Presented by: Jeffrey A. Harrell, CFA Disclosure The - PowerPoint PPT Presentation

Presented by: Jeffrey A. Harrell, CFA

Disclosure  The presentations are provided for general information purposes only and should not be considered an individualized recommendation or advice. We have relied on third party vendors for data and while the information is deemed reliable, McGill Advisors makes no representations or warranties with respect to the accuracy or completeness of the information provided.  Before investing in any mutual fund or ETF, be sure to carefully consider the fund's objectives, risks, charges and expenses.  All investments involve risks, including the loss of principal invested.  Past performance of a security does not guarantee future results or success.  ETFs are baskets of securities that may track a sector-specific, country-specific, or a narrow/broad-market index. ETFs trade on an exchange like a stock. ETFs are subject to risk similar to those of their underlying securities, including, but not limited to, market, sector, or industry risks, and those regarding short-selling and margin account maintenance. Commission fees typically apply.  Supporting documentation for any claims, comparison, statistics, or other technical data, in options communications, will be supplied upon request.  Webinars are provided for general information purposes only and should not be considered an individualized recommendation or advice.  McGill Advisors, Inc is a registered investment advisor. Brokerage services are provided by unaffiliated third party broker dealers, TD Ameritrade, Inc. and Charles Schwab. McGill Advisors, Inc. provides discretionary advisory services for a fee. For more information please see the McGill Advisors, Inc Disclosure brochure (ADV Part 2).

2013 Investment Review

Major Market Index Performance Stock Indexes  Dow Jones Industrial Average: +29.7%  S&P 500: +32.4%  Russell 2000: 38.8%  NASDAQ: 40.1%  DJ US Select REIT: +12.6%  MSCI EAFE: 22.8%  Nikkei 225: +57.0% Bond Indexes  Barclays Aggregate: -2.0%  20+ Year Treasury: -14.0%  TIPS: -9.0%  S&P National AMT-Free Muni: -3.3%  BofA High Yield Master II: +7.4%

2014 Outlook

Wall Street Estimates  S&P 500 Estimate: 1,950  5.5% Above 2013 Close  Earnings Per Share (EPS) Estimate: $121  13% Above 2013  Gross Domestic Product (GDP) Estimate: +2.7%  2013 GDP Growth: +2.1%  Unemployment Rate Estimate: 6.5%  2013 Unemployment Rate: 6.7%  10 Year Note Estimate: 3.5%  3.0% As Of 12/31/13

Important Metrics To Track In 2014  Earnings Growth (See Handout)  Access data at http://us.spindices.com/indices/equity/sp-500 (Additional Info - Index Earnings)  10 Year Treasury Yield  Access data at http://finance.yahoo.com/q?s=^tnx  Investor Sentiment  Access AAII Index data at http://www.aaii.com/sentimentsurvey  Consumer Confidence  Access data at http://www.conference-board.org/data/consumerconfidence.cfm

Portfolio Managers Are “All In”

Investor Sentiment Very Bullish Source: American Associate of Individual Investors

Investors Still Underinvested

Valuations Compelling

Consumer Confidence Rising Source: Wells Capital Management

Household Debt Improving

Interest Rates Are Key Sources: BEA, U.S. Treasury Direct

Banks Reducing Treasury Exposure

Wage Pressures Building

Bonds Likely To Remain Under Pressure  Still A Vital Component To A Well Diversified Portfolio  Keep Interest Rate Exposure To A Minimum  Use Credit Sectors To Enhance Yield  Use Active Managers, Not Passive Indexes  Consider Alternative Investments  Corporate Only Funds, Market Neutral Funds, Hybrid Funds Research available www.morningstar.com

Monitoring Investment Performance

Benchmark Your Performance  Large Caps (SPDR S&P 500) – SPY Mid Caps (iShares Russell Mid Cap) – IWR   Small Caps (iShares Russell 2000) – IWM  International (iShares MSCI EAFE) – EFA  Investment Grade Bonds (iShares Core Total US Bond) – AGG  High Yield Bonds (iShares High Yield Corporate) – HYG Hypothetical 60/40 Benchmark (2013 Return) 30% SPY (+32.3%) 10% IWR (+34.5%) 10% IWM (+38.7%) 2013 Return: 19.1% 10% EFA (+21.4%) 30% AGG (-2.0%) 10% HYG (+5.8%)

Calculating Your Investment Return  There Are Two Ways To Calculate Your Investment Return  Internal Rate of Return (IRR): Used To Determine Your Personal Rate Of Return, Which Is Heavily Influenced By Cash Flows  Time Weighted Return (TWR): Used To Determine The Rate Of Return On Your Portfolio For Comparison Purposes, Negating The Effect Of Cash Flows Example:  $50,000 Investment On 1/1  $100,000 Value on 6/30  $900,000 Addition On 7/1 (Total Of $1,000,000 On 7/1)  $950,000 Value on 12/31  Investment Performance: IRR=0% TWR=90%, WHY???????  IRR = Personal Return Or Gain/Investment ($0/$950,000)  TWR = Linked Period Return (Period 1:100% Period 2: -5%) Calculation: (1+Period 1)*(1+Period 2)*(1+Period 3)… -1=TWR Calculator available in member center for McGill Advisory members

Investment Return Calculator

Active vs. Passive Investing

Passive Vs. Active Management  Mutual Funds and Private Managers commonly use active and passive management strategies  Passive management – Buying stocks to mirror the index and perform the same as the index  Active management – Buying stocks to beat the index according to the fund or manager objective

Investor Returns Equity: 4.3%

Investor Returns Versus Actual Fund Returns • Investors Cost Themselves 1.50% Due To Poorly Timing When They Invest In Various Mutual Funds Data Provided by: Morningstar

Track Records As Of 12/31/13  Large Cap (S&P 500 Index)  Outperformed 59% Over Past 1 Year  Outperformed 77% Over Past 3 Years  Outperformed 74% Over Past 5 Years  Small Cap (Russell 2000 Index)  Outperformed 65% Over Past 1 Year  Outperformed 57% Over Past 3 Years  Outperformed 55% Over Past 5 Years  International (MSCI EAFE Index)  Outperformed 68% Over Past 1 Year  Outperformed 77% Over Past 3 Years  Outperformed 49% Over Past 5 Years

Active Management (Active Share & Tracking Error)  Active Share Measures How Different The Holdings Are Of A Manager As Compared To Its Benchmark  Higher Active Share Managers Have Outperformed By 1.26% After Fees  Target Funds With Greater Than 80% Active Share  Active Share Helps To Eliminate “Closet Indexers”  Tracking Error Measures Performance Deviation From A Benchmark  Tracking Error Identifies Degree Of Active Management  Target Funds With Greater Than 4% (Large Cap) Or 6% (Small Cap)

Asset Location

Choosing the Right Location for Investments Case Study – Apple 1984: $50,000 investment 2013: $9,103,872 value IRA Account: Taxable Account: 39.6% income tax = $3,605,134 23.8% capital gains tax = $2,154,215 Net = $5,498,738 Net = $6,949,050  Investors can generate as much as 15% to 25% more after-tax wealth over time by allocating their investments optimally between tax-deferred and taxable accounts  The reverse is also true as realized losses in tax-deferred accounts cannot be written off  General Rule: Stocks In Taxable Accounts, Bonds In Retirement Plans Visit the website below for a thorough analysis http://www.fpanet.org/journal/TheAssetLocationDecisionRevisited/

Asset Location Recommendations  Invest Taxable Accounts In Individual Stocks And Tax Efficient Stock Mutual Funds  Invest Retirement Plans In Bonds and Bond Funds  Blend Two Strategies Together To Create Desired Asset Allocation  Additional Benefits  Gifting Of Highly Appreciated Stocks From Taxable Accounts  Writing Off Losses In Taxable Accounts  Better Control Of Tax Bill Every Year

Recap  Keep An Eye On Earnings, Interest Rates And Sentiment in 2014  Reduce Interest Rate Exposure, But Balance This With A Less Risky Stock Portfolio  Consider The Benefit Of Passive Investing, Or Be Prepared To Research High Active Share Managers  Allocate Your Assets In The Most Tax Efficient Manner By Putting Stocks In Taxable Accounts And Bonds In Retirement Plan Accounts

Thank You For Your Attention!! By Jeffrey A. Harrell, CFA jharrell@mcgilladvisors.com 866.727.6100