1960 — a simpler time...

"...hindsight tells us that these investors were blind to the actual risk of owning stock in just a company or two..."

Investing was simple in the ‘50s and ‘60s. Find a stock you knew something about and hold it until it rose in value. But, as the post-war boom faded, the normal cyclical nature of the markets returned. Plus, investors found that individual companies were often subject to their own personal bear markets. The death of the company’s CEO, or the crippling loss of a firm’s key contract quickly translated into an investor’s loss of virtually everything. Hindsight tells us that these investors were blind to the actual risk of owning stock in just a company or two.

To avoid this risk, investors turned to a then little used investment tool – the mutual fund. Now, when they bought and held investments, investors owned mutual fund shares invested in numerous companies and industries. Even a company-wide disaster would have little effect on the widely held portfolio of the mutual fund. Diversification in company shares was the first step in reducing investment risk.

1970 — capital market chaos...

"...the devastating 73-'74 bear market savaged fund investors..."

In the ‘70s, the flaw in the buy and hold fund strategy was quickly exposed. The devastating ‘73-’74 bear market savaged fund investors. The Dow didn’t rebound from its 19% plunge in 1973. Rather, prices continued falling, crashing another 32% in 1974. Over-the-counter issues lost over 60%. It took funds over ten years to recover!

Adding insult to injury, other investments soared. Gold and silver took turns climbing to new heights. Long-neglected global markets ignited. Although bondholders were treated to double-digit yields, they also were rocked by bonds’ worst bear market of the century. Money market funds provided the only relief on U.S. shores.

Surviving analysts sought answers. Some researchers saw hope in the historic out-performance of small company shares. Others sought salvation in firms with sterling balance sheets – so-called value plays. Ironically, no sooner had these opportunities been found then their returns began to lag as well.

1980 — asset allocation...

"...academicians looked for new ways to try to invest safely..."

Exasperated with the risk of any single class of investment, in the 1980’s academicians looked for new ways to try to invest safely. Three American professors won the Nobel Prize for Economics, and a new approach was born – Asset Allocation. Researchers found that different asset classes tended to move independently of each other. So when gold soars and global shares are strong …domestic stocks and bonds may be weak. Even when they move in the same direction, the degree of movement varies. For example, stocks might fall violently, while bonds hardly budge.

In these differences was a possible solution. A lower risk portfolio needn’t be limited to diversifying among domestic equities and bonds. It could include different types of each, as well as international securities, and even gold funds. And though these asset classes might represent riskier securities if held individually, the Nobel Laureates demonstrated that the overall risk of the portfolio would decline markedly.

1990 — a simple truth ignored..

"...portfolio diversity reduces risk, but at a cost..."

In the ‘90s, the equity portion of the scientifically constructed, asset-allocated portfolios of the 80’s fully participated in the decade’s surge in stock prices. But there were problems. The bond fund allocation didn’t appreciate nearly as much as the stock funds. The global component also lagged, as did small company and value plays. And gold funds, rather than providing inflation protection, were instead a drag on returns as inflation all but vanished.

The defect of passive asset allocation investing was now apparent. Portfolio diversity reduces risk, but at a cost. When you passively combine the returns of many asset classes, the resulting average return must always be less than the return of the top-performing asset. And, if the best asset earned record returns, like U.S. stocks did in the ‘90s, the resulting shortfall in overall return could be extreme. The markets of the ‘90s needed dynamic management – an occasional tweak in the portfolio’s percentage allocations just fell short.

2000 — dynamic investment management

"...recognized by only a few...the next advancement will extend diversification further still..."

The first two attempts at risk management, diversification of stocks and then of asset classes, weren’t failures…they just didn’t go far enough. At Flexible Plan Investments, Ltd., we believe that a third level of risk management is in the embryonic stage of development. Recognized by only a few and building on the academic foundation of the first two progressions, the next advancement will take diversification further still.

Financial advisers and their clients are coming to the realization that there is no Holy Grail for the financial markets. There are flaws in buy and hold investing, but also in market timing. Asset allocation is real progress, but when practiced passively is doomed to mediocre returns. All of these strategies work sometimes. None of them work all of the time.

For the 21st Century, investors need strategic solutions:
a solutions that allow fund investors to diversify among investment strategies;
a dynamic, not passive, solutions that give portfolios the flexibility to cope with ever-changing markets;
a solutions that provide financial planners with real choices to cushion assets during volatile markets.

Strategic Solutions is the answer; separate, customized portfolios that allow an investor to diversify among extensively researched risk management strategies. Most utilize mutual funds exclusively as the investment vehicles, including Evolution All-Cap Equity, Large Cap, Small Cap, Total Return and Managed Bond Funds, for which Flexible Plan serves as sub-adviser and which are available with Flexible Plan management*(see prospectus for details). Each strategy is systematically and actively managed in accordance with a carefully chosen risk reduction approach, seeking a level of risk substantially below a passively managed portfolio. While any one of the strategies can be used on its own, the beauty of the program is the diversification in strategies that is now possible (the minimum investment in any one strategy is just $20,000). Create your own portfolio of strategies!

*In deciding whether to invest in the Funds described, you should carefully consider the investment objectives, risks, and the charges and expenses of the investment company before investing. Read the Prospectus carefully before investing.

The Prospectus and Funds’ SAI contain information regarding the above considerations and more. You may obtain a Prospectus and SAI by calling Potomac Funds at (800) 851-0511 or writing Evolution Managed Funds, P.O. Box 1993, Milwaukee, WI 53201-1993 or download the PDF from http://www.direxionfunds.com/evolution.