Gary D. Halbert President & CEO

. . . continued from FORECASTS & TRENDS

Financial Planning - Why We Are Different

by Gary Halbert

At ProFutures Investments, we are different because in addition to traditional financial planning and asset allocation, we also offer alternative strategies such as market timing and others I will discuss below. These alternative strategies can be critically important today because the stock markets have fundamentally changed over the last couple of years.

As discussed in Forecasts & Trends, any financial planning firm or large brokerage firm will put you into a buy-and-hold selection of stocks, bonds or mutual funds, and they will say you are diversified. However, we've seen plenty of examples, especially in the last few years, when stocks and bonds went down together. Many buy-and-hold portfolios have been hammered over the last two years, and many investors have bailed out.

Clearly, the "go-go" days of the late 1990s, with 20-30% returns in back-to-back years, are over. The sources I respect most believe the broad stock market will return to its historical norm of 8-12% average annual returns, but they also believe it will continue to be very volatile. If most investors were under-performing the market averages back in the late 1990s when the market was producing 20-30% returns, imagine what will happen if the market gives us only 8-10-12% returns.

While we have long been believers in market timing for a part of your equity portfolio, we think the market outlook for the next few years makes market timing more critical than ever. If the market action of the last two years is any indicator, there will be times when you may want a portion of your equity holdings to be able to move to the safety of cash (money market).

ADVISORLINK™

As discussed in Forecasts & Trends, we track and monitor hundreds of professional market timers. While most market timers do not meet our strict performance criteria, there are those who do. Most importantly, we have found a select few market timers that not only did well in the good times (1990s) but also performed well in the last two very difficult years.

Unfortunately, most investors will never hear of these market timing pros because, in most cases, they don't advertise. They don't have to! We find them by spending over six figures a year going to industry conferences, subscribing to trade publications and networking. Then we spend even more to travel to their offices to conduct our due diligence investigation and performance verification.

While market timing may not be right for everyone, we believe it is suitable for most investors, especially given the market outlook we expect for the next several years. With so much uncertainty in the world today, it may be wise to have a part of your equity portfolio in a market timing program which has the ability to get out and move to cash if conditions warrant.

We have recommended Advisors with market timing strategies that range from very conservative to more aggressive. With the information you give us in the Confidential Investor Profile, we can determine which of these programs would be most suitable for your portfolio.

Market timing is not a substitution for a buy-and-hold approach; rather, it should be used as a complement to your core holdings. However, there are some investors who want all of their equity assets in market timing programs which can go to cash if need be. For those folks, we recommend they diversify with two or more market timers to spread the risk. No market timer is perfect.

How Advisorlink Fits In Your Financial Plan

Let me again remind you that most financial planning firms don't offer market timing programs. They either don't believe in market timing, or they don't want to spend the big bucks to go out and find the successful market timers. This is just one reason why our service is different and more valuable.

If we determine in our financial planning review that market timing is right for you, we then recommend one or more Advisors to you. Once you agree, the next step is to open an individual account(s) in your name with the custodian where the Advisor manages accounts (usually at Rydex or Fidelity).

The Advisor has a limited power of attorney to make purchases and sales of mutual funds in your account. You receive monthly statements showing activity and the balance in your account(s). The Advisor charges an annual management fee of 2-2½%, which is typical among market timers. Minimum account requirements are less than usual, ranging from as low as $15,000 to $100,000.

ProFutures is compensated directly by the Advisor for introducing clients, so our services are provided at no additional cost to you. You could approach these Advisors directly, but your management fees would be the same, and you wouldn't have the benefit of our ongoing monitoring or access to new Advisors we find from time to time.

Market Timing Program for GOLD

Speaking of new Advisors, last year we discovered Dorset Financial Services, a market timer that uses mutual funds which invest in gold/precious metals mining shares. Many investors want to have a small portion of their portfolio in gold and/or precious metals, especially with all the uncertainties in the world today. Unfortunately, these investments have performed very poorly for many years.

Dorset Financial Services uses the Rydex Precious Metals Fund. Beginning in 1995, during a time when gold was locked in a broad trading range, Dorset has been able to post an impressive inception-to-date average annual compound return of 13.5% through the end of February 2002.

The Dorset Precious Metals program originally used the Oppenheimer Gold & Special Minerals Fund, but in 2000 they decided to move to the Rydex Precious Metals Fund. Eventually, the Oppenheimer fund was totally phased-out, so the program is now 100% Rydex-based. Dorset remains in the Rydex money market fund until their proprietary indicators signal that an undervalued situation exists in precious metals. That's when they buy. Dorset typically makes eight to ten trades per year, with most lasting about a week.

To control downside risk, Dorset establishes a stop-loss (usually between 3% and 4%) before the trade is ever entered. Once this stop is hit, they exit the position. Dorset is somewhat unique in also using "profit stops." Once a trade hits a pre-determined gain, the position is either sold or the stop is moved up to protect the profit. The account remains in cash until a new buy signal is generated. Of course, profit and loss stops are targets. There can be no assurance that the limits won't be exceeded by the time the trade is unwound.

ProFutures has prepared a Special Report entitled, "Should I Invest In Gold?" This Report analyzes the bullish and bearish cases for the price of gold, and then presents the case for Dorset's Precious Metals program that has not required a bull market in gold to make money over the past seven years. This Report is available to you free of charge and without obligation by going to www.profutures.com/gold on the Internet.

Privately Offered Funds

In addition to the programs discussed above, ProFutures offers additional alternatives for "accredited" investors. An accredited investor is generally someone with a net worth of $1 million or more, or who earns at least $200,000 per year. One of our private funds is a professionally managed commodities futures fund utilizing one of the oldest and largest futures Trading Advisors in the world. Another is a "hedge fund" that seeks out special opportunities in both public and private companies. We also have an offshore fund that trades exclusively in foreign currencies, which is available to U.S. accredited investors.

Regulations prohibit us from providing the names of these funds, or even discussing them beyond the very general terms used above. However, when our financial analysis determines that an accredited investor would be suitable for one of these funds, we are able to offer an even greater level of diversification.

Conclusions

As I stated early on in this article, the products and services offered by ProFutures work best when integrated into an overall financial plan. We have a knowledgeable and experienced staff who can help you get your financial house in order. Even if you still prefer to make your own decisions, several of the services we offer can be strategic additions to your portfolio - particularly the market timing programs and/or our privately offered funds. Either way, you can invest with confidence knowing that ProFutures is there with you all the way.

How To Make The Most Of Financial Planning

By: Phillip R. Denney, CFP™

In this month's Forecasts & Trends, Gary stresses the need for all investors to have a "big picture" view of their financial situation. Financial planning helps to do this, as it focuses not just on investments, but your ultimate financial goals, time frames, risk tolerance and resources. In fact, choosing the actual investments is usually the last step in the financial planning process.

I have read many articles that discuss the "common mistakes" investors make in financial planning. To be sure, there are certainly a lot of mistakes that can be made, but suffice it to say that a lot more mistakes are made without a financial plan than with one. In this article, I will address seven ways to make sure you get the most from the financial planning process.

1. The first, and most obvious suggestion is to make sure you DO financial planning in the first place. Financial planning is a process, not a product. There are literally millions of investors who confuse financial planning with investing. The two are related, but are definitely not the same. Before you put your hard-earned money into investments, make sure you know how those investments fit into your overall financial plan. The proper use of financial planning will force you to identify your various financial goals, and then chart a course to accomplish them.

Speaking of financial goals, you must set goals that are realistic and measurable. Set specific targets for the results you want to achieve and when you want to achieve them. For example, instead of saying you want to be "comfortable"" when you retire, or that you want your children or grandchildren to attend "good" schools, quantify what "comfortable" and "good" mean so that you'll know when you've reached your goals.

2. Act now! Procrastination is the leading cause of failure of financial plans. There's an old adage that I first heard in the insurance business

which says, "people don't plan to fail, they fail to plan." Though this saying has become somewhat trite over the years, it is still as valid as ever.

Some investors think they have waited too long, and any planning now would be too little, too late. Nothing could be further from the truth. While it is true that the younger you start planning the more beneficial the process will be, financial planning is worthwhile at any age.

Others recognize the need for financial planning but are waiting until they become wealthy, since they believe financial planning is only for those with millions of dollars. If you have a goal to become wealthy, a comprehensive financial plan will help you to reach that goal. Trying to become wealthy without a financial plan is like trying to drive in New York City without a road map. How many wrong turns can you afford on your way to financial independence?

3. Realize that every economic decision has an effect on other financial issues. Each financial decision you make can affect several other areas of your life. For example, an investment decision may have tax consequences that are harmful to your estate plans. Or a decision about your child's education may affect when and how you meet your retirement goals. Remember that all of your financial decisions are interrelated.

That's not to say that you can't have the things you want. It's just important to identify them early on in your financial plan, and then structure your investments and savings such that you can have them when you want them. Therefore, before making any economic decision, ask yourself how it will affect your financial plan.

4. Structure your financial plan to cover your lifetime. Many well-meaning financial plans cover the period of time between the creation of the plan and retirement at age 60 or 65. Unless you plan to move to the woods and live on honey and wild hickory nuts, you will still need a financial plan after you retire. Americans are now living longer than ever before, meaning your money has to last longer after you retire. A financial plan can help to insure you don't outlive your money.

5. Financial planning will help you deal with a crisis. Unfortunately, many investors wait until they have a crisis to begin financial planning. As the old saying goes, "that's like closing the gate after the cows are out." We've all seen the commercials for the debt management agencies that assist people who have become mired in credit card and other debt. This is a case where the financial plan was delayed until after the crisis happened.

The presence of a good financial plan can actually help you avoid extensive debt in the first place. This is much better than developing a financial plan that has to dig itself out of a hole before it can even begin to address financial goals like college education for children and retirement.

6. I mentioned above that your goals have to be realistic. So do your expectations for returns on your investments. Most investors have heard that stocks have an average annualized return of 11% to 12% over the long haul. However, the mid 1990s ushered in a five-year period when the S&P 500 posted returns of over 20% per year. Unfortunately, many investors now consider that to be the average return they should expect for their financial plan. By over estimating investment returns, current savings may be reduced to a point where lower actual returns will not meet the investor's goals.

Even if you are satisfied with the 11% to 12% annualized returns, you must realize that there have been significant periods of time where these averages have not been attained. What's more, there have also been significant drawdowns in the stock market, and your risk tolerance may not be such that you could tolerate these kinds of losses. As a general rule, the less risk you want to take, the lower the actual returns will be.

7. Finally, you should monitor the progress of your financial plan regularly and re-evaluate your goals, risk tolerance, and attitudes toward investing. Age and experience have a profound effect upon your view of the world, and this will affect your financial plan. Life events, such as births, deaths, illnesses, inheritances, promotions, relocations, etc. will also affect your financial plan.

It is important to remember that the financial plan is a dynamic process, not a "do it once and forget it" activity. Also, your financial planner should be a trusted member of your "advisory team" that includes your tax professional, attorney and insurance agent. In fact, financial planning works best when all of these advisors are involved. Beware of any financial planner that wants to keep your other professional advisors in the dark.

It is important to realize that YOU are the focus of financial planning. The results you get from working with a financial planner are as much your responsibility as they are those of the planner. Provide the planner with all relevant information on your financial situation. Ask questions about the recommendations offered to you, and play an active role in decision-making.

Using a qualified financial planner does not mean losing control of your financial destiny. Actually, you gain more control by working with a professional who will help you define your financial goals,determine how much risk you are willing to take, assist you in selecting investments, and then help you monitor the plan through the years.

Financial planning is a common-sense approach to managing your finances so that you can reach your life goals. It cannot change your situation overnight; it is a lifelong process. Remember that events beyond your control, such as inflation or changes in the stock market or interest rates, will affect your financial planning results.

Successful financial planning offers many rewards in addition to the obvious ability to meet your life goals. When a group of Certified Financial Planners were surveyed about the most significant benefit of financial planning in their own lives, the top answer was "peace of mind." There are few benefits in life greater than this.

Phillip R. Denney, CFP™, is a financial planner with ProFutures Investments and specializes in investment planning. The information in this article is based on a CFP Board brochure, "What You Should Know About Financial Planning." It is available free at 1-888-CFP-MARK or www.CFP.net. Founded in 1985, the CFP Board is a nonprofit certifying organization that owns the CFP certification marks and benefits the public by fostering professional standards in personal financial planning.

To Short or Not to Short

By Brad Unruh

Traditionally, market timing investment strategies involve only going fully/partially "long" or to a neutral cash position. However, in the last few years some market timing Advisors have made use of mutual funds that "short" the S&P 500 and Nasdaq 100, meaning the value of these funds goes UP when the corresponding index goes DOWN. Their goal is to make money no matter which direction the markets are trending.

2001 was a frustrating year for most Advisors with programs that use short trades. On the surface, it would seem that just the opposite would be true, since the major markets all ended down for the year. However, one of the primary indicators used by most market timing systems is monetary policy. Usually, when the Fed's monetary policy is easing and interest rates fall, that is good for stocks and they go up. However, in 2001, we had an unprecedented 11 rate cuts, but the stock market still went down. Because rates were falling, most timing systems failed to generate short sales, and many good opportunities were missed in 2001.

However, we know of two market timing Advisors who have systems that did profit from short trades in 2001. I'll tell you more about them later.

In my duties as an Investor Representative with ProFutures, I frequently talk to clients who prefer an investment strategy that can short the market in times of decline. As a practical matter, shorting the market is a lot easier said than done, and there is more than one method of shorting used by market timing Advisors. Thus, an investor must determine whether a program that shorts the stock market is suitable for his/her investment goals, and if so, which method is preferable?

The first decision that must be made is whether a program that shorts the market is suitable for an investor. Any short system is more aggressive than a traditional market timing program. If you can make money whether the stock market goes up or down, you can also lose money both ways as well. If an Advisor is on the short side of an up market, the investor will lose money. This is hard for some investors to stomach.

An example of such a situation occurred in early January 2001, when the Federal Reserve surprised everyone with an interest rate cut. The stock market had been in a downward trend, and some Advisors had short positions. However, when the interest rate cuts were announced, the stock market immediately shot up, causing losses for those Advisors in short positions.

Methods of Using Short Trades

If an investor is comfortable with the additional volatility that may accompany a market timing system that can short the market, then the next decision is which method of shorting the market is most preferable. There are two ways to use short trades in market timing systems. In the first, up to 100% of the account value may be placed into a short fund. This is the method most investors think of when shorting the market is mentioned.

In this scenario, the Advisor's system not only issues a "sell" signal to liquidate long holdings, but is so bearish that a short signal is generated. Some Advisors will commit 100% of the account to the short position, while others are more reserved and will only do a portion of the account. Either way, this method will make money if the particular market index the Advisor is shorting goes down during the course of the trade. Usually, short trades are of a brief duration, typically only one or two days.

An example of this method of short trading can be found in Hallman & McQuinn Capital Management, Inc.'s (H&M) market timing system. H&M uses the Rydex "inverse" funds that provide investment returns that are the opposite of several different major stock and bond indexes. At present, Rydex offers inverse funds that negatively correlate to the S&P 500 Index, the NASDAQ 100 Index, and the 30-year U.S. Treasury Bond.

In 2001, a difficult year for most short traders, H&M entered into 14 short trades, and made money on 11 of them, netting a positive 1.23% contribution to H&M's total performance. (Past performance is not indicative of future results.)

H&M will rarely, if ever, take a 100% short position in their system. The H&M system seeks to determine the best market sectors to be invested in. Even on days when the overall market indexes go down, there are usually some market sectors that go up. So, sometimes they may be short the S&P 500, but long other market sectors that their system tells them should go up. The short trade is not a hedge, but rather a call by their system that a particular segment of the market is likely to decrease. Thus, in the H&M program, it's possible to make money on both long and short trades in the same day.

Tom Hallman and Jim McQuinn, principals of H&M, understand how risky a short position can be and are averse to losing money (theirs and their clients'). Therefore, their trading methodology has to be extremely bearish for them to enter a short trade. Unfortunately, in spite of their success in using short trades, their program still finished down -4.04% for 2001 (net of all fees and expenses), but much better than the decrease of -11.88% for the S&P 500 Index and -32.65% for the Nasdaq 100 Index over the same period of time.

Since H&M does not generally commit 100% of an account to a short position, we consider them to be a moderate-risk investment. If you are interested in a program that can make money going short, H&M merits your consideration. They use the Rydex Funds platform, and their minimum investment is only $15,000.

Using Short Trades as a Hedge

The second method of using short trades in a market timing system is to use the short trade as a hedge against other long positions in the account. In this case, the goal is not so much to make money on the short trade itself, but rather to serve as insurance in case the stock market takes an unexpected turn to the downside.

In such systems, success is measured by the extent to which the short trades protected the long positions from losses. In contrast to the first method of using short trades, a hedging Advisor would be perfectly happy if the short trades always lost money, because it would mean the long positions performed as expected.

An example of a program that uses short trades as a hedge is the Niemann Capital Management "Equity-Plus" program. While this program has the ability to go 100% to cash if market conditions merit, it will also use short trades to hedge long positions to protect it from periodic downturns in the market.

As stated above, short trades used as a hedge are not necessarily designed to make money. As a result, Niemann does not keep detailed analysis of how many short trades they entered into and what the net effect of those trades were. In 2001, the Niemann Equity Plus program posted a gain of +2.51% (net of all fees and expenses), as compared to the -11.88% loss in the S&P 500.

If you are interested in a program that can use short trades to hedge long positions and possibly moderate the effects of a sudden market downturn, you should look into Niemann's Equity-Plus program. Niemann manages accounts through Fidelity brokerage, and their minimum investment is $100,000.

As is the case with any investment strategy, there are few Advisors who can successfully short the market and enhance returns. The past two years have produced several brand-new Advisors with impressive, but short records. However, because their track record is only as long as the recent bear market in stocks, it is difficult to tell if their success is attributable to skill or luck.

Some Advisors enter the market with a bearish bias, and their programs work out well as long as the stock market is in a downward slide. However, impressive returns quickly turn to losses when the market rises with the bear bias still in place. Through detailed due diligence, it is often possible to tell luck from skill. Individual trades must be researched and monitored to discover if a bias exists - bearish or bullish. If so, the program is headed for a fall as soon as the market switches direction.

We at ProFutures are constantly on the lookout for Advisors with proven ability to use short trades to enhance overall performance. We employ our many years of due diligence experience to separate the Advisors with proven programs from those who just happened to get lucky for a couple of years.

As we find additional Advisors with proven short records, we'll bring them to your attention. In the meantime, both of the Advisors discussed above deserve your consideration.

You can obtain information on both H&M and Niemann by calling ProFutures at 800-348-3601. You can also contact us by e-mail at mail@profutures.com. If you have questions about any of the programs mentioned above, ask to speak to one of our experienced Investor Representatives.

Tips On Surfing the Internet

by Gary Halbert and Will Lamb, Certified Novell Administrator

Over the past few years, we have written several newsletter articles about using computers and the Internet. My feeling is that if you are not already using the vast resources available on the Internet, you need to be. With the current rock-bottom computer prices and user-friendly software, there is no reason why you shouldn't be able to enjoy all of the benefits that the Internet has to offer.

I know that many of you have already made the leap to the "Information Age" because you have signed-up for our e-mail Special Updates. You already know the benefit of communicating with friends and loved ones instantly. It's also fun to get "forwarded" e-mails that contain messages or articles that are funny, informative and even inspirational.

However, there is also a dark side to using the Internet. There are frequent news stories about computer "viruses" that can render your computer useless. Programs exist that can track your every movement on the Internet, and relay this information to advertisers who then send you "SPAM" e-mail, the electronic equivalent of junk mail. Since the Internet is free speech in action, there are also many websites that most people consider offensive. Beware of the porn sites!

Many first-time computer users are ignorant of these pitfalls, so I asked Will Lamb, ProFutures' resident computer network administrator, to offer some Internet advice that would make your web surfing safer and more enjoyable. I have summarized some of his comments below and more tips will follow in subsequent newsletters.

Avoiding Computer Viruses

A computer "virus" is nothing more than a software program that seeks to invade your computer and damage it in some way. In almost all cases, the virus is sent to your computer by an e-mail that requests you to click on an attachment. Sometimes it will tell you the attachment is a picture, or an inspiring story, or sometimes even a special program that says it will help rid your computer of viruses. If you receive an e-mail from someone you don't know, it's best to NEVER click on or open the attachment.

Most computer users have already been warned to just delete e-mail messages from someone they do not know. That way, there is no chance of accidentally triggering the attached virus. However, it is possible to get an e-mail from someone you know that contains a virus. That's because many of these viruses not only try to disrupt your computer's operations, but will actually use your computer to send out copies of itself to everyone on your e-mail address list. The recipient gets an e-mail from a familiar person, clicks the attachment and unleashes the virus that again replicates itself using the recipient's e-mail address list.

In such cases, it is virtually impossible to tell a "safe" e-mail sent by a friend from one that was sent by the virus. Therefore, to help prevent your computer from being infected, Will suggests that you invest in a virus-detection software package. Some good ones are McAfee ASAP if you have a small business, or the Norton Antivirus (NAV) software for individuals. The McAfee ASAP is available only on the Internet by going to www.mcafeeasap.com. The Norton NAV program can be found at stores that sell computers and software, and costs around $20.00.

If you think your computer may have a virus, get on the Internet and go to the following website housecall.antivirus.com (note that there is no "www" preceding this address). Follow the directions to have your computer scanned for existing viruses.

Also, if you have a DSL/Cable or other high-speed Internet connection (such as Road Runner through Time/Warner), Will recommends a software "firewall" like Zone Alarm Pro ($49.95 for a 1-year subscription). This program prevents hackers from accessing your computer remotely.

Note that an estimated 200 new viruses are created every month by computer hackers. Therefore, arming your computer with anti-virus software is not a one-time thing. You must continually update your virus program so that it can detect and block the new viruses that may be sent to your computer. The anti-virus software programs that Will suggested above all have regular update features.