Welsh Money Management LLC

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Welsh Money Management LLC

• Does Traditional Asset Allocation Preserve
  Capital?

• January 2009

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• Disclosure Statement

• CLIENTS AND PROSPECTIVE CLIENTS SHOULD READ THE
  DISCLOSURE BROCHURE OF WELSH MONEY MANAGEMENT LLC
  BEFORE INVESTING ANY MONEY.
• This document does not constitute an offer to
  sell or a solicitation of an offer to buy any
  securities. The information contained in this
  document is confidential and proprietary to Welsh
  Money Management LLC (WMM). By accepting this
  document, the recipient agrees that it will keep
  confidential its contents and will not disclose
  the same to any third party without the express
  written permission of WMM, or otherwise use this
  document or the information contained herein for
  any purpose other than an evaluation by the
  recipient of the investment described herein with
  WMM or its affiliates.

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Program Explanation
Does Traditional Asset Allocation Preserve
Capital?

• After accumulating some savings, many people seek
  investment guidance, since they are simply too
  busy working at their career and feel overwhelmed
  by the whole investment process. Theyll meet
  with a financial planner or investment advisor at
  one of the major investment firms. The investment
  professional will help the investor identify
  their investment goals, tolerance for risk, and
  potentially some estate planning. After gathering
  all this information, the investment professional
  will establish an investment plan. They will
  explain the need and importance of asset
  allocation and diversification. Depending on the
  investors age and risk tolerance, the advisor
  will recommend an allocation of 50 to 80 to
  equities, and an allocation of 50 to 20 to
  fixed income, with a small amount set aside in a
  money market. The mutual funds or equity managers
  used to implement each portion of the investors
  equity portfolio will usually be 90 to 98
  invested, all the time.
• The investor will usually receive an update every
  quarter. If any of the allocations drift too far
  from the initial allocation, the advisor will
  rebalance the investors portfolio to keep
  everything shipshape. The advisor will also meet
  with the investor once a year to review and make
  any adjustments, if the investors situation
  changes. For most investors, this whole process
  is very helpful and comforting.

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Program Explanation
Does Traditional Asset Allocation Preserve
Capital?

• Most of the time, the strategy of asset
  allocation and diversification works well. Of
  course, the stock market occasionally stumbles,
  as it did in the crash in 1987 (-35), or after
  Iraq invaded Kuwait in 1990 (-25), or in 1998
  when the market fell 25 after Russia defaulted
  on its debt. During declines, the investor
  realizes that asset allocation and
  diversification will not insulate them from
  losses. But the advisor is helpful, telling them
  its only a loss if you sell, reminding the
  investor that they have established a good plan
  that will be fine, as long as the investor
  maintains a long term perspective. During the
  secular bull market of 1982-2000, the large
  declines in 1987, 1990, and 1998 were reversed
  within a fairly short time, which helped mask a
  significant flaw in the asset allocation and
  diversification process.
• Whenever the stock market falls 20, 30 or 40,
  all an investor using asset allocation will be
  left with are diversified losses. I suspect that
  most investors will not find much comfort, when
  their advisor tells them the SP is down 35 this
  year, but youre account is only off -27.1.
  Thank goodness, were well diversified!
• Good money management requires discipline and, to
  be effective, will use a strategy that limits
  losses to 4 to 6 on any position.
  Unfortunately, when investors need a strategy to
  preserve their capital, traditional asset
  allocation fails.

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Program Explanation
Does Traditional Asset Allocation Preserve
Capital?

• One of the outcomes of this bear market, so close
  on the heels of the 2001-2002 bear market, will
  be investors challenging the traditional asset
  allocation process. Many investors will choose to
  avoid or abandon the stock market altogether,
  until they can be persuaded there is a strategy
  that can preserve their capital during market
  declines. Those investment professionals who
  suggest all the money in money markets and
  Treasury Bills will jump back into the stock
  market dont appreciate had badly investors
  confidence has been shaken by two bear markets in
  less than a decade. Fool me once, but not twice.
• Welsh Money Management has developed a Dynamic
  Asset Allocation model which uses a disciplined
  approach, incorporating technical tools to limit
  losses and preserve capital during bear markets.
  It combines our SP model, which can go both long
  and short, with our Sector ETF model that
  identifies the strongest sectors and uses a
  separate strategy for bull markets and bear
  markets. If you would like to learn more, go to
  welshmoneymanagment.com, click on the Investment
  Strategies tab, and the tab for the SP model and
  the Dynamic Asset Allocation tab.

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