Basic Investment Principles 101: From Asset Allocation to Zero Coupon Bonds (Series: Personal Finance & Investing Fundamentals 1.0)

Practical and entertaining education for
attorneys, accountants, business owners and
executives, and investors.
2

The material in this webinar is for informational purposes only. It should not be considered legal,
financial or other professional advice. You should consult with an attorney or other appropriate
professional to determine what may be best for your individual needs. While Financial Poise™
takes reasonable steps to ensure that information it publishes is accurate, Financial Poise™
makes no guaranty in this regard.
While Financial Poise is happy to make this PowerPoint freely available to all, the reader is
cautioned that it was created for use as part of a webinar that featured an extensive verbal
discussion of the topics addressed in the PowerPoint. It was not designed to be read by
itself. Financial Poise webinars can be purchased at www.financialpoise.com. You may also
receive offers for free webinars by subscribing to Financial Poise's DACyak, a free weekly
newsletter.
DISCLAIMER
3

MEET THE FACULTY
MODERATOR:
Arthur T. Doglione Alpha Fiduciary
PANELISTS:
Christopher Cahill Lowis & Gellen LLP
Benoit J.P. Flammang Beninvest & Associates LL
Michael Terrien West Loop Financial LLC
4

ABOUT THIS WEBINAR
There are certain fundamental concepts and terms that every investor should understand. This webinar
covers many of them. Some of the many covered: accredited investor; annuity; asset allocation; bonds
(including zero coupon bond); capital gain; compound interest; defined benefit v. defined contribution
plan; diversification; inflation; IRA (Traditional v. Roth); Modern Portfolio Theory; mutual fund; net
worth; P/E ratio; stock; Prime Rate; rebalancing; registered investment advisor; umbrella insurance;
whole life v. term insurance; yield.
This webinar is delivered in Plain English, understandable to you even if you do not have a
background in the subject. It brings you into an engaging, even sometimes humorous, conversation
designed to entertain as it teaches. And, it is specifically designed to be viewed as a stand-alone
webinar, meaning that you do not have to view the other webinars in the series to get a lot out of it.
5

ABOUT THIS SERIES
This webinar series is intended for the investor who wants to reduce “unknown unknowns” of investing. First, a refresher
on asset allocation and portfolio theory, i.e., how to array your investments to produce reliable returns over time and
temper potential losses.
Then two episodes on the “why?” of investing – the goals one pursues, such as financing family events, retirement, and
the fate of your assets when you meet your Maker or Makers or fade to black or whatever. Tax and legal and investment
professionals have their uses, but you get more from them when you know what questions to ask and what information to
insist on receiving.
The final two episodes turn topical, taking up special topics, including options and private securities (as well as public
securities).
As with every Financial Poise Webinar, each episode is delivered in Plain English understandable to investors, business
owners, and executives without much background in these areas, yet is also valuable to attorneys, accountants, and other
seasoned professionals. And, as with every Financial Poise Webinar, each episode brings you into engaging, sometimes
humorous, conversations designed to entertain as it teaches. Each episode in the series is designed to be viewed
independently of the other episodes, so that participants will enhance their knowledge of this area whether they attend
one, some, or all episodes.
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Dates shown are premiere dates; all episodes will be available on demand after
their premiere date.
EPISODES IN THIS SERIES
Episode #1 Basic Investment Principles 101 - From Asset Allocations 1/24/19
to Zero Coupon Bonds
Episode #2 Goal Based Investing- Planning for Key Life Events 2/21/19
Episode #3 The Legal & Tax Aspect of Investing: Asset Protection; 3/21/19
Estate Planning, and Tax Efficiency
7

Episode #1: Basic Investment Principles 101 -
From Asset Allocations to Zero Coupon Bonds
© 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ 8

ACTIVE OR PASSIVE: THE BUFFET BET
From Mark J. Perry, “Warren Buffett wins $1M bet he made a decade ago that the S&P 500 stock index would outperform hedge
funds,” AEI (September 16, 2017) at
https://www.aei.org/publication/warren-buffett-wins-1m-bet-made-a-decade-ago-that-the-sp-500-stock-index-would-outperform-hedge-
funds/

TIME IS INVESTOR’S FRIEND

ASSET ALLOCATION
• An approach to investing used by investors to diversify their portfolios into
different “asset classes,” such as stocks, bonds and cash.
• A well-designed asset allocation will reflect the investors risk tolerance and
provide plenty of diversification.
• The Asset Allocation approach is often used in conjunction with
rebalancing.

CORRELATION
• When two securities tend to move together in price, as those of competing
firms in the same industry often do, the prices are said to be correlated.
• When they tend to move in opposite directions, they have negative
correlation.
• When neither can be used to predict the other at all, they are called
uncorrelated assets.
• Asset allocation and rebalancing work better to reduce portfolio volatility
the lower the correlation among the assets in the portfolio.

DIVERSIFICATION VS. CONCENTRATION
• “Don’t put all your eggs in one basket,” as the adage goes.
• Diversification seeks to lower risk in the aggregate by investing in multiple
non-correlated assets. But diversification may not be for everyone.
• Warren Buffett, a value investor, once said, “Diversification may preserve
wealth, but concentration builds wealth.”

DIVERSIFICATION VS. CONCENTRATION
(cont’d)
• Rebalancing. An investment strategy based on the fundamental rule “buy
low, sell high.” Rebalancing is the process selling and buying assets within a
portfolio to restore them to the target asset allocation percentages whenever
they deviate too far. For instance, suppose the target allocation is 50% stock
and 50% bonds and over time the allocations have drifted to 54% stock and
46% bonds, rebalancing would mean selling 4% from the stock allocation
and purchasing 4% more of the bond allocation, to restore the target.

INVESTMENT PHILOSOPHY
Active Investing is a philosophy of investing that seeks to out-perform the
market rate of return. For instance, buying undervalued stocks, searching for
muni bonds with a better-than-average risk/return profile, and buying paintings
by today’s unknown Picassos with the hope they will appreciate in value are all
examples of Active Investing.

INVESTMENT PHILOSOPHY (cont’d)
Passive Investment is a style of investing that seeks to capture the returns
offered by the asset classes invested in, at very low cost, by purchasing a
broadly diversified collection of securities representing such asset classes, often
but not always through the use if indices, and eschewing efforts to identify
purportedly undervalued securities or to time the market.
• For passive investors value investing involves investing in a broad
portfolio of companies that are characterized by low P/E, Price/Book or
Price/Sales ratios

P/E RATIO
• A means for valuing Public Equities
• Theoretically, it shows how much investors are willing to pay per dollar of
earnings
• P/E Ratio = Market Value per Share divided by its Earnings per Share (EPS)
• Usually calculated using EPS from last four quarters (the “trailing P/E”)
• Sometimes EPS derived from estimated earnings over the next four quarters
(“forward P/E”)
• Some analysts will combine forward and backward looks in calculating P/E Ratio

P/E RATIO (cont’d)
• A $10 stock with a P/E Ratio of 75 is more expensive than a $100 stock
with P/E Ratio of 20
• Unprofitable company has negative EPS, and therefore a nonexistent P/E
Ratio or P/E Ratio of 0
• Important: Is company’s P/E Ratio higher than the industry average?
• P/E Ratio tends to be lower during inflationary times
• Important: Are P/E Ratios low in general? High in general?

EXPENSE RATIO
• Sometimes abbreviated E/R, it is the ongoing cost investors pay for owning
shares in a specific fund.
• The least expensive stock index funds can have expense ratios under 0.10%
(“ten basis points”); the most expensive master limited partnership (MLP)
funds can have expense ratios above 5.0%.
• Many passive investors are very sensitive to the “cost” of the funds they buy.

ALPHA AND BETA
• Alpha is a measure of performance on a risk-adjusted basis, and is often
referred to as “excess return” or “abnormal rate of return.”
• Beta is a measure of volatility or risk.
• Alpha is often considered the active return on an investment, for it gauges
the performance of an investment against a market index used as a
benchmark. Market indexes are often considered to represent the market’s
movement as a whole. The excess returns of a fund relative to the return of
a benchmark index is the fund’s alpha.
• Alpha is often represented as a single number (like 3 or -5), but this refers
to a percentage reflecting how the portfolio or fund performed compared
to the benchmark index ( i.e. 3% better or 5% worse.)

FUNDAMENTAL V. TECHNICAL ANALYSIS
Fundamental Analysis. One method active investors employ to pick stocks they
expect will produce with better-than-market returns is to analyze the
fundamentals of a business, an industry, and/or a country’s economy.
Reviewing company financial statements, calculating price/earnings ratios, and
forecasting the growth of corporate earnings and dividends are all aspects of
fundamental analysis.

(cont’d)
Technical Analysis. The technical analyst focuses on trends and charts and
attempts to forecast moves of markets or individual stocks based on past data,
particularly price and volume. A technical analyst may pick a particular stock
strictly from charts, without ever studying the firm’s financial statements or
learning about their position in the industry (i.e. their “fundamentals”).

(cont’d)
• Investors practicing “fundamental” analysis seek to understand particular
companies, industries and/or economies, in an effort to allocate capital to
investments they believe are undervalued and therefore likely to
outperform.
• Investors practicing “technical” analysis believe they can forecast the
movement of markets or individual security prices based on a study of
trends and charts showing past market prices and trading volume.

VALUE V. GROWTH INVESTING
• The Value Investor uses fundamental analysis to find companies they believe
are selling at a price less than they are actually worth.
o Benjamin Graham and Warren Buffet are two famous value investors.
• The Growth Investor uses fundamental analysis to find companies whose
earnings are expected to grow at above-market rates.
o Peter Lynch is a famous growth investor.
Warren Buffet said:
“Growth and value investing are joined at the hip. Value is the discounted present value of an investment’s
future cash flow; growth is simply a calculation used to determine value.”

BASIC ASSET CLASSES
• Stocks
• Bonds (a/k/a Fixed Income Securities)
• Cash
• Real estate
• Commodities
And then…. There are the “wrappers” that package and deliver exposure to
underlying asset classes.

STOCKS
A share of ownership in a corporation.
• There are publicly traded stocks which are sold on exchanges like the New
York Stock Exchange and the NASDAQ.
• There are “closely held” stocks not listed or publicly traded.
➢ Stockholders, or shareholders, typically have rights in the company such as
voting on the board of directors.
➢ Stock is sometimes called equity.

STOCK MUTUAL FUNDS
A pool of stocks created when investors get together in order to enjoy the
benefits of diversification without each individual investor having to purchase
all the individual stocks in the pool himself or herself.

BONDS
• A debt investment; a type of “Fixed Income Security”.
• Through a bond, an investor can loan money to the federal government
(“Government Bond”), a state or local government (“Municipal Bond”), a
corporation (“Corporate Bond”), or some entity that is based overseas
(“International Bond”).
• During the term of the bond, the investor typically receives interest
payments, and when the term is over, the bondholder receives back the full
original principal of the bond, unless there is a default.

ZERO COUPON BONDS
A zero coupon bond has no interest payments (no “coupons”) during the term
of the loan, so all the interest is paid at the end of the term, along with the
principal.

ANNUITIES
Usually sold by life insurance companies, in their simplest form, annuities pay
a fixed amount to the annuitant for their lifetime.
• But annuities come in many types:
• Fixed, Variable, and Equity-Indexed;
• Immediate and Deferred.
• Depending on the particular product, annuities may have a variety of
payout options as well, including a “lump sum payout.”

LIFE INSURANCE
In its purest form, a term policy, life insurance is not an investment per se.
However, permanent forms of life insurance, which have a cash value, can be a
type of investment and should be taken into account when analyzing one’s
portfolio.

CASH
Savings Accounts, Certificates of Deposit (CDs), and Money Market Funds are
all often considered to be “Cash” in terms of their asset class.

TANGIBLE INVESTMENTS
A type of alternative investment.
(a/k/a Hard Assets)
Gold and other Precious Metals, Collectibles (Art, Wine, Antiques, Coins,
Stamps, etc.), Oil and Gas, and Real Estate are examples of tangible assets.

ALTERNATIVE ASSETS
Any investment which is not a stock, bond, or cash, i.e. not a traditional investment.
The term is broad and includes both tangible alternatives and intangible (or
“financial”) alternatives.
• Intangible Alternative Assets are also known as Financial Alternatives. Private
Equity and Private Equity Funds, Hedge Funds, Venture Capital, and Financial
Derivatives are all types of Alternative Assets.
oDerivatives. There are a broad range of financial derivatives including
forwards, futures (a standardized forward contract), options and swaps.
Derivatives can be created to bet on the movements of a variety of
underlying phenomena including commodity prices, interest rates, currency
exchange rates, equity indexes, credit defaults and home mortgages.

THE ALTERNATIVE ASSET LANDSCAPE

CROWDFUND INVESTING

RECAP: INVESTMENT CLASSES

INVESTOR PRESPECTIVE DISTORTIONS
[happens to the best of them, er, us]
• House Money Illusion: gains from seem less real, so not treated with the
same care as initial savings from toil
• Backfire Effect: doubling down on our beliefs when exposed to opposing
viewpoints (“We ARE in a Bull Market!”)
• Confirmation Bias: Seek out only that information which confirms what we
already believe (“My go-to is Bull Market News!”).
A cure: see research of The Good Judgment Project, at
www.goodjudgment.com

INVESTOR PRESPECTIVE DISTORTIONS
(cont’d)
• Anchoring Bias: Clinging to irrelevant piece of information when estimating
value (“I paid $900 for that, so it is worth much more than the current
market price of $38.50)
• Recency Bias: Using the recent past as a guide to the future (2006: Look at
those real estate prices increase! Gotta get in on this flipping game!”)
• Blind-Spot Bias: The tendency to think the aforementioned biases afflict
them but not me.

INVESTMENT ADVISORY RELATIONSHIPS
• Investment advice is provided in a variety of different arrangements.
• The bulk of advisors provide services either through broker-dealers (e.g.
Merrill Lynch), insurance companies (e.g. Northwestern Mutual Life) or
independent registered investment advisors (“RIAs”).
• Advisors can be either fiduciaries (owing a duty to serve the client’s best
interest) or arms-length sales representatives (owing a primary duty to their
employer, and required only to sell investments “suitable” for any investor).
• Advisors are typically compensated either on a “fee only” basis, a
“commission” basis, or a “fee based” basis.

VETTING THE HELP
a. search on Google for litigation and complaints
b. read Form ADV at advisorinfo.sec.gov
c. review advisor’s history at brokercheck.finra.org
d. ask advisor if she has ever been audited by state or federal regulators
e. request a customized investment policy statement (IPS)

Z-SCORE
➢ A normalized statistic.
• For instance, if a stock’s average price over a 3-year period was $30 and its
standard deviation over that period was $10.0, then the Z-score of $50 is 2
([$50-$30]/$10.0).
• The Z-score can then be checked against a standard normal distribution
(mean=0, s.d.=1) to calculate confidence intervals and other statistical
measurements.

ABOUT THE FACULTY
ARTHUR T. DOGLIONE
arthur@alphafiduciary.com
Arthur is an industry veteran with more than 20 years’ experience working with high-net-worth clients. He has an extensive background in wealth management
with particular expertise in portfolio management. Before establishing Alpha Fiduciary, Art was a Senior Vice President with Merrill Lynch where, prior to
leaving in November 2006, had built his practice to be the largest of Merrill Lynch’s Arizona territory. Art founded Alpha Fiduciary in 2006, and has completed
two acquisitions. The firm currently serves clients across many states as a fee-only Registered Investment Advisor (RIA).
As president, Art has assembled a team of experienced, credentialed professionals at Alpha Fiduciary to execute on its mission of helping clients achieve their
optimum financial life. The firm’s approach combines prudent financial planning with an investment style focused primarily on low-cost “passive” investment
solutions. The Investment Committee also seeks to enhance returns or diversification of its passive portfolio by adding a smaller number of carefully selected
actively managed funds. Alpha Fiduciary has a fiduciary responsibility to its clients, and this means you can be sure we only serve one master: our clients.
In addition, Art has taught a six-week wealth management course at UCLA Extension several times. This coursework was designed to educate investors by
providing a framework whereby business principles are applied to the investment process, which in turn provides a greater understanding of the key areas of risk
and performance that can shape investment returns. This education is founded in Art’s fiduciary focus and desire to improve the quality of the individual
investors investment decisions.

ABOUT THE FACULTY
CHRISTOPHER CAHILL
ccahill@lowis-gellen.com
Christopher Cahill is Head of the Bankruptcy and Restructuring Practice Group at Lowis & Gellen LLP, in
Chicago. He advises businesses on relationships with vendors, customers, and lenders, to maximize market share,
return, and liquidity. He also litigates on behalf of secured creditors, trade creditors, and in chapter 11 cases and
advised more generally on corporate restructuring, including workouts, loan forbearance, assignments for the
benefit of creditors, UCC Article 9 foreclosure sales, and avoidance litigation.
Mr. Cahill also publishes and speaks frequently on commercial insolvency and commercial transaction issues. He
is an Executive Editor of Commercial Bankruptcy Litigation, 2d Edition (Jonathan P. Friedland, Elizabeth
Vandesteeg & Christopher M. Cahill eds., 2018), a comprehensive treatise that is updated annually and published
by Thomson Reuters. In addition, Mr. Cahill is the host of Financial Poise Radio, a weekly interview and
commentary podcast for investors and other market participants, with 100 episodes and counting.

BENOIT J.P. FLAMMANG
ben@beninvest.com
Benoit J.P. Flammang is a Family Office investor and a serial entrepreneur, currently focusing on Blockchain Fintech initiatives in the diamond industry. Ben
spent the first five years of his career at IBM Belgium. He moved to the US in 1988 and restructured a money losing R&D/Manufacturing telecom company in
Raleigh, NC, made it profitable, structured and implemented a management buy-out.
He created Beninvest in 1992 in New York for alternative investments. The Family Office now opened their private Luxembourg domiciled funds to non US
investors. He raised money and did strategic business development for many companies and investment fund managers in Europe, Latin America, the Middle
East and Japan.
He was a partner in the establishment of the merchant bank of the Indian Hinduja Group in NY and an advisor to the Antwerp Diamond Bank for a private
equity fund.
He created, published, and distributed in 48 countries, the first English buyers guide in the world for new prestigious wristwatches. He sold the company in
2000. He also crossed the Sahara in a VW-combi at age 17, did NY-LA on the motorbike, is a car aficionado, airplane pilot, skier and runs at least 10 miles a
week.
He received his degree in Applied Economics from ICHEC Management School in Brussels. He is fluent in English, Dutch/Flemish, French and
conversational in German. He is a frequent speaker at LP/GP, Family Office and Blockchain events. He was the 2016 Keynote speaker at the Arabian
Venture Forum at KAUST in Saudi Arabia. He spoke at Keio University in Tokyo about alternative investments.

MICHAEL TERRIEN
mterrien@westloopfinancial.com
Michael S. Terrien is the founder and Managing Member of West Loop Financial
LLC (WLF). WLF is a registered investment advisor (RIA) committed to
disciplined, evidence-based investing and personalized, comprehensive financial
planning designed to help clients build their tomorrows while guarding against the
pitfalls on the road today and in the future. West Loop Financial is a member of
The BAM Alliance (BAM), a nationwide network of like-minded advisors. Mr.
Terrien brings the intensive commitment to client service and attention to detail
developed over a legal career spanning more than 20 years to West Loop Financial.

The material in this presentation is for general educational purposes only. It has been prepared
primarily for attorneys and accountants for use in the pursuit of their continuing legal education and
continuing professional education.
While Financial Poise is happy to make this PowerPoint freely available to all, the reader is
cautioned that it was created for use as part of a webinar that featured an extensive verbal discussion
of the topics addressed in the PowerPoint. It was not designed to be read by itself. Financial Poise
webinars can be purchased at www.financialpoise.com You may also receive offers for free webinars
by subscribing to Financial Poise's DACyak, a free weekly newsletter.
IMPORTANT NOTES
47© 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™

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DailyDAC LLC, d/b/a Financial Poise™ provides continuing education to
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websites, webinars, and books provide Plain English, entertaining,
explanations about legal, financial, and other subjects of interest to these
audiences.
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Basic Investment Principles 101: From Asset Allocation to Zero Coupon Bonds (Series: Personal Finance & Investing Fundamentals 1.0)

Basic Investment Principles 101: From Asset Allocation to Zero Coupon Bonds (Series: Personal Finance & Investing Fundamentals 1.0)

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