1) Bullseye Highlights Investor Returns F or the past several years, Morningstar® has been tracking mutual fund asset flows to provide a statistic they call “Investor Returns” (or dollar-weighted returns) on an individual fund basis. The returns are based on purchase and sales data, giving more weight to periods when investors are pouring assets into a fund and less weight to periods when total fund assets are lower. In other words, by tracking asset flows in and out of a fund, the performance is adjusted to estimate the returns for the majority of investors. These dollar-weighted returns illustrate the gap between published mutual fund total returns and the performance actually experienced by investors. The performance gap indicates how well investors managed to time the markets. When the investor return is less than the total return, it means that investors tried and failed to time the markets, a decision perhaps influenced by emotions. All too often, investor returns lag the overall performance of individual funds and the overall market, as illustrated by the annual Dalbar Investor Behavior studies (Source: www.qaib.com). According to Dalbar, through the end of 2010, the annualized 20-year return for the S&P 500 averaged 9.14%, whereas the average equity fund investor earned 3.83%. Why does this happen? Because as the study has shown time and again, investors do the exact opposite of what they should do—they buy high and sell low. Calendar-based total returns are meant for comparison purposes only and rarely reflect the asset-weighted performance of actual investment flows. It is not realistic to assume that all investors schedule their buying decisions with a perfectly timed calendar date. Investor returns demonstrate in real terms how greed and fear can influence decision making. The results of tracking actual investor returns shows how investors often abandon their own investment goals and diversification policies in exchange for the allure of higher returns. An example used by Morningstar is a study of the Internet bubble of the early 2000s. By tracking historical asset flows, Morningstar was able to illustrate how investors chased the performance of tech-related growth funds in the late 1990s, which often went against their stated investment objectives and risk tolerance. Asset flows into these Total Return 0% vs. Investor Return -33% funds were at an all-time high right before the Internet Investor Buys @ $12 bubble burst. And when the market did collapse, many investors ran for cover, missing the recovery period $12 and the outperformance achieved by value funds in the following years. The hypothetical graph to the right illustrates how an investor’s returns may differ from published fund performance. This is one of the many reasons to emphasize that past performance is never indicative of future returns—and returns experienced by individual investors may vary (significantly). $10 $10 $8 Jan Mar Jun Sep Dec Investor Sells @ $8 ($4 loss) Hypothetical image for illustrative purposes only. 

2) Perhaps in a case of history repeating itself, similar results are seen with the more recent financial crisis of 2008. The image below shows the asset flows of net purchases and redemptions from mutual funds from 2008 through 2010. In the first calendar, the S&P 500 was down -37.0% as assets flowed out of mutual funds for three of the four quarters of 2008. However, fear-based selling continued as asset flows were net-negative for seven of eight quarters over two years, despite strong recovery period returns of 26.5% in 2009 and 15.0% in 2010. Had investors simply held their ground, the net result would have been a far-less-dramatic loss of -2.86% annualized for the period (and turned positive by early 2011). Largest Monthly Outflows for 20 Years Based on Net Monthly Sales Through Dec. 2011 -4000 Aug 2000 Nov 2008 Feb 2000 Jan 2000 Mar 2000 Sep 2008 Aug 2001 -3000 Oct 2008 -2000 Jul 2002 -1000 Nov 1999 0 Flexible Fund Asset Flows (AUM $ millions) When the stock market rallies, investors often pour money into mutual funds, including flexible funds. Despite the fact that flexible funds aren’t always pure stock funds, investors still seem surprised when they underperform during a bull market. And when the stock market declines, investors sell out of flexible funds and miss the periods of time when these funds are truly meant to help. As assets flow out of flexible funds, the performance in the following 12-months illustrates how investors time the funds incorrectly. After the largest outflow months, on average, flexible funds were up 1.53% when the S&P 500 was down -3.84%. -5000 What was the performance after the largest Average 12-Month Performance This backwards approach flies in the face of two outflows? In the 12-months following the outflows, key elements of flexible investment strategies— After Largest Outflows: on average, Flexible Funds were up +1.53%, participate in the upside of the markets, to a whereas the S&PFunds +1.53% Flexible 500 was down -3.84%. degree, but also help out during down markets through diversification and tactical portfolio changes. By trying to time funds that are already tactical in nature, S&P 500 -3.84% investors failed to achieve either of the two elements. They pile on during times when it is understandable for these funds to underperform, and they jump ship right when these funds are needed the most. Avoiding the temptation of greed and fear requires discipline, which involves being ever-mindful of risk tolerance, time horizons and sticking to personal investment objectives regardless of short-term market swings. Using a systematic purchasing strategy, like dollar cost averaging or buying on drawdowns, has proven to be a far more disciplined method than trying to time the markets—especially when investing in actively managed, tactical portfolios that are already designed to adapt to the markets. To see the negative effect of failed market timing, check the published investor returns of any given fund. By re-cooking the cooking, investors get burned and are left with a bad taste in their mouths. Past performance is not indicative of future returns. Historical data is used for statistical illustration purposes only and should not be used as a predictive measure for the future return expectations. The information is subject to change (based on market fluctuation and other conditions) and should not be construed as a recommendation of any specific security or investment product, and was prepared without regard for specific circumstances and objectives of any individual investor. All investments, including flexible and tactical strategies, involve risk and the potential for loss of principal. Flexible and tactical strategies may involve additional risks, including, but not limited to, shorting risks, the use of leverage, the use of derivatives, futures market speculation and regulatory changes. Before investing in any financial product, always read the prospectus for product-specific risks. The Lipper Flexible Funds Category had 42 funds in 1992 and 220 funds in 2011. Category changes can skew performance results and potentially create a survivorship bias (where newer funds can alter the long-term perspective,and underperforming funds may close, and therefore, be removed from the data set). For more information about Lipper and Lipper Categories, please visit www.lipperweb.com (©Thompson Reuters). The material herein has been provided by Arrow Investment Advisors and is for informational purposes only. Arrow Investment Advisors serves as investment advisor to one or more mutual funds distributed through Northern Lights Distributors, LLC (member FINRA). Northern Lights Distributors, LLC and Arrow Investment Advisors are not affiliated entities. 0783-NLD-5/22/2012