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Personalized Investments at Hampton Wealth Management

This section covers the bulk of our Investment Policy Statement in the most general terms. The specifics particular to your situation will be furnished to you upon signing a money management contract and will supplement that which is presented here.



Common Themes to Either Approach:

We have two approaches to investing, depending on your preference: Mutual Funds/Exchange Traded Funds or Individual Securities.

Upon signing an agreement, we will review all the investments that you bring to the table (along with their cost basis). We may recommend selling certain ones, while holding others, and maybe even buying more of others. There is no pre-defined time table to exit out of a legacy portfolio, because everything is individually negotiated.

Ideally, we would like to give any of our mutual fund and separate account managers one full market cycle to gauge their effectiveness, which could range anywhere between 3 to 5 years. There will be times when the market can humble any guru, so it is important to believe in their underlying philosophy in order to keep the faith when their style may be out of favor. If, over time, they continue to underperform their benchmark/peer group or aren't meeting your goals, then we can eventually fire them and replace them with somebody else.

An emphasis is also placed on risk control. Rather than focusing solely on returns, we would like to start educating the investing public on the regular use of risk statistics as an enhancement in our reporting. Too much emphasis by the financial press is placed on returns and not enough on risk. If the recent bear markets taught us anything, downside risk is just as important as upside potential and yield. Oftentimes, the best offense is a strong defense.

In Today’s “New Normal,” investors are facing a challenging environment of muted stock returns, higher correlations, and elevated risks. How well investors prepare for this altered landscape can make all the difference in successfully pursuing their financial goals. To help clients take control amid the uncertainty, Hampton Wealth Management will spend more time initiating a uniquely upfront conversation about risk, offering education, analysis, innovative strategies all geared to helping you better understand and manage risk.

The financial downturn and the extraordinary turnaround that followed have left many investors with an incomplete or inaccurate view of risk. With investors at a crossroads, now is the time to have an open and positive conversation about risk. We want to get risk right in 2010 by being risk smart. Throughout the year, we will be providing our clients with a thoughtful intellectual capital to enhance your thinking about variation and volatility.

Black Swan Events
In Wall Street lore, big declines are known as “black swan events”. The term “black swan” derives from the ancient belief, once widespread in the West, that all swans are white — a notion that was proven false when European explorers discovered black swans in Australia. The gist: Anything is possible. In fact, big surprises are more common than people think:

Crash of '87(10/6/87 - 12/4/87)-21%
Iraqi Invasion of Kuwait(8/2/90 - 2/28/91)-16%
Implosion of Long Term Capital(7/17/98 - 8/31/98)-19%
9/11 Attacks(9/10/01 - 9/11/01)-12%
Collapse of Lehman Brothers(9/12/08 - 3/9/09)-46%
 
In other words, a "black swan" is an unforeseen event that can wreak havoc on the financial markets. Statisticians call these events "fat tails", because they occur on the fringes, or tails, of a bell curve showing a theoretical distribution of normal, possible outcomes. Professional investors try to manage their “tail risks” using alternative strategies to protect against the next unpredictable “black swan event”.

Many investors still believe that the 2008 crisis was a “once-in-a lifetime event,” and that we are unlikely to see this sort of widespread market shock again. However, we beg to differ. A flashback shows that markets have experienced this type of multi-asset decline many times. And as the global markets become more correlated, market shocks may actually happen more often. That is why tactical allocation strategies that explicitly hedge against tail risks are gaining traction among investors.

Once we have taken care of the basics the cash and fixed income allocations, we will be in a confident position to seize opportunities and take calculated risks to pursue return potential.

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The Mutual Fund Approach:

We can use Exchange Traded Funds in conjunction with no-load, actively managed mutual funds to build a core portfolio with satellites positioned around it.

The packaged products approach may work for you if you are more of a big picture person and don't care to delve into the portfolio beyond what your sector exposure is and their investing themes.

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The Individual Securities Approach:

If you do not like mutual funds or don't understand them, we can manage individual securities with/for you as well. Generally, we prefer to make nondiscretionary stock recommendations to you based on documentable research. In other words, nothing happens without your approval. We will do the ground research and come back to you with a short list of ideas from which you can select. In our past experience, clients are most happy with the results when we make informed decisions together.

However, there may be times when you will be away on vacation or preoccupied with work or life that may require you to play a more passive role. In that case, we can manage the portfolio for you on a discretionary basis after we have gotten to know you and understand your investing style. You will need to sign an agreement for that specified period to go into effect. There is no additional cost for switching from nondiscretionary to discretionary money management, and vice-versa when your schedule returns back to normal.

Do not be fooled by anybody who tells you that they are too busy to make stock picks. That means they are too busy selling, or are not really interested in managing your money. That is a common, indirect sales pitch by larger wirehouses, so caveat emptor.

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On Separately Managed Accounts:

If you would like some big, brand names to manage a separate account for you, that approach is also available for your retirement accounts. Perhaps they can fill a niche where less research is widely available and where markets are less efficient, for example in the small cap or international arenas. In our experience, this approach works best when you do NOT want to make joint decisions on stock picks. Their methodology will differ from ours, but given their track records, we will let them do their own thing. Diversity of styles can be beneficial for your portfolio.

These accounts involve an upcharge, but the commissions that would be normally charged would be absorbed by this flat percentage fee. These outside money managers can certainly be worth it if used on a limited basis — certainly not for the entire portfolio. We need speed and flexibility in the event of another market meltdown. These accounts would be a part of the buy-and-hold strategy, given the lag time it takes for them to process liquidation requests.

While managed accounts offer many benefits (such as observing certain investment constraints, making proactive trades, and harvesting tax-losses), they also do present some logistical hurdles (e.g. additional paperwork, potentially higher charges by your accountant, and slow to implement for the entire portfolio, i.e. it's not push-button technology). Consequently, there is a right time and place to use these tools — preferably in your retirement accounts and during healthy bull markets. These accounts are not for everybody.

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The Benefits of Fixed Income via Separate Account Management:

On the fixed income side, we generally prefer to have institutional bond specialists manage a portfolio on our behalf. Bond trading is one of the final frontiers in the traditional investing world. Most bonds are traded over-the-counter where prices are negotiated between dealers. They are not listed, so pricing is not as efficient as it is in the stock market. Good buy-side research is extremely difficult to come by without paying a fortune for it. Much of the pricing is dominated by large bond houses as well as other institutional investors (e.g. pensions, insurance companies, and endowments). Hence, it is very difficult to get the best bonds with the right features on them, let alone trade them at the right price when market conditions and yield curves warrant such moves. Oftentimes, the bonds available through retail bond desks are the leftovers that the investment banks could not sell, not unlike the IPO market. The retail bond desks mark-up the prices significantly to compensate themselves for taking on this market making risk in such a way that trading retail bonds would significantly diminish the realization of any profit-taking opportunities. Consequently, this has resulted in retail investors taking a buy-and-hold approach, which has not yielded optimum results over a full market cycle.

The fixed income managers with whom we deal conduct their own independent credit analysis based on direct source material and make the relative comparisons for us. This buy-side research (representing the investor, not the investment banker) can result in research opinions that can vary significantly at times from the recently discredited ratings agencies. For example, recently this has resulted in our managers sidestepping many of the landmines littering the subprime landscape. As your financial advisor, we can place investment constraints on their portfolios, so that they do NOT reinvest the interest payments and make sure they set enough proceeds from any bond sales to fully fund your cash requirements, in order to replenish the withdrawals from the money market funds. Periodically when the cash becomes available, we can journal money over to the money market fund (in an account that they don't manage) to replenish your cash pool. In this manner, we can preserve their trading flexibility without regressing into a buy-and-hold model. (We can discuss this arrangement in more detail in our office should you need further clarification.)

We can also avoid a "run on the fund", should rapidly or unpredictably rising interest rates cause money to start flowing out of bond mutual funds. Because you actually own the bonds inside the separately managed account, your fixed income weightings are not held hostage by the stampeding of the masses. For example, this is particularly important in the municipal arena, which is coming under increasing strain, which may cause (what has otherwise been known as a sleepy corner in) the bond market, to potentially become fodder for headline news over the next few years. We want to have this money invested in a risk-constrained manner — without equity exposure — so that it does what it is supposed to, namely break correlation with the stock market. This diversification is a strong example of adding alpha by not losing. We have total return strategies that can go anywhere (much like an all-cap equity manager), taking advantage of pockets of value in various subsectors, as well as sections of the yield curve and credit ladder.

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On Reporting:

If you wish to engage us in financial planning (which we strongly encourage at the outset), you will receive a Financial Goal Plan from us. This will be presented to you in hard copy, bound in genuine leather, and personalized with your name and year stamped in gold. You can use this binder to keep all of your important documents from us throughout the year. As our special private client, each year you will receive a new elegant binder to reflect your tenure with us.

Next, you will receive an Investment Policy Statement, which will complement all the information that you see online here. Everything in this section is a part of our Investment Policy Statement, which governs the terms of our relationship and both our roles. The paper addendum highlights your specific goals, along with your unique investing preferences. As part of our annual suitability review, we will make sure that this document is kept up-to-date.

In addition, you will be issued a quarterly Comprehensive Portfolio Analysis a few days ahead of time to review recommendations prior to our meeting. If you have any material changes that would affect our judgment since our last review or have other ideas that you would like to bring to the table, it would be incumbent upon you to notify us at least one week ahead of time, so that we don't waste time moving you in the wrong direction. Receiving an accurate report in a timely manner will give you a chance to prepare questions and comments for our discussion. Again, we can either e-mail the recommendations to you, or send you a hard copy. If you prefer not to receive the report ahead of time (either because it would confuse you or if you know you won't have time to preview it), then we will make a note of that for future reference.

If, after our meeting, substantial revisions are required, we can re-run the report, so that you have an accurate record of our discussion prior to implementation. We want you to be comfortable with ideas presented. If we are significantly off-the-mark, then we would be happy to recalibrate our recommendations based on a fine tuning of your investment preferences.

Last, you will receive a Quarterly Performance Summary from us in either electronic or paper format. This quarterly statement will normally be dollar-weighted and will reflect performance numbers net-of-fees. Alternatively, the quarterly performance statement can be time-weighted (and still net-of-fees) if we are meeting significantly off the calendar quarter cycle (either much earlier or much later) due to scheduling issues. Regardless of when we meet, the relevant stock and bond indices will also be printed to gauge how we have done against common benchmarks.

To manage expectations, we won't be beating the blended, asset allocation benchmark all the time, but we hope to do so most of the time. As long as we can give you an accurate accounting of what helped and what hurt and why, then we can provide forward-looking adjustments to remedy the situation.

These days, you don't need a monthly statement anymore, since you can look online to see your accounts and see a de facto daily statement. Consequently, most custodians are moving away from paper statements and are archiving your statements for several years, so that you can print them off when necessary. If you insist on paper statements, they may pass the cost onto you in the form of higher commissions. You can log into your institutional accounts through our web portal and then bookmark the web address for direct access. The custodians have special websites for institutional clients, like you.

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A Word Regarding Management Fees:

If you can provide written proof on how you are being charged, we can meet or beat any of our competition when it comes to fees. Because we do not have shareholders or multiple layers of management to satisfy, we can cut out most of the fat to give you a fairly priced deal. Do not be fooled by anyone who says they are worth twice as much (or more) of what we charge. Believe me, I am a former insider, so I know how this industry works.

Fees will be assessed based on the fair market value upon close of the last business day of the current calendar quarter and billed on the first business day of the following quarter. In other words, we will work for you first, then bill for you later. The amount charged will generally be based on the program chosen, your asset allocation, and other competitive cost considerations. The management fee would be deducted from your money market fund, so that you don't have to go through the inconvenience of writing a separate check. (Sorry, we cannot accept credit card.)

We will discuss fees on a definitive basis once you are committed to signing up. For most clients, our fees are reasonable enough so that they are a non-issue.

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We hope these sections define who we are, what we stand for, and what to expect by investing with us. Of course, we encourage you to call us for a private appointment in our exclusive and conveniently located office.