Asset Allocation Models (5) 
The Asset Allocation (AA) Models are included with the $99, 149, and $179 memberships.  The AA models consist of five different models including the Main Model, Conservative Allocation, Aggressive Allocation, Maximum Return Allocation and the Blend Allocation.  The AA models use five different asset classes and the models are updated monthly.   Unlike static models where the investor adjusts their allocation based upon their age, our models are active and adjust based on market conditions. They are almost a combination of an asset allocation model and a timing model.  For example, in 2000 and into 2001, the models would have had you in government bonds thus avoiding the implosion of the stock market. 

The Main Model selects one asset class out of the five asset classes.  It will hold that asset class for six months and adjust every six months.  In some cases, the model will not make any changes for as long as 2 years or more.  The Main Model has a track record going back to 1971 with an average annual return over those 36 years in excess of 19%. The power of this model is it helped investor sidestep major market declines in 1974, October 1987 and 2000. We reviewed the predictions for September 1987 and the models had investors in government bonds or bond funds.

The other models include the Conservative Allocation, Aggressive Allocation, Maximum Return Allocation and Blend Allocation.  These allocations are updated monthly and are usually fine tuned or have no changes during the month.  Investors can use no-load index mutual funds or exchange traded funds (ETFs).  By using no-load index funds or ETFs, investors in non-tax sheltered accounts can effectively use the models.  Tax sheltered accounts like IRA’s, 401Ks, Roth IRAs and others are ideal for use with the models.  Please note our models are tools for investment research and are not advice or recommendations.  We believe the five asset allocation models are worth the price of membership alone.

Sector (6), RS (3) & Delta Models (2) 
Investors Alliance members who have the $229 gold or $259 platinum memberships have access to our investment model portfolios.  This includes the six Sector models, the three RS models and the two Delta models plus the five Asset Allocation models.  The Investors Alliance models are not recommendations, stock picks or investment advice.  The models started development over 15 years ago based on research done by Frank Lardino.  The models are Frank's intellectual property which he shares with Investors Alliance.  After the market meltdown in 2000, Frank decided to offer this research to members because he felt Wall Street had let investors down. 

 One of the advantages is almost every model uses ETFs or exchange traded funds. ETFs are essentially index mutual funds. Frank felt that ETFs took away the problem of stock specific risk. Stock specific risk is when you are not properly diversified and you hold to few stocks.  Examples would include Worldcom and Enron. Most ETFs hold at least 30 stocks in their portfolio and as many as 200 stocks. If an investor had a large part of their money in one stock like Enron then they would essentially be wiped out. The idea of sector ETF funds means tax liabilities would be less than using regular mutual funds.

Recent events and the involvement of Merrill Lynch, Bear Streans, Goldman Sachs, Wachovia (including their securities department), Bank of America, Lehman Brothers, UBS, CitiGroup (Smith Barney), eTrade and other brokerage firms involvement in the subprime mess is more evidence that Wall Street does not have American Investors best interest at heart. This may sound harsh and we may sound like we are on our soapbox but this is just another example of investor essentially being cheated by Wall Street.

Merrill Lynch involvement was detailed in a fairly recent article in the Wall Street Journal as were the others.  Why did these firms engage in reckless high risk securities and strategies that have devastated their shareholders, balance sheets and individual investors? Money.  There was a lot of money to be made.  Different departments within these firms saw opportunities to make a lot of money but they were playing a game that was a combination of musical chairs and Russian roulette.

Wall Street was also assisted by politicians who believe every American should be a homeowner. This was also encouraged by quasi-government companies like Fannie Mae and Freddie Mac.  Banks were also concerned about discrimination or red lining when making loans. Credit standards were relaxed.  Somebody changed the laws that encouraged teaser rate mortgages at 1% and so on.  We are getting off the track.  The point is these things happen in cycles just like the dot bomb implosion in 2000.  No writer has ever had the guts to write a story about how investment banks and their cronies engaged in stock manipulation when they brought many dot com companies public. 

The point is this nonsense happens every decade or so like clockwork and the general public gets fleeced.  One of the only investment or large commercial banks not devastated by the subprime mess was Goldman Sach.  Goldman Sachs is essentially the market.  They had two hedge funds totally blow up but they made a fortune off the subprime mess due to shorting these securities and will likely buy a lot of them on the cheap.  GS was actually losing a bundle on subprime like the others until two of their traders persuaded management to start heavily shorting subprime.  This saved Goldman from major writedowns.  Remember, Wall Street makes the most money pushing the markets to extremes with lots of volatility.  They make the most money when markets are being whipsawed all over the place and usually small investors pay for it.    

The Investors Alliance models are based on the research Frank Lardino did using sector rotation back in the early 1990s.  At the time, Investors Alliance offered a nifty mutual fund program.  Frank used the program to look for the best sectors to invest in.  At that time, investors had limited options for targeting sectors to invest in.  Fidelity had their Sector funds but they usually had 2 or 3% sales loads plus high management expenses often in the range off 2%.  Fidelity had a lot of people trading the funds so they rationalized the higher fees plus Fidelity at the time had limited competition.  During this time period, Frank was able to find another fund family with no loads that allowed switching.  Invesco funds offered only about 5 or 6 sectors but that was enough.  Vanguard at the time had a few sectors but they discouraged fund switching.  Frank also found out that in using Invesco that only a few switches per year were needed.

Frank came to the conclusion that sector rotation was what Wall Street did and it had the potential to be the most profitable way to invest if you could only determine which sectors were the best to invest in.

This is what Wall Street would essentially do. They would move money from overpriced sectors to undervalued sectors in many cases.  Individual investors often do not realize the investing with Wall Street is a zero sum game where one party usually wins and another loses.  You have some of the smartest people in the world doing anything legally and often illegally to separate you from your money. If you think the Securities and Exchange Commission is able to catch all of the illegal actions on Wall Street then you are mistaken.  SEC employees are among the most diligent government employees but there is only so much they can do.

A good example of how Wall Street or the “Smart” money on Wall Street would engage in sector rotation was in late 1999 to 2000 when the smart money was shorting technology and going long on real estate investment trusts (REITs).  Why?  Well the public was snapping up technology and the shares were overpriced.  Meanwhile, REITs were often trading below book value and had dividend yields of around 10%.  During this time period, we were telling members to buy REITs because they were cheap.  Another example might be when we also told members post Desert Storm 1 when oil prices crashed to buy energy companies. 

Frank found in doing the research that sectors had longer term cycles and shorter term cycles.  The REI and energy cycles were longer term cycles.  Some industries had longer cycles while others had shorter cycles.  The Power Investor software proved to be invaluable in doing this research.   

Sector Models
The Sector Models include six different models that try to target specific sectors looking for the best sector to invest in over the next 3 to 4 months.  The sector models usually have about 3 to 4 switches per year.  The Sector Models are almost always fully invested.  They usually target sectors like semiconductors, large integrated energy which includes big oil companies, oil and gas drillers, pharmaceutical, biotech, financial services, technology and possibly other sectors. The sectors sometimes converge with similar holdings but then diverge.  The sectors are number with the lowered number sectors having lower volatility while the higher number sectors are more volatile. In most cases, the more volatile sectors have had higher returns but this is not always the case.  

The sector models use exchange traded funds (ETFs) including Merril Lynch HOLDRs, Barclays iShares, State Streets SPDRS and possibly other ETFs from Vanguard and the others.  There are no so many choices for ETFs that we also suggest alternates.  For example, the HOLDRs require investors to buy and sell in 100 share lots. Another import consideration is how liquid is the ETF.  Some of the newer ETFs trade very few shares, which is generally not a good choice.  We will be launching the new mutual fund and ETF program soon which will provide members with more research tools. A good source of information for ETFs is www.etfconnect.com.  Investors could also probably use Fidelity's sector funds which are open-end funds you can buy from Fidelity or a discount brokerage that may offer them. Much of the research Frank did was based on the indexes for these sectors which have been around about 15 to 20 years depending on the sectors.

The holding of those indexes roughly mirror many of the ETF funds. Fidelity has similar sectors in their open-end funds. So if a sector is suggesting HOLDRS Pharmaceutical ETF then Fidelity probably has a fund with similar holdings. The disadvantage of Fidelity's open-end sector funds is that they usually pay capital gains at the end of the year and possibly during other parts of the year. Open-end mutual funds or regular mutual funds do this unless they are index funds.  This means if you want to use Fidelity sector funds with our models then you better use them in an IRA or other tax sheltered type of an account.  The year end or other distributions can cause tax issues. 

We will also give you an alternate choice like an iShares HealthCare which has similar holdings.  If a sector model has picked semiconductors or biotech there may be three choices you can chose from.  iShares and SPDRS are often the least expensive but they may have a disadvantage in some cases.  Sometimes an ETF  

Relative Strength Models
There are three Relative Strength or RS Models. The RS Models work differently then the Sector models. When Frank was doing the research over 15 years ago for these models he wanted to look for a way to stay out of the market for most of the year.  The RS Model are designed to sit in a money market most of the year.  They buy when prices are cheap and try to hold for about a month or less.l The RS Models goal is to have about 4 trades per year that average about 4 to 6%. Over the year this can be a compounded return in the region of  20 to 25%.  The RS Models usually use the QQQQ or NASDAQ 100 ETF, large industry leaders like Intel and possibly another large semiconductor company or index.  Investors who want to follow the RS models need to watch them closely. Updating Power Investor on a daily basis is recommended. The models are usually updated every 2 weeks or so but RS signals can occur at any time. 

Delta Models
The Delta Models are similar to the RS Models but they usually wait for even deeper market corrections.  They sit in a cash or money market fund waiting for a larger correction.  The goal is for 2 or 3 three trades per year with a return in the range of 5 to 7% on each signal.  The Delta Models use ETFs like the QQQQ Nasdaq 100 or the Semiconductor Index.

What Methodology Is Used?
Some people have asked how are the signals determined or what the methodology is. The models are Frank's intellectual property and the exact methods are not disclosed.  We can tell members that technical analysis, econometrics, seasonality, volume, industry earnings are used to determine the signals.  The Relative Strength and Delta Models use technical analysis almost exclusively.  A few members and some prospective members have told us how can I become a member or renew and have faith in the models if I do not know the methodology?  For renewing or existing members we tell them to try them out for a year (without using them) to see if they like the results.  

How Can A Member Use the Models?
We tell members repeatedly that the models are not recommendations, stock picks or investment advice.  They are research to hopefully give members ideas on how to diversify their portfolios or how they may be able to use sectors to improve their returns.  If you decide to use the models for investing make sure you wait to buy when the next switch is announced or buy at a price close or below the last buy signal.  As we mentioned these tools are not recommendations. Investors Alliance has no liability for any losses suffered by members who may use the models as a basis for their investing. 

Advantages to Other Services or Methods
One of the reasons we like the models and their methods is we cannot move the markets and there are usually no individual stocks.  For example, if you sign up for a newsletter that has stock picks, you are not diversifying your portfolio properly if you are buying a few stocks.  The newsletter might recommend a stock and you miss the sell signal and you could get whipsawed and lose any gains. Unless you have a couple of hundred thousand to invest you should probably use funds or ETFs.  If you have that much then you should be holding about 20 stocks which is more than most people can follow.  The models could be used by ten people or thousands and we probably could not influence the ETFs or the few stocks that may be used.  This also means that if we personally want to use this for our personal portfolio after we call the switch then we do not need to worry that we could ever be front running or manipulating the investment.  There is no way that a 300 share purchase of say iShares Energy or XLE could be manipulated because the largest holdings are stocks like Exxon, Chevron and British Petroleum.  

Summary
The models have done very well over the past decade or so but past results do not predict future returns.  2006 and 2007 were exceptionally good years for the Sector Models.  2008 may turn out to be a major challenge for all markets and all investments. Please note that these models are not recommendations, stock picks, investment advice or any form of advisory.  The models are research investors can use for additional analysis.

 
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