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Tony Romo Has the Right Attitude for Restylement!

By Jamie Cornehlsen, CFA®

We are all meant to live a life of significance.  There are times when that idea is tested.  I was reminded of this recently while listening to my favorite quarterback relinquish his place on his team.  It was not his choosing, nor anything that he did. But, his team has moved on and is no longer his.

Last month, Tony Romo crushed all rumors in a speech, and relinquished any question of who the Dallas Cowboys starting quarterback is. You can watch his four and a half minute second speech here.

In Romo’s closing statement, he said “I feel like we all have two battles, or two enemies going on. One with the man across from you. The second is with the man inside of you. I think once you control the one inside of you, the one across from you really doesn’t matter. I think that’s what we’re all trying to do.”

To find out how you restyle, you need to find the significance inside you.

Important side note: In an office that discusses college basketball, and specifically Duke (Ted’s alma mater), there is not much room for discussing other sports or teams. But Tony Romo earned some respect for supporting Duke basketball after attending a quarterback camp on the Duke campus.

But I digress. Romo’s speech saddened me because I realized this may bring to a close the dream and ultimate goal that Tony Romo has likely held since he was a child: playing and winning a Super Bowl.

My hope is that Romo finds and tackles that inner man to decide what he wants his significance to be. He has played his craft triumphantly. Watching him execute over the years has created a great deal of joy for me.

Most people have seen firsthand how humble, selfless, and what a life of significance Tony Romo has led as a young man. Bringing that same attitude to whatever he does next, I can only imagine he will achieve significance in restylement. I look forward to seeing the next chapter unfold.

Remembering Fess Parker


By Ted Schwartz, CFP®

For those of us old enough to remember black and white TV, Fess Parker is etched into our memories as Daniel Boone on the hit TV series of the same name. He also portrayed Davey Crockett, so…those of us who sometimes confuse the two frontiersmen are safe in picturing the tall lumbering hulk that was Fess Parker as Davey, Daniel, or most any frontiersmen.

Around the turn of the 21st century, we had the chance occurrence of spending a little bit of time with Fess Parker. We were staying in Santa Barbara close to none other than the Fess Parker Resort. We had no prior knowledge of the resort, which he had opened in 1986 after his acting career was pretty much in the rear-view mirror. He was 62 years old at the time the resort was opened, and it was this time in his life that he chose to restyle it into something he loved and valued rather than simply declaring himself a retired actor. We were surprised to find a resort with his name in beautiful Santa Barbara, but…the story gets better.

We decided to drive from Santa Barbara to the nearby vineyards along what is now called the Foxen Canyon Wine Trail. There was Parker’s newest project, the Fess Parker Winery and Vineyard. We parked our car and got out to tour the facility (and, of course, taste a few wines). Another car pulled up and out of the car stepped a tall, older gentleman who, although somewhere in his 70s, was immediately recognizable as Fess Parker. He said hello, exchanged a few pleasantries, and offered to be our guide and take us on a personalized tour of the winery. Being gracious guests, we accepted the offer.

What really struck us was the sheer joy and excitement that he showed around his “new baby”, the vineyard. He was vitalized by the project and had a clear purpose for his life. He shared some of the specifics (as I recall, there was a fear of a disease or fungus that could spread to California vineyards at the time) but was also keenly aware of his role in the mission — to be the businessman but not the vintner. While he had learned a great deal of the mechanics of his new endeavor, he wanted to hire the most skilled people to make his vision a reality so that he could play to his strengths. He knew the establishment of a successful winery took many years and his goal was to get the winery to that point during his lifetime.

Life is meaningful, and Fess Parker realized his restylement. Not only did he discover its worthiness; he realized its ultimate significance. At some point, what we struggled to work for most of our lives may be in the rear-view mirror. Rather than fester in despair about a past life, Fess Parker chose to find significance in other endeavors that pleased him and made him happy.

With restylement, we peer into our souls to figure out what is truly important: Time, significance, or money (money to help us do the things that are significant to us).

As children, we live without thinking about the significance of what we do. Preferring to live in the moment.  At some point society tells us that we have to strive to do certain things. But what is there to achieve? What is the significance of this? Buried in a career, supporting a family, we may lose some hope or lose sight of what really makes us happy.

Fess Parker may have left behind his acting career, but he found a different and equally important part of his true self, which was learning to live in a new moment, exploring a new part of himself.

After about 45 minutes, our tour concluded. At that point, Fess Parker donned his signature coonskin cap and began autographing bottles for visitors.

Actor, real estate developer, and winemaker, Fess Parker passed away in 2010 after a very meaningful and accomplished life; however, his winery, his two luxury inns, and our memories of the big fellow have survived. My belief is that he died a pretty happy fellow; his life filled with significant achievements in several areas.

Hallelujah! What a Second Act Leonard Cohen Wrote!

Canadian singer and poet Leonard Cohen is pictured on January 16, 2012 in Paris. Leonard Cohen's new album "Old Ideas" will be released in France on January 30. AFP PHOTO / JOEL SAGET (Photo credit should read JOEL SAGET/AFP/Getty Images)

By Ted Schwartz, CFP®

As you may know, Capstone Investment is focused on what we refer to as restylement. Essentially, this is achieving your financial goals so that you can concentrate on the personal goals that give you meaning. Traditional retirement is a cessation of work. We believe this is not meaningful for everyone and that the pursuit of your passions (whether that involves the cessation of work or not) is really the key to how we need to assist clients.

We typically find that passion comes down to time, significance or money.  Time – the ability to choose the amount and what you do with your discretionary time (work, sing, tour the world). Significance- what pursuit am I following that light’s me up, and makes me the happiest. Last, how much money do I need to accomplish the two things above.

That brings us to the incredibly unusual life and times of one of my favorite artists, Leonard Cohen. Leonard passed away recently at age 82.

Back when I was callow youth, Leonard Cohen was one of my favorite songwriters. “Suzanne”, “Bird on a Wire”, “Hey That’s No Way to Say Goodbye” were amongst the many great songs early in his career. Judy Collins would likely have been far less famous without her renditions of Leonard’s songs to propel her career. A bit older than the Nobel Prize winner, he and Bob Dylan were dueling for our collective attention in the late ‘60s. Additionally, Leonard’s career included writing books of fiction and poetry.

While Leonard wrote his tunes slowly (“Hallelujah” took around 80 drafts and two years to write) and released albums sporadically, his popularity in Europe and Canada was not mirrored in the US and he slowly faded into the background of my mind. His personal life was certainly complicated, a mix of sex, drugs, and…not so much rock and roll. If you would like to understand the beauty of the songs Leonard produced in his early and middle career, I suggest you try Jennifer Warnes’ Famous Blue Raincoat disc. One of his many talented collaborators, this disc is one of the most beautiful ever produced and includes a good variety of his best older works.

While not a household name in the United States, Leonard maintained a successful career around the world and was well-positioned when he reached the age at which many people retire. By 2009, Leonard Cohen had not performed in concert in the United States for 15 years. He had grown and mellowed personally by combining Buddhism with his religious faith in Judaism into his personal practice.

Unfortunately for him, he paid little attention and had no interest in his financial affairs. He awoke to find that his financial adviser, a woman with whom he had been personally involved, had separated him from the millions of dollars that he had saved during his lifetime. He won a court judgement but I do not believe he ever recovered his money and faced a grim challenge as a senior.

Well over 70 years old, Cohen had never truly enjoyed being an on-stage performer that much. For one thing, he doubted whether there were crowds wanting to see him perform. It was time for him to restyle as he had little economic stability and needed some fulfillment. He decided to launch a world tour at age 74, including the United States. The tour enriched all who participated (Leonard’s pockets were filled, fans or performers were satisfied). The performances were epic! Concerts generally went from three to four and a half hours in length. At the same time, Cohen accelerated the rate at which he was writing songs and producing new releases. From age 74 until his death at 82, he released two live albums and three studio albums of new material, the last one weeks before his death.

In his restylement, Leonard Cohen led a life of significance. He learned that performing energized him and became a significant use of his time. His time on stage became a source of inspiration for him and for those who were touched by his performances.

I had the privilege of attending a live concert when he was 78 years old. It was a mystical experience- almost 4 ½ hours long with one intermission, Cohen skipping across the stage, repeatedly bouncing to his knees and back up, crooning his way through his songbook. There was an Eastern European lilt to the music that touched my soul and made me feel like he was a kindred spirit. He opened the evening by saying he did not know if he would pass this way again, so he would give the audience “everything he had”. Nobody was shortchanged that evening.

It was clear that Leonard Cohen got as much from the latter part of his life as he gave to others. How many of us would like to kick into high gear and transform the last part of your life into the most productive and personally significant part?  In one of his later songs, “Going Home”, he wrote:

“I love to speak with Leonard, He’s a sportsman and a shepherd, He’s a lazy bastard, Living in a suit”

We should all be so lazy in our restylement!! Hallelujah!!! We will miss him so.

Don’t Put Your Date at Risk! –Understanding your Risk to Retirement Date

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Many individuals are often unsure of the proper time to retire. They may wonder when they will finally have enough saved to comfortably live on, or are uncertain of the lifestyle they intend to lead post-employment.

There are many points to consider when determining a retirement date. First, you must understand the risk to retirement date. What this means is if the market declines within the first seven years after you retire, it will be difficult to recapture the value of your portfolio in order to last through 25 years of retirement.

After you have assessed your risk to retirement date, you must look at your retirement glide path, which is the sequence risk you can expect to experience in retirement. The sequence risk, also known as sequence-of-returns risk, is the risk that an individual will receive lower returns early when withdrawals are made from one of their accounts.

Good vs. Bad Sequence of Returns

In a scenario where the sequence of returns is “good”, a person may be able to reach his or her desired retirement amount earlier than anticipated. Conversely, under a “bad” sequence of returns, a person may fall short by as much as 34% of their targeted goal. The difference between a “good” and “bad” sequence of returns for two individuals saving the same amount can mean a delayed retirement of more than eight years.

In the event of receiving an unfavorable sequence of returns, it is best to encounter it either early in one’s accumulation phase or later in the distribution phase. A poor sequence of returns just before or after retirement is detrimental to the success of an individual’s portfolio.

The sequence of returns helps to determine one’s retirement timeline, and can dramatically impact an individual’s anticipated quality of life in the post-employment period. Any adverse correction in the stock market can cause an individual’s actual retirement date to be materially different than the initial goal.

Retirees who take distributions or remove cash flows out of their portfolio introduce a sequence of return risk, as the removal of money from a portfolio not receiving contributions, along with a decline in the market can leave a portfolio exposed to the threat of money loss.

Preparing For Retirement

For retirees looking to increase their spending ability in retirement, there are some potential compromises that can be made. Working individuals may decide to wait until the market improves before establishing a retirement date. Others may choose to ramp-up savings or reduce stock market exposure in order to reduce portfolio decline.

For those looking to boost the amount in their retirement fund, increasing savings by 40% in the 10 years leading up to retirement can galvanize a portfolio from market decline in retirement. The overall best strategy is to reduce retirement risk in the seven years leading up to retirement and the first seven years of active retirement. After that, retirees may want to take on more stock market risk in order to keep up with inflation.

There are a number of ways to manage retirement date risk for individuals looking to secure financial stability in retirement. Proactively managing portfolio volatility can be a meaningful way to manage retirement date risk. Put simply, the larger the portfolio, the less contributions matter and the more emphasis is put on the increase/decrease in the value of the portfolio. This heightened significance is due to the compounding of returns to the portfolio over a period of time. A volatile portfolio that produces poor results can end up forcing the accumulator to work longer as the portfolio recovers. Therefore, continuing to work until the retirement accumulation goal is achieved is typically the favored method. 

What Happens if I am Forced to Retire Early?

While the most preferred approach to a successful retirement is to continue working until your savings goal has been met or exceeded, many individuals may be forced to retire earlier than anticipated. This necessitates having to reduce the amount being spent throughout retirement.

Declines in the value of a portfolio can cause retirement date risk, as the portfolio value determines the amount of monthly cash flow a retiree has to spend. In addition, a lower portfolio value reduces the amount one can withdraw from the account.

If markets average out to eventual long-term returns, or if early returns are too low for too long, ongoing withdrawals can deplete the portfolio before the “good” returns.

finally arrive. The greater the volatility of the portfolio and reliance on growth, the greater the retirement date risk that accompanies it.

Based on the situations mentioned above, you may be wondering what a prospective retiree is to do. In the final years leading up to retirement, accumulators may wish to proactively manage risk and reduce the volatility of the portfolio, specifically as a means to lower the retirement date risk they face. In order to do so, individuals may have to save more leading up to retirement or work longer in order to receive the amount necessary to provide the desired monthly income.

July 2016 Portfolio Reporter: Earnings Are the Fundamental Driver

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At this point in the economy, stock market growth is unlikely without earnings breaking out of its two-year lull.

In this edition, we will cover the most significant drivers indicating the current status of the market. Second, we will offer a Strengths, Weaknesses, Opportunities, and Threats analysis of the Capstone investments.


If earnings meet expectations, we can expect a decline for the fifth consecutive quarter. The decline in earnings is led by a drop in revenue that — if persistent in the second quarter of 2016 — will be the sixth consecutive quarter of declines (Source: Factset).

While on recent upturn, expected earnings (blue line) have been in an overall decline since July 2016 (below). In total, earnings have been range-bound (see the orange parallel lines below.)

Earnings Scorecard Capstone Reporter July 16

S+P 500 Change Capstone Reporter July 16


The economy is growing at a rate that is below average. Industrial production is leading a decline. After being up through April, the industrial production began to sink in May.

Employment is the strongest contributor to the economy. Most recently, nonfarm payrolls reported for June were stronger than expected. Even with the solid monthly showing, employment growth has been slowing down the last six months.

Consumption and housing are more tempered. Housing began to fall with an annualized rate of 1,164,000 units, down from 1,167,000 in April. At this time, the three-month trend for sales, production, consumption, housing and employment are all down.

A report by the Chicago Federal Reserve based on national activity has indicated that growth has been in a slump since December of 2014.

FRED Capstone Reporter July 16


The S&P 500 has broken out and reached a new all-time high. The strength is supported overall by the internal market action as the percentage of companies above their 200 day moving average is higher than 60%. A secondary look at internals indicates that the market is being led higher by defensive stocks. Typically, a move higher is led by more growth-oriented sectors. The defensive sectors include consumer staples, utilities, gold and precious metals, and US bonds.


Below is the momentum from Value (red) stocks as they began to outperform Growth (blue) stocks.

S&P Graph Capstone Reporter July 16


Whether above trend, or based on trailing corporate earnings, the market (as measured by the S&P 500) appears to be expensive. Reports by Doug Short and Crestmont Research (below) show individual valuations are high, allowing for little price appreciation potential.

Crestmont PE Ratio Capstone Reporter July 16


So far this year, the market has been driven by dividend yielding stocks. The SPYDER Dividend ETF is outpacing the S&P 500 18.7% to 6.3%.

While earnings and/or valuations — the two biggest drivers of stock prices — would suggest little upside, the overall trend and technical jump into new highs solidly supports a rising market. We can’t say it will last, but as the saying on Wall Street goes… “The trend is your friend.”

Portfolio Notes

The foregoing comments represent the general investment analysis and economic views of the Advisor, and are provided solely for the purpose of information, instruction and discourse. Only comments in the Portfolio Notes section relate specifically to the Capstone Portfolios and the investment positions.

ETF PORTFOLIOS (Aggressive, Growth, Moderate, Conservative and Income)

The Aggressive, Growth, Moderate, Conservative and Income portfolio returned -1.1%, 0.2%, -0.3%, -0.6% and 1.7%, net of fees over the last 12 months. The S&P 500 (with dividends) increased 5.4%, the DOW (an index of 30 companies) rose by 6.6%, and the Lunt Capital 7Twelve Index saw an incline of 4.2%. The Lunt Capital 7Twelve Index is a diversified, strategic allocation across seven broad asset classes and 12 underlying indices.

The difference is a story of faster ascents after a market decline. At the start of 2016, the S&P 500 experienced a decline of 11.6% while the Aggressive model was down 10%. However, from the end of February to July 31, the S&P 500 ascended by 19%, the Aggressive model increased, and the ETF models all experienced progress, with Growth up by 13%, Moderate up 12%, and Conservative rising by 14%.

The drag in the rebound is a result of the different holdings between the S&P 500 and the ETF models. First, holding Biotechnology — the workhorse of the portfolio with a previous incline of 47% over the past two years — declined 28% from October 2015 to February 2016.  Second, the semiconductors of energy and retail have been the strongest industry groups within the S&P 500, though we have not held either of these industries (some exposure to semiconductors is held within the NASDAQ 100).

Lagging over the last year are the IQ Merger Arbitrage (MNA) up 1.7%, the NASDAQ 100 index (QQQ) of mostly technology stocks with a gain of 4.5%, and the S&P Growth Index (IVW) up by 5.1%. These three holdings accounted for roughly 25% of the portfolio.

Adding strength to the portfolio were three holdings: iShares Cohen and Steer REIT (ICF) up 21.9%, SPDR Consumer Staples (XLP) with an incline of 11.3%, and iShares Edge MSCI USA Quality Factor (QUAL) up by 6.6%.

The holding of bonds has been a net positive to the portfolio. Albeit in hindsight, holding longer-dated bonds with 20- and 30-year durations would have been even better as interest rates have declined over the last 12 months, thereby raising the price of all bonds.

Two trades that have worked well since the beginning of March (when the market was down) were the purchase of VanEck Vectors Gold Miners (GDX) and SPDR Utilitites (XLU). These holdings increased by 53% and 10%, respectively. However, holding just 7% of GDX and 5% of XLU weighed down the portfolio. Upping them to a full allocation of 15% each would have added growth to the portfolio.

Analyst Upgrades declined 1.9%, while the S&P 500 increased by 5.4% in the last 12 months. The decline in January clearly impacted this portfolio. As of now, the rebound is mimicking the S&P, but is not strong enough to catch up to the S&P at this time.

Drilling and mining hurt Analyst Upgrades with declines from ENSCO PLC (ESV), falling by 51%; FREEPORT-MCMORAN INC (FCX) down 26%, EQT CORPORATION INC COM (EQT) dropping 21%, and EOG RES INC (EOG) down 22%. Additionally, financial holdings such as Huntington Bancshares (HBAN) declined 11.9%, Northern Trust (NTRS) fell by 9.6%, and Legg Mason (LM) experienced a decrease of 8.1%.

Strengths came from HEWLETT PACKARD CO (HPQ) up 71%, Nvidia (NVDA) rising by 45%, DOLLAR TREE STORES INC (DLTR) with an incline of 23%; DOW CHEM CO (DOW) up 14%, and Duke Energy (DUK) climbing by 9%.

Analyst Momentum declined 19.8% versus the S&P 500 gain of 5.4% over the course of the last 12 months. Similar to what the Analyst Upgrades experienced, the decline in January was torturous, and the rebound is not yet benefiting the Analyst Momentum portfolio.

Losses were led by CENTURY ALUM CO (CENX) down 19%, FIDELITY NATIONAL FINANCIAL IN (FNFV) dropping 15%, MARATHON PETE CORP COM (MPC) falling by 18%, PBF ENERGY INC (PBF) down 20%, and TRIUMPH GROUP INC (TGI) declining by 21%. Certainly, buying into energy stocks was like catching a falling knife; they continued to decline even further rather than increasing.

Strengths were found in Grief Brothers Corp, with a gain of 21.5%, APOLLO EDUCATION GROUP (APOL) up by 23%, CST BRANDS INC COM (CST) rising by 15%, JOY GLOBAL (JOY) up 16%, and Aarons (AAN) climbing by 7%.

Focused Strength gave up 8.4% in the last 12 months as the S&P increased 5.4%. Holding bonds has saved the account in the downturn, but with the rebound in March, the Focused Strength portfolio has been left behind. Currently, 50% of the holdings are in iShares Barclays 20-year bond (TLT), which has risen by 9%. The other 50% is in PowerShares Commodity Index (DBC), currently down by 2.3%.

MaxBalanced is up 1.5% over the last 12 months versus the Lunt Capital 7Twelve Moderate Index up 4.2%. The MaxBalanced portfolio is Capstone’s most diversified portfolio and is structured like a university endowment; investing in more than 12 asset classes. The idea behind this investment is that we cannot predict the market, nor can we accurately forecast how assets are measuring up at any given point.

Most assets outside the US are weak and continues to be reflected in the MaxBalanced fund. The weakest of the assets are WisdomTree International High Dividend (DTH) down 21.7%, iShares Malaysia (EWM) with a drop of 21%, WisdomTree Japan falling by 21%, Guggenheim Multi-Asset Income ETF (CVY) declining by 23%, and PowerShares Global Agriculture Portfolio (PAGG) down 20%. The few strengths in the portfolio are coming from Consumer Staples Select Sector SPDR ETF (XLP) up 22%, and Schwab U.S. REIT ETF (SCHH) rising by 19%.

Equity Income is down 0.9% over the last 12 months versus the S&P 500 with dividends up by 5.4%. The goal of the Equity Income portfolio is for a total return over a three-to-five year investment horizon. Performance has been hit with allocations to Cameco (CCJ) and Honda Motor (HMC), down by 20.4% and 5.2%. Strengths are supported by Reynolds American, up by an impressive 108.6%, Altria (MO) up 87.2% and Crawford & Company (CRD.A) rising by 56%.

Earnings Momentum is up 3.3% over the last 12 months versus the S&P 500 with dividends climbing by 5.4%. The philosophy of the Earnings Momentum portfolio is to invest in companies with good or improving return on capital, and to acquire management teams that make good decisions about the resources they have, all while stock is selling at a reduced priced relative to generated cash flow.  Strengths in the Earnings Momentum came from Constellation Brands (STZ) with an increase of 220%, Fiserv up by 131%, and Equifax (EFX) rising by 120.1%.

Constellation Brands has improved by accelerating earnings through accretive acquisitions, and is certainly overvalued as a result of the great rise. However, in terms of earnings, we have no reason to sell the holding. Both Fiserv and Equifax have benefited from increased use of data technology in the financial services industry. Earnings have improved well for both companies. Similar to Constellation Brands, Fiserv and Equifax are both overvalued, but fundamentals don’t warrant selling at this time.

For more information about your investments, please contact your financial professional.

The Analyst Upgrades, Analyst Momentum, Target 2015 Conservative, and Bond ETF programs are based on Ready –to-Go Folios selected by Capstone to meet specific objectives of investors. Detailed information on these programs is available from Folio. Prior to 4/1/15, the MaxBalanced program was managed at a predecessor firm but using the same methodology and by the same manager. The performance reported above is model performance reflecting how the programs were actually traded but without any deposits or withdrawals as would be typical in an actual account. The returns are in U.S. Dollars and include reinvested. Past performance is no guarantee of future performance. There can be no assurance that a client’s investment objective will be achieved or that a client will not lose a portion or all of his or her investment. All returns are in time-weighted total return and include dividends. If a dividend is declared but not paid out in that month, then the returns from a previous month may be adjusted higher to account for the dividend payment.

For a list of all recommendations made over the past 12 months, please contact CIFG.

Active versus Passive……versus Common Sense!

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By Ted Schwartz, CFP®

The biggest shift (and debate) during my decades in this business is the move from active management to passive. Active management means that your investment has a portfolio manager who is tasked with picking your investment from the universe of choices. His job, obviously, is to be above average in his choosing so that you do better than average in the returns you receive versus the risk that you take. A passive investment merely tries to duplicate an index of investments with no decisions made by a manager. The idea here is to do average with as little expense as possible incurred.

The battle over which of these ideas is superior has raged for more than a decade with both sides presenting evidence that they have the superior position. Both sides have logical arguments to make, but…the field has been tilting towards the passive side. Investors have voted with their feet, leaving actively managed mutual funds for Vanguard low cost index funds and ETFs (exchange traded funds). My belief after watching this for twenty years is… in a good market (where the trend is clearly up), you are probably better off in low cost index investments that capture average returns. The data shows that relatively few active managers outperform in these markets and also shows that these instances of outperformance tend not to persist (i.e. this year’s winning fund is unlikely to be next year’s winner).

So, does that mean we should all only own passive investments with a buy and hold for the long term discipline? I think the answer to this is….use some common sense! Remember, passive investments include zero risk management and you will always capture an average share of all losses in market declines. Let’s say you owned a passive investment in the Nasdaq index in early 2000. Stock prices were well over ten times their normal valuations, but there were lots of pundits explaining that this was a “new paradigm”. Passive investors were set to lose 78% of their principal by sticking to their long term buy and hold strategy. The Nasdaq index was at 5048 in March of 2000 and is at 5058 as I write this in July of 2016. An optimist might say “see, I told you to just hold onto it and it would come back”. A realist would say that, including 16 years of inflation, you are nowhere near having the buying power you had in 2000 when you made this ill-advised investment.

Common sense would tell you that when stocks are selling for over ten times their normal valuations, you should own less of them than normal. The expected future return on investing in those stocks was at an all-time low due to their being so overpriced. To manage your future risk and returns, any rational person should have been thinking that they needed to actively manage their allocation to this passive index. This is common sense. Failing to use common sense in investing can be very costly.

One piece of good news is that we now have thousands of passive indices to invest in and some have been designed to control your risk better than the older indices. These are often referred to as “smart beta” products, a term that annoys me as much as fingernails running across a blackboard. That said, they tend to reduce your exposure to investments that have gone up the most (think overpriced) and therefore are worth considering as you allocate your money. They do not replace common sense! It is the investor’s job to manage risk and return by deciding how to allocate money in a portfolio. Diversification is definitely step one. You want to own assets which have low correlation to one and another, so you don’t end up with all your eggs in one basket. Second, it is an investor’s job to buy the eggs that are on sale and sell a few of the eggs that are overpriced.

Unfortunately, this process is neither simple nor always immediately pleasant. An investor who decided that technology stocks were way overpriced in early 1999 and sold some of his tech stocks would likely be kicking himself by the end of the year. Almost all of the returns that year came from tech stocks. The rest of the market languished all year and posted disappointing returns. In hindsight, that investor would have saved themselves a great deal of capital in the long run by sticking to the simple discipline of using their common sense. Market returns do not reflect common sense in the short term, but the long term payoff can be tremendous.

Our common sense answer is that a good portfolio… actively managed and makes use of as many low cost, passive investments as possible. The old adage that most return come from asset allocation decisions seems to be right on. However, the world is not static and your portfolio requires attention as the world turns.

The Hunt for More Time — Do You Really Want it All?

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The idea of having more time appeals to most, if not all, individuals. In a life dominated by taking kids to soccer games, attending PTA meetings and satisfying the demands of your boss, free time can seem obsolete.

Retirement typically means freedom and more available time for most people. But the question you must ask yourself is…what will you do with all that time?

Most individuals need something that is bigger than themselves in order to feel valued and energized.

Jack Guttentag, a retired Wharton Professor once stated “The least successful [people in retirement] are those who hated what they did to earn a living, and looked forward to a retirement where they could begin to do what they enjoyed. The most successful are those who loved what they did during their most productive years, and continued their involvement with the same or closely related activities, possibly at a reduced scale, as they became older.”

Selecting Your Special Interest

Those who find a second career often identify a cause worthy of occupying their time.

These people also typically use their experience and knowledge in a different way and often feel challenged by what they may be working to accomplish.

According to a study by Merrill Lynch, people are happier, healthier, and possess a higher self-esteem and stronger sense of purpose when they volunteer in retirement. However, this sense of purpose doesn’t have to come from a second career or through volunteering. It can also be found in the form of a hobby or an activity that you throw yourself into and simply just enjoy.

Still wondering what to do? Perhaps it is time to think about looking into a phased retirement where you can work less by going part-time, all while withdrawing retirement benefits.

Realizing Your Retirement Goals

One of the hardest aspects of retirement is that many people build up their personal idea about what it will look like. Once they have reached retirement, however; they come to realize it is very different from their vision and are typically left with a feeling of overall discontentment.

The grandiose idea of retirement many of us have envisioned is long gone. In its place is the philosophy of Restylement — doing something you love that has both purpose and intention.

Shaping Success One Contribution at a Time

Peter Cappelli, Professor of Management at Wharton stated “A lot of people get both their identity and social interactions from work, so the idea of stopping [a career] means they’re going to lose both.”

Many individuals are concerned about their financial well-being in retirement. But true happiness is more likely to be found in the people who take time to maintain their social engagements and those who have created and sustained an identity for themselves.

While having an unlimited amount of free time sounds enticing, it’s important to remember the most successful people in retirement are those who enjoy the time they have and use their talents and passions to make a contribution.

FLOW: Volume 7 — One Month In; A Smaller Barrel

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In our most recent series written by Jamie Cornehlsen, Denver CFA and founder of Capstone, FLOW examines how we seek out investments and make selections based on current market trends and future forecasts. Part seven of our series unveils the significance of obtaining a sustainable cash flow in high-yield stocks.

It has been one month since I opened my FLOW account; investing $150,000 in high yielding stocks.

When I selected my 20 investments, I did not choose based on how each had performed in the previous month or year. The investment value was presented in each company’s ability to produce cash flow.

I had to remind myself that this was the goal after the value of the portfolio declined to $140,137 within the first week; a cool $10,000 loss, or about 7% in five days of trading.

But this investment was developed to increase cash flow through acquiring businesses that could produce. Rather than focus on price, the value of the underlying business is what we will instead choose to concentrate on.

Besides the downturn in the account, we also received our first dividend check. With the TD Ameritrade account I created, I requested that dividends be paid out each month. On February 2, $432.67 was deposited into my savings account. This represents an annual return of 3%. I expected this percent to increase once our investments reached the ex-dividend date, which is the date stock must be owned by in order to have a right to the dividend.

After a full month of investing, I predicted the annualized yield to reach 11%.

Sustaining a Steady Cash Flow

Fortunately, the portfolio is beginning to produce satisfactory results. By the end of January, the account value had reached $157,489. Although I expect the principal value to fluctuate, the cash flow should preserve the investment.

Here’s my FLOW investment summary:

  • 20 investment positions
  • 10 investment categories
  • Categories: convertible/preferred, covered calls, emerging markets, foreign governments, go anywhere (manager discretion), high-yield (junk bonds), REIT, mortgage debt, infrastructure, individual stocks (of the stock category, there are 6 individual stocks)

Since the last time of purchase made in the end of January, we have seen a spike in prices. Consequently, conditions for investing are not as favorable. However, for a cash flow yield, there are still opportunities with these 20 investments.

So, where does this leave us? In a slightly less favorable place, but a place that is still providing consistent cash flows.

The next step is to begin the weeding process. This is probably the most important practice of all, as it is where we evaluate the holdings to see if they are continuing to provide a consistent cash flow. If an investment shows a declining ability to produce a flow, we will then sell and replace with investments that we feel can generate the desired results.

In summary, I’m planning to keep my account open for the long haul, and expect to continue reaping the gains of the cash flow while I ride out the volatility of the stock market. I will be reporting back with updates as changes are made to the portfolio.

Past performance is not indicative of future results. This article is intended for informational purposes only and is not intended as investment advice. Individual investor experiences and results will vary.

FLOW: Volume 6 – Tracking the Portfolio’s Progression

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In our most recent series written by Jamie Cornehlsen, Denver CFA and founder of Capstone, FLOW examines how we seek out investments and make selections based on current market trends and future forecasts. Part six completes our series by taking a closer look at the specific investment opportunities that were chosen to enhance the performance of the FLOW portfolio.

When I chose the 20 investments for this portfolio, I did not choose based on how they had performed over the last month or year. Although the yield each investment presented was likely due to poor performance recently, the overall investment value was presented in each company’s ability to produce cash flow.

Despite reminding myself of this logic, the value of the portfolio declined to $140,137 within the first week of the initial investment being made — a cool $10,000 loss, or about 7% in five days of trading.

But this investment was selected for the cash flow opportunities and the faith that the chosen businesses could produce such returns. So rather than focusing solely on price, the value of the underlying business is what we will continue to concentrate on.

Identifying Success through Dividend Production

As a result, this means removing the S&P 500 as a benchmark for success. The success is created off of dividend income generated from a portfolio. Outperforming the S&P 500 doesn’t generate revenue; it’s the production of dividend income that leads to an increase in profits.

As the portfolio continues, buy and sell decisions will not be dictated by the performance of the S&P 500, or the 20 individual investments. In the future, we will either look into upgrading to higher quality investments with greater income-generating capabilities, or sell the investment if the company’s ability to generate cash flow no longer supports its ability to pay the dividend or if the price is much greater than the value.

As we progress, I will provide updates on the cash flow and will keep readers informed of the decisions I make, whether it’s upgrading to investments with higher cash flow or seeking other income-generating opportunities.

FLOW: Volume 5 – Understanding Price Movement

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In our most recent series written by Jamie Cornehlsen, Denver CFA and founder of Capstone, FLOW examines how we seek out investments and make selections based on current market trends and future forecasts. Part five of our series dives deeper into portfolio development and helps readers understand what creates value in today’s changing market.

The downturn the stock market experienced in the final weeks of 2015 and the first few weeks of 2016 set up a prime time to invest.

I went into the new year thinking that I would take on five investments at a time. If the market fell, I would buy the next lot.

As chance would have it, the first lot was purchased on January 12th. The following lots were purchased on January 15th, January 19th and January 20th.

The portfolio was invested more quickly than expected, but the declining prices in the market provided a favorable opportunity, with a jump in current yield occurring right off the bat.

Removing the Panic from Portfolio Development

The declining prices have led many investors to fret over their portfolios, with the anxiety and fear being that they will lose all their money. But if the investment was made with the belief that the company will not only continue to generate cash flow, but overall growth in the future, then the anxiety is more emotional and less analytical.

I have observed that poor investment decisions are often dictated by price movement. However, price movement is very different than a company’s ability to continue generating earnings and to grow those earnings over time. There are times when a decline in price reflects verifiable concerns, but price movements alone can be very misleading. A rising stock price may put an investor at ease, creating a false sense of security.

Investors make mistakes when they let emotion creep in and impact behavior and investment decisions. When plowed over by the hype from greed or the hysteria from fear, investors seldom make rational decisions. This type of behavior only creates optimal opportunities for those not falling prey to emotions.

Value is what you get; Price is what you pay

I seldom hear of investors providing the price they are willing to pay in order to generate a stream of cash flow. In our FLOW portfolio, we were willing to pay $150,000 for a stream of cash flow of $17,580 annually, or 11.72% of the portfolio.

I don’t know if this is what will eventually come of it or if the portfolio will be significantly lower, but I wanted to make sure the price of $150,000 for 20 different investments could create a value worth at least $15,000 a year (in this case $17,580).

Value is different than price because value represents cash flow to us. Since we are value-conscious investors, we are intently keen on paying attention to potential cash flows that are expected to be received. Unfortunately, few investors spend the time necessary to focus on this critical element. Instead, many financial brokers’ attention is placed on stock price and its up or down pattern of movement.

If you pay too much, you receive very little value. No matter the amount of cash flow a company generates, the overall impact felt is the price that was paid to buy that investment. When purchasing an investment, you can often determine the value by how much cash flow is being received now, as well as in the future.

As I mentioned before in FLOW: Volume 1, Warren Buffett’s investment philosophy is all about value in purchasing a stream of cash flow for as little as possible. His quote, “Price is what you pay. Value is what you get” clearly summarizes this.

With the $150,000 invested in cash flow generation, my thinking now turns to the possibility of buying the whole company as the investment process begins.