LINING UP FOR ZERO PERCENT!

Presented by:William Larkin, Jr., Portfolio Manager

The United States has $2.637 trillion (US$) in money market mutual funds.

RISK INTOLERANCE, a term used in Behavioral Finance, is defined as ‘market conditions when investors refuse to take risk to earn a return’.

#1 Reason: FEAR!

Standard Deviation – a measurement of variability. Variability is used to measure confidence in statistical conclusions. This is important math for finance where the standard deviation on the rate of return on an investment is a measure of the security’s volatility.

Application:Natural ScienceSocial Science

Bell Shape

Normal Distribution

Central Limit Theorem

Outlier

Mean

Gaussian Distribution

Measures the probability of a random variable taking certain values. The application of this process underpins the discipline of probability and the science of statistics.

A Leaky Faucet A Door that Sticks A Neighbor’s Barking

Dog

Normal Life Experiences

Financial Decision Making

Low Interest Rates Cheap Foreign Imports Inexpensive Fuel

Humans are resilient and learn to live with their changing environment, which can cause critical errors when making financial decisions. Investors tend to anchor their future expectations in their recent past. Seldom do investors think that new developments or changes in economic conditions will create a new course.

Fear – Preserving Capital

Greed – Return Focused

Falling

Rising

The Normalization of Deviance

(a change from normality)

Peak

Trough

Financial System Imbalance

Late Expansion

Early Recession

Late Recession Early Expansion

GREED – Focus on Return

FEAR – Focus on Protection

Natural changes caused by the economic cycle

can be underestimated.

THE FUTURE STRATEGY LIMITATIONS

Effective decision making requires a recognition of change and understanding the complexities involved in forecasting.

New developmentss always emerge as the economy moves from the old business cycle to a new business cycle. The framework or drivers of change are always slightly different and often significantly unique. How should investors deal with such complex amounts of data and the factors that drive change?

Human Comprehension

Vast Complexity

Diversification Strategy

SELECTION STRUCTURE

VALUATION

Developments in a Changing Economic Cycle

Causes Conflict between Simplicity and Reality

Weak Economy

Low Growth Economy

Moderate Growth Economy Robust Growth Economy Money Market Investments Ultra-Short Bonds Short-Term Bonds Variable Rate

Long-Term Bonds High Credit Quality

Intermediate-Term Bonds Medium Grade

High Yield Short-term Corporate

Bonds Mortgage-Backed Security Floating-Rate Securities

Scenario Building – Weak, Moderate or Strong?

5 Simple Fixed-Income Principles

1) Think outside of the box!2) Use every investment

option. 3) Avoid negative real

returns.4) Diversification can

weaken uncertainty.5) Strategy shifts should be

gradual, not reactionary.

QUESTIONS?