[PPT] - Y OU C HOOSE ? 2 ROR: 10% P ORTFOLIO I STD: 15% 2 O UT OF 3 Y PowerPoint Presentation

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HOW TO CHOOSE & EVALUATE

YOUR FINANCIAL ADVISOR & PORTFOLIO

Ed Butowsky Chapwood Investments, LLC

15455 North Dallas Parkway, Suite 1200 | Addison, Texas 75001 | (972) 865-2223

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THE CONVENTIONAL WAYS TO CHOOSE AN ADVISOR

Firm name
Referrals from friends/colleagues
Company sponsored event/Guest speaker
Personal Accountant (CPA)
Lawyer

SLIDE 3

CURRENT STATE OF THE INDUSTRY

The world of personal investing is flooded with a bewildering mix of half truths and conflicts
f interest. Even worse, the vast majority of people are ill equipped to navigate through the

muddy waters of investing, so they turn to investment professionals seeking professional assistance.

However, vast majority of these investment professionals have little to no training on

structuring portfolios, and therefore lacks the knowledge to minimize risk while maximizing returns in the portfolios they manage.

After growing up at a major brokerage firm and working with investors for over 25 plus years

it became clear to us that the whole investment management industry as a whole was broken in its current state.

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The field is overwhelmed with salesmanship, product sales, PR and marketing and is

managed for the betterment of the underlying investment firm versus the well being of its’ client, the investor.

The goal of this presentation is to educate you so you are able to objectively and

dispassionately analyze portfolios for their strengths and weaknesses, to truly understand the fees they are being charged and most importantly provide investors full transparency into their investments/portfolios.

The lack of transparency and information in the investment/portfolio management

marketplace has allowed all companies, big and small, to take advantage of investors. This represents “The Lack of Information Dividend” (LOID), the amount of money lost due to lack

f information. We want to empower investors with knowledge because, ignorance is not

bliss, it’s simply investment suicide.

CURRENT STATE OF THE INDUSTRY

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GLASS-STEAGALL ACT

Enacted in 1933 by Senator Carter Glass and Congressman Henry Steagall, created silos with

in the investment/financial industry.

The Act prohibited commercial banks from collaborating with full-service brokerage firms or

participating in investment banking activities.

After 66 years, in 1999 the Gramm-Leach-Bliley Act dismantled the Glass Steagall Act, which

resulted in mass confusion in the industry.

The distinction between commercial banks and brokerage firms has blurred; many banks own

brokerage firms and provide investment services.

Investors were lost on where to go and how to judge.

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MODERN PORTFOLIO THEORY

“The Rule Book”

In 1990, Harry Markowitz, Merton Miller and William Sharpe were awarded a Nobel Prize in

Economics.

MPT focuses on investment analysis, portfolio design, and performance evaluation. It

confirmed that it is not enough to look simply at risk and return.

MPT statistics provides us the guidelines, “The Rule Book”, to quantitatively measure risk and

analyze the efficiency of portfolios.

MPT focuses attention on the overall composition of the portfolio rather than analyzing and

evaluating its individual components.

MPT statistics quantifies risk and its relationship to return and how the return was achieved

as well as the relationships between the assets in the portfolio and how they relate to one another.

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OBJECTIVELY EVALUATING YOUR PORTFOLIO

1

Rate of Return (ROR) Standard Deviation (STD) Variance Drag Phantom Tax (VDPT) Sharpe Ratio Probability of Any Loss in the Next 12 Months Amount of Money at Risk in the Next 12 Months Upper and Lower Return Correlation to S&P 500

2 3 4 5 8 6 7

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RATE OF RETURN

This is the rate you need to make on your portfolio in order to not lose purchasing power after subtracting your expenses, taxes, and cost of living increase.

Shown as a percentage change from the original investment
93.6% of a portfolio’s return is derived from the overall architecture of

the portfolio; the investment policy

1

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STANDARD DEVIATION

This is a statistic that measures how much risk you are taking, versus your return.

Your standard deviation should be 70-80% of your historical rate of return.
The lower the ratio, the better and more consistent the performance.
It is a measure of the distribution of average historical annual returns of

your portfolio.

The more spread apart the returns, the higher the deviation/risk
98% of a portfolio’s standard deviation is derived from its
architecture

2

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WHICH PORTFOLIO WOULD YOU CHOOSE?

2

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PORTFOLIO I 2

20

10

40

30
10

10 30 50

19 OUT OF 20 YEARS ROR: 10% STD: 15%

5

10

25

30
10

10 30 50

2 OUT OF 3 YEARS

10 10 30

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PORTFOLIO II 2

ROR: 10% STD: 6%

2

10

22

5

5 15 25

19 OUT OF 20 YEARS

4

10

16

5

5 15 25

2 OUT OF 3 YEARS

0 5 10 15 20

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PORTFOLIO III 2

ROR: 10% STD: 2%

6

10

14

5 10 15 20

19 OUT OF 20 YEARS

8

10

12

5 10 15 20

2 OUT OF 3 YEARS

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Portfolio I

5

10

25

30
10

10 30 50

4

10

16

5

5 15 25

8

10

12

5 10 15 20

ROR 10% STD 15%

WHICH PORTFOLIO WOULD YOU CHOOSE?

Portfolio II Portfolio III

ROR 10% STD 6% ROR 10% STD 2%

2 out of 3 years

20

10

40

30
20
10

10 20 30 40 50

2

10

22

5

5 15 25

6

10

14

5 10 15 20

19 out of 20 years

2

10 10 20 30

0 5 10 15 20

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VARIANCE DRAG PHANTOM TAX

Variance Drag Phantom TAX (VDPT) is a ratio that calculates the degree of your standard deviation in proportion to your rate of return. Ideally, your VDPT will be a 0.8 or lower. Anything over 1.5 is not acceptable.

3

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SHARPE RATIO

The Sharpe Ratio is a measure of the risk-adjusted return. It was derived by Professor William

Sharpe, now at Stanford University, one of three economists who received the Nobel Prize in Economics in 1990 for their contributions to the "Modern Portfolio Theory".

The Sharpe Ratio is a direct measure of risk vs. reward. The greater a portfolio's Sharpe, the

better its risk-adjusted performance. The Sharpe Ratio shows the investor whether the returns

f a portfolio are due to smart investment decisions or a result of excess risk.
The Sharpe Ratio can be very useful in comparing portfolios to determine the amount of risk

taken verses the rate of return achieved. For example, one portfolio may have higher returns than its peers, however, it is only a better portfolio if it did not take additional risks to achieve these higher returns.

4

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Portfolio I

ROR 10% STD 15% SHARPE .33

Portfolio II Portfolio III

ROR 10% STD 6% SHARPE .83 ROR 10% STD 2% SHARPE 2.50

20

10

40

30
20
10

10 20 30 40 50

2

10

22

5

5 15 25

6

10

14

5 10 15 20

19 out of 20 years

SHARPE RATIO

4

ROR:Rate of Return MM: Money Market Rate (Risk Free Rate averaged over the observed time period) STD: Standard Deviation

= ROR - MM STD

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PROBABILITY OF ANY LOSS IN THE NEXT 12 MONTHS

Based on historical data, this measures the probability of your portfolio losing any value during the next 12 months. The goal is to have that probability at zero, but realistically, you want it to be 15% or less.

5

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MAXIMUM AMOUNT AT RISK IN

THE NEXT 12 MONTHS

This measures the amount of money at risk with a 95% degree of confidence. This is based on historical 12-month rolling periods. Your goal is zero but realistically it should be as low as possible.

6

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UPPER & LOWER RETURN

This identifies, based on historical data, the range of returns that you should expect

ver the next 12 months.

7

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CORRELATION TO THE S&P 500

This is the performance of your portfolio relative to that of the S&P 500 Index. It accounts for the extent to which these two investments’ returns move together.

This metric addresses the use of diversification to reduce risk, which places major

emphasis on finding investments that are distinctly different from one another. Correlation coefficient is a measurement to determine this difference between investments.

This metric is important because, in a diversified portfolio, each metric’s unique

pattern of returns partially offsets the others’. This has the effect of smoothing the portfolio’s overall volatility.

The correlation coefficient is between +1.0 and -1.0.

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CORRELATION TO THE S&P 500

+1.0 = Perfect Positive Correlation. A positive correlation indicates that the two

investments tend to move in the same direction at the same time. The greater the positive coefficient, the greater the tendency of similar performance.

1.0 = Perfect Negative Correlation. A negative correlation indicates that the two

investments tend to move in the opposite direction at the same time; they move inversely to each other. The larger the negative coefficient, the greater the tendency of inverse performance.

0.0 = No Correlation. A correlation coefficient of zero indicates that the

performance of the two investments are wholly unrelated and act independently from each other. The closer the correlation is to zero, the weaker the relationship between the two investments’ performances.

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SLIDE 23

Russell 1000 Growth Russell 1000 Value S&P 500 Russell 2000 Index Emerging Markets International Markets Russell 1000 Growth 1.00 0.57 0.90 0.47

0.06

0.24 0.93 0.98 0.91 0.89 0.85 Russell 1000 Value 0.57 1.00 0.87 0.57

0.12

0.17 0.93 0.98 0.94 0.88 0.91 S&P 500 0.90 0.87 1.00 0.50

0.15

0.24 0.98 0.98 0.95 0.90 0.91 Russell 2000 Index 0.47 0.57 0.50 1.00 0.44 0.29 0.91 0.94 0.95 0.84 0.89 Emerging Markets

0.06
0.12
0.15

0.44 1.00 0.41 0.74 0.74 0.90 0.75 0.89 International Markets 0.24 0.17 0.24 0.29 0.41 1.00 0.85 0.91 0.94 0.89 0.93

THE WORLD HAS CHANGED

Jan. 1991 – Dec. 2001 / Jan. 2002 – Dec. 2014

CORRELATION TO THE S&P 500

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SLIDE 24

BULGE BRACKET FIRM STRATEGIC CAPITAL PRESERVATION

Rate of Return 5.62% Standard Deviation 7.37% Variance Drag Phantom Tax 1.31 Sharpe Ratio 0.49 Probability of Any Loss in the Next 12 Months 22.29% Amount of Money at Risk in the Next 12 Months $11,525 Maximum Return 20.36% Minimum Return

9.12%