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Andrews' Performance Enhanced Portfolio Strategy

Over the past dozen years, I have had the opportunity to help clients and other people take a serious look at their finances. My objective has been to refrain from "Wall Street Speak" and use plain English to explain to people ways they can resolve various life dilemmas that affect their financial situations.



A.P.E.P.S®: How do you select your investments? My methodology A.P.E.P.S.®, allows for backtesting - that is, reviewing how an investment would have behaved in a portfolio over time. If the sector is one that I believe will increase in value over time, and it has proven historically to have had no major setbacks - i.e., repeated historical incidents of more than a 10 percent pattern - it becomes a potential candidate. Please bear in mind that the future is more important than historical behavior, just as looking in the rearview mirror of a car when driving is of very limited use. Although it's good to know what's behind you, the future is where the path to profits lies. The selling of "underperforming investments" is the method to successfully reduce losses and increase gains.

Remember, I hate to lose money - and the less you lose, the smaller the gain needed to outperform the markets.

Alpha:

A measure of a fund's risk-adjusted return. Alpha can directly be used to measure the value added or subtracted by a fund's manager, since it measures the portfolio return in excess of the market return after both have been adjusted for volatility. In other words, alpha is a measure of selection risk (residual risk) of a fund in relation to the market. Therefore, a positive alpha is the extra return that rewards an investor for taking excess risk over the market risk.



Pain Ratio:

A modified alpha that divides the excess return by the "pain" standard deviation, rather than the normal standard deviation. Thus, market volatility is dramatically reduced, since the negative movements are the predominant decision-making mechanism in making investment choices. Pain trumps gain. Positions with positive rates of return are rebalanced.



Exchange Traded Funds (ETFs):

These are securities certificates that state the legal right of ownership over part of a basket of individual stock certificates. ETFs combine the characteristics of an open-end mutual fund and a stock. Like index mutual funds, ETFs represent a fractional ownership in an underlying portfolio of securities that track a specific index. However, unlike mutual funds, individual investors do not purchase or redeem shares from the fund.



Pain:

A variation on standard deviation. Standard deviation assigns equal values of volatility to both positive and negative returns when calculating risk. Pain changes the emphasis by assigning a value only to the negative historic returns (hence the name), and ignoring the positive rates of return, when deciding whether to include a position in a portfolio. It is also used in the decision to reduce or eliminate a position with negative market returns.



Standard deviation:

Standard deviation is the measurement tool of risk or volatility in modern portfolio theory.







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