Feedback is welcomed. I hope to welcome you soon as a member.

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1 As you save for retirement, maximize your return and minimize your risk. Dear Inquirer, Thank you for looking into this proactive rotational allocation C-lect strategy. C is the riskadjusted relative strength metric that we use to strive to identify funds whose return is maximized and risk is minimized. These funds will change over time. So, C-lect is a quarterly rotational allocation strategy designed for you to invest your money with the highest ranked funds available in your retirement plan. With all the plans tested so far, we found that the C-lect strategy of rotationally investing with the risk-adjusted relative strength leaders produced better results than two fixed alternatives (SPY (S&P 500) or VWELX (Vanguard Wellington a typically 60% stock and 40% bond fund)) over the 20.5 year test period. Indeed, none of a plan s fund choices outperformed the C-lect proactive rotational approach. 401kSelections.com is your go-to place to find out how your plan compares, get signed up, and begin having your same investment dollars work harder for you. Feedback is welcomed. I hope to welcome you soon as a member. Best regards, Stephen L. McKee Managing Partner, Watercourse Way Holdings LLC No-Load Mutual Fund Selections & Timing Newsletter ETF Selections & Timing PO Box 3367 Bella Vista AR Info@401kSelections.com 401kSelections.com SelectionsAndTiming.com 1

2 PERFORMANCE COMPARISON The chart compares 20.5 years cumulative results, assuming a $500 per month contribution into each plan. The total contribution could be from any combination of employee savings and employer match. The 401k Composite gained more than $500,000, the best 401k plan ended with more than $700,000, while a buy and hold of the S&P 500 made less than $300,000. It was the same contribution amount, but a proactive rotational allocation strategy produced far superior results over time. The top dark blue line is the best of the tested 14 C-lect 401k plans, the red line is C-lect Composite of k plans, the green line is the worst of 14 C-lect 401k plans, the purple line is the Vanguard Wellington (VWELX) a normally fixed 60% stock and 40% hybrid fund, and the lighter blue line is the S&P 500 (SPY). The period covers both bull and bear markets. The scale on the left is dollar values ($100,000, $200,000, etc). $500 per month in the 401k Composite grew to more than $500,000, while $1,000 per month for 20.5 years would have grown to more than $1 million. The following table shows the average annual returns and cumulative returns for each approach over 20.5 years (C-lect Composite is k plans using C, Best is the best 401k of 14 plans 2

3 tested, Worst is the worst 401k of 14 plans tested, VWELX is buy and hold a low cost balanced fund, SPY is buy and hold a low cost index fund. C-lect Cmpst 401k BEST PLAN WORST PLAN VWELX SPY 13.2% 15.3% 10.1% 9.5% 8.6% 1,165% 1,740% 617% 546% 441% As always, the issue for the investor is which fund will do best in the future? No one knows of course. It is really the wrong question, however, because it is impossible to answer ahead of time. Instead, why guess about the future? We ask which investment strategy to pick funds might do best in the years and decades ahead? Still worse, no one knows where the ever-changing efficient frontier of some stock and bond and cash allocation designed to maximize return and minimize risk will range in the future. Why use a fixed allocation? Why use an allocation based on something unrelated to the markets like one s age? Why speculate with your future? We use a proven proactive rotational allocation approach. There s no guesswork or speculation because it does recognize that things change. It rotates through the top funds based on the plan s fund s risk-adjusted relative strength results each quarter; that is, C. Hence, C-lect ends up toward where we want to be; that is, investing at the leading edge of the efficient frontier where return is maximized and risk is minimized. Lastly, to make one general comment about C-lect and an individual retirement plan, each plan is unique as to the funds it offers to employees. C-lect may use only those funds that are available in the 401k plan. Even though in all comparison tests, C-lect outperforms a fixed allocation (VWELX) or the S&P 500 over the 20.5 years, as you can see on the chart and table above, certain plans provide substantially better results than others. We understand the reasons for this wide variance. Some plans are poorly constructed in one or more ways. The plan s fund styles do not provide enough diversification. The plan s funds themselves might also be laggards within their peer group. The good news is these problems are easily fixable. A plan with wider diversification choices and better funds will result in a substantial difference to an employee s retirement account. It will make the same dollar contribution work harder for you. To investigate actual improvements to your plan, please have the person in charge of the plan contact us at Info@401kSelections.com. Or call us at

4 ASSUMPTIONS and CAVEATS Number of available funds in each 401k selection pool may be up to 35. We exclude funds with limited operating histories or unavailable from data provider. We then may substitute like funds. We include a money market (cash) fund. Contributions were assumed to be made monthly. A 90-day holding period was required before selling a position on the account, except for monthly contributions. No commissions or redemption fees to buy or sell were assumed, except for 1% on monthly contributions held less than 90 days. Two fund maximum held at any one time (50% allocation into each). Account was always fully invested, though the C-lect program could choose the money market (cash) as an alternative. C ranks all of the plan choices on risk-adjusted, relative performance. Dividends reinvested. For the test, one fund s sell and buy rebalanced both funds held, though in real time, one sell buys one fund for the same dollar amount would be practiced. Test period is from 12/31/1992 through 6/30/2013, which includes both secular and cyclical bull and bear markets. There is no guarantee future periods will be equivalent or comparable to past periods. Not all of the plan s current fund choices were available to buy and sell over the entire period. Mutual fund and ETF data is from FastTrack. They adjust fund prices for dividends and capital gains. Not all plan fund data was available and substitutes that had similar objectives were used. Some fund information was from Morningstar. Past performance does not guarantee future performance. Information does not take into account your personal situation. 4

5 401k PLAN AVAILABLE FUNDS Each 401k plan is unique in the funds it offers. If we could find the data, we used the same funds in the back test that are currently available. If a fund was not available from our data provider, we mapped the fund style to an available fund and substituted it. We then ran the back test using the same choices available throughout the whole 20.5 years. To be clear, a strategy of staying with the funds providing the most return and the least risk matters. Even the worst of the tested plans beat the buy and hold and low cost alternatives. At the same time, there is also a clear difference between plans in two more ways; that is, some are well diversified and some have better funds than others. All of these things will work together to help to achieve retirement goals. 5

6 C lect 2 401k PLAN DESCRIPTION C-lect is a proactive rotational allocation investment strategy for you to manage the selection process of fund choices in your 401k plan. C (Comet) is a funds risk-adjusted relative performance rank each month. This metric is loosely modeled on the efficient frontier concept (maximum return and minimum risk), but with the key difference being my recognizing and accounting for the fact that the efficient frontier shifts, changes, and flip-flops over time. This chart, courtesy of Guggenheim Partners, shows the truth of the ever changing efficient frontier over the decades. For example, notice how stocks will sometimes provide top returns ( ), but also at times worst returns ( ). It is the same with bonds and combinations of assets. The C-lect approach accounts for these things. We strive to capture the main moves up and avoid the main moves down. To achieve the cusp where return is maximized and risk is minimized, a proactive allocation strategy is required. Many investors are aware of the traditional fixed 60% stock and 40% bond allocation, but most are unaware from where it sources, which is to a snapshot of the stock and bond market capitalizations in the Fifties (Harry Markowitz). The world has long since changed. As all investors well know, the reality is the efficient frontier shifts and changes dramatically over the 6

7 decades. Recall the last bear market in 2008 where stocks lost 50%; this is where return is minimized and risk is maximized, which is the exact opposite of our goals. For our part, therefore, on a quarterly basis, we attempt to meet the efficient frontier where the specific area lies of some ongoing fluid percentage combination of stocks, bonds, and cash where return is maximized and risk is minimized. For the available 401k funds in your plan, we rank them monthly and invest with the two top funds. We repeat this each month with the provision of a 90-day holding period that must be met before rotating out of a fund. So, at any point, stock funds might be the area to invest that meets the most return and least risk parameter. At other times, bond funds might be the best area. At still other times, a combination may be the best. Lastly, there are times when cash is providing the most return with the least risk. The C-lect strategy takes all of this into account. The alternative investment schemes taught to many 401k participants are typically two fold. One is an age-based method. Two is a fixed balanced approach. The reality is your personal age has nothing to do with your fund manager s performance or market risk and return. Moreover, the fact is that the efficient frontier, which is what every investor wants (most return and least risk), shifts dramatically over time. So, a fixed balanced approach also may not be appropriate. We advocate the C-lect approach. In short, C-lect rotational allocation is intuitively simple to grasp. Based on C, the risk-adjusted relative performance number, it ranks the plan s funds out of the myriad of choices specific to a plan on a monthly basis. It then picks as buys the top two leaders. On an ongoing basis year after year and decade after decade, after meeting that minimum holding period (typically three months), the model then rotates through the choices as the stock and bond markets rally and decline, as the efficient frontier shifts and morphs with changes in risk and return. 7

8 ANNUAL RETURNS WORST DRAWDOWNS VWELX C-lect 2 Cmpst 401k Annual Inter-annual To 6/30/13 8.7% 10.2% C-lect 2 Cmpst 401k -2.6% -15.4% VWELX SPY (worst drawdowns assume no contributions) (worst drawdowns may not occur at same times)