Investment Process Summary



Investment Process SummaryCraig MoserFirst, we recommend you have an approach to investing for all accounts. For your IRA and other qualified accounts:Our approach is to build a core account that has a low standard deviation which gives us more upside due to minimizing risk.We include an all stock component (literally a 20-individual-stock portfolio) which is built for long-term growth-Multi-Cap Equity. The portfolio is very strong and built on a “rules-based chassis” whereby we do not continue to remain fully invested if there are no stocks which make our selection process. This gives us better downside risk management and an approach which is very competitive in up-trending markets. Part of the repositioning of your portfolio would focus on protecting the first 5 years of income. By doing that, you will accomplish 2 goals:Have the necessary cash flow to cover your RMDs;Avoid risk of loss while making withdrawals. To make sure you have the cash, we build a 5-year Treasury bond ladder with bonds maturing every January and July. This is the cash flow we need to fund those first years. Your taxable investment portfolio:I believe that taxes will be one of your largest “costs” in your retirement future as the demographics and debt combine to create stress on our economic system. Being as tax efficient as possible is a major goal of ours. So, when we look at assets that are already out of qualified investment accounts, the question is: How do we shelter those funds from gains, dividends, and interest taxation?One Absolute is that you lose all use of the money you send away to taxes.So, from an investing perspective we need to build out a strategy that will give you both reasonable cash flow on an after-tax basis and competitive returns.I expect that you will combine these strategies described below but I will break them down into components to understand better.Purely investment assets:Fixed Income:I would use primarily General Obligation tax-free municipal bonds put together initially in a 5-year bond ladder with maturities every 6 months to have liquidity and take best advantage of increasing interest rates, while avoiding federal and state taxes. We can decide how much later but the strategy is to use bonds that will avoid AMT so that we can keep more of what we make.We also use “some” ETF investments in this category to give us some exposure to floating rate and high yield bonds so there will be some taxable interest income and potentially some capital gains. We will add these in if they are trending positively and remove if they are not. Active equity investments:We would recommend the combination of our “adaptive portfolio” and our “tax harvesting portfolio” to provide both growth and tax efficiency. The tax harvesting approach selects approximately 120 individual stocks and uses a continuous screening process to determine if you should continue to own the asset. Monthly, the managers will “look into” the portfolio and harvest losses to bank and use to offset gains either this year or into the future. It would work like this:We bought Bank of America and it went down to our threshold sell rule. We would sell, and then select the next choice for that category and replace Bank of America, thus harvesting that loss and keeping the integrity of the portfolio. So, simplistically put, we sold BAC and bought JPM. At least in method. The adaptive portfolio uses primarily ETF investments and our proprietary formulas to either invest into or sell away from a set list of equity, real estate, or commodity indexes. If there are no positive trending asset classes in our universe we would not remain invested. We would move to government-backed money market accounts. This is unusual but can occur as in 2008, but usually there are positive trending asset choices and our selection process is a constant monitoring one. Either as an alternative or combination to this strategy is a specific annuity choice that is available only to our team:The Chosen EI Annuity gives us the ability to:-have tax deferral. This means that while assets remain in the account you will not incur any taxation on the gain in the account.-you could utilize several riders. You can add them to the account when you decide to utilize them and would not pay for the rider until you decided to use it.Tax benefits. You will ultimately want income from your investments. A benefit of this specific contract is that you may withdraw systematically using a method called exclusion ratio which is a patented payout method. A portion of your original deposit (FIFO) and a portion of your gain (LIFO) is returned to you on your cash flow which makes the cash flow more tax efficient.This can be done without “annuitization” of the contract which is specific to Annuity company. Other annuities are LIFO only. Multi-Generational payouts, non-spouse payout options, FIFO payouts for death benefits with the gains being able to be stretch out over multiple years and various other planning benefits can be attached to your base annuity and you can decide if/when you use them or not. So this provides flexibility. Investment choices within the annuity contract are built on an Equity Indexing methodology.Our flagship choice is on an index which was developed and run by JP Morgan called the Balanced Capital Strength 6. Much like any other index if you want to purchase the index, a company will provide access to that index and LFG uses First Trust for the provider. This is a rules-based bond and equity model which has a history of low risk and competitive returns.Annuity company provides the 2-year step-up/lock-up of any gains. So, at the end of the 2-year period you either get 1.1 times the index return, or you stay at your last highest point. Win but not lose. There are several other index options but, the base concept is that you will make money when the index chosen increases in value and if it declines you remain safe at your last highest point during each period you are invested in an index. Estate issues:Our firm works with your attorney to insure your wishes are accomplished. Proper titling of accounts and proper beneficiary designations are a crucial element that we see as a weakness for many folks as they are not well versed in “lawyer talk.” So, we will either work with your attorney or help your find an attorney that can get your documents in order and efficient. Accounting: This is an important person for you given that taxes will impact your outcomes more in the future. We want to interface with your CPA so that the things that we are doing do not show up as a surprise and that by working as a team we make your after- tax world as efficient as possible.We are in touch with you on a regular basis to provide such things as account reviews, market updates, educational events, and ongoing financial planning and analysis when either needed or requested. Let me know what questions you may have and what next steps that you envision will best fulfill your goals. ................
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