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Flexible Plan Investments

And 3 questions to ask to not be fooled

When I was a child, I was fascinated with magic and magicians. I read scores of books, learned loads of tricks, and put on magic shows (ten-cent admission) in our basement. My favorite part was the illusions (I once worked a part of a summer vacation mastering a very convincing floating wand).

Houdini was the mentor we had in those pre-David Copperfield days. He had walked through walls, escaped everything, performed death-defying stunts, and even made a live elephant disappear from a London stage!

This weekend I watched a fascinating bio-flick on the History Channel on Houdini’s life, starring Adrien Brody. One of the best parts of the picture was Houdini’s war on spiritualists.

In one dramatic scene, the magician is confronted by a spiritualist who accuses him of being as much a fake as the mediums that he sought to expose. His reply was that he had always said his tricks were just that and he was an entertainer, while the spiritualists made out that they were real and their customers often relied on their “information.”

To learn more about the History Channel presentation or even watch it, go here.

As I consider the financial services industry, I wonder whether investors think of advisors as mediums rather than being masters of illusions. I sense that most think it is the former rather than the latter. How many times do you hear someone talking about an advisor as if he or she is infallible? Or listen to someone explaining a strategy or stock pick like it just can’t lose? Isn’t that the medium’s game? The spirit world has to be right, doesn’t it? Investors often want that certainty as well.

At the same time, investors don’t want to believe their investments are built on illusions. There’s a negative connotation to the word. As Houdini said, they are based on a “trick.” You see one thing while something else is really happening. That doesn’t inspire confidence, does it?

Yet on closer inquiry, both of these viewpoints are askew. While we look for the infallible expert and the perfect strategy, we know that such does not exist – at least in this world. And although illusions can be said to be based on “tricks,” in reality they are based on a well thought out understanding of human behavior and the physics underlying the illusion’s success.

A grand illusion (like making the elephant disappear or walking through walls) can take many years to develop. The illusion is based on the application of human ingenuity, not simple awe of an “expert’s” opinion. And while most everyone who watches an illusion marvels in amazement, there are always those who can divorce themselves from the normal behavioral tendencies and focus on what is really happening – figuring out the methods. However, this failure to convince the minority does not negate the awe experienced by the majority.

Many times in this column I’ve pointed out the problems in relying on “expert” analysis. Study after study shows that experts are wrong more often than not when it comes to predicting future events. Yet we see these financial spiritualists performing their act daily on the various financial channels.

Meanwhile, I have been a proponent of quantitative-based strategies. These investment approaches are based not on opinion but rather years of study and solid mathematics. They are founded on statistical measures of human behavior. And while they are not always right, the research underlying them shows that they lead to success most of the time.
Financial “experts” seem to be closer to the mediums of old, while quantitative analysts follow methods similar to the creators of illusions. Realizing that they both can be wrong and that each has the potential to mislead, which approach seems best to you in managing your money?

If you choose the illusionist’s methods, how do you know that the strategy results you are being shown are not “illusions”? Studies tell us that if one has to make predictions about the future, there are two things we can do to increase our chances that we are successful. According to Nobel Prize winner, Daniel Kahneman’s, “Thinking Fast and Slow,” this can be done by 1) following a rules-based approach and 2) looking to predict only a very short time into the future.

Of course, the first requirement is exactly what quantitative investing is all about. It tries to reduce investing to a set of rules that have proven successful in the past. Now, it is important to note here that by “successful” we don’t mean every trade is a profitable one or even that every day, week, month, or quarter of trading is going to be profitable. It only means that past research demonstrates that applying the methodology through past market cycles consisting of both bull and bear markets has a better than 50% probability of yielding profits.

The second requirement makes sense too, doesn’t it? We know that trying to predict the weather an hour from now is easier than predicting it next year at this time. Isn’t it foolish that around the beginning of each year we see these predictions of how the markets are going to have behaved by year’s end? Yet the pattern is repeated yearly. It’s not enough to try to predict company earnings next quarter; Wall Street routinely attempts to predict 2015 and 2016 as well.

Most quantitative models focus instead on shorter periods. They trade day by day or week by week or month by month. This makes the methodology more responsive to what is actually occurring and allows for quicker recognition if things are going wrong so that corrective action can be taken. If you are trying to look out a year into the future, you don’t know whether you are right or wrong until you are near the end of that year. Until then it’s easy to say about a losing position, “Oh, we have plenty of time. It will come back.”

So if you want to avoid falling for illusions, while taking advantage of the ingenuity of their creators, ask a couple of questions when you hear about good financial results:


  1. Are they founded on a rules-based approach or, instead, the cumulative results of an investment committee or other human experts?
  2. Have the rules been consistently applied over a very long time period that encompasses bull, bear, and sideways markets; and
  3. How often does it trade? Is it often enough to be responsive to the market being traded and to tell if the underlying assumptions were right or wrong?

Simple questions, but they will help you put the odds of success on your side in choosing among investment strategies. The results of quantitative strategies need not be illusions, nor should you follow the spiritual guidance of a financial medium.

Turning to last week’s markets, stocks were negative across the board. Both here and abroad the arrows were pointing down last week and month to date. At the same time, quarter-to-date numbers were mixed but mostly positive in this country. Stocks of larger companies continue to do well, while small and even mid-cap stocks have suffered.

The Dollar’s continued rise is largely responsible for domestically-based companies continuing to outperform their internationally-based brethren. It also is the reason why commodities continue to plunge. While gold has been the best of the commodities, it, too, has moved to an oversold condition that is the exact opposite of the Dollar’s overbought condition.

Source: Bespoke Investment Group 

I believe both are the result of the big move higher in interest rates of late. Investors continue to anticipate an increase in rates by the Federal Reserve. While most experts are suggesting next spring or summer, what’s important is that the markets are acting like it is right around the corner.

Source: Bespoke Investment Group

Since our interest rates are already higher than most developed countries, funds are flowing into the US and our Dollar is moving higher, and commodity prices, which mostly come from overseas, are falling. And the discussion of all this creates the uncertainty that underlies most stock market declines.

Last week more economic reports beat expert prognosticators than disappointed. But this was largely ignored in the face of rising interest rates. While bullish sentiment plunged, it has not yet reached the level that seems to spur rallies.

Source: Bespoke Investment Group

And, of course, as we have been reporting, our Political/Seasonality Index has been in negative territory since September 9th. It doesn’t turn positive for any appreciable time until October 9th (it does move back into stocks for the next couple of days though).

PSI Chart

Houdini’s war on spiritualists continued until the day he died here in Detroit and was carried on by his wife, Bess, for the remaining seventeen years of her life. Many thought that Houdini hated the spiritualists that he was always able to expose. In truth, he revealed to his intimates that he yearned to find the real deal.

Isn’t that what drives all of us? But just as there really is no magic bullet, there is no expert that is always right or strategy that only goes up and never goes down.

In real life we learn, instead, to put the probabilities on our side. If you do that consistently or employ methodologies that do so, experience tells us that while we won’t always be right, we will be right more often than not, and success will not be merely an illusion.

All the best,



Flexible Plan reveals new website

Watch for this week’s release of the public website, complete with a new look and feel, with improved functionality. A release for Phase 2 of the FPI site, which includes after-login features and broker applications, is planned for 2015.

Revised: New Guidelines for Flexible Plan’s Pioneering Small Accounts Program which continues at Trust Company of America and Schwab Institutional 

GREAT NEWS! Transfers will again be accepted on qualified accounts that are accompanied with a statement dated within 30 days.

In addition, effective August 25, 2014, demonstrating our commitment to improving our small accounts program so that the revolutionary program can continue to flourish, the following procedures are followed for new accounts under $25,000:

  • Non-Qualified accounts – only checks will be accepted to fund an account under $25,000. Please request a check from the current custodian (payable to the successor custodian).
  • Flexible Plan reserves the right to return accounts with a transfer that results in an account under $5,000.
  • Flexible Plan will no longer monitor funding for Small Accounts; therefore, if the account has not funded after 60 days, the client will receive a non-management letter.
  • Systematic withdrawals will not be accepted on accounts under $25,000.
  • Small Account Set-Up fees still apply – 3% of the estimated investment amount, up to a maximum of $350.
  • Small Account balance minimums will be screened on a monthly basis. Accounts reduced below $5,000 due to client withdrawals will receive a termination notice.

To accommodate new account paperwork for Small Accounts currently in the processing queue, a short grace period will be granted.

After today (September 15th), if a transfer form is received on a non-qualified account, the advisor will be notified by email to request a check from the current custodian.

The Small Account program at Flexible Plan was created on April 1, 2009 to allow for accommodation of small accounts for clients and family members and was designed to bring managed accounts to a new group of clients that previously had not had access to professional management. In our first five years of operations we have learned much from the experience – both advantages and pitfalls. The new procedures are designed to continue the program while making sure that the delivery of such services is cost effective.

New P.O. Box to Expedite Check Processing at TCA

Trust Company of America (TCA) has a new Post Office Box designated specifically for checks related to client account contributions and checks from transferring custodians.

The new Post Office Box is:
P.O. Box 5158
Englewood, CO. 80155-5158

This specific P.O. Box enables timelier posting of funds to client accounts and your ability to invest faster. The Transfer Request form has been updated to reflect this new P.O. Box and is available online.


Bulls took a breather last week, mulling whether recent economic indicators might lead the Federal Reserve to issue a slightly more hawkish policy statement this Wednesday. Across five trading days, the S&P 500 retreated 1.10% to 1,985.54, the NASDAQ 0.33% to 4,567.60 and the Dow 0.87% to 16,987.51.3

% Change Y-T-D 1-Yr Chg 5-Yr Avg 10-Yr Avg


S&P 500
Real Yield 8/15 Rate 1-Yr Ago 5-Yrs Ago 10-Yrs Ago
10Yr TIPS Yd

  YTD-August returns
S&P 500

Sources:,, - 9/12/14 4,5,6,7
Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly.
These returns do not include dividends.


Summer spending spree lifts retail sales

They increased 0.6% in August, easing some anxieties about a possible slowdown in personal spending. Core retail sales (which exclude auto, gas, food, and home improvement purchases and more closely match the consumer spending aspect of GDP) improved 0.4% last month, and were up 4.1% year-over-year. The Commerce Department also revised July’s headline retail sales gain up to 0.3%.1

Consumer sentiment hits a 14-month peak

At a reading of 84.6, September’s preliminary Thomson Reuters/University of Michigan consumer sentiment index was 2.1 points above its final mark for August. Not only that, it advanced to its highest level since July 2013. Household income expectations also hit their highest level in almost six years.1

Gold descends again, oil slumps on IEA forecast

Settling Friday at $1,231.50, the precious metal fell 2.8% last week on the COMEX, undercut by dollar strength. Silver posted the same weekly loss, ending the week at $18.55. After the International Energy Agency reduced its 2015 world demand forecast for oil, NYMEX crude slipped 0.6% Friday to settle at $92.27.2


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Several weeks ago we looked at the weekly chart for gold prices and spotted an inverse head & shoulders pattern, which turned into a “Pennant” formation (blue lines).

Source: The S&P GSCI® Gold Index, a sub-index of the S&P GSCI, provides investors with a reliable and publicly available benchmark tracking the COMEX gold future.                                                                        

Having failed to break the upper resistance line, it has now turned and renewed the downward trend by breaking the lower Pennant resistance line. It now looks like prices will go down and test the major support line, which has been holding at the gold production price level (purple line).

Did the US dollar strengthen? Over the last week, the gold spot price declined 3.09% as the US Dollar strengthened. The Gold Bullion Strategy Fund (QGLDX) lost 2.97% for the week. The difference was mostly due to QGLDX’s early close at 1:30PM (rather than 4:00PM). The prices of short-duration fixed income ETF holdings were lower, on average, over last week, while the COMEX gold futures contracts dropped 2.83%.

US equity markets were down last week. The NASDAQ Composite lost 0.33%, the S&P 500 was down 1.10%, and the Dow Jones Industrial Average recorded a weekly loss of 0.87%. Nine of the ten S&P industrial sectors were down for the week. The move downward was led by Energy (-3.73%), Utilities (-3.25%), Telecommunications (-2.64%), and Materials (-1.89%). All of the Quantified Funds were down last week. The largest drop was in the Quantified Market Leaders Fund (QMLFX, -4.31%), followed by the Quantified All-Cap Equity Fund (QACFX, -2.04%), the Quantified Alternative Investment Fund (QALTX, -1.27%), and finally the Quantified Managed Bond Fund (QBDSX), which was down 0.79%.

The Quantified All-Cap Equity Fund (QACFX) made some changes last week, shifting its weightings in four leading stock baskets, which were over 50% of the portfolio’s composition: “All-Cap Quality Acceleration” (23%), “All-Cap Piotroski” (16%), “All-Cap Cash Flow” (9%), and “CMPS- Double 10 Dividend and Growth” (7%). Among domestic sector distributions, Information Technology and Industrials led with portfolio allocations of 16% and 13%, respectively. The largest stock holdings in the All-Cap portfolio were in the common stock of Associated Estates Realty Corp. (AEC, 2.16%) and the common stock of AAR Corp. (AIR, 2.09%).

The cash level within the All-Cap Fund decreased to 10% last week. The Fund’s daily pattern trading of S&P 500 futures started the week neutral and changed to 6% long on Tuesday’s close to begin this week. Our TVA-based futures hedge remained neutral throughout the week.

The Market Environment Indicator (MEI) remained bullish last week. With the adjustment in the Quantified Market Leaders Fund (QMLFX) since the beginning of June, equity asset class allocations remained the same on Friday: Emerging Markets (19.2%), Large-Cap Growth (4.8%), Large-Cap Value (14.4%), and Mid-Cap Value (9.6%).

Total sector ETF weightings remained at 52% last week. Distribution of sector holdings and weights were as follows: Electronics (12.09%), Real Estate (13%), Energy Services (13.91%), and Technology (13%).The individual ETF positions with the leading portfolio weightings were in the iShares Dow Jones Technology ETF (IYW, 7.5%), the Ultra Dow 30 ProShares ETF (DDM, 7.1%), the Direxion Emerging Markets Bull 3x ETF (EDC, 7.0%), and the SPDR S&P Oil & Gas Exploration & Production ETF (XOP, 5.1%).

Within the Quantified Alternative Investment Fund (QALTX), the Long/Short Market Neutral Alternative sub-portfolio increased weighting in the Madison Covered Call and Equity Income Fund (MENAX) from 0% to 3% and decreased weighting in the Dreyfus Global Alpha Fund (AVGRX) from 1.33% to 1.27%.

Among the largest ETF positions there were a few changes: allocations to the Wisdom Tree Managed Futures Strategy ETF (WDTI, 3.76%), the First Trust North American Energy Infrastructure ETF (EMLP, 4.6%), and the Materials Select SPDR ETF (XLB, 2.06%) increased, while allocation to the PowerShares Global Water ETF (PIO, 1.5%) decreased.

The cash level within the Fund increased to 15.86% last week. The daily pattern trading of S&P 500 Index futures with 10% fund capital allocation started the week neutral and changed to 3% long on Tuesday’s close to begin this week. The 7.5% capital allocation of the volatility-based systematic trading of NASDAQ 100 Index futures remained at 15% long throughout last week.

The Quantified Managed Bond Fund’s (QBDSX) two leading broad-bond index ETF holdings, the Peritus High Yield Bond ETF (HYLD, -0.92%) and the iShares S&P National Muni Bond ETF (MUB, -0.40%), were down for the week.

The 10-year US Treasury yield increased to 2.61% for the week. The Fund increased weightings in the Peritus High Yield Bond ETF (HYLD) from 9% to 12.3% and in the iShares S&P National Muni Bond ETF (MUB) from 7.3% to 10.7%, while decreasing allocation in the SPDR Barclay’s Capital High Yield Bond ETF (JNK) from 9% to 6% and in the iShares Barclays 7-10 Year Treasury Bond ETF (IEF) from 5.8% to 4.8%. Cash increased to 4.2%.

The 10% active portfolio exposure to 30-Year US Treasury Bond futures in the Fund started the week long, changed to short on Tuesday’s close, long on Wednesday’s close, and short on Thursday’s close to begin this week. The position gained around 2.54%.

Fund (Inception) Symbol Qtr Ending 6/30/14 YTD Ending 8/31/14 1 Year Ending 8/31/14 Since Inception Ending (8/31/14)* Annual Expense Ratio
The Gold Bullion Strategy Fund (7/5/13) QGLDX 2.71% 5.98% (8.90%) 2.39% 1.66%
Quantified Managed Bond Fund (8/9/13) QBDSX 1.68% 3.94% 4.61% 3.58% 1.68%
Quantified All-Cap Equity Fund (8/9/13) QACFX 0.99% 0.29% 10.85% 4.71% 1.51%
Quantified Market Leaders Fund (8/9/13) QMLFX 4.62% 7.52% 18.74% 13.55% 1.71%
Quantified Alternative Investment Fund (8/9/13) QALTX 2.34% 3.58% 16.16% 11.54% 2.20%



As of the most recent prospectus, the expense ratios for the Gold Bullion Strategy Fund are as follows: Investors’ Class (No Load), 1.66%; Class A, 1.66%; Class C, 2.41%. The maximum sales charge imposed on Class A share purchases (as percentage of offering price) is 5.75%. An additional 2% redemption fee applies to all share classes, including Investors’ Class, when shares are redeemed within 7 days of purchase.

The performance data quoted represents past performance; past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate and an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be higher or lower than the performance data quoted.  For current performance, please call 1-855-647-8268.

Risks associated with the Quantified Funds include active frequent trading risk, aggressive investment techniques, small and mid-cap companies risk, counter party risk, depository receipt risk, derivatives risk, equity securities risk, foreign securities risk, holding cash risk, limited history of operations risk, lower quality debt securities risk, non-diversification risk, investing in other investment companies (including ETFs) risk, shorting risk, asset backed securities risk, commodity risk, credit risk, interest risk, prepayment risk, and mortgage backed securities risk.  For detailed information relating to these risks, please see prospectus. 

The principal risks of investing in The Gold Bullion Strategy Fund are Risks of the Sub-advisor’s Investment Strategy, Risks of Aggressive Investment Techniques, High Portfolio Turnover, Risk of Investing in Derivatives, Risks of Investing in ETFs, Risks of Investing in Other Investment Companies, Leverage Risk, Taxation Risk, Concentration Risk, Gold Risk, Wholly-owned Corporation Risk, Risk of Non-Diversification and interest rate risk. “Gold Risk” includes volatility, price fluctuations over short periods, risks associated with global monetary, economic, social and political conditions and developments, currency devaluation and revaluation and restrictions, trading and transactional restrictions. 

An investor should consider the investment objectives, risks, charges and expenses of each Quantified Fund and The Gold Bullion Strategy Fund before investing. This and other information can be found in the Funds’ prospectus, which can be obtained by calling 1-855-647-8268. The prospectus should be read carefully prior to investing in The Quantified Funds or The Gold Bullion Strategy Fund. 

There is no guarantee that any of the Quantified Funds or The Gold Bullion Strategy Fund will achieve their investment objectives.


  For more information on the Quantified Funds, sub-advised by Flexible Plan Investments, Ltd., please review the prospectus and fund performance.

Current or historical holdings of the funds


Over the past year, as editor of ProActive Advisor Magazine, I have had the opportunity (and privilege) of interviewing several dozen financial advisors from all corners of the US. The purpose has been to explore their attitudes and personal best practices regarding client service and to probe their investment philosophy and the strategic tools they use.

While each advisor has had a unique personal story and path into the advisory business, one attribute has been universally shared: their strong commitment to doing right by their clients. They have also consistently articulated a strong belief in active investment management, though their perspectives on its role for client portfolios have shown a fair amount of differentiation. I view that as healthy, with each advisor having had varying years of experience with active management approaches and each having his or her own unique client base.

What has been a bit surprising, over the past six months especially, is the realization that “advisors are human too.”

What does that mean? Of course, they are human, and I just told you they have a wide array of very interesting personal stories. What I mean is that despite their many years of experience and their dedication to risk-managed investment strategies, they also can fall prey to the same emotional reactions and doubts regarding the stock market that plague individual investors.

The very good news is that with their experience and their deep understanding of active management principles, they are able to dismiss those feelings far more easily than the retail investor. Tough as it can be at times, they know that third-party, actively-managed strategies (like Flexible Plan’s) provide time-tested strategies and discipline, thereby removing any need for acting on personal bias, emotion, or predictions for the market.

The specific advisor reaction that I have been hearing is a continued sense of wonder about the elevated state of the current bull market. Back when I was in the advertising business, we had an expression for consumer behavior when it came to advertising messages that stretched credibility—this “willing suspension of disbelief” sort of captures the outlook of many advisors I have spoken to recently.

Like everyone else, advisors read and hear the financial and economic news and cannot help but be affected by reports of a continued sluggish US economy (though showing signs of improvement), the dysfunction in Washington, relative weakness in China and Europe, inconsistent labor and housing market numbers, and, perhaps most importantly, the geopolitical risk around the globe. More than one advisor has commented on the phenomenon of the past several years where “bad news is good news,” which flies in the face of most logic and, obviously, is tied to expectations regarding Fed action, or lack thereof.

Merriam-Webster defines “phenomenon” as “something (such as an interesting fact or event) that can be observed and studied and that typically is unusual or difficult to understand or explain fully.” That sums it up nicely for some of the advisor reactions I have been hearing.

I think it simply relates to the fact that highly intelligent people, like these advisors, have some difficulty in totally accepting anything that flies in the face of prior experience and what normally might be expected outcomes. Don’t we all! Yet these advisors overcome these headline-induced feelings with the logic and discipline that a quantitatively based, third-party money manager brings to their client base.

Turning to the markets last week, there was—surprise—yet another prime “bad news is good news” example that helped major indexes finish the week on a strong note and notch another new all-time high for the SPX at 2007.7. The six FUSION Indexes and the STF Index all hit new all-time highs last week as well.

For the week, the Dow and S&P 500 both added 0.2% as the broad market logged its fifth week of gains. The “bad news” came in the form of the August jobs report on Friday, where a big miss (142,000 jobs versus expectations of 225,000) was initially met with selling. However, the Dow put in a turnaround from low to high of 128 points and all three major indexes finished solidly in the green.

While some analysts saw a few bright spots in the jobs report, according to the WSJ, “the weaker-than-expected data gave the FOMC more leeway to lift interest rates later rather than sooner,” explaining why the bad news was viewed as potentially good. It should also be noted that some reported progress in negotiations surrounding the Ukraine situation and the actions by ECB President Mario Draghi helped keep the market positive for the week.

European markets have registered a fairly substantial rebound since mid-August in anticipation of the ECB’s action. According to Bespoke Investment Group, “the ECB’s response to flailing demand, disinflation, and horrible credit growth is to cut interest rates further and introduce a bond-purchase program designed to pump cash into the non-financial sector.”

Source: Bespoke Investment Group

Will the bull continue in the US and will Europe see continued recovery in its equity markets? Of course, no one knows for sure. Bespoke has noted the historical record of September being the weakest market month of the year and the somewhat long-in-the-tooth nature of this bull market.

Not only has the S&P 500 closed above the 2000 mark for the first time recently, this bull market has exceeded its 2000th day. The current bull market now ranks 4th in terms of length (as well as strength) and, with a gain of 196.4%, is just about double the average bull market gain of 105.3% (through Friday, 9/5).

Bull and bear markets are determined by a 20% gain or fall in price. For that reason, many count the current bull market as starting March, 9, 2009. Yet, as we pointed out in an earlier Hotline, in 2011 the index did fall 19.38% from market close to market close, and on an intraday high to intraday low basis the decline was 21.58%. If we count the age of the bull rally from the October 3, 2011 bottom instead of 2009, the current bull market is only 1067 days old. Rather than ranking 4th in longevity, it would only rank 9th.

The most recent survey of the National Association of Active Investment Managers (NAAIM), however, shows a continued relatively bullish level of exposure for NAAIM’s active risk managers. This is consistent with Jerry Wagner’s frequent comments in this space that until the market uptrend is significantly broken, logic (and models) says to stay with the trend—and a level of exposure to stocks consistent with strategies associated with one’s specific risk profile.

So, whether this involves some “suspension of disbelief” or not, the important thing is to stay in tune with what the market is doing, not what anyone thinks it “should” be doing.

Have a great week.

David Wismer


The results may surprise you.

At least once a quarter for the last twenty years, I have received the same request, “Can you please make daily performance numbers available on your strategies?” This week yet another request was made.

This is despite the fact that we make daily account balances available here and on each platform’s website (TCA’s Liberty site, for example), our model account results are available on our website to financial advisors with daily return numbers provided with a five-day delay (to allow all trades and dividend payments to settle) and each week the hotline provides the weekly returns for all of our popular strategies.

Historically, I have not gone farther, first, because daily data has a higher incidence of mistakes even from the largest financial companies and these take time to be discovered and corrected. Why get worked up about something until it is verified?

Secondly, even professional investors have determined that for the most part daily data is too noisy to trade on the most popular technical analysis basis – momentum or trend following. More than twenty years ago we studied whether to use daily or weekly data in our trend approach – Evolution. Every way we studied it, it always came back the same. Daily data did worse than weekly. There was too much noise – random price movements, event, or headline spikes – to effectively discern the trend from daily data. When we did our FUSION research over the last two years, the results were the same.

Third, most investors have little interest in the daily data. While our daily account balance page is popular, less than 1% of our account holders go there daily.

Finally, and most importantly, I’ve always believed that watching account returns daily is bad for the average investor’s financial health. Why do I believe this? Because there is a substantial body of academic research that supports this belief.

There has been a wide array of academic studies of how often the average investor should look at their financial statements. While one should check account balances at least once a month to make sure nothing untoward has occurred (identity theft or custodian error, for example), calculating or reviewing returns is an entirely different matter. Most studies have shown that the best review period is about every 12 months (some have concluded as short as eight months and others as long as fourteen months).

Why not more often? Isn’t more, better? The reason researchers (including two Nobel Prize winners) have reached the opposite conclusion is because of two behavioral biases uncovered among humans that especially apply to investors.

First, investors are loss adverse. This means that investors have more fear of losses than the pleasure they derive from gains (about twice as much). As a result, they pay a premium in the unrealized gains lost from the fear induced by past losses.

We have been seeing this play out for the last five years right before our eyes in the stock market. The losses endured by investors in 2007-8, not to mention 2000-2, have caused many investors, professional and non-professional, to miss out on the current 100%-plus bull market. Just today on CNBC I heard a commentator saying he thought the next big move for stocks was going to be up because there is so much money on the sidelines that has missed the gains but now needs to find a way to get in to stocks to achieve better results to show by year end.

What does investor loss aversion have to do with how often an investor should review returns on a financial statement? It stems from another behavioral bias: narrow framing.

By narrow framing we mean that people tend to make decisions by looking for simple decisions that can be made one at a time in a series. In contrast, broad framing looks at a series of options and makes a single comprehensive decision after reviewing all of them. Studies show that broad framing will be superior or at least equal to the “one simple decision at a time” approach “in every case in which several decision are to be contemplated together.”

Applying this to investors, studies have found that they tend to look at investing trade by trade or review their returns over very short time periods. When you consider this along with their tendency to be overly concerned with losses, you can see why reviewing strategy returns too often can be costly.

In fact, one of those Nobel Prize winners, Daniel Kahneman, in his book, “Thinking Fast and Slow,” concludes:

The combination of loss aversion and narrow framing is a costly curse. Individual investors can avoid that curse, achieving the emotional benefits of broad framing while also saving time and agony, by reducing the frequency with which they check how well their investments are doing. Closely following daily fluctuations is a losing proposition, because the pain of the frequent small losses exceeds the pleasure of the equally frequent small gains. Once a quarter is enough, and may be more than enough for individual investors.

Kahneman offers additional advice to investors beyond less frequent return review. He says investors should learn to think like traders.

How do traders who are glued to the computer screens seeing an unending stream of gains and losses survive the stress and avoid the effects of loss aversion. They take a broader view and adopt an attitude of “you win a few and you lose a few” whenever deciding to accept a small risk.

Kahneman did caution that, while this attitude is used by experienced traders to shield themselves from the pain of losses, the use of it by individual investors is subject to some qualifications:

  • It works when gambles are genuinely independent of each other;
  • It works only when the possible loss does not cause you to worry about your total wealth; and
  • It should not be applied to long shots.

Here’s another example not from investments: We have all read that statistically it makes no sense to have a low deductible on insurance or to sign up for extended warranties on products. Many people do it anyway.

Even among those more disciplined that might initially have a higher deductible and/or avoid those extended warranties, it often seems that just one loss will cause them to start signing up for the warranties and/or lowering their deductibles. Loss aversion and narrow framing are at work here and the trader’s attitude of “you win a few, lose a few” would be better for our financial health.

I know the first time I heard this phrase applied to investing it sounded a bit cavalier, but think about it; if you have a properly diversified portfolio, be it made up of strategies or asset classes, will one trade or one day’s return really have that big an effect on your total investments?

When you chose that portfolio, did you choose it based on the results the day before or, instead, over a much longer period? And when you chose each asset class or strategy, did you think that every one of them would be profitable every day? Every month? Every quarter? Probably not.

So why look at returns every day, or every month, or even every quarter? Why give in to the tendency to overly fear a loss causing you to miss opportunities?

When most of this research was done, the predominant “strategy” for investing was “buy and hold” investing. Yet, Kahneman and Richard Thaler, the other Nobel Prize winner behind much of this research, still firmly believed these principles applied. If, instead, your investments are being managed by an investment advisor that is already actively managing the investment portfolio on a day-to-day basis, aren’t these considerations even more applicable?

Furthermore, if they are following a strategy that demonstrates a statistical edge based on years of research, aren’t you paying them to adopt the trader’s attitude for you? Why overrule your previous, broadly-framed decision?

In the financial markets, the greatest risk remains to be headline risk – whether the Ukraine, ISIS, Ebola or the European Union slowdown, they all have the potential to send prices reeling within the narrow frame of a day or so. On a broader basis, we continue in a rising trend. Just Friday, the S&P 500 set a new all-time high over 2000. Our STF and Fusion Indexes hit new all-time highs as well and all but one (the most conservative) have topped the S&P 500 year to date. See discussion below.

Interest rates remain low, earnings reports have been solid, and sentiment is bullish but may be getting a bit bubbly. While September seasonality is negative, it is less so in years where the market is up year to date (except in the first few days of the month when it is still very negative).

Historically, the very long view has the average September top occurring at the end of the first week, more recent data suggests a top around mid-month. Supporting this is the fact that this month most of the Federal Reserve infusion of money will occur in the first half of the month as well. Finally, a substantial majority of the economic reports last week were better than expected.

All this suggests that it may be best to ignore the daily returns for now, or if you must watch, use the opportunity afforded by any weakness to reposition your portfolios and add more equity to your portfolio until we have a conclusive break in the long-term uptrend.

All the best,


PS – Our family lost a good and faithful friend this weekend. Our son David’s dog, Precious, who lived many years with us as well, passed away.

It is strange how a four-legged creature can mean so much to us two-legged humans. But they are so much a part of our lives. When my son had an extended illness, she comforted him – rarely leaving his side, and when he trekked to the far west, she accompanied my son and me on the cross country journey. Out in California, she was a friend to David before he made any others.

She was so intelligent. She could do the darn’dest things, but her specialty was doors. There was rarely a door that could confound her. Many service people would ask me as they left, “Did you know that dog can open doors?” On our trip out west, she refused to stay in the hotel room. We’d leave her in the room and each time she’d get out and beat us to the elevator! We finally learned to always get carryout.

Even though she’s lived with David in California for four years, I’ll miss her being there when I come to visit. But I know she is better off now. Last time I visited earlier this year she was thinner, grayer, and had to be helped up the stairs. The dog that raced around our home, opened every door, and taught the dogs she left behind to do it too is gone, but the memory lingers and hopefully won’t go away.



It always seems to begin the same. A “News Flash” scrolls across the lower portion of our TV screens. Or the music trumpets a change is coming on the radio. (For those always plugged in on their phones or iPods, though, I have no idea how they learn about anything!)

Yesterday morning’s early birds watching or listening saw these alerts, while others heard about it shortly after they awoke. A few of our subscribers and clients probably felt it as it was happening.

A 6.0 earthquake rocked Napa Valley, disturbing the peace and quiet, the serenity that marks one of America’s most beautiful regions. Windows on Napa’s Main Street exploded into a shower of glass, racks holding both the highest and lowest quality vintages rocked and often disgorged their cargo indiscriminately into a broken mass of shards of glass with molten rivers of crimson and gold. Rubble fell from the fronts of buildings and mobile homes burst into flames. 89 people were injured, 3 very seriously.

It’s a scene unique to the area this weekend, yet familiar to us all. Every community has had its disasters. While they are all of varying proportions, they share some of the same characteristics. First and foremost, our hearts, America’s communal sense of empathy, goes out to every community experiencing the loss that these disasters bring.

Secondly, it is always the case that the specific disasters were unexpected at the time they occurred. Yet, almost paradoxically, the possibility of their occurrence was also almost always known with a certainty in advance.

While the earthquake this weekend could not be predicted with current technology, we know with a certainty that sooner or later the “big one” will hit the West Coast (that’s 7 .5 to 9 on the Richter scale versus 6.0 for this one). Although we cannot predict precisely when or where tornadoes will touch down, we know with a certainty that hundreds will occur across the South and Midwest each year. And, while models keep getting better and better, we can’t tell precisely where hurricanes are going to go ashore, yet we know that at least one will wreak havoc somewhere along our shoreline each year.

Of course, this is no different than what we have to deal with in the stock market (or with most financial asset classes, for that matter). Check out the three graphs of past stock market values. At the point where each red vertical line intersects the graph, each price line was hitting new all-time highs. But could you tell at that point that the bottom was about to drop out of stocks?

For more than a century, stocks have undergone these precipitous declines every five to seven years, on average. We know with a certainty that they will keep occurring, although no one knows for sure precisely when.

It is encouraging, however, that here at Flexible Plan we did have our clients 100% in cash for the first one in 1987, our rotational strategies made a profit during the 2000-2002 decline, and we substantially reduced losses versus the indexes for most strategies on the third occasion (2007-8).

How were we able to do this? Each of these market declines was very different from the other. In the 1987 example, stocks fell because of tightening operations of the Federal Reserve that were not widely recognized in advance. Fortunately, the primary indicator we were using for our market-timing decisions was developed to detect such operations, so we used that knowledge to protect our clients.

In the second crash, the decline occurred in waves. Not everything crashed at once and rotational strategies that seek to differentiate the leaders from the laggards were able to move smoothly from one asset class to another, profiting from the winners while avoiding the losers.

Finally, the last financial crisis was not widely anticipated, and most assets fell together when stocks collapsed. Protection was only achieved by having actively managed strategies with a defensive plan that automatically went into effect as prices fell, plus being widely diversified not only on an asset class basis, but also on a strategy basis.

Today, the financial markets are hitting new all-time highs, just as we have been suggesting that they would since late last year. All of the US stock market major indexes are up more than 3% this month alone, as stocks have moved higher for the last three weeks. Our STF and FUSION Indexes hit new all-time highs again repeatedly last week.

Yet you might ask, “What are we doing in anticipation of the next bear market?”

Some say the bear is right around the corner—if only because this bull market is growing old. If you count the March 2009 low as the bottom for stocks that preceded the current rally, the bull market has lasted more than five and a half years. This is longer than the average bull market.

Although this argument has been circulating Wall Street for some time, there is a different view possible. A bear market is traditionally defined as a decline of 20% or more in the major indexes. And it is true that the S&P 500 has not fallen 20% since March of 2009, but in 2011 the index did fall 19.38% from market close to market close, and on an intraday high to intraday low basis the decline was 21.58%.

If we count the end of that decline as the completion of a bear market, we now have a starting point of October 4, 2011 as the beginning of the current rally, and the current rally is then of less-than-average duration. This suggests that that the stock market rally could go on much longer.

On the indicator front, the picture is mixed. Earnings reports were decent, though not spectacular, yields for the month are lower, and all 11 economic reports last week equaled (1) or exceeded (10) expectations. At the same time, investor sentiment is getting into overly optimistic territory and we have an approaching political seasonality index top the first week in September. The first three indicators are my primary gauges, so I’ll go with the higher prices are yet to come.

On the price or momentum front, obviously these new highs suggest higher highs as well, but more importantly, as we were saying a month ago, the primary trend line has held on each downturn, suggesting that the primary trend remains upward or, as I said at the beginning of last week, it is pointing toward “higher ground.”

But what if this is neither a 1987-type decline (forecastable by indicators) nor a 2000-2002 melt down (tipped off by cascading momentum moves in different asset classes)? If it is, instead, a repeat of 2007-2008 or is something totally unexpected, what do we fall back on then?

That’s when we have to depend on the defensive plans of all of our actively managed strategies and on our Strategic Diversification line of defense. Our FUSION strategies are based on the concept of targeting a level of risk and restraining portfolios to the resultant targeted maximum loss levels, by diversifying among less correlated asset classes and strategies.

Usually I explain correlation as being how different asset classes or strategies relate to each other—how do they move when another asset class moves one way or the other?

Everyone seems to nod their head when I say that you need to have different types of assets and strategies in your portfolio to protect yourself from the unexpected. Yet, few seem to realize that to do that you have to own some assets or strategies in your portfolio that are not going up when everything else is.

If you expect everything in a portfolio to be going up when the market is up, then the portfolio probably is not uncorrelated. And when prices go down, all of those same components are likely to go down as well. No diversifying asset or strategy goes up all the time.

Having a diversified portfolio requires some parts to be acting differently from other parts. Otherwise, it is not truly diversified.

Similarly, you can’t have alternative strategies that move exactly like stocks or bonds when prices of either go up, and then expect them to behave differently when prices go down. Typically alternative investment assets or strategies underperform when stocks are strong and outperform when they are weak. But if you throw alternatives out when stocks are strong, then they are not there to help when unexpected losses occur.

Last Friday night, after I picked up my son at his house in Royal Oak to go downtown to the Lions-Jaguar football game, we had to drive through several blocks in the neighborhood around his home. It started two blocks away from his house, and continued for miles. Abruptly, the curbside had turned into four-foot or higher walls of litter. Soaked furniture, boxes, and unusable appliances were stacked high in front of every home.

Many who saw the water back up into their basements, and then saw it climb higher through their floorboards and into the upstairs living quarters, lost everything. Most of the rest lost all of their possessions stored in their basements. The weeks since have been spent in clean up mode. While somehow my son’s home had been miraculously spared, many Flexible Plan employees were among those victimized.

The State of Michigan declared it an emergency. Still, the City of Royal Oak is weeks behind in the pickup from the floods that submerged many of the Detroit suburbs two weeks ago. The deluge which had bested an over 100-year-old record, dumped as much as ten inches on the area in less than an hour.

The next day, the newspapers reported that that much rainfall in the Detroit area had been “totally unexpected.”

All the best,



Flexible Plan Investments, Ltd., a leading provider of dynamic risk-managed investment solutions, is excited to announce that it has made Inc. magazine’s 2014 Inc.5000.

In its eighth annual Inc. 500 | 5000 list, it was harder this year than ever before in history to achieve the Inc. 5000 honoree list with the average company on the list growing an astounding 516 percent. The Inc. 500|5000 is an exclusive list of the nation’s fastest growing private companies ranked according to revenue growth percentage.

“Being named as one of the nation’s fastest growing companies once again is an honor, and is a testament to the popularity of our separately managed accounts, the efforts of our incredible staff here in Michigan, the confidence of our clients, and the thousands of financial advisors around the country that work with us,” said Jerry Wagner, Founder & President, Flexible Plan Investments, Ltd.

This is Flexible Plan’s fifth year being recognized in the Inc. 500 | 5000 list, achieving that honor in 2014, 2013, 1995, 1994 and 1993.

For more information on the Inc. 500|5000 list, visit

Strategy Performance

To our readers
Everything in the newsletter pertains to strategies available on our Strategic Solutions platform at Trust Company of America. The same strategies are implemented on many other products: mutual funds, variable annuity, variable life and retirement platforms. Therefore, we expect the strategic discussion may be of interest to you. Note, however, that since these products have their own subaccount and fund universes and different internal expenses, the results and trading of the same strategy on other platforms may differ substantially from those described herein.

Managed Retirement Plan Participants:
Most of you are managed using Lifetime Evolution and our sub-advised funds, so those topics will be most applicable to your account. But, more and more of you are in plans using Market Leaders. If so, that newsletter section may interest you