Defensive Measures Policy

Dear Investor,

To be clear, investing involves risk, including the risk of losing your invested principal. We strive to effectively manage that risk, as described below, but we cannot guarantee that losses will never occur. Most of our clients are at or near retirement. They do not wish to jeopardize their lifestyle while spending years attempting to recoup severe losses. We therefore strive: (a) to limit catastrophic losses such as occurred in 2008; and (b) to enhance the recuperative ability of our portfolios when losses occur. This document will provide a summary of our DeGreen Capital Management (DCM) Defensive Measures Policy.

Proper Portfolio Selection

Portfolio Selection

By far, an investor’s best risk-control mechanism is the selection of an appropriate, proven portfolio with a long-term performance and volatility track record. Past performance does not guarantee future results, but over time, it can be instructive.

During your initial Best Interest Interview, if our program is appropriate for you, we will conduct various exercises together. Using the past volatility and performance of our EMA portfolios, we will help you determine the range of volatility you find acceptable in pursuit of your longer-term investment objectives. All investment portfolios – regardless how conservative – will demonstrate an historic range of volatility.

We will consider the use of our additional defensive measures, as described below, only when the performance of your portfolio falls outside – or looks relatively certain to fall outside – its historic range of volatility; and even then many economic, policy and market factors may mitigate in favor of “holding course”.

Our EMA portfolios have demonstrated excellent recuperative ability, in our opinion. To cite one example: after 2008, among client portfolios where DCM did not take defensive action, it took less than two calendar years for even EMA’s most aggressive portfolios to return to breakeven. It took the S&P 500 Index 5 ¼ years to return to breakeven. This illustrates the importance of selecting portfolios with strong recuperative abilities, that have demonstrated an acceptable range of historic volatility.

The Roles of EMA and DCM

Efficient Market Advisors (EMA) is an independent portfolio manager. It serves as DeGreen Capital Management’s Investment Committee. We have a close working relationship with EMA and routinely provide input to the Investment Committee. DCM may override EMA’s decisions. EMA works for DCM (at no additional cost to our clients). We work for you.

The Investment Committee maintains 15 low-cost, diversified, risk-adjusted exchange-traded fund (ETF) allocation strategies. These allocations all have long-term performance and volatility track records. EMA also maintains one non-diversified equities-only allocation strategy exclusively for DCM clients. DCM continuously works with the EMA investment committee and may recommend specific allocations or portfolio adjustments.

Using low-cost index-tracking exchange-traded funds (ETFs), EMA’s diversified strategies allocate worldwide across equities, fixed income, alternatives and cash. The more aggressive a strategy, the more it tends to be allocated toward equities (stocks). Less aggressive strategies are allocated more toward fixed income ETFs.

In consultation with our Clients, we at DCM select the risk-adjusted allocation(s) that we believe is most appropriate for each investor. We then monitor the continuing suitability of each client’s allocation based on our assessment of market conditions and changing client circumstances. In addition, DCM may implement defensive protocols as described herein. These measures are maintained by DCM, not by EMA.

EMA remains invested continuously. Only DCM maintains a formal defensive measures policy. DCM’s defensive measures policy may result in DCM moving clients from one allocation level to an historically-less-volatile allocation, or it may result in DCM taking its clients partially or completely to cash under certain circumstances (selling specific or all positions).

DCM may move a client to a less-aggressive allocation without the client’s permission. It will not intentionally move clients to a more aggressive allocation without their permission. The volatility of a specific allocation strategy may change somewhat when the investment committee changes positions or allocations within it, or when DCM removes one or more holdings within that strategy.

DCM Defensive Measures Protocols

  1. Each portfolio has a rolling 36-month standard deviation range. Basically, standard deviation is the extent to which a portfolio routinely fluctuated (plus or minus) from its statistical mean value during the past 36 months, 68.27% of the time.
  2. When we see a portfolio heading outside a single standard deviation, we assess the following:
    1. Whether economic conditions, market valuations, technical indicators, earnings and public policies (such as monetary policy) indicate that a portfolio, or portions of a portfolio are becoming overvalued, or whether a decline outside a single standard deviation of volatility may last for longer than one year.
  3. If we conclude that a portfolio component has become overvalued, or that downside deviation may be longer term, we may take additional defensive action. These actions may include:
    1. Reallocating clients to an historically-less-volatile allocation;
    2. Selling specific portfolio positions;
    3. Selling an entire asset class within our portfolios; or
    4. Going entirely to cash.
  4. As negative factors either stabilize or begin to reverse, then we may reverse our defensive positions to again become partially or fully invested.

Our more conservative portfolios have a narrower standard deviation range, and our more aggressive portfolios have a wider standard deviation range. Within our more aggressive portfolios, we may accept greater volatility in pursuit of greater potential returns, which are, again, never guaranteed.

Being “Right” Twice

When we “go to cash”, either partially or entirely, we must attempt to be “right twice”. That is, we must not only sell at the right time but buy back in at the right time. When we go partially or completely to cash, we may sacrifice some performance because it is rare that we can pick both the best exit and re-entry points precisely. However, our DCM defensive measures are not intended to enhance routine performance (i.e., we are not attempting to “time” the market). They are an attempt to limit the extent to which our clients may experience another longer-term 2008- 1999- or 1987-type deep and sustained downturn. In other words, they are intended to reduce the possibility of catastrophic, longer-term losses.

There are circumstances where, even if the above conditions appear to be met, we might still not take defensive action. For example, if we believe that markets may recover quickly (based on the various factors mentioned above such as strong underlying economic data), or that irrational factors are driving a downturn (even if longer lasting), then we might not take additional defensive action.

If there was a “black box” approach that worked at protecting portfolios against steep downturns, or one that would automatically prompt us to exit overvalued positions, everyone would use it. Instead, the process requires much research, a lot of experience, and – ultimately – the exercise of judgment.

The key is that we are ever alert to market risks, and we are prepared, when appropriate in our professional judgment, to take such action as is reasonably necessary to defend your wealth.

Thanks for investing with me.


Keith P. DeGreen, J.D., CFP®
CEO and Portfolio Manager
DeGreen Capital Management, LLC
Scottsdale Headquarters:
4800 North Scottsdale Road, Suite 1800
At the Portales Center
Scottsdale, AZ 85251