Financial Synergies' Quarterly Newsletter

1. Q4 2013
INSIDE THIS ISSUE
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Bonds Still Belong in Your Portfolio
By Mike Booker, CFP®, ChFC, CFS®
BONDS STILL BELONG
1
THE MERGER FUND
2-3
EDELIVERY AND PORTAL ACCESS
3
DURATION RISK
4
WHAT IT MEANS TO BE AN RIA
5
AN AFFIRMATION
5
ANNOUNCEMENTS6
“NEVER CONFUSE MOTION WITH ACTION”
- ERNEST HEMINGWAY
Many investors are concerned about the fate of bonds going forward as interest rates are expected to rise. As you know, when interest
rates rise, the market value of most bonds tends to go down in response. This phenomenon is referred to as “Interest Rate Risk” and occurs because a bond which someone might hold in their account that is yielding 2% becomes less attractive on the secondary market
when newly issued bonds begin paying a higher interest rate (coupon) of say, 2.5%.
So, if interest rates are going up, as they began to do in 2013, should we avoid bonds? Well, let’s back up a bit. Why do we have bonds
in our portfolios to begin with? We employ bonds in our client’s accounts because:
They have a low-to-negative correlation to stocks: This is the primary reason-Bonds don’t move in the same direction by the
same magnitude as the stock market. Often, as in the bear markets of 2000-2002 and 2008, bonds moved in the opposite direction
of stocks making solid positive returns as stocks took deep losses. So, generally speaking, most bonds make money when stocks are
tanking simply because they are not stocks - they are not walking the same financial path. This lack of correlation between these
two asset classes is the cornerstone of any thoughtful diversified investment strategy.
They aren’t as volatile as stocks: Assuming one is not buying extremely low rated bonds, they can be pleasantly boring while
paying out an attractive coupon rate. Even relatively low rated bonds can make sense if the interest rate they offer is substantially
higher and worth the extra default risk.
They are liquid: The bond market is huge and investors who wish to buy or sell bonds have a liquid and robust place in which to do
so. Many other assets that might provide some diversification benefits against stocks can be illiquid or have limited liquidity such as
real estate of a lump of gold or silver.
“But Mike”, you say, “this is all good stuff, but I don’t see that it makes any sense to own bonds if all they are going to do is lose money
as rates rise. Why should I take this interest rate risk?” And, “By the way, Mike, on top of all the risk I now have in my bonds due to rising
rates, they are paying me a ridiculously low interest rate!” Agreed. In fact, if interest rates rise just 1%, 77% of all bonds are deemed
vulnerable to losses (Source: Morningstar 12-31-12). You are right about rates, too. They are still at historic lows paying anemic coupon
rates. So, higher risk, lower return. Bad combo. Here is what we have to do:
We have to be smart. We have to be choosey. We have to make changes. The changes we must make are not to dump bonds or bond
funds because they are a vital component of our mission to diversify our stock holdings and, therefore, lower our portfolio’s overall
risk and volatility. The change we must make is to modify the type of bond fund we will use going forward: funds where the managers
have flexibility to seek out bond sectors that are most attractive in terms of risk/reward. Funds that can implement both long and short
strategies to mitigate or even eliminate rising interest rate risk.
For example, the Barclays Aggregate Bond index, considered the best indicator of the bond market, lost 2% in
2013. Two “flexible mandate” bond funds that we shifted into mid-year 2013 made 5% and 6%, respectively, for
the year. The managers of these funds had the flexibility to move out of the way of the approaching train that was
higher interest rates. While delivering these impressive returns, they still provided the traditional diversification
benefits of bonds - low correlation to stocks. Doing it the right way makes all the difference.
Bonds still belong in your portfolio. 
4265 San Felipe, Suite 1450 | Houston, TX 77027 | PH: (713-623-6600) | http://finsyn.com

2. “A RISK-REDUCER AND DIVERSIFIER”
The Fund with the
Odd Name
By Mike Minter, CFP®, CFS®
When first mentioned in client meetings, the Merger Fund sometimes elicits looks of confusion or curiosity from its name
alone. It doesn’t sound like the other names in your portfolio, and it doesn’t act like them either. It’s considered an alternative type of investment because it doesn’t correlate highly to the more traditional asset classes like stocks and bonds.
The Merger Fund’s strategy is very different from the other asset classes in your portfolio, and it requires a vast amount of
skill and experience to execute successfully. But the process is straightforward and rather easy to explain.
The fund invests in a target company (company being acquired) after a merger/takeover has been publically announced
and they feel that the probability of the deal closing is very high. The stock price of the targeted company will have already
increased in value on the news of the deal, but it won’t reach the deal’s full price potential until it actually closes. This is
where the Merger Fund makes its money – when the deal does close they liquidate their position and walk away with a nice
little profit – this is known as an “arbitrage” strategy.
If the deal involves the use of the acquiring company’s stock to purchase the target company, the Merger Fund might short
the acquirer’s stock to hedge against a fall in its price.
Their objective is to achieve a return
of around 15% per deal. In determining which deals will actually close, their
success rate has been about 98%.
We like the Merger Fund as a complement to our bond portfolio, and also as
a risk reducer to the stock funds. Since
the fund’s inception in 1989 through
12/31/2013, it has produced a stellar
6.81% annualized return, outperforming the Barclays Aggregate Bond Index.
It has also been 65% less volatile than
stocks (SP 500) over this period. And
with a very low correlation to stocks
and bonds it makes for a perfect portfolio diversifier.
The Merger Fund has also done an excellent job of protecting its shareholders’ capital in bear markets, as the chart
illustrates:
As you can see from the chart above, during the tech stock crash of 2000-2002 the SP 500 lost -45%, whereas the Merger
Fund lost just -3%. And during the recent financial crisis bear market the SP lost -51%, whereas the Merger Fund lost just
-6%.
Since its inception in 1989 the fund has had only two negative calendar years, the worst being -5.67% in 2002.
...CONTINUED ON PAGE 3
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4265 San Felipe, Suite 1450 | Houston, TX 77027 | PH: (713-623-6600) | http://finsyn.com

3. THE FUND WITH THE ODD NAME, CONTINUED...
The fund’s risk management techniques and meticulous deal analysis have led to steady, consistent returns over the
long-term. By limiting losses the fund has served its shareholders well.
And finally, with further interest rate increases looming, there is concern about the possible negative impact this will have on investors’ bond portfolios. Merger-arbitrage strategies have historically
been positively correlated to interest rates, or the cost of capital; therefore if interest rates rise the
Merger Fund could provide a hedge to a reduction in bond values.
At times, observing the movement of the Merger Fund can be like watching paint dry. But remember, it serves a purpose in the portfolio as a risk reducer and diversifier, and will prove to be valuable
over the long-term. 
Source: Morningstar Direct
Interested in eDelivery or Access to our Online Portal?
Did you know that you can receive your quarterly
statement electronically?
You can also see all of the accounts in your Household,
your account’s holdings, transactions, and respective asset
allocation through our online portal.
If you’re interested in enabling eDelivery or the online
portal feature, or would like to know more about it, please
call us at 713-623-6600.
4265 San Felipe, Suite 1450 | Houston, TX 77027 | PH: (713-623-6600) | http://finsyn.com
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4. “BOND INVESTORS NEED TO UNDERSTAND DURATION RISK MORE THAN EVER BEFORE”
Duration Risk: What Bond
Investors May Not Know
By Heath Hightower, CFP®
As Mike Booker mentioned in this quarter’s newsletter, we think bonds still deserve a place in most portfolios. After all,
bonds are ultimately one of the greatest diversifiers an investor can own. Historically, conservative investors have allocated large percentages of their portfolio to bonds because of their low volatility and consistent positive returns. They’ve
actually done quite well over the decades. Our fear, however, is that some bond-heavy portfolios may hold more risk
than people realize.
The particular type of risk I’d like to talk about is called Duration Risk. Without realizing it, investors have been adding
duration risk to their portfolio.
Duration is a measure of how
sensitive a bond is to changes
in interest rates. As you may already know, the price of a bond
decreases when interest rates go
up. The higher a bond’s duration,
the more it stands to lose if interest rates go up. For instance, if
interest rates were to increase by
1% a bond with a 2 year duration
would decrease in value by 2%.
Likewise, a bond with a 5 year
duration would decrease in value
by 5%, and so on. Over the last
10 years, the average duration
of the bond market has steadily
increased from 3.5% to over 5%
(see chart above). With interest
rates likely on the move, we think
this is a risk that conservative investors should consider carefully.
What matters more is where
the market is when you need to sell.
Bond investors need to understand duration risk more than ever before. Here’s why… Most traditional bond mutual
funds are handcuffed by their prospectuses to maintain a duration closely tied to a benchmark. The duration of the most
widely used bond benchmark is currently slightly above 5% (the Barclays US Aggregate Bond index). That means most
core bond funds are contractually obligated to have a duration of about 5% even if they’d prefer to hold less duration. The
share price of these bond funds could drop substantially if interest rates were to move higher.
Last year, we decided to move the majority of our fixed income portfolio to talented managers that
have the flexibility to minimize duration risk when appropriate. They’re not tied to any particular index.
Currently, all of the new bond funds in our portfolios have chosen to keep their durations much lower
than the overall bond market. Interestingly enough, all three of these funds made money last year even
though the Barclays Aggregate bond index lost over 2%. These managers have proven, long-term track
records and we are confident in their ability to navigate what could be a choppy bond market for the
foreseeable future. 
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4265 San Felipe, Suite 1450 | Houston, TX 77027 | PH: (713-623-6600) | http://finsyn.com

5. What it Means to Be a
“Registered Investment Advisor”
By Marie Villard
When I was home over the holiday break, my father asked me a very important question about why we are different from
other large brokerage firms. I simply responded with an impatient answer: “We are an RIA, Dad.” At that moment, I realized
that I hadn’t given him an adequate explanation as to what being an RIA truly means. Then it got me thinking, if anyone
else were to ask me that question, how would I discuss the distinct differences between us and them, and explain what
it means to be an “RIA”?
“RIA” is an abbreviation for Registered Investment Advisor, which indicates that our firm registered with the Securities
and Exchange Commission, and is regulated under the Investment Advisors Act of 1940. Broker-dealers differ in that they
are regulated by FINRA, a self-regulated organization (SRO) that is not affiliated with the US Government and is monitored
in a different fashion. While some of the regulation differences are subtle, the guidelines to which we adhere are much
more stringent and watched more carefully.
As an RIA, we have a fiduciary responsibility to our client. This means that our relationship with our clients is one of utmost trust and confidence, where we have an obligation to act in our clients’ best interests. The decisions we make in our
clients’ portfolios are ones that we believe will best accomplish their financial goals; they are not products we are required
to sell (unlike brokers who are paid a commission on products sold). This consideration for our clients is one of the most
important distinctions between an RIA and brokers.
Another benefit of being an RIA is that we custody our clients' assets outside of our firm, at Charles
Schwab. This adds a layer of protection for both the advisor and the client, due to all the strategic infrastructure and regulations in place at the custodian. The information that we provide our clients is the
same information that Schwab provides. These checks and balances allow a greater transparency, and
can provide reassurance as to what is happening in our clients’ accounts.
Our website has a plethora of information about RIAs, in addition to this article. We also promote an
outside campaign, “RiA Stands for You”, which is a great resource for understanding the RIA model. If
you have any questions, feel free to reach out to us or take a look at our website http://finsyn.com/
about/ria/ 
An Affirmation from Morningstar
By Bryan Zschiesche, CFP®, MBA
Morningstar announced last week their selections for their 2013 Fund Manager of the Year awards. We were pleased to
learn that Dan Ivascyn and Alfred Murata, managers of the PIMCO Income fund, were selected as Fixed-Income Fund
Managers of the Year.
We added this fund to our fixed income lineup during the summer of 2013 after extensive due diligence and conversations with fund management. While we were confident that we made a great selection in PIMCO Income, it was great to
have the decision affirmed by Morningstar in the form of this prestigious award.
Here’s an excerpt from Morningstar’s summary on why Ivascyn and Murata were selected:
“Making the most of a tough market is where funds can really help shareholders. While PIMCO won’t get all of its calls
right--no one does--its concerted efforts to prevent any single bet from overwhelming performance played out for this
fund in 2013. Ivascyn and Murata have also delivered on the fund’s income-oriented goals without
returning capital to shareholders since its 2007 inception. That’s a tall order in today’s relatively lowyielding environment, but PIMCO’s vast tool chest and diversified approach instill confidence.”
As Mike pointed out in his cover article, we believe diversification and manager flexibility within the
bond market will be crucial as the interest rate environment remains uncertain. PIMCO Income has
the flexibility to seek out income sources that appear most attractive in any environment, but it does
so with an emphasis on risk management and liquidity. We are confident that the addition of PIMCO
Income makes our bond portfolios stronger. 
4265 San Felipe, Suite 1450 | Houston, TX 77027 | PH: (713-623-6600) | http://finsyn.com
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6. The 2013 Holiday Event Show
Thanks to all who came out for our most recent event at the Alley Theatre. On December
5th , 2013 Financial Synergies entertained clients with a dinner buffet catered by Arcodoro,
and a showing of Charles Dickens’ “A Christmas Carol”.
Above are some of the highlights from the evening.
Congratulations
Bryan!
Bryan Zschiesche celebrated his 10
year anniversary with Financial Synergies on November 16th, 2013, and
joins Mike Minter and Heath Hightower as a shareholder in Financial
Synergies.
Please join us in congratulating him on
his accomplishment!
4265 San Felipe, Suite 1450 | Houston, TX 77027 | PH: (713-623-6600) | http://finsyn.com
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