FocusConfidence through Education SUMMER 2018 NUMBERS 2 A Portfolio's Foundation TCI NEWS Improvisation 4 How to Read Your TCI Performance Reports applied to Comedy, REMINDERS 4 Office Closures Business and Life ASPIRE CORNER 5 Prescription for Less Stress PURSUIT OF HAPPINEss 6 “Yes, and...” Improv Comedy, Business and Life TCI’s Marc Campbell applies his experience in Improv Comedy to CYBERSECURITY create a valuable perspective on life, business and finances. Read CONNECT more on page 6. 8 Fraudulent Emails MARKET SNAPSHOT ECONOMIC SNAPSHOT 13.71 2.72 Market Volatility TYPICAL Inflation TYPICAL 10.13 62.25 -2.99 14.59 10 Yr. U.S. 2.83 3.80 Treasury Yield TYPICAL Unemployment TYPICAL 1.45 15.84 2.50 10.80 0.91 2.00 Yield Spread TYPICAL Economic Expansion TYPICAL -1.91 4.39 -10.00 16.90 6.56 99.30 Home Prices TYPICAL Consumer Sentiment TYPICAL -19.01 17.12 51.70 112.00 MOST 3 MONTH TYPICAL ACTUAL 0.00 RECENT TREND RANGE RANGE Assessed 06/29/18. ©Russell Investments 2018. All rights reserved. Reprinted with permission. NUMBERS A Portfolio's Foundation by Sam Swift, CFA, CFP®, AIF® We have spent a good amount of time in past newsletters discussing how TCI arrives at the actual funds used in portfolios, but there is an equally important part of portfolio construction that happens prior: asset allocation. Asset allocation helps define what makes an asset class in the first place. Simply put, an asset class is defined as a group of securities that have similar behavioral characteristics—stocks and bonds are the two largest groups that come to mind. A more nuanced look, however, reveals that those larger asset classes have smaller subsets within them. Academic evidence has shown us that stocks behave differently depending on their size, relative value, profitability, and in which country they are domiciled. Bonds behave differently depending on their time to maturity, credit quality, and whether or not a corporation or government is issuing them. When considering portfolio construction we need to add an important qualifier to our simple definition: an asset class is both a group of securities that have similar behavioral characteristics to one another and lack correlation to other asset classes. You have probably heard the phrase, “There’s no such thing as a free lunch”. It is not 100% true. Diversification amongst different asset classes actually does provide us a “free lunch”. Take international stocks versus U.S. stocks, for example. Figure 1 below shows measures of the return and risk (standard deviation) from 1970-2017. Why even bother adding international stocks with their relatively lower return and higher risk? Well, because they behave differently we can actually produce a portfolio that has higher return and lower risk relative to either of the individual asset classes on their own. Diversification is a free lunch! When TCI determines the asset class mix for our Figure 1. Risk and Performance, 1970-2017 Portfolio Return Standard Deviation 100% U.S. Stocks 10.48% 15.04% 100% International Stocks 9.50% 16.82% Combination (60% U.S./40% International) 10.34% 14.34% 2 FOCUS — Summer 2018 Figure 2. World Market Capitalization portfolios, the goal is to either raise expected returns without raising risk or reduce risk without lowering expected returns. Given that we believe markets to be efficient—that is, investors allocate their dollars across the world in proportion to where there are opportunities—then a good starting point is the world market itself. Figure 2 is a map of the world scaled to the size of each country’s market as of the end of 2017. The U.S. makes up about half of the world’s investable stock markets. Other developed markets around the globe make up around 35% and emerging markets (countries like China and India who have less market stability due to political or other circumstances) make up the rest. This is the “market portfolio” and if we are going to deviate significantly from these percentages there needs to be a good reason. At TCI, our target allocations come very close to the “market portfolio” as far as the international to U.S. mix is concerned. There is no evidence that the U.S. has higher expected returns than any other developed country. There is evidence, however, that asset classes within these larger groups have higher expected returns. Specifically, small stocks have been shown to outperform large stocks, value stocks have been shown to outperform growth stocks, which render the exercise useless. The goal is to use the and stocks with high profitability outperform those with evidence we have to position a portfolio such that it has the low profitability. TCI’s portfolios tilt towards the groups greatest chance of meeting your goals going forward. with higher expected returns over time without losing the shorter-term diversification benefits of owning everything. To be clear, we do not believe we (nor anyone) can know the exact optimal mix of a portfolio for the next twenty Sam Swift, CFA, CFP®, AIF® is an Advisor in our Tucson office and years. Historical data is probably one of the better guesses Shareholder for TCI Wealth Advisors. Sam also leads TCI’s Investment as to the future, but small changes to correlation, risk, or Committee which conducts on-going research and analysis that guides return can make massive differences in target allocations portfolio construction for TCI clients. TCI Wealth Advisors 3 TCI NEWS JOHNJOHN && JANEJANE SMITHSMITH AssetPortfolio Class Overview Performance Summary As ofA Decembers of June 30, 31, 20182017 Asset Allocation Cash/Money Funds Value Cash/Money Funds Total Weight Previous 1 Quarter Net Return Year to Date Bloomberg Barclays US Treasury Net Return 1-Year to Date Bellwethers 3 month $110,624.06 Net Return 5-Year to Date Inception to Date Asset Class 3.75% Net Return (11/20/1997) Fixed Income n/a Net Return Cash/Money Funds n/a Fixed Income - Fixed Income Total Currentn/a US Large Cap - Value Current Percent n/a Bloomberg Barclays US Aggregate US Small Cap $110,624.06 - * 2.88% $1,053,574.02 $1,053,574.02 3.75% - How to Read Foreign Large Cap 2.99% 35.73% US Large Cap Foreign Small35.73% Cap $547,953.23 0.01% 18.58% Emerging Markets $356,853.69 US Large Cap Total 0.39% 2.30% $374,316.48 12.10% Real Estate 2.30% 3.54% $226,014.67 12.69% S&P 500 Composite Total 1.21% $547,953.23 $147,280.583.54% 7.66% 2.10% * 3.41% 18.58% JOHNJOHN &&$132,317.18 JANEJANE SMITHSMITH 4.99% US Small Cap As of June 30, 2018 4.94% 6.93% As$2,948,933.91 of December 31, 2017 4.49% PerformanceUS Small Cap Total Review 6.64% 20.43% 100.00% 21.83% 20.43% Russell 2000 17.25% $356,853.69 21.83% Your TCI 15.80% * 6.34% Beginning Value Foreign Large Cap 12.10% 7.24% Net Contribution Previous 1 Quarter 3.15% Current Value 7.55% CapitalForeign Appreciation Large Cap Total $2,916,082.81 Year to Date3.34% $522,237.57 14.65% 7.55% IncomeMSCI EAFE Net ($51,000.00) $2,867,666.95 Inception Date1-Year to Date 15.45% $2,388,903.08 $374,316.48 14.65% $2,867,666.95 5-Year to Date 14.13% * 13.68% Management Fees $66,357.65 ($246,000.00) 12/16/1997 Inception$37,793.26 to Date Foreign Small Cap Account12.69% Type 7.99% Other Expenses $22,899.32 $291,689.60 3/30/1999($246,000.00) $3,145,002.23 (11/20/1997) IRA - R/O+# 4.58% Current $2,948,933.91 IndividualPortfolio Overview Account Value 25.68% EndingForeign Value Small Cap Total ($5,405.87) $57,536.284.23% 11/20/1997$291,689.60 Current ($1,178,250.00)Percent $0.00 IRA - R/O+# Value25.68% AssetAccount Allocation Name (Number) 25.03% 3.75% ($198,096.27) InvestmentMSCI EAFE Gain Small Cap Net ($21,947.45) $57,536.28 $835,811.13 7.94% $0.00 COMM PROP - WROS 11/20/1997 $110,624.0625.03% Performance SMITH, JANE (xxxx1234)(xxxx6123) $226,014.67 $269,773.3835.73% $2,293,180.61* 6.27% $2,948,933.91 ($21,947.45) 7.90% ($11.47) $1,053,574.02 18.58% EmergingSMITH, JOHN Markets (xxxx1234)(xxxx6124) Asset Class7.66% ($123,391.36) $1,355,583.995.25% Account Return (Net IRR) $83,851.10 $2,948,933.914.19% ($11.47) $547,953.23 12.10% SMITH, JOHN & JANE (xxxx1234) Cash/Money Funds SMITH, JOHN & JANE (xxxx6119) $327,266.96 $2,948,933.9129.32% $356,853.69 ($11.47)12.69% ($424,574.15) Emerging Markets Total Fixed Income 6.05% ReturnsTotal for periods exceeding 12 months are annualized 33.01% $374,316.4829.32%$2,948,933.917.66% ($77,160.27) MSCI EM (Emerging Markets) Net US Large Cap $327,266.96 JOHN & JANE SMITH 2.89% $226,014.6733.01%JOHN & JANE4.99% 12.48%SMITH $147,280.58 US Small Cap As of$982,181.68A Decembers of June 30, 31, 20182017 $2,948,933.91* 11.08% 11.84% $147,280.58 4.49%12.86% 4.99% Foreign Large Cap 11.84% $132,317.18 $3,147,030.18- Foreign Small Cap 7.42% 100.00% 37.22% Emerging Markets 7.44% $2,948,933.91 6.61% 37.22% Real Estate 37.28% 5.54% Reports 37.28% 4.12% * 10.98% Portfolio Overview Total 4.35% - Asset Allocation Inception to Date (11/20/1997) 5-Year to Date $0.00 1-Year to Date Current $3,145,002.23Current ($198,096.27) ..