Financial Portfolio v3_Farber Sept 26 2009
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Transcript of Financial Portfolio v3_Farber Sept 26 2009
Cornerstones of InvestingBuilding a long-term investment strategy
September 2009
Diane Farber, CFP® CIMA® – First Vice President – Investments Advisory & Brokerage Services
325 North Old Woodward Ave, Ste. 200Birmingham, MI [email protected]
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Professional profileDiane Farber, CFP®, CIMA®, First Vice President- InvestmentsBirmingham, MI
Education
Certified Investment Management Analysis– Wharton School of Business, University of Pennsylvania
Certified Financial Planner™– College for Financial Planning
School of Social Work: Master of social work– University of Michigan
Bachelor of Arts in history and political science– Boston University
Professional Background
UBS Financial Services Inc. Prudential Securities, Inc.
Current licenses and registration
General Securities Representative, Series 7 Uniform State Securities, Series 63 Investment Advisor Representatives, Series 65 Life and variable annuity licensed
CFP® and CERTIFIED FINANCIAL PLANNER™ are certification marks owned by Certified Financial Planner Board of Standards, Inc. CIMA® is a registered certification mark of the Investment Management Consultants Association, Inc. in the United States of America and worldwide.
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“The intelligent investor is likely to need considerable willpower to keep from following the crowd.Benjamin Graham
”
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Cornerstones of Investing
Define specific goals
Diversify among investment types
Stay invested
Periodically review your portfolio
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How does inflation affect your purchasing power?$100,000 today will be worth less tomorrow
Source: Karen Stevenson Brown, CPA, Retirement Changes Dramatically Over the Years, www.elderweb.com.
1 Average number of years in retirement were estimated by using average life expectancies at the average retirement age. Average life expectancies were obtained from the Center for Disease Control. Average retirement age is calculated by using data from the U.S. Office of Personnel Management.
Years 2% 3% 4% 5%
Assuming an inflation rate of:
5 $90,392 $85,873 $81,537 $77,378
10 $81,707 $73,742 $66,483 $59,874
15 $73,857 $63,325 $54,209 $46,329
20 $66,761 $54,379 $44,200 $35,849
Between 1970 and 2004, the average amount of time spent in retirement increased by 48% (from 13 to 19.2 years).1
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Ibbotson® SBBI®
Past performance is no guarantee of future results. Hypothetical value of S1 invested at the beginning of 1926. Assumes reinvestment of income and no transaction costs or taxes. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. Small stocks in this example are represented by the fifth capitalization quintile of stocks on the NYSE for 1926–1981 and the performance of the Dimensional Fund Advisors, Inc. (DFA) U.S. Micro Cap Portfolio thereafter. Large stocks are represented by the Standard & Poor's 500®, which is an unmanaged group of securities and considered to be representative of the stock market in general. Government bonds are represented by the 20-year U.S. government bond, Treasury bills by the 30-day U.S. Treasury bill, and inflation by the Consumer Price Index. Underlying data is from the Stocks, Bonds, Bills, and Inflation® (SBBI®) Yearbook, by Roger G. Ibbotson and Rex Sinquefield, updated annually.Government bonds and treasury bills are guaranteed by the full faith and credit of the U.S. government as to the timely payment of principal and interest, while corporate bonds are not guaranteed.Stocks represent ownership in a corporation, while bonds, if held to maturity, offer a fixed rate of return and fixed principal value. Small company stocks are generally more volatile than large company stocks.© 2009 Morningstar, Inc. All rights reserved. 3/1/2009
Stocks, Bonds, Bills, and Inflation 1926 – 2008
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Inflation impacts the returns of stocks, bonds and cashAverage annual returns before and after adjusting for inflation
Source: Ned Davis Research; used with permission. Stocks represented by Standard & Poor’s (S&P) 500 Index, long-term government bonds by 20-year U.S. Treasury bonds, T-Bills by 90-day US Treasury bills and inflation by the Consumer Price Index, which was 3.05% from 1926 – 12/31/07. The S&P 500 Index is an unmanaged, weighted index comprised of 500 widely held common stocks varying in composition and is not available for direct investment. The chart is shown for illustrative purposes only. Returns consist of income, capital appreciation (or depreciation) and currency gains (or losses), and do not guarantee or indicate future results. Certain markets have experienced significant year-to-year fluctuations and negative returns from time to time. Stocks are more volatile and subject to greater risks than other asset classes. Past performance does not guarantee future results.
10.3%
5.5%
3.9%
7.0%
2.4%
0.8%
0.0%
5.0%
10.0%
15.0%
S&P 500 LT Gov't Bonds T-Bills
December 31, 1925 – December 31, 2007 (before inflation)
December 31, 1925 – December 31, 2007 (after inflation)
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Investing in stocks and bonds
Stocks
Ownership in a corporation
Voting rights
Historically higher returns
More risk
Bonds
Debt holder
Fixed time
Fixed rate
Historically lower risk
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Growth through global investing
Past performance is no guarantee of future results. Returns expressed in U.S. dollars. This is for illustrative purposes only and not indicative of any investment . An investment cannot be made directly in an index. Equities or each country are represented by Morgan Stanley Capital International Indexes and the U.S. stock market by the Standard & Poor's 500® , which is an u managed group of securities a d considered to be representative of the stock market in general. The data assumes reinvestment of dividends and is expressed in U.S. dollars. Unlike domestic returns, foreign market returns consist of two main components: market performance and currency fluctuations.
Also, all returns are compounded annual returns for the periods shown.
Investing in foreign securities presents certain unique risks not associated with domestic investments such as currency fluctuations and political and economic changes. This may result in greater share price volatility.
© 2009 Morningstar. Inc. All rights reserved. 3/1/2009
2008 Japan -29% Switzerland -30% United States -37% Spain -40% United States -37%
2007 Finland 50% Hong Kong 41% Germany 36% Greece 33% United States 5%
2006 Spain 50% Portugal 48% Ireland 48% Singapore 47% United States 16%
2005 Canada 29% Norway 26% Japan 26% Denmark 25% United States 5%
Annual returns of top-performing developed global stock markets
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World stock market capitalization
Capitalization calculated at year-end 2007 . Total market capitalization is 539.1 trillion. Estimates are not guaranteed .
Investing in foreign securities presents certain unique risks not associated with domestic investments such as currency fluctuations and political and economic changes. This may result in greater share price volatility.
World Market Capitalization by Country is from the Morgan Stanley Capital International Blue Book" " and includes the following developed countries: Australia, France, Japan, Spain, Austria, Germany, Netherlands, Sweden, Belgium, Greece. New Zealand, Switzerland, Canada, Hong Kong, Norway, United Kingdom, Denmark, Ireland, Portugal, United States, Finland, Italy, Singapore. The data is expressed in U.S. dollars. Stock market capitalization is calculated at year-end 2007 and is calculated by multiplying the price per share by t he number of outstanding shares and then summing all of the equities traded in a country or region.
© 2009 Morningstar, Inc. All rights reserved. 3/1/2009
45%
24%
8%5%4%
14%
United States International Other Europe Japan
United Kingdom Other Pacific Canada
Year-end 2008
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The risks of international investing
Investing in foreign securities presents certain unique risks not associated with domestic investments such as currency fluctuations and political and economic change s. This may result in greater share price volatility.
© 2009 Morningstar, Inc. All rights reserved. 3/1/2009
Currency risk
Economic/political risk
Market liquidity risk
Differences in accounting standards
Costs of investing internationally
SECTION 1
Portfolio Diversification
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The case for style diversification
1 Estimated
Table source: Russell Mellon Analytical Services. Data as of 12/31/08. The indexes used are the following: Large Cap Growth – Russell 1000 Growth Index; Large Cap value – Russell 1000 Value Index; Mid Cap Growth – Russell Mid Cap Growth Index; Mid Cap Value – Russell Mid Cap Value Index; Small Cap Growth – Russell 2000 Growth Index; Small Cap Value – Russell 2000 Value Index; International Equity – Morgan Stanley Capital International Europe, Australasia, Far East Index (EAFE) Net; US Bonds – Barclays Capital Aggregate Bond Index; S&P 200 – Standard & Poor’s 500 Index; HFRI – HFRI Equity Hedge Index.
The past performance of an index is not a guarantee of how your portfolio will perform. Indexes are not available for direct investment and reflect an unmanaged universe of securities, which does not take into account advisory or transaction fees, all of which will reduce the overall return. Prepared by UBS Financial Services Inc. Manager Research Group. All rights reserved. Used with permission.
cation does not assure profits or prevent against losses in declining markets.
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008Small Value 29.1%
Int’l 32.6%
Int’l 7.8%
Large Value 38.4%
Large Growth 23.1%
Large Value 35.2%
Large Growth 38.7%
Mid Growth 51.3%
Small Value 22.8%
Small Value 14.0%
U.S. Bonds 10.3%
Small Growth 48.5%
Mid Value 23.7%
Int’l 13.5%
Int’l 26.3%
Large Growth 11.8%
U.S. Bonds5.2%
Mid Value 21.7%
HFRI 27.9%
Large Growth 2.7%
S&P 500 37.6%
S&P 500 23.0%
Mid Value 34.4%
S&P 500 28.6%
HFRI 44.2%
Mid Value 19.2%
U.S. Bonds 8.4%
HFRI-4.7%
Small Value 46.0%
Small Value 22.3%
Mid Value 12.7%
Small Value 23.5%
Mid Growth 11.4%
HFRI1
-26.4%
HFRI 21.3%
Small Value 23.8%
HFRI 2.6%
Large Growth 37.2%
HFRI 21.8%
S&P 500 33.4%
Int’l 20.0%
Small Growth 43.1%
U.S. Bonds 11.6%
Mid Value 2.3%
Mid Value-9.7%
Mid Growth 42.7%
Int’l 20.3%
Mid Growth 12.1%
Large Value 22.3%
Int’l 11.2%
Small value
-28.9%Large Value 13.8%
Large Value 18.1%
S&P 500 1.3%
Mid Value 34.9%
Large Value 21.6%
Small Value 31.8%
Mid Growth 17.9%
Large Growth 33.2%
HFRI 9.1%
HFRI 0.4%
Small Value
-11.4%
Int’l 38.6%
Large Value 16.5%
HFRI 10.6%
Mid Value 20.2%
HFRI 10.5%
Large value
-36.9%Mid
Growth 8.7%
Mid Value 15.6%
Small Value-1.6%
Mid Growth 34.0%
Small Value 21.4%
Large Growth 30.5%
HFRI 16.0%
Int’l 27.0%
Large Value 7.0%
Large Value-5.6%
Large Value
-15.5%
Mid Value 38.1%
Mid Growth 15.5%
Large Value 7.1%
S&P 500 15.8%
Small Growth 7.1%
S&P 500-37.0%
Small Growth 7.8%
Small Growth 13.4%
Large Value-2.0%
Small Growth 31.0%
Mid Value 20.3%
HFRI 23.4%
Large Value 15.6%
S&P 500 21.0%
S&P 500-9.1%
Small Growth-9.2%
Int’l-15.9%
Large Value 30.0%
Small Growth 14.3%
Large Growth 5.3%
Small Growth 13.4%
U.S. Bonds 7.0%
Large Growth-38.4%
S&P 500 7.6%
Mid Growth 11.2%
Mid Value-2.1%
HFRI 31.0%
Mid Growth 17.5%
Mid Growth 22.5%
U.S. Bonds 8.7%
Large Value 7.4%
Mid Growth-11.8%
S&P 500-11.9%
S&P 500-22.1%
Large Growth 29.8%
S&P 500 10.9%
S&P 500 4.9%
HFRI 11.7%
S&P 500 5.5%
Mid Value
-38.4%U.S.
Bonds 7.4%
S&P 500 10.1%
Mid Growth-2.2%
Small Value 25.8%
Small Growth 11.3%
Small Growth 13.0%
Mid Value 5.1%
Mid Value-0.1%
Int’l-14.2%
Mid Growth-20.2%
Mid Growth-27.4%
S&P 500 28.7%
HFRI 7.7%
Small Value 4.7%
Mid Growth 10.7%
Large Value-0.2%
Small Growth-38.5%
Large Growth 5.0%
U.S. Bonds 9.8%
Small Growth-2.4%
U.S. Bonds 18.5%
Int’l6.1%
U.S. Bonds 9.7%
Small Growth 1.2%
U.S. Bonds-0.8%
Large Growth-22.4%
Large Growth-20.4%
Large Growth-27.9%
HFRI 20.5%
Large Growth 6.3%
Small Growth 4.2%
Large Growth 9.1%
Mid Value-1.4%
Int’l -43.4%
Int’l-12.2%
Large Growth 2.9%
U.S. Bonds-2.9%
Int’l 11.2%
U.S. Bonds 3.6%
Int’l 1.8%
Small Value-6.5%
Small Value-1.5%
Small Growth-22.4%
Int’l-21.4%
Small Growth-30.3%
U.S. Bonds 4.1%
U.S. Bonds 4.3%
U.S. Bonds 2.4%
U.S. Bonds 4.3%
Small Value-9.8%
Mid Growth-44.3%
Historical Review of Market Leadership – Year by Year: 1992 – 2008
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Reduction of risk over time1926 – 2008
1-year 5-year 20-year 1-year 5-year 20-year 1-year 5-year 20-year 1-year 5-year 20-year
150%
120
90
60
30
0
-30
-60
Small Stocks Large Stocks Government bonds Treasury bills
Compound Annual return: 11.7%
9.6% 5.7% 3.7%
Holding period
Past performance is no guarantee of future results. Each bar shows the range of compound annual returns for each asset class over the period 1926 – 2006. This is for illustrative purpose only and not indicative of any investment. An investment cannot be made directly in an index©2009 Morningstar. Inc. All rights reserved 3/1/2009
Source Small company stocks in this example are represented by the fifth capitalization quintile of stocks on the NYSE for 1926 – 1981 and the performance of the Dimensional Fund Advisors, Inc. IDFA) U.S. Micro Cap Portfolio thereafter. Large-company stocks are represented by the Standard & Poor’s 500®, which is an unmanaged group of securities and considered to be representative of the stock market in general Government bonds are represented by the 20-year U.S. government bond, and Treasury bills by the 30-day U.S. Treasury bill The data assumes reinvestment of all income and does not account for taxes or transaction costs
Stocks represent ownership in a corporation, while bonds, if held to maturity, offer a fixed rate of return and fixed principal value
Small company stocks are generally more volatile than large company stocks
Government bonds and treasury bills are guaranteed by the full faith and credit of the U.S. government as to vie timely payment of principal and interest, while corporate bonds are not guaranteed
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Stocks and bonds: Risk versus return1970 – 2008
Past performance is no guarantee of future results. Risk and return are measured by standard deviation and arithmetic mean, respectively. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index.
Stocks in this example are represented by the Standard & Poor’s 500®, which is an unmanaged group of securities and considered to be representative of the stock market in general and bonds by the 20-year U.S. government bond. Risk and return are based on annual data over the period 1970 – 2007 and are measured by standard deviation and arithmetic mean, respectively. Standard deviation measures the fluctuation of returns around the arithmetic average return of the investment. The higher and standard deviation, the greater the variability ( and thus risk) of the investment returns. An investment cannot be made directly in an index. The data assumes reinvestment of all income and does not account for taxes or transaction costs. The portfolio is rebalanced annually.
Stock represent ownership in a corporation, while bonds, if held to maturity, offer a fixed rate of return and fixed principal value.
© 2009 Morningstar, Inc. All rights reserved. 3/1/2009
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The myth of the success of the average investorHow can investments do so well and the average investor do so relatively poorly?
Source: Lipper, Inc. and Dalbar; used with permission. For illustrative purposes only. Past performance does not guarantee future results. Performance calculated assuming reinvestment of all dividends and capital gains. The S&P 500 Index is an unmanaged, weighted index comprising 500 widely held common stocks varying in composition and is unavailable for direct investment. The Dalbar Average Equity Fund Investor is the rate or return investors earned, based on the length of time shareholders actually remain invested in equity mutual funds. Over the time period 1988-2007, the equity mutual fund shareholders held their mutual funds for an average of 3.1 years. Mutual fund sales, redemptions, exchanges, reinvested dividends and assets under management are based on monthly data provided by the Investment Company Institute. The average annual return of the Dalbar Average Equity Investor is based on all equity funds, represented by the Dalbar Equity Index which was comprised of the S&P 500 Index and the Ibbotson Small Company stock Index.
11.8%
4.5%
3.0%
0.0%
4.0%
8.0%
12.0%
16.0%
S&P 500 Index Dalbar Average Equity Fund Investor Inflation
Average annual total returns: 1988-2007
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Feast or Famine: “Average” returns rarely occur
year-by-yearS&P 500 Index year-by-year total returns from 1926 to 20081 (all values shown in percentages)
Source: Ibbotson Associates and Standard & Poor’s; used with permission. Ibbotson data beginning 12/31/26 through 12/31/70. Standard and Poor’s data beginning 1/1/71 through 12/31/07. The S&P 500 Index is comprised of 500 widely held common stocks varying in composition and is not available for direct investment. Past performance does not guarantee future results. Performance is calculated assuming reinvestment of all dividends and capital gains on a daily basis.
1 As of 10/21/08.
8% to 12%
1926 11.621959 11.961968 11.061993 10.082004 10.88
Less than-20%
1930 -24.901931 -43.341937 -35.031974 -26.472002 -22.1020081-33.83
-20% to -12%
1973 -14.69
-12% to -8%
1929
-8.421932
-8.191940
-9.781941
-11.591946
-8.071957
-10.781962
-8.731966
-10.061969
-8.502000
-9.102001 -11.89
-8% to 0
1934 -1.441939 -0.411953 -0.991977 -7.161981 -4.921990 -3.10
0 to 8%
1947 5.711948 5.501956 6.561960 0.471970 4.011978 6.571984 6.271987 5.251992 7.621994 1.322005 4.912007 5.49
12% to 20%
1944 19.751949 18.791952 18.371964 16.481965 12.451971 14.301972 18.991979 18.611986 18.671988 16.612006 15.80
More than 20%
1927 37.491928 43.611933 53.991935 47.671936 33.921938 31.121942 20.341943 25.901945 36.441950 31.711951 24.021954 52.621955 31.561958 43.361961 26.891963 22.801967 23.981975 37.231976 23.931980 32.501982 21.551983 22.561985 31.731989 31.691991 30.471995 37.581996 22.961997 33.361998 28.581999 21.042003 28.68
The S&P 500 Index has grown at about its average rate of return of 10.30% only 5 times in 82 years.
8%<x<12%
1926 11.62
1959 11.96
1968 11.06
1993 10.08
2004 10.88
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“Fear has a greater grasp on human action than does the impressive weight of historical evidence.Professor Jeremy SiegelStocks for the Long Run ”
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Historically, markets recover from crises
Source: Underlying data is from the Stocks, Bonds, Bills, and Inflation® (SBBI®) Yearbook, by Roger G. Ibbotson and Rex Sinquefield, updated annually.
Past performance is no guarantee of future results. Hypothetical value of $1 invested at the beginning of 1926. Assumes reinvestment of income and no transaction costs or taxes. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index.
© 2009 Morningstar, Inc. All rights reserved. 3/1/2009
Large stocks are represented by the Standard & Poor’s 500, which is an unmanaged group of securities and considered to be representative of the stock market in general. Government bonds are represented by the 20-year U.S. government bond, Treasury bills by the 30-day U.S. Treasury bill, and inflation by the Consumer Price Index. Underlying data is from the Stocks, Bonds, Bills, and Inflation® (SBBI®) Yearbook, by Roger G. Ibbotson and Rex Sinquefield, updated annually.
Stocks represent ownership in a corporation, while bonds, if held to maturity, offer a fixed rate of return and fixed principal value. Small company stocks are generally more volatile than large company stocks. Government bonds and treasury bills are guaranteed by the full faith and credit of the U.S. government as to the timely payment of principal and interest, while corporate bonds are not guaranteed.
$9,549$2,049
$99
$21
$12
Great Depression
Sept 1929 – June 1932
WWII
Oct 1939 – Dec 1941
1970s Oil Crisis
Jan 1973 –Oct 1974
1987 Crash
Oct 5 –Oct 19 1987
Dot comand 9/11
March 2000 –Oct 2002
0.10
1
10
100
1,000
$10,000
1926 1936 1946 1956 1966 1976 1986 1996 2006
Compound annual return 1926 – 2008:Small company stocks 11.7%
Government bonds 5.7% Inflation 3.0%Large company stocks 9.6% Treasury bills 3.7%
SECTION 2
Integrated Planning
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Your goal, our focus
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Regardless of market conditions, here’s what you should do
Revisit your financial plan periodically
Create a financial plan to guide your decisions
Discuss and outline your short- and long-term goals
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A 360° view of your financial lifeA financial plan can
Coordinate all your goals and finances
Evaluate where you stand today versus your goals
Identify potential insurance needs
Assess your cash flow needsReview your investments and asset allocation strategy
Address estate planning needs
A financial plan is not set in stone
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A financial goal analysis can help determine the
likelihood of reaching your goals
What happens if you get average returns?
What happens if you experience bad market conditions?
What is your probability of success?
Are you in your confidence zone?
Important: The projections or other information generated by FGA regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results.
Likelihood of funding all goals
Estimated % of goals funded
Average return
?%Bad timing
?%
Probability of success ?%? Confidence zone
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Lessons learned … investment disciplines to follow
Lessons Learned Emotion is the biggest obstacle to investor success
Periodic and painful declines are part of equity investing
Diversification is never out of style
Investment Disciplines Build a balanced portfolio:
– Based on your time horizon and risk tolerance
– Strategically and insightfully constructed
– Diversified by asset class, region, sector, and security
Review your portfolio at least once a year; rebalance when your portfolio’s asset allocation shifts away from your original investment goals
Have a plan, stick with it
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Take Away
Write down your short-term and long-term goals to provide a clear sense of direction
Complete a financial plan through an online vendor or your financial advisor and review annually
Maximize your annual retirement contribution in a 401(k), 403(b), 457, Traditional IRA, or Roth IRA