Flex Portfolio Performance through July 2012

The stock markets have been moving up, albeit on low-volume and despite several major economic and geopolitical risks.  My Flex portfolios have lagged their benchmarks in the past year because of relatively strong stock market performance.  They have pretty much kept pace over the 2-yr period.  They have outperformed in the 3-, 5- and 10-yr periods (massively so in the latter two).

Given the potential for further solvency issues in the Eurozone, China's slowdown, and stubbornly slow growth in the USA, as well as increasing potential for military flare-ups, or even war, in the Middle East, I believe it is important to remain flexible and diversified.  The stock markets will hopefully continue to rise, but a correction (dropping 10% or more), or even another bear market (dropping 20% or more), can happen suddenly.

My Flex portfolios have been much less volatile than standard portfolios and the stock markets.  When we have had pullbacks, corrections, and bear markets, Flex portfolios have protected us relatively--but significantly.  For example, a moderately-aggressive investor using a portfolio of popular index funds from Fidelity during the worst 12-month period of the 2007-9 economic/market crisis would have been down 39%, compared to only down 22% if using 80 Flex II.  Someone using just the S&P 500 (SPY, or the TSP's C-Fund, for example) would have been down 43%.  Despite providing that relative protection, 80 Flex II still delivered better overall results--6.7% average annual gains in the 5-yr period, compared to -0.2% per year for "80 Fidelity" and just 1.1% per year for the S&P 500.

Each quarter, I spend a great deal of time evaluating and tweaking my Flex portfolios, as well as designing and testing new ones to possibly replace them.  But the risk-reward balance still appears to be best with the current line-up.

If you want to invest money for the long-term, not have to worry about making adjustments yourself, but also know the portfolio is being tactically adjusted by several professionals working for us, the Flex portfolios are a prudent solution.

US and Foreign Stocks	1 mo	3 mo	YTD	1 yr	2 yr	3 yr	5 yr	10 yr
Stock Markets (50-40-10)	1.3%	-2.7%	7.7%	-1.9%	7.7%	8.8%	-1.7%	7.2%
S&P 500	1.4%	-0.8%	11.0%	9.1%	14.3%	14.1%	1.1%	6.3%
MSCI EAFE	1.1%	-4.2%	4.1%	-11.5%	1.8%	3.2%	-5.7%	6.2%
Barclays Agg Bond--US	1.4%	2.3%	3.8%	7.3%	5.8%	6.9%	6.9%	5.7%
Barclays Agg Bond--Global	1.2%	0.6%	2.7%	1.8%	5.4%	5.7%	6.5%	6.5%
Moderately Aggressive	1.2%	-1.6%	6.7%	-0.1%	7.8%	8.4%	-0.1%	6.6%
80 Flex II	0.6%	-2.0%	5.4%	-1.1%	7.8%	9.5%	6.7%	10.9%
80 Fidelity	0.9%	-1.9%	6.6%	-0.6%	7.4%	8.2%	-0.2%	6.6%
80 Flex III	0.7%	-1.6%	5.5%	-2.0%	7.5%	9.0%
Moderate	1.2%	-0.8%	5.8%	1.5%	7.4%	8.0%	1.8%	6.6%
60 Flex II	1.0%	-0.9%	6.0%	0.1%	7.3%	9.1%	7.3%	10.4%
60 Fidelity	0.9%	-0.9%	5.7%	1.1%	6.8%	7.6%	1.4%	6.3%
60 Flex III	1.0%	-0.7%	6.1%	-0.6%	7.1%	8.8%
Moderately Conservative	1.2%	0.0%	4.8%	2.9%	7.0%	7.4%	3.6%	6.5%
40 Flex II	1.3%	0.1%	6.6%	1.3%	6.8%	8.7%	7.9%	9.9%
40 Fidelity	1.0%	0.2%	5.0%	3.1%	6.4%	7.2%	3.0%	6.0%
40 Flex III	1.4%	0.3%	6.6%	0.8%	6.6%	8.5%
Asset Allocation	Cash	Stock	Bond	Other
80 Flex II	20%	54%	16%	10%
60 Flex II	24%	41%	27%	8%
40 Flex II	29%	27%	38%	6%

Flex Portfolio Performance Through June 2012

After a terrible month of May, the U.S. stock markets had a terrific month of June.  Our "Flex" portfolios continue to provide reduced volatility and are tracking closely their customized/blended benchmarks in the near-term while significantly out-performing the stock markets and the blended benchmarks for the 3-, 5- and 10-year periods.  Data is below:

US and Foreign Stocks	1 mo	3 mo	YTD	1 yr	2 yr	3 yr	5 yr	10 yr
Stock Markets (50/40/10)	3.3%	-4.5%	6.3%	-3.6%	10.9%	11.1%	-2.3%	6.1%
S&P 500	4.1%	-2.8%	9.5%	5.5%	17.4%	16.4%	0.2%	5.3%
MSCI EAFE	7.0%	-7.1%	3.0%	-13.8%	6.0%	6.0%	-6.1%	5.1%
Barclays Aggregate Bond--US	4.0%	2.1%	2.4%	7.5%	5.7%	6.9%	6.8%	5.6%
Barclays Aggregate Bond--Global	0.5%	0.6%	1.5%	2.7%	6.6%	6.0%	6.7%	6.5%
Moderately Aggressive Benchmark	4.5%	-3.5%	5.4%	-2.2%	10.8%	10.4%	-0.7%	5.7%
80 Flex III	3.0%	-2.3%	4.8%	-1.8%	9.4%	10.7%
80 Flex II	2.9%	-2.8%	4.8%	-1.1%	9.5%	11.1%	6.7%	10.4%
80 Fidelity	4.4%	-3.6%	5.7%	-2.8%	10.7%	10.5%	-0.8%	5.7%
Moderate Benchmark	4.8%	-2.4%	4.9%	-0.1%	10.1%	10.0%	1.4%	6.2%
60 Flex III	1.9%	-1.2%	5.0%	-0.2%	8.3%	10.0%
60 Flex II	3.7%	-2.2%	5.2%	-0.5%	9.0%	10.6%	7.1%	10.1%
60 Fidelity	3.3%	-2.3%	4.8%	-0.5%	9.3%	9.3%	0.9%	5.6%
Moderately Conservative Benchmark	1.8%	0.7%	3.6%	2.7%	8.6%	8.3%	3.4%	6.1%
40 Flex III	2.0%	-0.5%	5.2%	-0.9%	7.5%	9.4%
40 Flex II	2.0%	-0.7%	5.2%	1.3%	7.6%	9.6%	7.8%	9.5%
40 Fidelity	1.8%	-0.8%	4.0%	2.5%	7.8%	8.2%	2.7%	5.6%
Asset Allocation	Cash	Stock	Bond	Other
80 Flex II	21%	52%	15%	12%
60 Flex II	25%	39%	27%	9%
40 Flex II	29%	26%	38%	7%

TSP now offers Roth TSP option

Good morning.  The federal government's popular defined contribution retirement plan, the Thrift Savings Plan (TSP), recently began to offer a "Roth TSP" option.  Federal employees should figure out whether or not to use it.

Current TSP participants should contact their tax advisor about whether or not the Roth TSP is a good choice (and I'll join the call with you, if you want).

I do not provide formal tax advice—taxes are not my area of professional expertise.  That said, I have some thoughts and info to share:

1. Roth TSP contributions are from already-taxed money, instead of being tax-deductible like normal TSP contributions.
2. Roth TSP withdrawals in retirement, however, are tax-free (with some exceptions), while normal TSP withdrawals in retirement are taxable.
3. Tax rates are now pretty low by historical standards.  They might increase in the coming decades.  If they do, it is likely that "the better deal" is to give up the tax-deduction now in favor of the tax-free withdrawals later.
4. Many tax professionals I have read or heard from favor Roth anyway, even if income tax rates do not change.
5. This article provides a good overview, as well as some helpful details:  http://www.fedsmith.com/article/3408/unraveling-mysteries-roth-tsp.html

I generally favor Roth TSP over TSP, but each federal employee should consult their own tax advisor on this matter.

FYI, and please contact me with any questions or if you want my list of recommended tax professionals.

--Gary


Garo Linck Partoyan
Financial Advisor
Potomac Wealth Strategies, LLC
(703) 746-8195
(855) 347-9483 fax
Garo.Partoyan@PotomacWealthStrategies.com
www.PotomacWealthStrategies.com

Yacktman Reorganization--Probably Good for Yacktman Focused Fund

Good afternoon.  You may have received a phone call and/or letter from The Yacktman Funds.  That company runs one of the key mutual funds in my Flex portfolios.  They are reorganizing the company and want fund shareholders to vote on it.  Hence the calls and/or letters to individuals like you, instead of to investment advisors like me.

This is legitimate, just unusual.  Normally I handle "everything" for my clients, but in this case you retain the right to vote and I am not able to do it for you.

So, here is my brief explanation of what is going on at Yacktman:

1. Yacktman Asset Management (YAM) is the investment advisor to the Yacktman Funds (the Yacktman Focused Fund is in my Flex portfolios, so many of my clients own shares thereof); this means the Yacktmans and their employees work for YAM, and their one job is to provide the advisory/management services to the Yacktman mutual funds and "separately managed accounts".
2. YAM was founded by Don Yacktman about 20 years ago, and he is 70 now.  His son, Steven (about age 40) and a fellow named Jason Subotky are the two other key people.  They have a handful of assistants and junior management types, totaling about 10 people.  Don, Steven, and Jason, and I believe one other fellow, are the "portfolio managers", the ones who decide what to buy and sell in the mutual funds.
3. Don seems to want to cash-out a little (a lot?) and also make it easier to transfer ownership and/or control to Steven and others (like Jason) whenever Don's time is up.
4. YAM also wants to hand-off the administrative and back-office workload and focus solely on investment selection and portfolio management for the Yacktman Funds.
5. So, the YAM folks have decided to sell 55% of YAM to a firm called Affiliated Managers Group, Inc. (http://www.amg.com/Home/); this gives the Yacktmans cash in lieu of some equity in the company, and it also, according to the Yacktman employee I spoke with today, provides the right structure by which the firm can transfer ownership/control to the next generations if/when Don retires or dies.
6.  But now YAM only owns 45%, so how do we know they are still calling the shots?  Well, we don't for sure, but there are good indicators.

A.      For one thing, each of the key Yacktman people have agreed to 10-yr contracts--Don plans to be working at this until at least age 80, and I was told he only half-jokingly said he wanted a 25-yr contract.

B.      Another thing is AMG's reputation; they have done this sort of "acquisition" more than 25 times with other boutique investment advisors and the Yacktman team thinks AMG's reputation is for leaving alone the companies they buy or invest in and just let them continue the good work that attracted AMG to invest in the first place.

Bottom line:  I am in favor of this reorganization/sell-out, as the expectation is that there will be no adverse changes to the Yacktman Focused Fund and there is potential for positive changes (more resources, more time for portfolio managers to focus on investing instead of business management).  If you want to have your say, you are welcome to call them at 877-536-1557 (tell them you are calling to vote on the Yacktman reorganization) and vote Yes, No or Abstain.

Meanwhile, I will be monitoring the performance, people and strategies of the Yacktman Focused Fund.  If they make changes that appear to be inconsistent with the reason I "hired" them for the Flex portfolios (they are our best way to have exposure to large, US-based companies with "value" characteristics), I will take appropriate action and keep my clients posted.

Please contact me with any questions.  Thank you!

--Gary

Garo Linck Partoyan

Financial Advisor & Owner

Potomac Wealth Strategies, LLC

1800 Diagonal Rd., Suite 600

PMB 12

Alexandria, Virginia  22314

(703) 746-8195

(855) 347-9483 fax

Garo.Partoyan@PotomacWealthStrategies.com

www.PotomacWealthStrategies.com

FINANCIAL BLOG:  http://potomacwealthstrategies.blogspot.com

Flex Portfolio Performance Through May 2012

US and Foreign Stocks	1 mo	3 mo	YTD	1 yr	2 yr	3 yr	5 yr	10 yr
Stock Markets (50/40/10)	-8.7%	-8.8%	1.0%	-11.0%	6.8%	9.3%	-3.4%	4.9%
S&P 500	-6.0%	-3.5%	5.1%	-0.4%	12.0%	14.9%	-0.9%	4.1%
MSCI EAFE	-11.5%	-13.6%	-3.8%	-20.5%	1.9%	3.4%	-7.3%	4.0%
Barclays Aggregate Bond--US	0.9%	1.5%	2.3%	7.1%	6.5%	7.1%	6.7%	5.7%
Barclays Aggregate Bond--Global	-1.0%	-0.6%	1.0%	2.3%	7.1%	6.0%	6.5%	6.8%
Moderately Aggressive Benchmark	-6.9%	-6.8%	0.9%	-7.5%	7.3%	8.8%	-1.7%	4.9%
80 Flex III	-5.1%	-4.5%	1.7%	-6.1%	6.6%	9.4%
80 Flex II	-5.3%	-5.5%	1.8%	-4.6%	7.5%	9.8%	6.0%	9.9%
80 Fidelity	-6.8%	-6.6%	1.2%	-8.1%	6.9%	8.8%	-1.8%	4.8%
Moderate Benchmark	-5.1%	-4.9%	1.2%	-4.1%	7.4%	8.3%	0.7%	5.4%
60 Flex III	-4.4%	-3.9%	2.1%	-4.6%	6.3%	9.0%
60 Flex II	-4.6%	-4.6%	2.1%	-3.5%	6.9%	9.2%	6.6%	9.6%
60 Fidelity	-5.0%	-4.7%	1.4%	-4.7%	6.6%	8.1%	0.1%	5.0%
Moderately Conservative Benchmark	-3.3%	-3.0%	1.3%	-0.8%	7.4%	7.7%	2.8%	5.8%
40 Flex III	-3.7%	-3.3%	2.4%	-3.1%	5.9%	8.5%
40 Flex II	-3.8%	-3.8%	2.4%	-2.3%	6.3%	8.6%	7.2%	9.2%
40 Fidelity	-3.0%	-2.7%	1.7%	-1.0%	6.5%	7.6%	2.1%	5.2%
Asset Allocation	Cash	Stock	Bond	Other
80 Flex II	23%	52%	14%	11%
60 Flex II	28%	39%	24%	9%
40 Flex II	34%	26%	34%	6%

Flex Portfolio Performance Through March 2012

US and Foreign Stocks	1 mo	3 mo	YTD	1 yr	2 yr	3 yr	5 yr	10 yr
S&P 500	3.3%	12.6%	12.6%	8.5%	12.0%	23.4%	2.0%	4.1%
MSCI EAFE	-0.5%	10.9%	10.9%	-5.8%	2.0%	17.1%	-3.5%	5.7%
Barclays Aggregate Bond--US	-0.6%	0.3%	0.3%	7.7%	6.4%	6.8%	6.3%	5.8%
Barclays Aggregate Bond--Global	-0.7%	0.9%	0.9%	5.3%	6.2%	7.5%	6.4%	7.3%
Moderately Aggressive Benchmark	1.0%	9.3%	9.3%	2.6%	7.2%	17.6%	1.0%	5.6%
80 Flex III	0.7%	7.3%	7.3%	1.6%	7.4%
80 Flex II	0.1%	7.8%	7.8%	3.8%	8.7%	16.9%	8.1%	11.0%
80 Fidelity	1.2%	9.7%	9.7%	2.1%	7.1%	17.8%	0.9%	5.5%
Moderate Benchmark	0.5%	6.9%	6.9%	3.9%	7.2%	14.7%	2.6%	6.0%
60 Flex III	0.4%	6.6%	6.6%	2.2%	6.9%
60 Flex II	-0.1%	7.0%	7.0%	3.9%	7.9%	15.2%	8.3%	10.6%
60 Fidelity	0.8%	7.3%	7.3%	3.2%	6.7%	14.8%	2.1%	5.5%
Moderately Conservative Benchmark	0.1%	4.5%	4.5%	5.0%	7.1%	11.8%	4.0%	6.3%
40 Flex III	0.1%	6.0%	6.0%	2.8%	6.5%
40 Flex II	-0.2%	6.2%	6.2%	3.9%	7.1%	13.5%	8.5%	10.0%
40 Fidelity	0.4%	4.9%	4.9%	4.6%	6.5%	11.9%	3.3%	5.5%
Asset Allocation	Cash	Stock	Bond	Other
80 Flex II	23%	53%	13%	11%
60 Flex II	28%	40%	24%	8%
40 Flex II	34%	27%	33%	6%

Small Business is the Heart of the American Economy

The Small Business Administration (SBA) cites 10 reasons why small businesses are "the heart of the
American economy."

1. Small businesses make up more than 99.7% of all employers.
2. Small businesses create more than 50% of the nonfarm private gross domestic
product (GDP).
3. Small patenting firms produce 13 to 14 times more patents per employee than
large patenting firms.
4. The 22.9 million small businesses in the United States are located in virtually
every neighborhood.
5. Small businesses employ about 50% of all private sector workers.
6. Home-based businesses account for 53% of all small businesses.
7. Small businesses make up 97% of exporters and produce 29% of all export value.
8. Small businesses with employees start-up at a rate of over 500,000 per year.
9. Four years after start-up, half of all small businesses with employees remain open.
10. Small businesses create 75% of the net new jobs in our economy.