INVESTING IN A RECESSION ON’T OSE WICE
Transcript of INVESTING IN A RECESSION ON’T OSE WICE
INVESTING IN A RECESSION - DON’T LOSE TWICE RE-EVALUATE, REFOCUS AND REBUILD
CIFPs
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Agenda
• Capital Market Review– What happened?– Where are we now?– Is this time different?
• Emotional Investing– Emotions and investing don’t mix
• Don’t Lose Twice – Strategies for recovery
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Post-Tech Bust & 9/11 Stock Market Crash Low Interest Rates
GREED Wall Street’s creation of exotic
lending products based on assets (some illiquid)
Lack of regulation/transparency Hedge Funds, Investment Banks & Investors - Excess Leverage/Poor Risk Management
Real Estate Overbuying/ OverbuildingReal Estate Bubble
Inventory Correction Real Estate Devaluation and write-downs
Mark to Market Forced Recapitalization of Financial Institutions’ Balance Sheets
INVESTOR PANIC
2001-2008: U.S. Cycle of Doom, Boom and Gloom
Forced selling of quality, liquid assets (blue chips/treasuries)
Increased Regulation Fiscal Policy Bailouts
Counterparty RiskLiquidity & Insolvency Risk
Increased Cost of Capital
FEAR
Monetary Policy BailoutsRepricing of RiskDe-leveraging
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2008 – A Challenging Year Overall #1 Reason – Every equity market globally was down significantly
2008 Calendar Year Returns
2.6%
-27.6%
6.4%
-33.0%
-21.2%-31.3%
-43.1%
-50%-40%-30%-20%-10%
0%10%
DEX
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Day
Trea
sury
Bill D
EX
S&P/
TSX
TRI
S&P
500
TRI C
AD
$
MSC
IW
orld
CA
D$
MSC
IEA
FEC
AD
$
MSC
I EM
CA
D$
Weekly Market Return Correlations vs. US Equities (Local Currency)
-0.50
0.00
0.50
1.00
ABS
Agen
cyBo
nds
CMBS
Glo
bal H
igh
Yie
ld
Mun
icip
alBo
nds
Trea
sury
Bond
s
Cash
Glo
bal
Corp
orat
es
Asia
ex-
Japa
n
Emer
ging
Mar
kets
Euro
peEq
uitie
s
Glo
bal
Gro
wth
Equi
ties
Glo
bal
Smal
l Cap
Glo
bal
Valu
eEq
uitie
s
Oil
Gol
d
Cana
daEq
uitie
s
Japa
nEq
uitie
s
3 Years3 Months
Source: Morningstar Direct as of December 31, 2008
#2 Reason – Correlations between most assets rose significantly
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Capital Market Overview
-40%
-35%
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
1 Month 3 Month 1 Year 3 Year
TSX DEX BOND UNIVERSE
S&P/TSX COMPOSITE (C$)
S&P 500 (C$)
MSCI EAFE (C$)
Index Returns to March 31, 2009 (CAD)
Source: Morningstar Direct
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Market in Transition – Capitalism Refined or Re-defined?
Reasons why market sentiment has improved:
• G20 Summit trillion dollar commitment through the IMF
• FASB’s decision to suspend mark-to-market accounting
• Increase in regulatory oversight for hedge funds, credit agencies and financial institutions (risk and pay)
• Crackdown on tax havens
• IMF and World Bank reform to allow more influence from China, Brazil and India
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“This Time is Different”… “…are among the most costly four words in market history”, Sir John Templeton
Current economic concern Has this happened before?• Speculative commodity price
bubble bursting led by an oil spike• 1974 and 1990 when an oil shock was a large contributor to the
coming economic malaise
• A financial crisis led by excessive government deregulation resulting in speculative lending
• 1982 after the passage of the 1980 DIDMCA bill – led to the most bank failures since the 1920 recession
• 1920 recession when low margin requirements resulted in overleveraged financial institutions
• Government bailouts of large financial institutions
• 1982 Continental Illinois National Bank & Trust deemed “too large to fail” and resulted in a $4.5 billion U.S. government bailout
• Financial institutions with low capital reserves and excessive leverage forced to merge
• 1982 - 118 Savings & Loan institutions with $43 billion in assets failed between 1980 & 1983 totalling 750 forced mergers
• 9000 banks failed during the 1920 recession
• High cost of capital for corporations
• 1982 when the U.S. Fed Funds rate and Prime rate both exceeded 20% stifling corporate investment activity
• Real Estate market decline led to decreased consumer confidence
• 1990 across most of the U.S.
• Recessionary economic conditions experienced worldwide
• 1990 U.S. recession led to a similar recessionary decline in Canada, Australia, Europe, and Japan
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There Have Always Been Reasons Not to Invest Step back and take a long-term view
Source: Morningstar Research Inc.
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EMOTIONAL INVESTING: EMOTIONS AND INVESTING DON’T MIX
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Source: The Third Annual Congress on the Psychology of Investing, June 1997 (Boston, MA). 1. Kathleen Gurney, Ph.D., Financial Psychology Corporation.
Investment Decisions are 89% Based on Emotion
Which would you prefer?
1. A: To win $80,000B: To have an 80% chance of winning $100,000
or
2. A: To lose $80,000 B: To have an 80% chance of losing $100,000
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The Rational, Irrational, and Emotional Struggle…
For example, on average, stocks returned 12.5% each
year following consumer confidence of 66 or lower
…In volatile markets & when low consumer confidence prevails
(S1060)
Monthly Data 2/28/1969 - 3/31/2009 (Log Scale)
DJIAGain/AnnumWhen: (2/28/1969 - 2/28/2009)
Consumer Gain/ % Confidenceis: Annum of Time
Above 113 0.2 18.9Between 66 and 113 5.9 68.2
* 66and Below 9.6 12.9
632 748 885
10471239146717362054243128783406403147705645668179079358
11075 13108
632 748 885
10471239146717362054243128783406403147705645668179079358
11075 13108
Extreme Optimism = Bearish for Stocks
Extreme Pessimism = Bullish for Stocks
3035404550556065707580859095
100 105 110 115 120 125 130 135 140
3035404550556065707580859095
100 105 110 115 120 125 130 135 140
Dow Jones Industrial Average
Consumer Confidence (Conference Board) Source: The Conference Board
1970 1975 1980 1985 1990 1995 2000 2005
Copyright 2009 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. . www.ndr.com/vendorinfo/ . For data vendor disclaimers refer to www.ndr.com/copyright.htmlSee NDR Disclaimer at
(S1060)
Monthly Data 2/28/1969 - 3/31/2009 (Log Scale)
DJIAGain/AnnumWhen: (2/28/1969 - 2/28/2009)
Consumer Gain/ % Confidenceis: Annum of Time
Above 113 0.2 18.9Between 66 and 113 5.9 68.2
* 66and Below 9.6 12.9
632 748 885
10471239146717362054243128783406403147705645668179079358
11075 13108
632 748 885
10471239146717362054243128783406403147705645668179079358
11075 13108
Extreme Optimism = Bearish for Stocks
Extreme Pessimism = Bullish for Stocks
3035404550556065707580859095
100 105 110 115 120 125 130 135 140
3035404550556065707580859095
100 105 110 115 120 125 130 135 140
Dow Jones Industrial Average
Consumer Confidence (Conference Board) Source: The Conference Board
1970 1975 1980 1985 1990 1995 2000 2005
Copyright 2009 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. . www.ndr.com/vendorinfo/ . For data vendor disclaimers refer to www.ndr.com/copyright.htmlSee NDR Disclaimer at
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Stock Market Cycle & Investor Emotions An investor’s emotional rollercoaster ride through volatile markets
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Oct. 14, 1974
Nov. 2, 1987
1991
October 9, 2000
February 20, 1989
October 5, 1998
Separate your emotions from investment decisions Tune out the noise and keep a longer-term perspective
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Prevent investing based on emotion
What a difference a day makes!
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1/98 4/00 7/02 10/04 1/07
Domestic Equity and ETF Fund Flows S&P 500 Index
Do Not Believe in the “Wisdom” of Crowds
Grow
th o
f $10
K
$18,000
$15,000
$12,000
$9,000
$6,000
$3,000
$0
Investors bought high and sold low
Source: © Copyright 2008 Ned Davis Research, Inc., December 31, 2008. Further distribution prohibited without prior permission. All Rights Reserved. Includes flows of exchange traded funds. Indexes are unmanaged, and one cannot invest directly in an index. Past performance does not guarantee future results.
This chart is for illustrative purposes only and does not reflect the performance of any Franklin, Templeton, Bissett, Mutual Series fund or Quotential Portfolio.
Net F
lows
($Bi
llions
)
$40
$30$20
$10
$0($10)
($20)
($30)($40)($50)
Investors Bought High
Investors Sold Low
12/08
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Bear Markets are What You Make of Them Three types of investors, three strategies…
Pessimistic Peter
Skeptical Sam
Optimistic Olivia
• Sells entire portfolio at every 20% decline and invests in a GIC*
• Reinvests in S&P/TSX Total Return Index when index level reaches previous market peak
• Switches back and forth five times between Jan. 1980 to Dec. 2008
*Represented by Average 1 Year GIC Index based on each period’s 1 year prevailing rates.
•Leaves money invested at every 20% decline
•Decides to stick to a long-term investment strategy
•Stays invested in S&P/TSX Total Return Index and does nothing through all market cycles
• Invests an additional $1000 at each 20% decline in the S&P/TSX Total Return Index
• Chooses to increase equity exposure six times between Jan. 1980 to Dec. 2008 for an additional investment of $6,000 in the S&P/TSX Total Return Index
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Case in Action: Illustrations Demonstrate the Growth of $10,000 Three types of investors, three strategies & three different outcomes
$110,476
$53,834
$134,009
$0
$50,000
$100,000
$150,000
$200,000
Dec-79 Dec-82 Dec-85 Dec-88 Dec-91 Dec-94 Dec-97 Dec-00 Dec-03 Dec-06
- Olivia
- Sam
- Peter
Dec-08
“You can make money in a bear market”
RESULTS:• Olivia’s additional investment of $6,000 provided her $24,000 more than Sam and
$80,000 more than Peter.
• Sam experienced some periods of negative returns but his buy-and hold strategy returned more than double Peter’s strategy
• Peter may have reduced additional losses as the stock market continued to fall further than 20%, but he also missed out on large parts of the subsequent recovery
These examples are hypothetical & intended for illustrative purposes only. Above examples assume: initial investment of $10,000 on Dec. 31/79 in S&P/TSX TRI reinvested distributions and does not account for fees. Peter sells entire portfolio at every 20% decline & invests in average 1 Yr GIC Index based on prevailing rates, reinvests in S&P/TSX TRI when index level reaches previous market peak, and switches back & forth fives times between Jan. 1980 to Dec. 2008; Sam stays invested in the S&P/TSX TRI from Jan. 1980 to Dec. 2008; and Olivia invests an additional $1,000 at each 20% decline in the S&P/TSX TRI and invests an additional $1,000 6 times between Jan. 1980 to Dec. 2008 in the S&P/TSX TR I.
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DON’T LOSE TWICE: STRATEGIES FOR RECOVERY
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Time to Take Action! Where do we go from here?
• Investors are skeptical at best, pessimistic at worst • Start the conversation; if you are not talking to your clients, someone else is!
• Ensure that you and your clients don’t lose twice• Declines have been significant; focus on rebuilding
• Participate in the rebound: history has shown that markets always recover• Stock markets are traditionally a leading indicator of the economic cycle
• Partner with Franklin Templeton Investments for your recovery solutions
“Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.” - Sir John Templeton
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Source: Bloomberg September 17, 1929- March 31, 2009. Bear markets defined as market trends -20% or more from peak to trough. Bull markets defined as period of appreciation between bear markets.
Bull Markets Are Longer and Stronger Current market is not unprecedented
600%
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400%
300%
200%
100%
0%
-100%
Mar
-29
Mar
-34
Mar
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Mar
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Mar
-49
Mar
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Mar
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Mar
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Mar
-69
Mar
-74
Mar
-79
Mar
-84
Mar
-89
Mar
-94
Mar
-99
Mar
-04
Mar
-09
S&P 500 (USD): Bull and Bear Market Returns
Avg. Duration Bear: 23 months Bull: 70 months
152-M 579.2%
43-M 79.8%
151-M 436.1%
56-M 324.3%
36-M -29.6%
5-M -28.0
7-M -22.2%
You are
here
32-M -86.2%
63-M -60.0%
49-M 157.7%
26-M 48.1%
31-M 73.5%
18-M -36.1% 21-M
-48.2%
74-M 125.6%
20-M -27.1%
61-M 228.8%
3-M -33.5 25-M
-48.9%
60-M 101.5%
18-M -49.0%
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* Source: Bloomberg, US$
Recovery resumed during the recession so waiting for the first signs of positive economic growth means missing substantial returns
Recovery resumed during the recession so waiting for the first signs of positive economic growth means missing substantial returns
Bottom to Signal: +38.2%
Why You Should Commit Now Historically, markets start recovering during the recession
• By staying invested, you would have surpassed your previous peak
• Missing the 10 best days from market bottom to previous peak represents 98% of the recovery
98%
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Recovery resumed during the recession so waiting for the first signs of positive economic growth means missing substantial returns
Recovery resumed during the recession so waiting for the first signs of positive economic growth means missing substantial returns
Why You Should Commit Now Historically, markets start recovering during the recession
• By staying invested, you would have surpassed your previous peak
• Missing the 10 best days from market bottom to previous peak represents 95% of the recovery
95%
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Source: Globe HySales, Bloomberg, Market Peak: June 18, 2008, Market Bottom: March 9, 2009 The above example is hypothetical and is intended for illustrative purposes only. It assumes the following rates of return for the following asset classes which are represented by [in brackets]: Equity 27% [Average annualized 2-year return over the last 5 recovery periods for the S&P/TSX Composite TR Index] , Fixed Income 3.45% [DEX Universe Bond Index], High Yield 22% [CFSB High Yield Index] , Treasury Bill 1%, and GIC 3%. The assumed returns illustrated above do not represent the future performance of any Franklin Templeton Funds.
The Cost of Inaction is Significant Now is the time to reposition your clients’ portfolios
T-Bills
GIC
Do Nothing (42% Equity, 58% Fixed Income)Revised Mix (42% Equity, 58% Fixed Income, 18% High Yield)
Original Mix (60% Equity, 22% Fixed Income, 18% High Yield)
Revised Mix (80% Equity, 20% High Yield)
Recovery Time
42% Equity, 58% Fixed Income
$7,261
15m 19m 23m 26m Over 10 years Over 50 years
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Ease into the Markets with Dollar Cost Averaging (DCA) How it works
DCA in Action
Total Investment = $1,200Monthly DCA Amount = $100DCA Term = 12 monthsDCA Avg. Unit Price = $5.50Total Units Purchased = 244
Over time, this results in a loweraverage unit price and a higher
growth potential
DCA in Action - Illustrating How it Works
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33 33
25
20
17
14
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5
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25
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Mth 1 Mth 2 Mth 3 Mth 4 Mth 5 Mth 6 Mth 7 Mth 8 Mth 9 Mth 10 Mth 11 Mth 12$-
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
$8.00
$9.00
Units Purchased Unit Price
25
$0
$5,000
$10,000
$15,000
$20,000
8/00 8/01 8/02 8/03 8/04 8/05 8/06 8/07 8/08
DCA investment Lump sum investment
Power of Dollar Cost Averaging DCA protects your portfolio in a down market
The chart shows DCA investment of $833.33 per month for 12 months vs. a lump sum investment of $10,000 on August 31, 2000 in the S&P/TSX TRI. At the end of the DCA period, DCA outperformed lump sum investment by 29%.
Source: Bloomberg, as of February 28, 2009Does not assume any distributions, reinvestment and fees or charges. This example is for illustrative purposes only and does not reflect the performance of any Franklin Templeton Investments mutual fund.
Down Market
DCA
DCA investment vs. lump sum investment in a down market
29%
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Now is the Time to Take Action!
• Tools to help clients off the fence and committed to this market
• Strategies to help you keep your clients and prospect for new ones
• Solutions to help your clients and your business recover faster and stronger
• Franklin Templeton can help: Re-evaluate, Refocus and Rebuild
“Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.” - Sir John Templeton “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.” - Sir John Templeton
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Ensure Your Clients Don’t Lose Twice – www.dontlosetwice.ca
Visit our website www.dontlosetwice.ca for timely market updates, tools, and strategies to help your clients position their portfolios for recovery
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OR
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