Crisis Management: Are your investments safe?

October 21, 2008

Introduction
Raffa Wealth Management is an independent investment advisor that specializes in providing the resources nonprofits need to maintain strong governance, performance, and oversight standards in the management of their investment reserves.
As an affiliate to Raffa, PC and Raffa Financial Services, we were established by professionals with over 25 years of experience providing investment and other financial services to nonprofits, associations, and foundations. Transparency, Clarity, and Vision are the principles that make us different.
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Learning Outcomes
1. Understanding the new FDIC limits and Treasury money market insurance program 2. Money market accounts vs. Money market funds Whats the difference? Which is safer?

3. Improving your Investment Policy so its ready to lead.

4. The long term risks you can eliminate today without sacrificing long term returns. 5. Down market opportunities.

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New Investor Protection

FDIC Insurance: Deposits of Corporations and Unincorporated Associations $250,000 per entity Increase effective 10/03/2008 through December 31, 2009 Treasury Guarantee Program for Money Market funds Temporary guarantee intended to address dislocation in the credit markets. Exists for an initial three-month term, after which the Secretary of the Treasury

will review the need for extending the program. Money Funds must elect (and pay) to participate. Participation is not automatic. Triggered if a participating fund liquidates its assets as a result of its net asset value falling below $1, "breaking the buck". Investors will be covered for either the number of shares held as of the close of business on September 19, 2008, or the current amount, whichever is less. Any increase in the number of shares held in an account after the close of business on September 19, 2008, will not be guaranteed.

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Cash Options
Money Market Account FDIC Insured Short-term funding for banks Funds available on demand Yields reflect the banks need for funds
Certificate of Deposit CD FDIC Insured Short-term debt for lending institutions Funds invested for defined term (30 days 5 years) Penalty for early withdrawal Generally higher yields than Money Market Accounts

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Cash Options
Money Market Fund - MMF Diversified fund that purchases short term instruments with invested cash Seeks to maintain a Net Asset Value (NAV) of $1 Subject to investment guidelines as specified in the Investment Company Act of 1940 (Rule 2a-7) Various types of funds, including US Treasuries, Agencies, Corporates, and blended vehicles Returns vary based on investments Carries an associated expense ratio Sweep Feature Allows a banking institution to sweep daily balances into a Money Market Fund to increase earnings Investors normally have a choice of Money Market Funds based on underlying holdings
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Cash Options
Ultra Short term bond fund Diversified fund that purchase short term investments Holdings are normally longer maturities than MMFs, increasing the Interest Rate Risk Funds do not target a NAV of $1, and may fluctuate Various types of funds, including US Treasuries, Agencies, Corporates, and blended vehicles Not subject to 1940 Act Rule 2a-7 Funds carry an expense ratio Funds have to be sold similar to a mutual fund, and may be below initial purchase price

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Cash Options
Considerations in current environment: Minimize exposure to banks by limiting aggregate holdings to FDIC limits. Yields on CDs are currently attractive as banks try and shore up deposits, however, the FDIC watch list continues to grow. Consider diversifying your CDs across several FDIC insured institutions. Talk with your advisor about what your Money Market Funds are invested in: US Treasuries, CDs, or short term corporate securities. Pay attention to Prime Money Market Funds that offer higher returns, but tend to invest in higher risk securities. Ask your advisor if your Money Market Fund is participating in the Treasury Departments Guarantee Program. Note that the program only applies to funds on deposit as of September 19th.

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Investment Policy Considerations

The Investment Policy Statement (IPS) is key to providing a consistent approach to investing over time and various market conditions. Portfolios should be based on the portfolios ability to take risk (losses) and its primary objectives: Cash flow needs from portfolio Long term objective Capital preservation and income Capital appreciation Specific project need Consider maintaining separate IPSs based on the portfolios objective: Operating Portfolio Short Term Reserve Long Term Reserve
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Investment Policy Considerations

Have specific asset allocation targets based on your risk tolerance and your expected returns: US Equity (Large, Mid, Small) / (Value/Core/Growth) International Equity / Emerging Markets Real Estate Short Term Fixed Income Long Term Fixed Income Cash Have a rebalance policy Keeps the portfolio in its long term allocation Allows for an objective measure on when to buy and sell Facilitates buying low and selling high

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Investment Policy Considerations

Your IPS should specify the types of investment vehicles to help establish the portfolios overall risk. Key risks to consider: Diversification: Mutual Funds and ETFs or individual securities Limitations on the exposure to one issue(r) Credit and Interest Rate Risk: Specify a target maturity Specify minimum credit ratings and weighted average target Speculation: Are derivatives, commodities, and alternatives part of the strategy? Does the IPS allow for discretionary overweighting? Liquidity: List acceptable exchanges for securities Limit the amount of any issue you purchase
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Investment Policy Considerations

Considerations in current environment: Are your portfolios correctly defined based on risk and long term objectives? Do you need multiple Investment Policy Statements? Does your IPS address both the long term objectives of the portfolio and the ability of the portfolio to suffer losses? Is the asset allocation specified and do you have a rebalancing plan to keep the portfolio on plan? Are restrictions specific enough to assure that the portfolio isnt taking unintended risks? Is the portfolio being compared to proper benchmarks that show how the portfolio is performing on a relative basis?

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Risk Management Long Term Reserve

Necessary Market Risk Credit Risk (maybe) Interest Rate Risk Inflation Risk Un Necessary Individual Stock and Bond Individual Sector Individual Country Speculation

Four step to managing, not avoiding, risk 1. Diversify comprehensively without speculating 2. Invest in high quality, short term bonds 3. Balance stocks and bonds carefully 4. Remain patient, dont follow the crowd

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Long Term Reserve Diversification

Impact on a Hypothetical $100,000 Portfolio
Year 1 Return Portfolio #1 Portfolio #2 50% 10% Year 2 Return -50% -10% Average Return 0% 0% Compound Return -13.4% -0.5% Value at End of Year 2 $75,000 $99,000

For illustrative purposes only

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Long Term Reserve Speculation

Growth of $1,000
$54,118 $49,604 $40,194

Performance of the S&P 500 Index January 1970-December 2007

$25,217 $16,993

Annualized Compound Return

$9,015

The S&P data are provided by Standard & Poors Index Services Group. US bonds and bills data Stocks, Bonds, Bills, and Inflation Yearbook, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield). Indexes are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Values change frequently and past performance may not be repeated. There is always the risk that an investor may lose money.

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Long Term Reserve Patience

Annualized Compound Returns (%) S&P 500 Index One-Month US Treasury Bills 1926-2007 10.36 3.73 1965-1981 6.33 6.66 1982-2007 13.06 5.30

The S&P data are provided by Standard & Poors Index Services Group. One-Month US Treasury Bills data Stocks, Bonds, Bills, and Inflation Yearbook, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield). For illustrative purposes only. Indexes are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Values change frequently and past performance may not be repeated. There is always the risk that an investor may lose money.

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Down-market Opportunities
1. Re-asses risk tolerance Survey the Finance Committee Objective Time Frame Willingness for short term losses Set clear expectations 2. Strategic Rebalancing Objective decision making void of emotion. Once portfolio drifts outside risk tolerance 20% from target (If the US Large Cap is 20% of the portfolio, you would rebalance once the allocation grew or contracted by 4% - to 24% or 16%)

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Crisis Management Action Items

1. Maintain less then $250,000 per bank in: Money market accounts CDs 2. New money market funds assets may need to be limited to investments in Treasury or Agency securities. 3. Re-asses your investment policies adequacy Identify restricted investments Outline diversification standards Outline credit quality standards 4. Stick to your long term plan Refrain from speculation Eliminate diversifiable risks 5. Rebalance to your targets based on a formal policy

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Resources
Additional resources are available for download at www.raffawealth.com. 1. Click on the Crisis Management webinar button. The items available for download are; a. Crisis Management: Are your investment safe PowerPoint presentation. b. Treasury Money Fund Guarantee press release. c. FDIC protection increase letter 2. Portfolio assessment a. Complete our survey and receive the following; i. Assessment of current asset allocation ii. Starbucks gift card.

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