Emerging Markets frightful • pg. 7

Don’t leave referrals to chance • pg. 3

Will the Halloween Effect produce a new “sugar high”? • pg. 4

October 30 | Volume 4 | Issue 6

First magazine focused on active investment management

for

David Quick

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with clients their progress on the hard numbers and also their overall prog-ress toward achieving their wish list.

As clients over the years at every op-portunity start crossing things off their wish list, I ask them if there is anybody else they know that could benefit from such a process and who might like to make inroads on their own personal wish lists.

They usually are excited about their progress and how tangible it has become, leading to direct referrals of friends, neighbors, relatives, and co-workers. This really can be a win-ning situation for everyone involved and has made asking for referrals much more productive and comfortable.”

he best way I have found to generate new prospects is

through a very intentional method of securing referrals from current clients. I do not think that referrals should be left to chance or based on a warm and fuzzy client assessment of me and our practice. I try and create a more sys-tematic approach to referrals, the same way I do for my clients’ financial plan-ning needs. I want clients to be able to say, ‘Steve and his process helped me achieve X, Y, and Z.’

People generally do not have a comprehensive tool or model to pull together all of the elements of their financial life and to track their prog-ress versus their goals. They may have many financial tools or products that they have accumulated over the years, but no organized way of making sure they are working together in the most efficient and coordinated fashion. I am very process-oriented, especially in the area of risk management and in devel-oping an overall macro look at a cli-ent’s entire financial picture.

With our software and practice models, a big focus is on formally cre-ating those macro financial goals and tracking progress toward achieving them. This also happens in a more in-formal fashion during new client in-formation sessions and client reviews. I literally create a client wish list, in addition to more specific short- and long-term financial goals. I review

Prompting referrals from “results-based” planning

Steven RedelspergerMinneapolis, MN

Cadaret, Grant & Co., Inc. Redelsperger Financial Group

T“

Steve Redelsperger is a Registered Representative offering securities through Cadaret, Grant & Co., Inc. member FINRA/SIPC. Branch Office: 232 1st Avenue E., Shakopee, MN 55379. Redelsperger Financial Group is not affiliated with Cadaret, Grant & Co., Inc.

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Proactive Advisor MagazineCopyright 2014 © Dynamic Performance Publishing, Inc. All rights reserved. Reproduction of printed form, whole or in part, without permission is prohibited.

EditorDavid Wismer

Associate EditorElizabeth Whitley

Contributing WriterDavid Wismer

Graphic DesignerTravis Bramble

Contributing PhotographerRobert Hart

October 30, 2014Volume 4 | Issue 6

Proactive Advisor Magazine is dedicated to promoting and educating on active investment management. Distribution reaches a wide audience of financial professionals who advise clients on investments and portfolio management. Each issue features an experienced investment advisor who offers insights on active money management, client service, and investment approaches. Additionally, Proactive Advisor Magazine offers an up-close look at a topic with current relevance to the field of active management.

The opinions and forecasts expressed herein are those of the author and may not actually come to pass. Any opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security nor specific investment advice. The analysis and information in this edition and on our website is for informational purposes only. No part of the material presented in this edition or on our websites is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any portfolio constitutes a solicitation to purchase or sell securities or any investment program.

October 30, 2014 | proactiveadvisormagazine.com 3

TIPS & TOOLS

Can October’s market

turn into Halloween

By david wismer

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The seasonal tendencies of the “Halloween Effect” may help spooked investors forget a ghoulish start to Q4 2014.

So far, 2014 has not played out according to the forecasted script, with multiple surprises on the bond yield front, un-foreseen geopolitical risk events, jarring weakness in the energy sector, the smashing of complacency in the markets, and the emergence of the Ebola virus as a global concern—to mention just a few of the unexpected occurrences.

But within this context, how have some of Wall Street’s time-honored “truisms” held up in 2014? The picture is very mixed, with some hits, some misses, and the jury still out on several others. With Halloween upon us—historically a potential turning point for volatile markets—let’s take a look at the year-to-date performance of some pieces of the Street’s conventional wisdom.

The “January Indicator” or “January Barometer” says, in effect, “As January goes, so goes the market for the year.” With the S&P 500 off nearly 4% in January 2014, this indicator was decidedly negative for the full year. But does the saying really merit any consideration? Statistics can be massaged to prove just about any point, including cases for or against the “January Indicator.” One finding that resonates the most consistently is just slightly negative, found in research by S&P Capital IQ that states, “While a down January does not necessarily predict a negative year, it has relatively strong accuracy in suggesting a less than stellar market year.”

proactiveadvisormagazine.com | October 30, 20144

Less well-known is the “Easter Indicator.” This adage more or less gives a second chance to markets if there was indeed a down January. Analysis by Schaeffer’s Investment Research and Forbes shows that for the past 30 years, when the S&P 500 is down at Easter, the Index averages a loss of 2% for the rest of the year and is positive just half of the time. Years when the Index was positive through Easter average a return of nearly 10% for the rest of the year, and have been positive an impressive 90% of the time. The somewhat good news here is that the S&P 500 rallied hard in the shortened trading week before Easter this year, turning what was looking like a negative performance for the year at that time into one ever-so-slightly positive, +0.8% for the SPX (but that can hardly be considered a definitive leaning one way or the other).

has pointed out that stocks have been up two-thirds of the time from May-October since 1950, though average returns are worse than any other six-month period.

This does, however, segue nicely into a brief discussion of three additional Street seasonal indicators. The first pertains to mid-term elections and the second years of presi-dential terms. Though without a catchy name, the election cycle has had a powerful effect over the years (though causality is not well explained), especially in predicting increased volatility preceding a mid-term election. And the second years of presidential terms have represented some of the weakest market years of the election cycle, though usually showing poor performance beginning in the 2nd and 3rd quarters, followed by much stronger 4th quarters. While this indicator may not have

worked perfectly in 2014, many cyclical market models did call for market weakness for much of October, and that certainly ar-rived right on cue.

The historical market weakness of September, leading to the possibility of height-ened October volatility, is well-known and represents at least one seasonal indicator that played out to near perfection this year. Doug Short noted recently in Advisor Perspectives that October has by far hosted the most sig-nificant market bottoms of any month since 1950, with five of the top ten such negative events. As indicated in Chart A, he also com-ments on October’s historical high volatility ranking, saying, “A survey of all the months with 10% or more intra-month volatility puts October at the top, as does a ranking by the average intra-month volatility.”

Short’s ending analysis—“So, if you don’t like volatility, you’ve traditionally been hap-pier when Halloween is a memory”—brings us to the final Street seasonality adage. This is thankfully a far more positive look at his-torical market data, known as the “Halloween Effect.” Simply stated, the trends favor a rebound of the markets in the remainder of the 4th quarter following Halloween and in the first third of 2015 (including perhaps the frequent “Santa Claus” rally of the year’s last five trading days and the New Year’s first two).

continue on pg. 11

Halloween is historically a potential turning point

for volatile markets.

“Sell in May and Go Away” may be the best known of all Street sayings. This cliché has its roots in British market tradition, where savvy “City” investors were advised to sell before the summer months and return after “St. Leger Day.” The traditional market theory, according to the UK’s Telegraph, “was that with so many sports-related social events in the summer months—Royal Ascot, Wimbledon, Henley Royal Regatta, Cowes Week, and ending with the St. Leger Stakes horse race (on September 13th this year)—that trading volumes plum-met and stock market fortunes wane.”

But what about the real performance of this period here in the U.S. for 2014? Whether one sold in the beginning, middle, or end of May—and then bought back into the S&P 500 on September 15—it was a losing proposition (giving up roughly 5% of Index gains). This was far from an unusual occurrence—Barron’s

OctoberJanuaryAugustSeptemberJulyNovemberAprilJuneMayDecemberMarchFebruary

1713101099776552

8.9%7.3%7.1%6.9%6.6%7.2%6.3%6.1%6.5%5.6%6.4%5.6%

Month Number with10%+ Volatility

AverageVolatility

Monthly Volatility Since 1950

Chart A Source: Advisor Perspectives, 10/14

2.0

1.5

1.0

0.5

0.0

-0.5

-1.0

-1.5

2.0

1.5

1.0

0.5

0.0

-0.5

-1.0

-1.5Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Chart B

S&P 500 Index: Average percent change each month 1928-2014

Aver

age

gain

Aver

age

loss

1.2

-0.1-0.1

0.6

1.3

-0.2

0.8

1.5

0.7

-1.0

0.40.6

1.5

Source: Yardeni Research

October 30, 2014 | proactiveadvisormagazine.com 5

01 02 03 04 05 06 07 08 09 10 11 12 13

(% of global GDP, excluding financials)

215

210

205

200

195

190

185

180175

170

165

160

A Scary Story for Emerging Markets

o says popular economist and newsletter writer John Mauldin,

along with co-author Worth Wray, in the October 26th edition of “Thoughts from the Frontline.”

This is not a new theme for Mauldin, as he has been writing about risks to emerging markets for some time. While the iShares MSCI Emerging Markets ETF (EEM) is only down slightly for the year, it has been under considerable pressure since 2014 highs in early September, off close to 11% as of Friday (10/24).

Investing.com recently analyzed the action for EEM and says the technical picture remains “terrible,” as the Index sits well below its 200-day moving average (as of 10/24), despite a recent bounce accompanying the general improvement in global markets. Their analysis cites the equity markets of Russia and Brazil as far and away the weaker performers among large “emerging markets,” while China and India have fared substantially better. Russia’s ETF (RSW) was trading down 23% from 2014 highs earlier this week, and Brazil’s EWZ was down close to 28%.

While Russia and Brazil have country-specific circumstances, Mauldin’s analysis focused more broadly on issues common across the globe. Their primary theme is that the probable coming divergence in central bank policies

S

Source: Buttiglione, Lane, Reichlin & Reinhart. “Deliverage, What Deliverage?” 16th Geneva Report on the Global Economy September 29, 2014

between the U.S. and the rest of the world “is capable of fueling a 1990s-style US Dollar rally with very scary results for emerging markets and dangerous implications for our highly levered, highly integrated global financial system.”

As part of this thesis, Mauldin points to the ever-increasing “explosion” of the ratio of global debt to global GDP—leading to fundamentally shaky economic ground as the U.S. inevitably moves to higher interest rates. He says, “Slowing

growth and persistent disinflation (both logical side effects of rising debt) will detract from the ability of major economies to service those debts in the future. But the real explosion in debt and financial assets has played out across the emerging markets, where the unwarranted flow of easy money has fueled a borrowing bonanza on top of a massive USD-funded carry trade.”

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Are you getting it wrong on risk tolerance?There is a great difference between a client’s attitude toward risk, the capacity to absorb it, and his or her ability to take it.

Help clients avoid emotional, irrational investment decisionsAdvisors cannot predict markets—but they can help clients avoid emotionally based decisions and build client portfolios that might slow or divert an account’s otherwise downward spiral.

How Moving Average strategies can really workMoving Average Crossover (MAC) strategies can be constructed in numerous ways—a focus on market sectors may diminish the whipsaw effect of all-or-nothing strategies.

GLOBAL DEBT-TO-GDP IS EXPLODING ONCE AGAIN

Data based on OECD, IMF and national accounts data

7October 30, 2014 | proactiveadvisormagazine.com

TOPPING THE CHARTS

L NKS WEEK

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As changes in the interest rate environment have undermined retirement’s traditional safe havens, David Quick has turned to active management platforms to manage client risk and generate returns in the years to come.

for

David Quick

PREPARINGRETIREMENTthe longest vacation By David WismerPhotography Robert Hart

8 proactiveadvisormagazine.com | October 30, 2014

Proactive Advisor Magazine: Tell me about your background, David?

David Quick: I am a graduate of the University of Missouri-St. Louis, where I ma-jored in business administration and econom-ics. I began my career working as a CPA, and worked for two of the large national accounting firms. I also have been involved at a senior level with several financial services organizations and worked in corporate finance, investment bank-ing, and real estate. I decided to branch out on my own in the early 1990s, originally focusing on tax and accounting services. I have since grown that into a full-service financial planning and advisory practice.

I primarily work with people who are re-tired or about to retire, and I think my CPA background has brought a number of advan-tages to my clients that many advisors may not necessarily have. The tax consequences of how a client invests and generally manages his or her finances is a very strong consideration in my work. I also always put my CPA hat on as I do my own due diligence on specific investments or evaluate the strategies of third-party active money managers.

How has your investing philosophy evolved to bring you to use actively managed accounts?

When I first began on the advisory side, Modern Portfolio Theory was certainly popular and something that I’d spent considerable time taking a look at. I had the belief, as did many, that it was possible to diversify away from risk by constructing a portfolio that was mathemat-ically calculated to put the client’s portfolio along the efficient frontier.

In the late 1990s and early 2000s, I became very concerned with market valuations, the whole dot-com bubble, how fundamental anal-ysis seemed to be out of favor, and how tradi-tional correlations, or lack of correlations, were no longer working as they should. I moved a lot of client money into indexed annuities with guaranteed minimums, which worked well for that time period. I essentially built my practice around products that allowed clients a risk-free income stream and the promise of some upside participation, if the market cooperated.

Over time that method of managing client risk has become far less attractive with the changes in the interest rate environment. While there are some exceptions, annuities just do not

generate enough interest income to structure those products, or hedge risk, as they have in the past. And the interest rate environment affects all investments and asset classes. It has made it very difficult for individuals who are at or near retirement to seek traditional safe havens. This has posed tremendous amounts of risk for the average retirement investor who wants to generate income relatively safely and continue to build their asset base over the long term.

How do you attempt to deal with risk for clients?

This is where third-party managers and active money management comes into play. I was systematically searching for answers for my clients when these guaranteed returns became unattractive. Financial advisors are trained to try to measure risk in terms of volatility, the standard deviation from the mean return. That volatility measurement is often held up as a measure of risk, but I will tell you in plain English, risk to me really means my clients are losing money.

I began looking for ways where I could effectively manage my clients’ portfolios with a strategy in place designed to prevent large losses. This is something that my clients somehow inherently thought that mutual fund managers should be doing for them all along, but mutual funds really cannot and do not, due to their style mandates. We saw the results of that in 2008-09.

tactical feature that is very compelling—the ability to not only go to cash in a down market, but to trade inversely to the market to make a profit during unfavorable market conditions.

I think the alternative to active money management—those modern portfolio/efficient frontier approaches that rebalance quarterly—delivered losses close to 30% in 2007-09. I do not have any client for whom I consider that an acceptable level of loss. And the math will tell you how hard it is to recover from such losses, especially if you are drawing income against your investment portfolio in retirement.

Active management platforms provide a place for me to find strategies for my clients that will help them achieve the objective of pre-venting those large losses and generating returns

continue on pg. 10

David J. Quick, CPADallas, Texas

President and founder: Hearthstone Financial, Inc.

Broker-dealer: Foresters Equity Services, Inc.

Graduated with honors: University of Missouri-St. Louis

Early career: Senior Manager at Price Waterhouse

Estimated AUM: $50M

So I was looking for a more rules-based, non-emotional investment approach that attempted to prevent large losses. I wanted an approach that was designed on mathematical principles and model-based algorithms, with more or less constant market analysis, and the guiding philosophy that the trends and cycles of market history tend to repeat themselves. If and when we have another market crash, I want to make sure my clients have a line of defense in place.

That is what active management, at least as practiced by the strategies I am using, is de-signed to do. Some strategies also have another

Volatility is often held up as a measure of risk … but risk to me really means my clients

are losing money.

October 30, 2014 | proactiveadvisormagazine.com 9

David J. Quick, CPA, is an Investment Advisor Representative offering securities and advisory services through Foresters Equity Services, Inc., member FINRA, SIPC and a Registered Investment Advisor. Hearthstone is independent of Foresters Equity Services, Inc. Hearthstone is not a CPA firm.

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L E A R N M O R E

whether markets are up or down. There are, of course, no guarantees, but that is the concept, and I have conducted very thorough research and due diligence, along with my broker/dealer.

These are some pretty sophisticated concepts. How do you communicate them to clients?

Clients understand the concept of want-ing to avoid large losses in their portfolios. I have a variety of ways I describe it and tools I use showing the history of the markets and the expectation that the next major market correction has a high probability of arriving in due course. I also explain that the theory of what we are trying to achieve is not to beat the market, or to match the highest returns of the strongest-performing market years. We are trying to smooth out returns, keep things on the positive side of the ledger, and avoid the large losses of very bad market years.

And, if we go into an identifiable bear market, we have ways to make money then also. That inherently makes sense to people.

One simple analogy I use relates specifically to their journey of retirement. I describe this as the longest vacation they will ever take and the need for the appropriate vehicles to carry them through that vacation. No one would consider taking a trip cross country in a car that had only one gear—the forward gear, constantly pressed to the floor. There are times you need a car to slow down, to stop, and to be put into reverse, depending on your destination, your progress toward your goal, and the driving conditions.

Same thing with an investment strategy in terms of needing all of the options available to make the required adjustments along the road. I believe this approach will make for a more comfortable and productive journey for my clients over the long haul.

continued from pg. 9

10 proactiveadvisormagazine.com | October 30, 2014

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The Stock Trader’s Almanac states that since 1950 the Dow Jones Industrial Average (DJIA) has had an average return of only 0.3% during the May-October period, compared with an average gain of 7.5% during the November-April period. Yardeni Research has charted average monthly returns of the S&P 500 from 1928-2014 (Chart B), indicating the consistency of three of the four strongest market months falling in the November-April period (July being a notable outlier).

The Wall Street Journal also acknowl-edges the “Halloween Indicator” and its “six-months-on, six-months-off” seasonal pattern (Chart C) demonstrating “a tendency for the stock market to deliver the bulk of its gains between October 31 and the subse-quent May 1 (6.6% gain vs. 0.8% over the past 50 years).”

While seasonal market indicators and patterns are hardly guarantees of future market performance, their general grounding

continued from pg. 5

The Bull in WinterAverage gain in the S&P 500over the past 50 years.

Summers Winters Wintersfollowingpositive

summers

Wintersfollowingnegativesummers

Source: S&P Dow Jones Indices/The Wall Street Journal

Chart C

Note: ‘Summers’ refer to the periods between May Day and Halloween;‘winters’ are the other six months of the year

in historical data over long time periods does provide food for thought for the serious market participant. In fact, more than one tactical active investment strategy factors in quantitative consideration of the metrics of seasonal cycles and patterns.

At the very least, for investors feeling like parts of this October were far too tricky, there is perhaps some evidence-based hope that the passing of Halloween will turn out to be a treat in and of itself.

The trends favor a rebound of the markets in the remainder of the 4th quarter following Halloween and in the

first third of 2015.

11October 30, 2014 | proactiveadvisormagazine.com