$

NINE THINGS

Harold Evensky, CFP

WHATME WORRY?

SQUARING THE CURVE

1

Probability of a 65-year-old living to various ages

0%

25%

50%

75%

100%

65 70 75 80 85 90 95 100 105

MaleFemaleAt least one spouse

Age

78 81 86

85 88 91

91 93 96

Prob

abili

ty

86

91

Squaring The Curve

0

2

4

6

8

10

0 10 20 30 40 50 60 70 80 90 100AGE

Perfect

Death

Health StatusSquared

Traditional

RETURNS (NO CONTROL)

2

This Time There is Something

DifferentEquity Premium

12% <6%

THE NEW REALITY?

7.6%

Retail Efficient Frontier is 3-Dimensional

EXPENSES&TAXES

RISK

RETURN

Viable efficient frontier analysis does not exist on an after tax basis

EXPENSE & TAX DRAGCURRENT FUTURE RETURN* RETURN

GROSS 14.0% 7.8%Less Expenses (1%) 1.0 1.0Less Taxes (20%) 2.6 1.4 NET GROSS RETURN 10.4 5.4

After InflationWhat Do You Have to Spend?

Past Future7.2% 2.4%

* 40% Fixed / 60% Equity – 20 Years

The key to a successful investment model will

be one focused onAn optimal strategy

instead of an optimal portfolio

CORE & SATELLITE

β

CORE & SATELLITE

COREβ +

CORE & SATELLITE (TACTICAL)

EXP &TAX EFFICIENT

CORE

SC & VALUE BIAS

EMERGING MARKET

TACTICAL/SECTOR

U.S.SMALL CAP

GROWTH

ALTERNATIVE HEDGE/V.C.

REAL ESTATE

COMMODITIES

Pascal’s WagerDoes God Exist?

The consequences of a choice are as important, or even more important, as the odds of something happening.

Pascal’s Retirement Wager

Consider not only the likelihood of living well past normal life expectancy or experiencing high inflation or a market downturn but also the consequences of each.

VOLATILITY RISK & LUCK

3

~ 20% Reduction

THE E&K CASH FLOW STRATEGY

THE TOTAL

PORTFOLIO

CASH FLOW RESERVE

THE INVESTMENT PORTFOLIO

CASH FLOW RESERVE

THE INVESTMENT PORTFOLIO

1 YEARS CASH FLOW

5 YEARS LUMP SUM

BALANCE OF PORTFOLIO

REINVESTMENT OF ALL INTEREST & DIVIDENDS

ADJUSTED AS NECESSARY FOR OPPORTUNITY COSTS

CASH FLOW RESERVE

THE INVESTMENT PORTFOLIO

PERSONAL CHECKING ACCOUNT

Rebalance

RefillRegular Monthly

Payments

the “PAY CHECK”

BEHAVIORAL FINANCE

4

Daniel Kahneman2002 Nobel Prize in economics for having integrated insights from psychological research into economic science, especially concerning human judgment and decision-making under uncertainty

IN CLASSICAL FINANCE PEOPLE ARE

RATIONALIN BEHAVIORAL FINANCE

PEOPLE ARE NORMAL

ARE THE HORIZONTAL LINES PARALLEL OR DO THE SLOPE?

HEURISTICSHEURISTICS

MENTAL SHORTCUTS

OVERCONFIDENCEOVERCONFIDENCECOMPARED TO OTHERS IN

THIS ROOM, ARE YOUR CHILDERN &

GRANDCHILDREN ABOVE AVERAGE?

OVERCONFIDENCEOVERCONFIDENCE

“I CAN TIME THE MARKET”

OVERCONFIDENCEOVERCONFIDENCE

“MY ADVISOR CAN PICK STOCKS BETTER

THAN MOST”

Terry Odean’s research

When an investor sells a stock and immediately buys another

The stock that is sold does better by 3.5% in the following year

THE COST OF A GOOD IDEA

REPRESENTATIVENESSREPRESENTATIVENESS

IF IT LOOKS LIKE A………………...

REPRESENTATIVENESSREPRESENTATIVENESS

HHTHTTTHTH

TTTTTTTTTT

REPRESENTATIVENESSREPRESENTATIVENESSMORNINGSTAR GAVE THIS FUND...

IT MUST BE GOOD

MENTAL MATHMATICSMENTAL MATHMATICSHOT TECH STOCK - IF

GOVT. SAYS GO 90% PROTOTYPE GOOD 90% REGIONAL TEST OK 90% NATIONAL ROLLOUT 90%

DO YOU INVEST?66%

MENTAL MATHMATICSMENTAL MATHMATICSLAST YEAR, I MADE 80%

AHEAD 20%

BEHIND 28%

THIS YEAR, I LOST 60%

THEREFORE I’MMENTAL MATH

REALITY

THE WAY A QUESTION IS FRAMED,

DETERMINES THE OUTCOME

FRAMINGFRAMING

Which would you rather have?‘10% fat’ or ‘90% fat-free’

FRAMINGFRAMING

FRAMINGFRAMINGNAME THE TOP 10

BASEBALL PLAYERSPAINTERSMOVIE ACTORS

MONEY MANAGERSDRESS DESIGNERS

BEWARE OF OVERCONFIDENT

ANALYSIS4

Good software can make it easier to do complex things, but it can’t magically transform the complex into the simple

FALSE CONFIDENCE

COMPLEMENTART ANALYITICS

Sensitivity analysis - a range of possibilities that go beyond what the individual might have considered

What-if scenarios - a walk through possible futures

Sensitivity Analysis

Year 1 – 2 STD

Year 2 – 1 STD

What-If Scenario Planning

PLAYING IT SAFE

5

Dividends and Interest The paycheck

syndrome

MYTH I’m Retired so I need...

MRS BOONE NEEDS 5% CASH FLOW

Bond Cash Flow Stock Cash Flow TotalAllocation from Bonds Allocation from Stock Cash Flow

100% 7% 0% 0% 7%90% 6.3% 10 0.3 6.8%80% 5.6% 20 0.6 6.2%70% 4.9% 30 0.9 5.8%60% 4.2% 40 1.2 5.4%50% 3.5% 50 1.5 5.0%40% 2.8% 60 1.8 4.6%

-$4,000.00-$3,000.00-$2,000.00-$1,000.00

$0.00$1,000.00$2,000.00$3,000.00$4,000.00$5,000.00$6,000.00

1 2 3 4 5 6 7 8 9 10

“INCOME PORTFOLIO”

Fidelity Intermediate

Bond

Fidelity Intermediate & Vanguard S&P

“TOTAL RETURN”

“EXCESS”ANNUAL CASH FLOW

I’m poor!

I’m rich!

$100,000.00

$110,000.00

$120,000.00

$130,000.00

$140,000.00

$150,000.00

$160,000.00

$170,000.00

1 2 3 4 5 6 7 8 9 10 11

TOTAL RETURN

INCOME

ACTIVE MANAGEMENT

6

MPT ISN’T DEAD

7

The process of selecting a portfolio may be divided into

two stages.

PORTFOLIO SELECTION

Journal of Finance 1952

Harry Markowitz

The first stage starts wit observations and

experience and ends with beliefs about the future

performances of available securities.

“One suggestion as to tentative µi, ij is to use observed µi, ij for some

period of the past. I believe that better methods, which

take into account more information, can be found.”

NOT MAXIMIZING

SOCIAL SECURITY

8

ANNUITIES & REVERSE

MORTGAGE9

71

Age 92 Success Wealth

CFR Only 56% $825

Standby 99% $900

Tenure 85% $1,050

Age 100 Success Wealth

CFR Only 41% $805

Standby 95% $440

Tenure 71% $1,100

*Wealth in $1,000’s