudinal Gauges, and Economic/Interest Rates/Inflation Measures. Revisions and weighting adjustments are made from time to time.

Spectrum Market Update

After an overly optimistic start in the month of January the markets have corrected in a volatile decline, the likes of which we have not seen in several years. The combination of euphoric buying, overvalued stock prices, and the realization that the Federal Reserve will be raising interest rates several times this year to fight inflation contributed to a severe selloff and extreme market volatility. In 9 days the Dow Jones Average has dropped 10%, one of the fastest corrections in history. This follows a period of over 500 days of not having a 10% correction. The longer the market goes without a correction, the more violent it can be to work out the excesses in the financial system. While the majority of the time a situation like this leads to favorable returns over the 12-month period following a correction, there are a number of times when very nasty things happen. A majority of the investment managers today are younger and have not experienced what can happen to buy and hold investors. More recently, in the past 20 years, we have had two stock market corrections in excess of 50%. This kind of activity can cause investors who have buy and hold portfolios to change their lifestyle.

Current Portfolio Updates show reduced exposure to portfolios prior to the correction:

Spectrum High Yield Bond Strategy: Exposure was moved to the safety of the money market on Feb 2.

Spectrum Dynamic High Yield Bond Strategy: exposure continues to take advantage of shorter term movements while maintaining a strict focus on risk management

Spectrum International Sector Strategy: exposure to volatile equity sectors has been reduced and exposure to alternative risk-adjusted sources has been maintained.

Spectrum Core Focus Strategy: continues its hedge equity exposure due to unchanged macro themes despite the heightened volatility.

The Spectrum Low Volatility Fund: SVARX had no high yield bond or stock exposure for the decline, and leverage of other credit positions has been eliminated.  It remains the number 1 ranked U.S.-domiciled nontraditional bond fund by Morningstar out of 280 funds for the past three years date ending 2/8/18*. Please visit for more information and fund documents.

The Spectrum Advisors Preferred Fund: SAPEX, our alternative equity fund, transitioned exposure out of traditionally higher beta positions while still maintaining exposure for this macro bull market trend. The fixed income exposure has been reduced due to the few fixed income sectors having acceptable technical characteristics. Please visit for more information and fund documents.

The Hundredfold Select Alternative Fund: SFHYX/HFSAX, managed by Hundredfold Advisors, LLC (Ralph Doudera, Portfolio Manager), also has little high yield bond exposure and very modest stock exposure. Leverage of credit positions has also been eliminated. The alternative exposure has actively managed the commodities space maintaining the objective of low volatility. Please visit for more information and fund documents.

Our portfolios are very actively managed. Spectrum has been managing risk for over 30 years, and has seen about every market condition imaginable. Our primary concern is not making lots of money, but by providing superior risk adjusted returns for clients. We want clients to know that they don’t have to pay attention to market volatility because that is what we do best. While this correction may be just a hiccup on the way to new high prices, it may also be the beginning of a bear market. Bear markets begin with extended prices, and optimism. Our Bull/Bear monitoring system this week raised the caution flag after several years, but has not gone to the sell side yet. It is in a wait and see mode.  Any investors who are buy and hold stock investors need to think through whether or not a 50% decline in their account will change their lifestyle, and if so, pay attention. Remember almost every bull market has eventually had a correction of about 50% of the gains, and this market is up 300% since 2009.

Remember: Steady plodding brings prosperity, hasty speculation brings poverty. Proverbs 21:5

*© 2017 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.

Does Bitcoin belong in your Portfolio?

Recently we visited the New York Stock Exchange, and there was a Bitcoin buzz in the air. With Bitcoin futures beginning to trade on the CBOE, there were supporters and nay-sayers. Due to a recent soar in prices of Bitcoin, and other cryptocurrencies, these have become a tempting alternative investment. However Bitcoin is currently unregulated, and highly volatile. There is no FDIC to back this new currency.

So what is a Bitcoin? It is a digital currency that can be used to make peer-to-peer payments without an intermediary or bank. Bitcoins have no central backer and rely on a decentralized network of record keepers that all work the same ledger of transactions. These transactions are called the “block chain”. The idea of the block chain is to record all transactions and share this information with the Bitcoin network without having to rely on one entity to verify or control the currency. Miners are rewarded for validating transactions utilizing an equation and in return are paid in Bitcoins. The honest chain will always beat an attacker’s chain by a process known as Binomial Random Walk. This calculation is similar to the Gambler’s Ruin principal.  The Good chain will always prevail, similar to how the House always wins in Vegas.

Bitcoin is only worth what the sum of its buyers are willing to pay for it. As with any asset, if everyone stops holding it, the value plummets.

Bitcoin is officially the biggest bubble the world has ever seen as measured as a multiple of its starting price. The spike eclipses the chaos around Dutch “tulip mania” in the 1600s, the Mississippi Bubble of the 1700s, and the dot-com bubble of the late 1990s and early 2000s. Bitcoin has already surged 2000% in the last year alone. But that doesn’t necessary mean the party is over. Blockchain technology has numerous benefits and is here to stay. This technology has the potential to revolutionize transactions by reducing complexity, costs, boosting accuracy and lowering risk.

Will Bitcoin be a homerun, or the biggest loser of this century?
Only time will tell.

“Steady plodding brings prosperity; hasty speculation brings poverty” (Proverbs 21:5, LB) is written on the back of every newsletter Spectrum has written. We believe in protecting principal so goals like retirement, dream purchases, sending kids or grandkids to college, can be achieved.  So, does Bitcoin belong in your Portfolio?

The Current Market Environment: Where is the Risk?

Markets have historically had psychological booms and busts since the beginning of time. The fear/greed syndrome will continue to drive investors into making emotional decisions at the wrong time. Human nature will remain the same. Mania has always gripped the markets from season to season. Gold, tulip bulbs, real estate, tech, oil. Bubbles tend to develop, and while “bubbles” can continue a lot longer than predicted, they will all come to a very unpleasant ending. For example, Japan’s market hit it’s high in 1989 and 18 years later it was still down 55% from its high. Knowing which markets to avoid and when to exit them is an important philosophy to have present in a portfolio. While I expect the markets to continue their bull market run, we always need to sit close to the exits when technical market conditions deteriorate.

In April of 2007, I wrote the paragraph above in our quarterly newsletter to our clients. In January of 2008 we received our bear market signal and saved clients a lot of money by going to cash. Liquidity is a pillar of risk management, and our clients were positioned to make double digit returns in 2009. In 2017 I have the same feelings: While I expect the markets to continue their bull market run, we always need to sit close to the exits when technical market conditions deteriorate.

The chart below illustrates our Market Environment Model. This model has indicated a bull market environment since early 2016, following a significant market sell-off beginning in mid-2015. The indicators that we utilize illustrate higher market risk, and can cause us to significantly reduce exposure to stocks. We currently use a proprietary combination of four components: (1) Moving average model of major equity indexes, (2) Weekly Directional Movement Index model, which defines the quality of the trend, (3) Negative Leadership Composite as defined by Investech, and (4) Spectrum’s High Yield Bond signal, which confirms a healthy economy. These four indicators together are not a forecasting device, but they give us insight into levels of market risk. Depending on this evaluation, we adapt trading strategies to become more aggressively invested or more defensive to reduce risk.Created with TradeStation. © TradeStation Technologies, Inc.  All rights reserved.

With the stock market hitting new highs, investors are beginning to get overly-excited about this bull market. Since 1932, there have been 16 bull markets, the average of which lasted 3.8 years. The current one is 8.4 years old and is approaching the longest of 9.4 years in the 1990s. Clients, managers and allocators tend to forget about risk when they are making money. I always think about risk because I have seen a lot of those 16 bull markets. I remember quite well 1987 when the market corrected 30% in two weeks. That changed a lot of plans for a lot of people. Are you evaluating risk in 2018?

Still A Bull Market?

Spectrum developed a propriety indicator that shows us when to step to the sidelines to reduce equity exposure. This methodology is designed to capture many technical indicators and consolidate them to illustrate bullish and bearish environments.

Created with TradeStation. © TradeStation Technologies, Inc.  All rights reserved.

The lower section charts this methodology and provides “buy” and “sell” points indicated by the yellow circles. This macro view of the general market can be used not only in equity positioning but also in our bond models.  Risk management is at the forefront of our investment philosophy and preserving principal is extremely important for our clients.

InvestTech says it best in its November 17, 2017 issue.

If the S&P 500 closes high in November, it will have posted a positive total return for 13 consecutive months, surpassed only once in 90 years – 1959. The next year (1960) the economy entered a recession.
We’re not sharing these insights because we have turned bearish in our market outlook. We haven’t.  Most technical evidence and virtually all macroeconomic data still point to new bull market highs immediately ahead.  However, it is becoming increasingly important to remember that trees do not grow to the sky, and bull markets do not last forever.  And don’t forget that virtually every bear market except one (1956) has repossessed or taken back roughly one-half or more of the previous bull market’s gain.

it is becoming increasingly important to remember that trees do not grow to the sky, and bull markets do not last forever. 

Spectrum agrees. Our models also indicate a bullish market environment for equities so until our indicators reveal elevated risk we will participate, but our exposure is watched closely on a daily, hourly, even minute by minute basis.  We will act quickly to reduce exposure when our indicators reveal elevated equity risk.

Equally important to remember – just like all bull markets come to an end, bear markets end as well. Spectrum’s philosophy, investment methods, and analysis tools allow us to position our client’s preserved principal to take advantage of the next market opportunity.

US Dollar Impact on Bonds and Interest Rates

Well known technical analyst and commentator, John Murphy, CMT, authored the groundbreaking book, “Intermarket Technical Analysis”, published in 1991. He covered his research of how stocks, bonds, commodities, and currencies influence each other with varying degrees and various lead and lag times.  Armed with a ruler, a plain white sheet of paper, and a pencil, I was able to make a cross comparison grid that displayed all the asset classes he noted in the book.  Each cross comparison highlighted the direct or indirect influence, the lead, lag or coincident impact, and the typical time in months of that impact.  The US Dollar stood out on the grid because his work found that it had a leading tendency across most of the asset classes with a couple being coincidental while not being a laggard to any.  A couple of years later, in 1994, I met John at a conference.  Like a star struck teenager getting a Taylor Swift autograph, I excitedly had him sign my copy of his book.  I also showed him the grid.  He smiled and said, “perhaps I ought to add something like that to my next revision”.  That made my day.  He also said something extremely important.  He said that he was noticing the intermarket relationships were evolving…

The US Dollar is like the wind blowing through the investment world. It can act as a headwind or a tailwind to most all asset classes.

Sometimes the influence is only slight and other times the gusts can be highly influential and blow an asset sharply off course.  Over the last 25 years, the world has changed significantly.  Technical or chart-based investors focus less on the why and more on the bottom line.  That said the dollar’s role has evolved as relatively new players have entered the scene.  Historically small economies, such as China, have recently taken on greater roles in trade.  Global oil trade in US Dollars has undergone correlation changes as the US has become less dependent on foreign oil.

With what has been covered so far, there are many paths we can walk down in how the US Dollar influences other assets or is impacted by other assets. To rein it in, let’s start with bonds and interest rates.

Created with TradeStation. © TradeStation Technologies, Inc.  All rights reserved.

In our example (chart above), we will use the iShares 20+ Year Treasury Bond ETF (TLT) to represent longer-term bond prices. Keep in mind as bond prices rise, interest rates fall.  As mentioned earlier, the US Dollar is like a wind that generally blows against the direction of bond prices and in the same direction of yields.  At the risk of oversimplifying, rising rates attract dollar denominated investment.  A reason why that risks oversimplification is because investors often take action in anticipation of future events.  Therefore, the US Dollar can lead if domestic economic activity is improving, attracting investors from around the globe to need US dollars for US investments.  As economic activity improves, interest rates rise which can increase demand for dollars.  However, sometimes interest rates are held artificially low as economic activity shows signs of improvement.  I have heard it said that the US Dollar is the stock certificate of the United States.  If people are bullish on America, then they need US Dollars to put their investment plan in action.  So there really is not a consistent starting point but we can recognize the inverse nature of the US Dollar to bond prices.  Don’t be too eager to assign a cause and effect because sometimes demand for the dollar leads and sometimes it is demand for bonds.  Be satisfied in simply knowing a relationship exists.  Arrows on the chart illustrate the concept of inverse directional bias.  The general trend of the TLT has been up during the first three quarters of 2017, while the general trend of the dollar is down.  Trend direction appears to have changed in early September.

So why go through all the trouble? Investors implementing charting techniques may find it easier to analyze the dollar and then draw conclusions about bonds and interest rates.  Traditional chart methods such as breakout/breakdown implications and trend line breaks are much more misleading on charts of the TLT versus the lower volatility trending nature of the US Dollar.  No method is perfect but it only takes a quick look to conclude the price action in the TLT is more volatile than the US Dollar.

It can be very frustrating to learn a new concept and have it appear to not work. Setting expectations is important and in this case, the inverse direction bias of the dollar to bonds should not be assumed as being in rigid lock-step.  In the lower pane of the chart, two measures of correlation are displayed.  If the dollar (UUP) moves in the opposite direction as the bond (TLT), then a blue dot is plotted at -1.0.  Those are the days in which the theme of this blog is easy to embrace.  If the dollar (UUP) moves in the same direction as the bond (TLT), then the blue line is plotted at +1.0.  During 2017, there are many days in which the bond and the dollar moved in the same direction.  For example, those are the days in which a viewer may be tempted to abandon these concepts – abandoning what ultimately could be a useful concept.  A red line can be seen in the lower pane that represents a 21-day average of the 1-day correlation.  Other than in mid-February and mid-July, the rolling 21-day average of correlation fits the norm of being inversely correlated.

If we are comfortable with the idea of inverse correlation but with the understanding it is not precise, then we can take the next step. Instead of focusing on implementation of trend analysis and other charting techniques applied to bonds or interest rates,

applying methods to the less volatile US Dollar could prove useful.

Conclusions derived from chart analysis of the dollar can then be transferred over to bonds (inverse conclusions) or the interest rates (same conclusions).  Actual chart-based methods are vast and beyond the scope of this blog.  The bottom line concept is if bullish conclusions are derived after assessing the dollar then a bullish outlook on interest rates (bearish on bond prices) can be concluded.

Chart-based assessment of the US Dollar should not be the only method but can be a useful tool to investors seeking to diversify analysis techniques within bond and interest rate assessment. Lower relative volatility of the US Dollar may lead investors to insights more difficult to conclude if focusing methods on underlying assets with higher volatility such as long-term interest rates.

Selective Leverage: Achieving Returns and Low Beta

If you could purchase an apartment building today that produced a cash flow after all expenses of 8% a year, you might be pleased with your cash on cash return in the current interest rate environment. If you financed your property with a 50% mortgage which had an interest rate of 4%, you could purchase two apartments for the same equity. Scenario one has a net investment return of 8%, but the second scenario will generate a 12% net rate of return on the same investment. A downturn in real estate values might depress the investment return upon sale, but increasing values will give an even higher return. This uses the concept of leverage which can have significant advantages in certain market conditions.

The chart below illustrates the performance of the SFI Floating Rate Index since 2012. This index is an average of four short-term senior floating rate mutual funds which accrue a daily dividend. It is normally a low risk investment that has a dividend payout currently of about 5%. Let’s say if I were able to borrow funds currently at 1.5% , and have a 50% loan amount like the previous example, I will enhance my return by 3.5% a year on the portfolio. The difference between this example and the real estate example is

with liquid investment vehicles there is daily liquidity on the investments- you must have liquidity to manage risk well.

You can go to a liquid cash position without a real estate commission or waiting around for a buyer to come along. The liquidity of the investment vehicle combined with the low volatile characteristics of this asset class can make the use of selective leverage low risk. This concept can enhance returns while still controlling investment risk when you layer a low volatile investment, like the floating rate exposure, with maybe riskier asset classes, like high yield bonds in a fund.

Selective leverage is one tool to use to meet the objectives of enhancing returns and controlling investment risk- something every investor and shareholder want. I have been applying leverage to high yield bonds and other fixed income asset classes since 1996 in SMA strategies and later in the mutual funds I manage, via derivatives and swap contracts, with the ability to still maintain low beta. Why? Because I think about risks before returns, I always use liquidity, and I know the characteristics of my underlying investments. There are times to use leverage and times when the entire portfolio should be in a liquid cash position. There must be expertise present to determine when, and where, to put leverage on or take it off. Leverage and the tools you use to present leverage in your funds or portfolios does not always mean higher risk.

How many of you have enough money?

I asked this question to an adult Sunday school class I was teaching a few years ago. Not many hands went up. I didn’t dare to ask how many were tithing (or giving the first 10% of their income away). That seems to be a topic as sensitive as asking about someone’s sex life.  But when I asked who would give more if they won the lottery, all hands went up.  My observation has been that if someone was not giving 10% now, he or she wouldn’t give any more even if they had more.

Stewardship is not based on what you don’t have, but on what you currently do have .

Stewardship is a New Testament concept, whereas tithing is taught in the Old Testament. “…The purpose of tithing is to teach you always to put God first in your lives” (Deuteronomy 14:23 The Living Bible).  The concept of stewardship puts a new perspective on giving.  It takes the “my” out of what I control, and returns ownership back to God.  I only control its use.  The New Testament teaches that “If you are not faithful in the way you manage unrighteous mammon, God will withhold from you true riches which are spiritual blessing.” (Luke 16:11 paraphrased). So how do I apply these principals to my own life?

I established a lifetime giving goal, and a new accounting system .

I keep a financial statement that reflects temporary and permanent assets.  Temporary assets include assets I still control such as real estate and investment accounts.  Permanent assets include what I have already given away to charities that I believe God would spend His money on.  I have much farther to go to meet my lifetime giving goal, but my permanent new worth has finally exceeded my temporary net worth.  Next time you prepare your financial statement, try this new accounting system.  Mother Teresa said, “Everything that is not given is lost.” I wrote a book a number of years ago, “Wealth Conundrum”, if you would like a complimentary copy, please contact our office.

The Relationship between Liquidity and Certainty

Ralph Doudera is the CEO and head portfolio manager of Spectrum Financial. He has been successfully managing money for 44 years and he will never sacrifice liquidity.

When you are a money manager for 44 years, you learn some lessons, sometimes the hard way.

That is why he chose to manage money with mutual funds and not hedge funds. Even with up to 300% leverage at times in his funds, he can be out of everything by end of day. Liquidity is important to Ralph because he has managed money in the worst bear markets since 1973. When you maintain liquidity, you can rotate into more favorable investments, even cash, depending on the market environment. Liquidity becomes your cornerstone for risk management.

Let’s pretend that you knew 2018 was going to be comparable to 1987 or 2008 – total chaos in the domestic and international financial markets.

How important would liquidity be to you?

There is a positive correlation between the certainty of bear markets and the value of liquidity (and risk management in general). Stepping back into reality, we are not certain there will be a bear market in 2018, but there will be a bear market.

Dr. Michael Burry, the hedge fund manager of Scion Capital (played by Christian Bale in the movie The Big Short), was right early, but he still ended up being right.

Actively managed strategies should always make up a percentage of your portfolios.

At a family office conference I attended in July this year, the CIO of a billion-dollar family office asked the attendees why he would sacrifice his liquidity in the private market if he could get a better risk adjusted return in the public market. He wouldn’t. Diversification does not just apply to manager investment philosophies or market sectors. It applies to the types of investment products you use and the managers you choose.

All clients value making money and not losing it. Do not become a complacent buy and hold investor in an extended Bull Market. The markets, when they correct, will not wait for you to adjust. Austin Kiplinger said, “The foundations of future fortunes are laid in bear markets.” Adversity always has a way of sifting the important things to the surface, like risk management and liquidity.

Duration vs. Maturity and Why the Difference Matters

Understanding the complexities of the bond market is important when evaluating the types of products and exposure a portfolio has within the asset classes of fixed income. The terms “duration” and “maturity” differ in the world of finance from their common everyday use. In finance, both duration and maturity refer to different characteristics a bond may have. Clarification of the definitions should help those wishing to dive a little deeper into what may be subtle yet important difference among bonds whether looking at fixed income mutual funds, ETFs, or individual bond issues.


How long something lasts is commonly associated with the word “duration”. An example of this would be a movie with perhaps a duration of two hours or a roller coaster with a duration of one and a half minutes.

When assessing a bond or a bond portfolio, how long the bonds last, if not sold early, is closer to the definition of “maturity”.

A 30-year Treasury Bond, as the name implies, matures or pays back its face value 30 years from its initial date. Investors are not obligated to hold the bond for the entire period as they have the option of being sold within the secondary market.  Therefore, ten years after its initial offering, a 30-year Treasury Bond will have a maturity of twenty years but is still called a “30-year” Treasury Bond.

Individual investors or portfolio managers can buy or sell bond holdings to adjust the average maturity of the portfolio. Why would they want to do that?  Generally speaking, the further out the maturity, the wider the potential price swings of the market value of the bond.  That is a very important concept to bond investors, but it is a general concept as compared to an attempt at better detailing the relationship when we cover duration.

Keep in mind bond investors recognize two types of return, the first is the interest payment income which may be paid quarterly, semi-annually or even annually.  If investing in a fixed-income mutual fund, interest payments are in the form of mutual fund dividends and may be paid monthly.  Those payment cycles will play a role when duration is covered.  The second type of return is from price changes of the bond itself (why maturity matters).  Putting the two types of returns together, an investor gets the “total return”.

Bonds are often quoted with two yields. See the diagram below to understand the relationship between the bond’s price and its interest rate (or coupon rate).

  1. A bond is quoted with its “coupon yield”. This refers to the annual interest payable as a percent of the original face or par value. An 8% bond with a par value of 1000 would receive $80 per year.
      1. Coupon/Interest Rate= 8%
      2. Original face or par value= $1,000
      3. Math= .08(1000)= $80
  2. The second is the “yield to maturity” (YTM). This quote takes into account the amount of years left until the bond matures and the impact the market and secondary trading of the original bond has had on the investors final total return.
    1. Example: 10 years later the original 8% bond with a par value of 1000 is actually trading at $950. Remembering the above diagram, this means the coupon/interest rate would be higher than the original 8%. So what would be the bond’s yield to maturity?
      1. The formula for YTM takes several things into account:
        1.      Original Coupon/Interest Payment (C)
        2.      Original Face or Par Value (F)
        3.      Price bond was purchased (P)
        4.      Years to maturity (n)
    2. If you plug in all the numbers and calculate the YTM when n=20 (10 years later…) the YTM quote is 8.46%
    3. Let’s say that 5 years later, interest rates have dropped and now the bond is purchased in the aftermarket for $1060. The Yield to Maturity is 7.38%

So what’s the bottom line when it comes to maturity?

Other than a few reasons that would cause a bond to end its existence prior to maturity, the life span of a bond tells an investor how long the bond may be exposed to risk – the primary one being the erosion of its value (purchasing power) when inflation is present (higher bond price, and a lower return than the coupon rate as in example 2 on YTM).


Plain and simple, duration is the measure of a bond’s sensitivity to changes in interest rates. Complexity increases in the details of various ways duration is calculated.  We will quickly outline the calculations but then then circle back and focus on the broader concept and why investors look at duration in conjunction with maturity.

Macaulay duration, modified duration and effective duration are three types of duration calculations. Investors will more than likely run across effective duration numbers.  It is calculated by taking into account how fast a bond’s initial purchase price will be repaid based on its cash flow – this may be a weighted average if looking at a bond portfolio such as in an ETF or mutual fund.

Despite the fancy math of the different versions, duration is more of a concept and not a tool to measure an exact expected price change of the bond when interest rates change.

So what’s the bottom line when it comes to duration? An example should drive the concept home.

An investor that purchases a bond with a face or par value of $1000 would naturally wonder how much that price could be impacted by changes in interest rates. If a bond has a duration of 6 years, then a 1% change in interest rates should cause the bond to lose approximately 6% (to about $940).  Keep in mind the image of a see-saw on a playground conveying the idea that when interest rates go up, bond prices go down and the opposite is true.

As noted earlier, duration is more of a concept that estimates the impact to the bond when interest rates change. It is an estimation of the amount of up/down swing in that see-saw image.  Ultimately, market participants determine price, but keep in mind market participants would probably be using models to calculate duration in an attempt to determine supply (selling) and demand (buying).

You may have noticed the duration example had the term listed as years. That is the norm used to note duration and also the probable reason why it is can be easily confused with maturity.  Recall that the formula(s) for duration measured how long it took for the cash flows to repay the initial investment.

Now, the bottom line of the bottom line. Two bonds may have the same maturities, but their sensitivity to interest rate changes may be different.  Investors and portfolio managers not only can diversify holdings in regards to when the holdings may expire or mature, but now can diversify holdings in regards to the possible volatility or impacts to bond price movements as interest rates change.

Take high yield bonds for example – according to the iShares website (, the High Yield Bond ETF (HYG) has a Weighted Average Maturity of 4.15 years and an Effective Duration of 3.59 years.  On the same website, the 3-7 Year Treasury Bond ETF (IEI) has a Weighted Average Maturity of 4.70 years and an Effective Duration of 4.42 years.  Morningstar ( lists the Guggenheim Floating Rate Fund (GIFIX) has having an Average Maturity of 5.12 years and an Effective Duration of only 0.27.  The bonds within these portfolios have, on average, a relatively similar period of time until the principal is assumed to be paid as shown by the average maturities.  However, high yield bonds are implied to have greater insulation to changes in interest rates versus the 3-7 year Treasuries.  Floating rate, as the name implies, has the characteristic of periodically adjusting their interest rate payouts making them even less susceptible to rate changes than the other two.  An investor or fund manager may be comparing these potential investments in their due diligence process.  If they have an opinion on the direction and speed of possible interest rate changes, then duration would be an important factor.

Those newer to fixed income assessment often start with seeing the bond market as one entity, perhaps thinking “the bond market was up today…”, etc. That is certainly not the case.  The next step in learning more about fixed income is to see how various classes within the bond market actually differentiate themselves in price direction and volatility.  Maturity and Duration are simply two measures among many that investors explore when attempting to separate the parts that make up the bond market.


Phishing Smishing: If you didn’t order it, don’t click on it.

It’s the oldest online scam in your inbox: They send out an official looking e-mail. “Your password has expired,”  “Your account is in arrears,”  “Please verify a charge,” or some emergency that needs you ASAP.  These are the tricks “phishers” use to get you to click 1st and think 2nd. So how do you protect yourself from phishing schemes?


Very simply–if you see an official looking communication from your bank, credit card, Amazon or any entity, directing you to take action by clicking a link–don’t!  Click it, and the bad guys verify your existence.


Hackers are really good at creating phony e-mails that look like the real thing.  The company “will never ask you for your password in an e-mail or send you a password as an attachment.”  The same goes for the IRS, banks and other officials–if you’re under an audit, you’ll be notified by the US mail. You don’t need to sign into an account that’s probably bogus.


Fake e-mails usually look spot on, but there’s often a typo, a mis-spelled word, a contact address that isn’t a or , but instead a webmail address. Perhaps you have a Wells Fargo account and get an email from: Wells Fargo Support. Looks legit, but would they use   Not likely!  I have even seen domains registered close to the legitimate such as   Just a small misspelling could get your information compromised.

Many times the pages served by these links are not secure. They will show up as http:// instead of secure https:// The S stands for secure, by the way.


Be wary, inspect it, ask the friend what the intent was before agreeing to click on the link. If it doesn’t seem legit, don’t be tempted, just delete it.  If the e-mail is from a company, and you’re addressed as “sir” or “madam” and not by your name, and you’re also asked to fill out a form, the smartest solution–don’t.


Smishing is a phishing scam that is sent over Short Message Service (SMS) Text message. It’s not just your inbox that they are after anymore.  Most texting fraud is an attempt to get your private information by responding by text.   They often use fear tactics to get you to respond hastily.  In an age where we live on our smart phones, these fraud attempts are smaller, harder to spot, and more frequent, so you’ll need to be that more diligent and take the time for inspection.


Google, Facebook, Amazon, Apple and other companies routinely ask us, via an e-mail, to update our passwords when we’ve forgotten them. Their pages look authentic, and they offer e-mails with links when we ask for a reminder. So why should I click their link when they send it to re-set the password? Because you requested it from the company.  If you’re worried and want to play it safe, skip clicking in any email and go straight to your browser. Most company websites let you change your password at their registered .com addresses, by going to the account section and opting for a new password.

Finally, it goes without saying, while I have your attention, that this is a great time to update your passwords with hacker proof collections of numbers, symbols, upper and lower-case letters. Stay away from hacker favorites like “password,” 123456″ the name of your street, default, or your pet’s name.

Long passwords from a pass phrase work well. “JimwasmyfavoriteCollegePal1” is an example of a strong password.  There are secure password manager programs such as Roboform, that can also securely help you keep track of your passwords.


Always act quickly when you come face to face with a potential fraud, especially if you’ve lost money or believe your identity has been stolen.

FBI – If a phishing scam rolls into your email box, be sure to tell the company right away. You can also report the scam to the FBI’s Internet Fraud Complaint Center at

SEC – If the email purports to come from the Securities and Exchange Commission, alert the SEC by submitting a tip online at

FTC– If you think that your personal information has been stolen, visit the Federal Trade Commission’s feature on Identity Theft at for information on how to control the damage.

High Yield Returns When Yield Spreads Are Low

This blog is taken from our January 2017 newsletter discussing yield spreads.

High Yield Returns

The yield differential between high yield bonds and US government bonds is currently only about 3.8%. This indicates that the yield on high yield bonds is paying 6.3%, where 10year government bonds only yield 2.5%.

A normal range for this yield spread is between 3% and 7%.  The lower this number is, the lower the potential returns are.

Looking at what happened in 2004, when we were midway in an economic expansion and the yield spreads were about where they are today, these charts illustrate the returns for the three years following this similar economic period. Total returns for the next few years averaged about 8.5% annually for high yield bonds. If the yield spread continues to drop, high yield bonds should continue to appreciate, but if this spread drops below 3%, a defensive strategy is likely.  Currently the yield spread is 3.33%

*The CSFB High Yield Index is designed to mirror the investible universe of the $US-denominated high yield debt market.


Why Use Leverage?


Leverage is a tool that most people use on a daily basis without the knowledge they are even using it. Think of a home mortgage, this is leverage. A person is able to put down 15-20% the actual cost of the home and borrow the remainder. That person has now leveraged their money 4-5 times beyond its normal purchasing power.

Spectrum uses leverage in some of our SMA accounts and sub-advised mutual funds to borrow money or increase exposure to potentially increase potential returns when our proprietary models indicate risk is lower and trends are established. Below is a graph showing a sampling of these periods.

Managing high yield bonds has been Spectrum’s core investment strategy since offering investment management services in 1988. We have seen about every scenario possible—war, the great recession, over- and under-valuation, and have had experience in all of them. We understand bonds, and consider them predictable, since we have observed them for over 10,000 days. If we can borrow money at 2% and purchase bonds that yield 7%, we can make a net gain of 5% in addition to the 7% bond yield. This is called “carry trade”. However, we need to have liquidity to exit these positions when they are no longer in an uptrend. Since all the funds we use have daily liquidity, we can use this strategy when appropriate without having to ride out a serious decline. So our philosophy is simply; there are times when it is good to own them, good to stand aside, and even times to consider borrowing money to own more for short periods of time when “the wind is at your back”.

Give me your Credit Card

Most of us do some shopping online. Some of us a lot! So how can we stay safe with using our credit card for all those purchases? Here are a few tips that go a long way toward protecting your assets while taking care of business:

Only shop at sites you know and trust. Most of the problems come from sites that are just a little off the beaten path. That “Unbeatable Deal!” might be a trick to steal your credit card info. But, large well-known sites are seldom a problem.

Credit is safer than Debit. Credit cards have some built-in protection like a limit on your liability. It can be as low as $50 or even zero-liability. Debit cards do not have this same protection.

Secure sites. A secure site encrypts your credit information so it can’t be stolen. Look in the website address for the extra “s” near the beginning. “https”. This means that the site is secure. It doesn’t mean that your 100% safe, but it helps a lot.

PayPal. Is PayPal safe? Absolutely. It may be safer than your credit card because it has powerful fraud and consumer protections in place. If you use PayPal, it’s best to link it to your credit card, not your bank account. This way you’ll also gain the extra layer of protection that your credit card provides. Double protection!

Protect your social. Never give out your social security number for a purchase. It’s never needed for an online transaction. If they ask for it or for more info than is needed for the transaction, cancel the purchase and run.

Review your transactions regularly. Small unfamiliar charges that show up on your bank statement could be a test from a hacker, and can give them the green light to larger fraudulent charges.

Stay Private. Don’t do online transactions on public computers or Wi-Fi. Your credentials could be saved or hacked. This could lead to identity theft or fraudulent credit card charges.

Rising Interest Rate Risk

Spectrum continues to get many questions about investing in bonds in a rising interest rate environment.

The study below shows an updated chart illustrating every period of rising government bond rates for four or more quarters since 1982. These results show that while government bonds can have loses due to interest rate risk, high yield bonds can have gains.

The CSFB High Yield Index (CSHY) is designed to mirror the investible universe of the $US-denominated high yield debt market. *Data obtained from Bloomberg.

The primary reason for this is that interest rates generally increase when economic indicators are improving, causing government bond prices to go down. However, an improving economy reduces the risk of owning high yield bonds because they should strengthen as their credit rating improves. High yield bonds act more like stocks than bonds in a favorable economic environment. This is consistent with the Federal Reserve’s commitment to keep rates low until the economy is stronger.

We believe high yield bonds should have more room to continue to be profitable in any case.

An impending recession would provide reason to reduce high yield bond exposure due to the fact that risk of default is high. By moving to a cash position when a recession becomes likely, we will be in a position to reinvest the funds and take advantage of a purchase at much lower prices. Currently high yield bonds offer a yield of 3.6% more than government bonds.

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Spectrum Financial, Inc. in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Spectrum Financial, Inc. expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.  For full disclosure please see disclosures page here.


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Spectrum Financial, Inc 2018