Investment Approach

Schultz Financial Mgmt Corp

Risk-Controlled Portfolios for Serious Investors

Our Risk-Controlled Approach

We believe that the key to successful investing is to follow a disciplined investment approach that opportunistically seeks out superior returns during favorable market conditions, but reduces market exposure during down trends in order to preserve capital.

Our philosophy differs from the typical "diversify and hold" approach that we believe stifles investment performance without adequately reducing risk.

Our risk controlled investment approach is described below:

1. Diversification by Asset Class

First we will help you determine what type of investments to own and what percentage to allocate to each. These investment types are called asset classes and the process of dividing the investment portfolio among these different asset classes is referred to as asset allocation. The four asset classes that we use include cash equivalents, bonds, real estate, and stocks. This type of diversification can be very effective in reducing risk since these asset classes tend not to be highly correlated. However, it is important to note that there may be periods when stocks, bonds, and real estate all decline in value at the same time.

2. Diversify among "Core" Investment Strategies

Within each asset class, we may employ multiple investment strategies for making buy and sell decisions. Each strategy will differ significantly so that the diversification of strategies can help to reduce risk and provide for more consistent returns.

The term "core holding" if often used among investors when referring to a long term investment with a history of steady performance. In a similar manner, we will add the prefix "core" to the name of our investment strategies that invest with a long term perspective, regardless of market cycles. An allocation of "core" investment strategies within an investment portfolio is illustrated below.

"Core" Investment Allocation

3. Diversify among "Trending Following" Investment Strategies

The "trending following" investment strategies in our managed portfolios are designed to quickly take advantage of strong intermediate term trends in the financial markets. Most important however, is our ability to preserve capital by either switching to a money market fund or applying a hedge strategy to protect against further market declines.

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We monitor and compare the trends of over eighty foreign and domestic stock market indices on a daily basis. Because we will alter the holdings in our trend following strategies based upon current market trend, we will add the prefix "trend" to the names of our investment strategies that use a trend following approach. An allocation of "trend following" investment strategies within an investment portfolio is illustrated below.

"Trend Following" Investment Allocation

4. Use Timely Security Selection and Limit Losses

Because we are a small money management firm unlike most mutual funds and institutional money managers, we can nimbly adjust our investment strategies to our advantage. We combine quantitative and technical analysis in order to make the most timely decisions. We regularly prune out lower ranked or non performing securities in favor of more timely selections. We quickly sell securities when bad news is released concerning them. By following this active approach, we can focus on our best choices and avoid holding too many securities which tends to limit performance.

5. Keep Investments Management Costs Low

For the majority of the investments we manage, we perform the money management in-house, rather than using mutual funds or third party money managers. Therefore, we can avoid a layer of fees and provide our personalized and risk-controlled portfolio management service at a cost competitive with no-load mutual funds.

Definition of Terms

To assist you in understanding our investment approach and how we would design a diversified portfolio, we have described our investment terms below.

Investment Portfolio: This is an investor's entire investment portfolio not including home, personal property, and liquid funds needed for living expenses and emergencies.

This would include brokerage accounts, IRAs, annuities, rental property and company retirement plans such as 401(k)s.

This portfolio would be tailored to meet an an investors objectives, and regularly monitored and adjusted order to control risk.

Asset Allocation: This refers to the division of the investment portfolio into the most basic or general types of investment assets (called asset classes). This diversification is the most important factor in determining the overall behavior of the portfolio.

Investment Strategies:

The investment strategies are the building blocks of a risk-controlled portfolio. Each investment strategy is managed according to specified management style or approach. These investment strategies may hold individual securities. mutual funds, real estate, or trust deeds.

Core and Trend:

The terms "core" and "trend" are used to distinguish between two very different investment approaches or styles.

The "core" investment strategies are long-term in nature and tend to stay fully invested throughout a full market cycle, regardless of market trends.

The "trend" investment strategies follow a market-timed investment style. This investment style will normally be 80-100% invested in it's particular type of securities. However, during downtrends, this strategy will attempt to reduce its downside risk by switching into a money market fund and/or by applying a hedge position in order to create a market neutral position.

Exchange Traded Funds (ETFs): These are index funds or trusts that are listed on an exchange and can be traded intraday. ETFs are designed to generally replicate the holdings and correspond to the performance and yield of their underlying index.

© Schultz Financial Management 2002