Investment Approach

Schultz Financial Mgmt Corp

Risk-Controlled Portfolios for Serious Investors

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 downtrends 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" Investments

Within an asset class, we may diversify among multiple investment styles (i.e., sub classes) to further reduce portfolio risk and provide for more consistent returns.

The term "core holding" if often used when referring to an investment that is intended to remain in the portfolio throughout a full business cycle, often with a long term perspective. We will add the prefix "Core" to the name of our investment styles that are invested in this manner. An example of an allocation of "core" investment styles within our "Balanced" model portfolio is illustrated below.

"Core" Investment Allocation

3. Diversify among "Trending Following" Investments

The "trending following" investment styles 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 declines during market down trends.

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

"Trend Following" Investment Allocation

4. Use Timely Security Selection and Limit Losses

Because we are a small money management firm compared with most mutual funds and institutional money managers, we can be more nimble to adjust our investment strategies to our advantage. We combine quantitative (i.e., computer aided statistical) and technical analysis in order to make timely buy or sell decisions. We regularly prune out lower ranked and 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 Investment 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 avoid a layer of fees when compared to other financial advisory firms that outsource money management using mutual funds or third party managers. We can often provide our risk-controlled portfolio management service at a cost competitive with do-it-yourself investors that manage a portfolio of 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 Class:

This refers to the type of investment asset (e.g., stocks, bonds, real estate, etc.). Diversification among these different asset classes in commonly referred to as asset allocation.

Investment Styles:

This refers to an investment approach to buying or selling securities within an asset class. We use "core" and "trend" to distinguish between two distinctly different approaches that we use.

Our core investments would typically stay mostly invested throughout a full business cycle.

Our trend following investments attempt to reduce market exposure during downtrends in order to preserve capital.

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