HARPER FINANCIAL SERVICES, LLC

INVESTMENT MANAGEMENT PRIMER

WAYS TO MANAGE MONEY
On Main Street you may be told there are three basic methods of investment management: Security Selection, Market Timing and Asset Allocation. Some explanation of these will follow then two other methods will be introduced: Diversification and Safe Money Places.

SECURITY SELECTION
“Security selection” is choosing one investment over another. This is sometimes called stock picking, thinking that something will go up. Our opinion is that in most cases and managing within mutual funds, rather than individual stock picking, provides the best chance of success.

MARKET TIMING
“Market timing” is trying to decide where a market or a particular security currently is, where it may be going, and when. To win at the market timing, one needs to be correct considerably more than 50% of the time to break even with mistakes, transaction costs, and taxes. The odds speak for themselves, it is completely impossible. We do not time any market or security.

ASSET ALLOCATION
Asset allocation is how money in a portfolio is divided up between the different asset classes such as stocks, bonds and cash.

To determine how much a client should have of each asset class (asset allocation category) their risk tolerance needs to be determined through discussion and questionnaires. This is not an exact science, and the reason for discussion. There are five categories that summarizes how one feels about investment risk and how they can tolerate downside market fluctuations, etc. The risk category determines which asset allocation model is used.

This allocation should be used going forward unless there is a life changing event or a move into a different stage of life. Asset allocations should not change in response to market movements, short-term market fluctuations, opinions of the market (friends, TV shows and magazines). Changes for these reasons are market timing. This allocation should be monitored and rebalanced periodically.

DIVERSIFICATION
Historically the index returns of the three major asset classes from 1926 - 2002: stocks, bonds and cash have been about (Source Ibbotson Associates): Small Cap Stocks (equities) 12.5%, Large Cap Stocks (equities) 10.2%, Long-term Government Bonds 5.4%, Cash / T-bills 3.7% Obviously the higher your stock (equity) exposure as a percentage of your total assets, the better the overall portfolio return will be.

With Diversification there is ownership of hundreds of companies worldwide. Major equity themes are represented by owning separate portfolios (mutual funds) within a "portfolio". The portfolios balance off against each other; each does something the others can not do. Portfolio volatility can be reduced by using a mix of mutual funds and diversifying the equity portfolio by management style (types of companies owned) and geographically. Diversification is like winning baseball games, you hit singles and doubles. You may not hit grand slams, but you don't need grand slams to win the game. You need balance to win the game.

An all equity portfolio is more volatile (plan on at least a 20% decline at least every 5 years) but that does not translate into a loss unless the equities are sold in a down market. The key here is not to have money in the market that you will need in the next 5 maybe 7 years depending on your tolerance for risk. So, we figure what income may be needed in the next 5 – 7 years. We allocate this amount somewhere safer so when the market declines there is kitty set aside and assets will not have to be sold in a down market.

If owning a 100% equity portfolio is uncomfortable, there is such a thing as a good irrational decision, if it helps you sleep at night. Some bonds up to a point, for the sleep factor, can be good. But, too many bonds may provide near term emotional comfort at the cost of long term financial harm. To use the diversification method of investment management one must understand and believe the case for equities and the 5 – 7 years safer money formula.

WHY WE USE MOSTLY MUTUAL FUNDS IN PORTFOLIOS
Our opinion is that “Actively Managed” mutual funds (vs. index type funds / investments) provide the best chance of success in today’s investment world. They have a finger on the pulse of the investment world. Active management and an emphasis on dividends can reduce volatility in down markets. The focus of the managers, with a team, is to devote their full attention to individual security research and selection within fund guidelines.

We look for mutual funds that have a long-term perspective, low expenses and are research driven. Research requires having all the experience, skills, equipment, financial programs, databases, sources, industry experts, analyzing companies from the bottom up and company visits. Fund managers have access to company management.

WHO IS MANAGING THE MONEY?
It is important to have mutual funds and managers that are security analysts with the character, beliefs, traditions, disciplines and skills - not fad, trend, concept or momentum driven managers.

SAFE MONEY PLACES
A definition of safe money is money you cannot afford to lose. A safe money place is the opposite of a risk money place where principal can be lost due to circumstances beyond your control. A safe money place is where your principal is protected from loss as long as you follow the rules, and if you do decide to take your money, you know pretty much what leaving early will cost. A safe money place is not an investment but a savings vehicle.

Some people cannot tolerate any risk to their principle. These people will need to save more to reach their goals and their purchasing power may not keep up with inflation. For the risk adverse, we can build a portfolio of safe money places.

P.J Harper,RIA, CSA, Member of the Society of Certified Senior Advisors, Member of the National Association of Christian Financial Consultants, Phone 734-428-0324

For Further Details Contact
P.J. Harper,RIA, CSA
Harper Financial Services, LLC
15415 Schleweis Rd.
Manchester, MI 48158
Tel. 734-428-0324
pj.harper@harper-enterprises.com

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