Morningstar Advisor - February/March 2009 - 17

Advisor Profile Heading to Shore By Ilana Polyak Amid extreme market volatility, Dominick Paoloni believed that the sidelines offered the best measure of safety. At least once a year, Dominick Paoloni flies to the British Virgin Islands, rents a 50-foot catamaran for a week, and sails the Caribbean Sea. The trips, which tend to coincide with favorable winds, take him to one or two islands a day. The rest of the time is spent watching the sailboat slice through still, glassy waters. On a few occasions, the seas have not been so kind, catching him in a tropical storm. Paoloni knows what to do on these occasions. “If I’m fighting with a 50-foot mast and there’s lightning coming at me, I sail out of the way and head to shore,” he says. That was much the same storm the Lakewood, Colo., money manager saw brewing in last year’s market. Extreme volatility was thrashing stocks around, and an investor in a tiny catamaran was unlikely to win such a battle against nature. “In September, I realized I was in the middle of a financial hurricane,” he says about recent financial events. “When all my correlations converged, I got out of the way.” Paoloni moved his client accounts into a fully defensive position in money-market funds and short- and intermediate-term Treasuries. “I need to see volatility come down before I commit assets to this market again,” he says. The bulk of his clients, he says, are in their 60s, so losses are particularly devastating to these retirees and pre-retirees. “In bear markets, the game plan is to lose less,” says Paoloni, who, in addition to being a Registered Investment Advisor, is also a Certified Elder Planner and is finishing up his CIMA designation. “When a client loses half his money, he has to make 100% return to get back to break-even.” Some might call a wholesale move into cash “market-timing” and insist that it is the surest path to financial defeat. After all, rebounds come fast and furious, and it’s almost impossible to pinpoint a market bottom until after the fact. But Paoloni sees it differently. What he is doing, he says, is tactical allocation; he alters an allocation mix as conditions warrant. “As macroeconomic and correlations of assets change, how can you not change your allocations to stay diversified?” he says. Rethinking Buy-and-Hold ing. “When someone else is managing your clients’ money, you have no control,” he says. “When they screw up, you still suffer.” He moved back to Colorado because he loved the area when he was an undergrad at the University of Colorado at Boulder. Shortly thereafter, he started his fee-only firm, Investment Protection Service, in 1993. Being far from Wall Street helped him to view things from a different angle, he says. One assumption that Paoloni is challenging is buy-and-hold investing. Buy-and-hold investors believe that stocks are generally on an uptrend. Severe declines are eventually followed by upticks. The best thing to do is stay the course and even add to positions as stock prices fall. Paoloni, however, insists that the facts don’t support a buy-and-hold strategy. It can take years—perhaps decades—to break even after a bear market, something his older, wealthy clients don’t have time for, he says. “Buy-and-hold is a great way to go broke,” he says. “If a client gave you $1 million at the beginning of 2008 and you kept the same asset-allocation mix, you were down south of 30% at the end of 2008.” The Long Bear Ahead The Bronx, N.Y., native started his financial career in 1983, when he worked for a Wall Street firm, Advest, as a broker. In the early 1990s, he handled stock transactions for clients. And when clients needed money management, he connected them with professionals who could give them that service. After a few years, Paoloni began to wonder if he might not be able to do as well or better than the money managers he was recommend- To illustrate his point, Paoloni points to an historic secular bear market. “If you had bought MorningstarAdvisor.com 17
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Morningstar Advisor - February/March 2009

Table of Contents for the Digital Edition of Morningstar Advisor - February/March 2009

Morningstar Advisor - February/March 2009
Contents
New on MorningstarAdvisor.com
Letter from the Editor
Contributors
Inbox
How Do You Gauge and Measure Risk?
No Skinny-Dippers Here
Heading to Shore
Investment Briefs
Weapons of Mass Destruction?
Déjà Vu All Over Again
A Failure to Gauge Risk
Five Areas to Find Opportunities
Getting a Read on Risk
Heavenly Returns
Greenspring Comes to the Rescue
How to Spot a Trustworthy REIT
Four Picks for the President
Find Succor in These Large Dividends
These Stocks Are Fiscally Fit
Mutual Fund Analyst Picks
50 Most Popular Equity ETFs
Undervalued Stocks
Most Popular Variable Annuities
New at Morningstar
You Gotta Look Sharpe
Morningstar Advisor - February/March 2009 - Intro
Morningstar Advisor - February/March 2009 - Morningstar Advisor - February/March 2009
Morningstar Advisor - February/March 2009 - Cover2
Morningstar Advisor - February/March 2009 - 1
Morningstar Advisor - February/March 2009 - 2
Morningstar Advisor - February/March 2009 - Contents
Morningstar Advisor - February/March 2009 - 4
Morningstar Advisor - February/March 2009 - 5
Morningstar Advisor - February/March 2009 - New on MorningstarAdvisor.com
Morningstar Advisor - February/March 2009 - 7
Morningstar Advisor - February/March 2009 - 8
Morningstar Advisor - February/March 2009 - Letter from the Editor
Morningstar Advisor - February/March 2009 - Contributors
Morningstar Advisor - February/March 2009 - Inbox
Morningstar Advisor - February/March 2009 - How Do You Gauge and Measure Risk?
Morningstar Advisor - February/March 2009 - 13
Morningstar Advisor - February/March 2009 - No Skinny-Dippers Here
Morningstar Advisor - February/March 2009 - 15
Morningstar Advisor - February/March 2009 - 16
Morningstar Advisor - February/March 2009 - Heading to Shore
Morningstar Advisor - February/March 2009 - 18
Morningstar Advisor - February/March 2009 - 19
Morningstar Advisor - February/March 2009 - Investment Briefs
Morningstar Advisor - February/March 2009 - 21
Morningstar Advisor - February/March 2009 - Weapons of Mass Destruction?
Morningstar Advisor - February/March 2009 - 23
Morningstar Advisor - February/March 2009 - 24
Morningstar Advisor - February/March 2009 - 25
Morningstar Advisor - February/March 2009 - 26
Morningstar Advisor - February/March 2009 - 27
Morningstar Advisor - February/March 2009 - Déjà Vu All Over Again
Morningstar Advisor - February/March 2009 - 29
Morningstar Advisor - February/March 2009 - 30
Morningstar Advisor - February/March 2009 - 31
Morningstar Advisor - February/March 2009 - 32
Morningstar Advisor - February/March 2009 - 33
Morningstar Advisor - February/March 2009 - A Failure to Gauge Risk
Morningstar Advisor - February/March 2009 - 35
Morningstar Advisor - February/March 2009 - 36
Morningstar Advisor - February/March 2009 - 37
Morningstar Advisor - February/March 2009 - Five Areas to Find Opportunities
Morningstar Advisor - February/March 2009 - 39
Morningstar Advisor - February/March 2009 - Getting a Read on Risk
Morningstar Advisor - February/March 2009 - 41
Morningstar Advisor - February/March 2009 - 42
Morningstar Advisor - February/March 2009 - 43
Morningstar Advisor - February/March 2009 - 44
Morningstar Advisor - February/March 2009 - 45
Morningstar Advisor - February/March 2009 - 46
Morningstar Advisor - February/March 2009 - 47
Morningstar Advisor - February/March 2009 - Heavenly Returns
Morningstar Advisor - February/March 2009 - 49
Morningstar Advisor - February/March 2009 - 50
Morningstar Advisor - February/March 2009 - 51
Morningstar Advisor - February/March 2009 - Greenspring Comes to the Rescue
Morningstar Advisor - February/March 2009 - 53
Morningstar Advisor - February/March 2009 - 54
Morningstar Advisor - February/March 2009 - 55
Morningstar Advisor - February/March 2009 - How to Spot a Trustworthy REIT
Morningstar Advisor - February/March 2009 - 57
Morningstar Advisor - February/March 2009 - Four Picks for the President
Morningstar Advisor - February/March 2009 - 59
Morningstar Advisor - February/March 2009 - Find Succor in These Large Dividends
Morningstar Advisor - February/March 2009 - 61
Morningstar Advisor - February/March 2009 - These Stocks Are Fiscally Fit
Morningstar Advisor - February/March 2009 - 63
Morningstar Advisor - February/March 2009 - Mutual Fund Analyst Picks
Morningstar Advisor - February/March 2009 - 65
Morningstar Advisor - February/March 2009 - 66
Morningstar Advisor - February/March 2009 - 67
Morningstar Advisor - February/March 2009 - 50 Most Popular Equity ETFs
Morningstar Advisor - February/March 2009 - 69
Morningstar Advisor - February/March 2009 - 70
Morningstar Advisor - February/March 2009 - 71
Morningstar Advisor - February/March 2009 - Undervalued Stocks
Morningstar Advisor - February/March 2009 - 73
Morningstar Advisor - February/March 2009 - 74
Morningstar Advisor - February/March 2009 - 75
Morningstar Advisor - February/March 2009 - Most Popular Variable Annuities
Morningstar Advisor - February/March 2009 - 77
Morningstar Advisor - February/March 2009 - 78
Morningstar Advisor - February/March 2009 - New at Morningstar
Morningstar Advisor - February/March 2009 - You Gotta Look Sharpe
Morningstar Advisor - February/March 2009 - Cover3
Morningstar Advisor - February/March 2009 - Cover4
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