TIAA Cref Asset Allocation
Transcript of TIAA Cref Asset Allocation
![Page 1: TIAA Cref Asset Allocation](https://reader031.fdocuments.in/reader031/viewer/2022032216/55a5802a1a28ab4c618b46da/html5/thumbnails/1.jpg)
Developing Your Asset Allocation Strategy for Retirement
Developed by Barbara O’Neill, Ph.D., CFP, Rutgers Cooperative ExtensionAdapted by Jean Lown, Ph.D.
Family, Consumer & Human [email protected]
![Page 2: TIAA Cref Asset Allocation](https://reader031.fdocuments.in/reader031/viewer/2022032216/55a5802a1a28ab4c618b46da/html5/thumbnails/2.jpg)
2
Overview
● Asset Allocation Principles● Risk-Return Relationship● Application to TIAA-CREF
Retirement Investment Options » 9 new investment choices (as of
2003)
![Page 3: TIAA Cref Asset Allocation](https://reader031.fdocuments.in/reader031/viewer/2022032216/55a5802a1a28ab4c618b46da/html5/thumbnails/3.jpg)
3
What Is Asset Allocation?
● Process of diversifying portfolio investments among several investment categories to reduce investment risk
● Example: 50% stock, 30% bonds, 10% real estate, 10% cash assets
● Objective: lower investment risk by reducing portfolio volatility
● Loss in one investment may be offset by gains in another
![Page 4: TIAA Cref Asset Allocation](https://reader031.fdocuments.in/reader031/viewer/2022032216/55a5802a1a28ab4c618b46da/html5/thumbnails/4.jpg)
4
The Callan Periodic Table of Investment Returns
● http://www.callan.com/resource/periodic_table/pertbl.pdf
● Illustrates the need for asset allocation
● Shows how various asset classes performed during the last 20 years
● Best performing asset class changes
● One year’s “winner” can be next year’s “loser,” so invest in a variety of assets
![Page 5: TIAA Cref Asset Allocation](https://reader031.fdocuments.in/reader031/viewer/2022032216/55a5802a1a28ab4c618b46da/html5/thumbnails/5.jpg)
5
Why Asset Allocation? Because Market Timing is Futile
● Value of $100 invested in large company stocks (S&P 500 index) from June 1980 to June 2000:
» $2,456 stayed invested entire time
» $613 if you missed the best 15 months
● Biggest market gains are often concentrated in short periods (can’t afford to miss)
![Page 6: TIAA Cref Asset Allocation](https://reader031.fdocuments.in/reader031/viewer/2022032216/55a5802a1a28ab4c618b46da/html5/thumbnails/6.jpg)
6
Second Example: The Futility of Market Timing
● Based on S&P 500 stock market index
● If investor stayed fully invested, return was 41.4%
● If investor missed top 10 trading days of 1998, 1999, and 2000: -41.7% return
● Moral: stay invested in both bull & bear markets
![Page 7: TIAA Cref Asset Allocation](https://reader031.fdocuments.in/reader031/viewer/2022032216/55a5802a1a28ab4c618b46da/html5/thumbnails/7.jpg)
7
Determinants of Portfolio Performance
Asset Allocation
91.5%
Other2.1%
Market Timing1.8%
Security Selection
4.6%
Source: “Determinants of Portfolio Performance II, An Update” by Gary Brinston, Brian D. Singer and Gilbert L. Beebower, Financial Analysts Journal May-June 1991
For illustrative purposes only. Not indicative of any specific investment.
![Page 8: TIAA Cref Asset Allocation](https://reader031.fdocuments.in/reader031/viewer/2022032216/55a5802a1a28ab4c618b46da/html5/thumbnails/8.jpg)
8
The Importance of Asset Allocation
● Asset allocation is the MOST important decision an investor makes (i.e., buying some stock, NOT Coke versus Pepsi)
● Asset allocation determines about 90% of the return variation between portfolios
● This study has been repeated numerous times, by different researchers, with similar results.
![Page 9: TIAA Cref Asset Allocation](https://reader031.fdocuments.in/reader031/viewer/2022032216/55a5802a1a28ab4c618b46da/html5/thumbnails/9.jpg)
9
Downside of Asset Allocation
● A diversified portfolio MAY generate a lower rate of return when compared to a single “hot” asset class (e.g., growth stocks from 1995-99) BUT
● You never know the “hot” asset class in advance (i.e., Callan table)
● Asset allocation reduces volatility to provide a competitive rate of return
![Page 10: TIAA Cref Asset Allocation](https://reader031.fdocuments.in/reader031/viewer/2022032216/55a5802a1a28ab4c618b46da/html5/thumbnails/10.jpg)
10
Factors To Consider
● Investment objective (e.g., retirement)
● Time horizon for a goal (e.g., life expectancy for retirement)
● Amount of money you have to invest
● Your risk tolerance and experience
» Caution about risk tests
● Your age and net worth
![Page 11: TIAA Cref Asset Allocation](https://reader031.fdocuments.in/reader031/viewer/2022032216/55a5802a1a28ab4c618b46da/html5/thumbnails/11.jpg)
11
Major Asset Classes
● Stocks » Large company
growth & value» Mid cap growth &
value» Small growth & value» International
● Bonds» Domestic » International» Corporate» Municipal
● Real estate (e.g., REITs)
● Cash (CDs, I-bonds, MMMFs, Treasury bills)
![Page 12: TIAA Cref Asset Allocation](https://reader031.fdocuments.in/reader031/viewer/2022032216/55a5802a1a28ab4c618b46da/html5/thumbnails/12.jpg)
12
Historical Average Annual Rates of Return
● Small Co. U.S. stocks = 12.6%● Large Co. U.S. stocks = 10.4%● Government Bonds = 5.1%● Treasury Bills = 3.8%● Inflation = 3.1%
![Page 13: TIAA Cref Asset Allocation](https://reader031.fdocuments.in/reader031/viewer/2022032216/55a5802a1a28ab4c618b46da/html5/thumbnails/13.jpg)
13
Stock Capitalization
● Large Cap companies: valued at >$5 billion » ExxonMobil, General Electric, Microsoft
● Mid-Cap: $1-5 billion » Bath & Beyond, Monsanto, Hilton Hotels
● Small-Cap: <$1 billion » Earthlink, FirstFed Financial, Vintage
Petroleum
![Page 14: TIAA Cref Asset Allocation](https://reader031.fdocuments.in/reader031/viewer/2022032216/55a5802a1a28ab4c618b46da/html5/thumbnails/14.jpg)
14
Why Invest Internationally?
● Correlations among world markets are low (e.g., U.S. and foreign stocks)
● World markets (especially small companies) are driven by local dynamics
● Investing in U.S. multinationals does not deliver the same level of diversification
● The benefits of diversification outweigh currency, market, & political risks
● U.S. accounts for less than 1/3 of the world’s equity (stock) markets
![Page 15: TIAA Cref Asset Allocation](https://reader031.fdocuments.in/reader031/viewer/2022032216/55a5802a1a28ab4c618b46da/html5/thumbnails/15.jpg)
15
Other Things to Know About Asset Allocation
● Portfolio risk decreases as the # of asset classes increases
● Best results are achieved over time● Diversify holdings within each asset
category» Stock: different industry sectors» Bonds: different types and maturities
![Page 16: TIAA Cref Asset Allocation](https://reader031.fdocuments.in/reader031/viewer/2022032216/55a5802a1a28ab4c618b46da/html5/thumbnails/16.jpg)
16
![Page 17: TIAA Cref Asset Allocation](https://reader031.fdocuments.in/reader031/viewer/2022032216/55a5802a1a28ab4c618b46da/html5/thumbnails/17.jpg)
17
RISK
● Is a 4 letter word● Remember
2000-2003? » S&P 500 lost 40%
of its value
![Page 18: TIAA Cref Asset Allocation](https://reader031.fdocuments.in/reader031/viewer/2022032216/55a5802a1a28ab4c618b46da/html5/thumbnails/18.jpg)
18
Risk-Return Relationship
● Low risk = low return● High risk = possibility of high return● Risk: chance of loss of principal in the
short run » 2000-2003 most U.S. stocks lost
value (after incredible run-up in prices in 1990s)
![Page 19: TIAA Cref Asset Allocation](https://reader031.fdocuments.in/reader031/viewer/2022032216/55a5802a1a28ab4c618b46da/html5/thumbnails/19.jpg)
19
Relationship Between Risk and Return
Risk HighLow
Expected Return
High
Low
CashEquivalents
U.S. Bonds
Int’l Bonds
Real Estate
U.S. Stocks
Int’l Stocks
For illustrative purposes only. Not indicative of any specific investment.
![Page 20: TIAA Cref Asset Allocation](https://reader031.fdocuments.in/reader031/viewer/2022032216/55a5802a1a28ab4c618b46da/html5/thumbnails/20.jpg)
20
Diversification From Combining Investments
Investment A
Investment B
Portfolio 1
No Diversification
Investment C
Investment D
Portfolio 2
Complete Diversification
Investment EPortfolio 3
Investment F
Some Diversification
For illustrative purposes only. Not indicative of any specific investment
![Page 21: TIAA Cref Asset Allocation](https://reader031.fdocuments.in/reader031/viewer/2022032216/55a5802a1a28ab4c618b46da/html5/thumbnails/21.jpg)
21
Stocks are Risky in Short Run
● Very volatile in sort run (1-5 years)» annual returns -50% to +50%!! » Remember 2000-2003?» 2003 was a great year to buy stocks
when all news was gloom & doom● Large Co. U.S. stocks = 10.7% (avg.
returns since 1926)
![Page 22: TIAA Cref Asset Allocation](https://reader031.fdocuments.in/reader031/viewer/2022032216/55a5802a1a28ab4c618b46da/html5/thumbnails/22.jpg)
22
Time Horizon for Retirement?
● Until the day you retire? ● Until the day you die?
![Page 23: TIAA Cref Asset Allocation](https://reader031.fdocuments.in/reader031/viewer/2022032216/55a5802a1a28ab4c618b46da/html5/thumbnails/23.jpg)
23
Invest for Growth ● There is no such thing as a risk-free
investment!● Retirement $ must grow faster than
inflation to provide financial security» Average inflation = 3.1%
● Risk is relative» Short term volatility=long term growth» Invest in stocks for growth
![Page 24: TIAA Cref Asset Allocation](https://reader031.fdocuments.in/reader031/viewer/2022032216/55a5802a1a28ab4c618b46da/html5/thumbnails/24.jpg)
24
Recent Example
● 2000-2003 was a gut check● Thank goodness some of my portfolio
was in bonds & real estate!» Stocks tanked» Bonds held steady» Real estate saved the day
![Page 25: TIAA Cref Asset Allocation](https://reader031.fdocuments.in/reader031/viewer/2022032216/55a5802a1a28ab4c618b46da/html5/thumbnails/25.jpg)
25
“Safe” Investments are Risky in the Long Run
● Inflation = 3.1%● Government Bonds = 5.1% -3.1% = 2%● Treasury Bills = 3.8% - 3.1% = 0.7%● Subtract the impact of taxes and ‘safe’
investments yield negative returns● You will not reach your goal with low risk
investments
![Page 26: TIAA Cref Asset Allocation](https://reader031.fdocuments.in/reader031/viewer/2022032216/55a5802a1a28ab4c618b46da/html5/thumbnails/26.jpg)
26
Understand Risk Tolerance
● Beware of taking risk tests and settling for a conservative portfolio
● Conservative investors risk outliving their assets
● Life expectancy calculators» http://www.ces.purdue.edu/retirement/Module1/module1b.html
![Page 27: TIAA Cref Asset Allocation](https://reader031.fdocuments.in/reader031/viewer/2022032216/55a5802a1a28ab4c618b46da/html5/thumbnails/27.jpg)
27
The Asset Allocation Process
● Define goals and time horizon
● Assess your risk tolerance
● Identify asset mix of current portfolio
● Create target portfolio (asset model)
● Select specific investments
● Review and rebalance portfolio yearly
![Page 28: TIAA Cref Asset Allocation](https://reader031.fdocuments.in/reader031/viewer/2022032216/55a5802a1a28ab4c618b46da/html5/thumbnails/28.jpg)
28
Tips For Funding a Tax-Deferred Employer Plan
● Diversify across asset classes● Avoid market timing● Choose investments with good historical
performance » Past returns are NO guarantee for the
future!!» <10 year track record is too short!
● Choose funds with low fees
![Page 29: TIAA Cref Asset Allocation](https://reader031.fdocuments.in/reader031/viewer/2022032216/55a5802a1a28ab4c618b46da/html5/thumbnails/29.jpg)
29
The Big Picture
● Same principles can be applied to » 401(k) plans» Individual retirement accounts (IRAs)» Other retirement plans
![Page 30: TIAA Cref Asset Allocation](https://reader031.fdocuments.in/reader031/viewer/2022032216/55a5802a1a28ab4c618b46da/html5/thumbnails/30.jpg)
30
Questions?
![Page 31: TIAA Cref Asset Allocation](https://reader031.fdocuments.in/reader031/viewer/2022032216/55a5802a1a28ab4c618b46da/html5/thumbnails/31.jpg)
31
5 TIAA-CREF Asset Classes
● Guaranteed (low risk; low return)● Fixed-Income (bonds)● Equities (stocks)
» High return; volatile in the short run● Real Estate
» Inflation protection; reduce volatility● Money Market (safe but very low return)
![Page 32: TIAA Cref Asset Allocation](https://reader031.fdocuments.in/reader031/viewer/2022032216/55a5802a1a28ab4c618b46da/html5/thumbnails/32.jpg)
32
Global vs. International
● Global: U.S. and foreign investments● International: “all” foreign
![Page 33: TIAA Cref Asset Allocation](https://reader031.fdocuments.in/reader031/viewer/2022032216/55a5802a1a28ab4c618b46da/html5/thumbnails/33.jpg)
33
TIAA-CREF Options (pre-2003)
● TIAA Traditional● TIAA Real Estate● CREF Money
Market● CREF Social
Choice (bond & stock)
● CREF Stock● Global Equities● Growth● Equity Index
» LOTS of overlap!
![Page 34: TIAA Cref Asset Allocation](https://reader031.fdocuments.in/reader031/viewer/2022032216/55a5802a1a28ab4c618b46da/html5/thumbnails/34.jpg)
34
9 New Fund Choices (2003)
● Real Estate Securities
● Growth & Income● S&P 500 Index● Large Cap Value● Social Choice
Equity
● Mid-Cap Value● Mid-Cap Growth ● Small-Cap Equity● International Equity
![Page 35: TIAA Cref Asset Allocation](https://reader031.fdocuments.in/reader031/viewer/2022032216/55a5802a1a28ab4c618b46da/html5/thumbnails/35.jpg)
35
Murky Mixture
● Few of the CREF funds are “pure”● CREF Stock
» 80% Large-, 15% Mid-, 5% Small-Cap» Some foreign stocks
● Mid-Cap Growth» 59% Large-! 39% Mid-, 2% Small-Cap
● Read Prospectus (or at least the summary)
![Page 36: TIAA Cref Asset Allocation](https://reader031.fdocuments.in/reader031/viewer/2022032216/55a5802a1a28ab4c618b46da/html5/thumbnails/36.jpg)
36
Growth Portfolio: 3 asset classes
● STOCKS for growth» Large-cap Domestic» 10-15% Mid-Cap » 10-15% Small-cap» 10-15% International
● 10-15% Real Estate (to beat inflation)● 10-15% Bonds (to dampen volatility)
![Page 37: TIAA Cref Asset Allocation](https://reader031.fdocuments.in/reader031/viewer/2022032216/55a5802a1a28ab4c618b46da/html5/thumbnails/37.jpg)
37
New Funds Offer Diversity
● Lots of different stock accounts DO NOT mean diversification (overlapping)
● International Equity● Small-cap Equity ● Real Estate Securities (to complement
TIAA Real Estate)
![Page 38: TIAA Cref Asset Allocation](https://reader031.fdocuments.in/reader031/viewer/2022032216/55a5802a1a28ab4c618b46da/html5/thumbnails/38.jpg)
38
Your “Action” List● Review your current asset allocation● Consider your other retirement accounts ● Use the TIAA-CREF web site● Understand risk-return relationship● Talk with a TIAA-CREF rep (at USU)● Sign up for automatic rebalancing
» Limits on moving $ out of TIAA● Re-visit, Reallocate, Rebalance
![Page 39: TIAA Cref Asset Allocation](https://reader031.fdocuments.in/reader031/viewer/2022032216/55a5802a1a28ab4c618b46da/html5/thumbnails/39.jpg)
39
Key Considerations For Successful Investing
● Educate yourself to make informed decisions
● Establish policies and objectives
● Monitor investment performance
● Stick to your plan and stay focused
● If you need help, seek professional advice
![Page 40: TIAA Cref Asset Allocation](https://reader031.fdocuments.in/reader031/viewer/2022032216/55a5802a1a28ab4c618b46da/html5/thumbnails/40.jpg)
40
Financial Planning for Women
● Second Wednesday of the month» 12:30-1:30 in Family Life 318
– bring your lunch» 7-8:30 p.m. at Family Life Center (500 N &
700 E – bottom of Old Main Hill)» February 8 FPW: Investment Basics
● For mo. email news & reminder: Sign up sheet or send email to [email protected]
![Page 41: TIAA Cref Asset Allocation](https://reader031.fdocuments.in/reader031/viewer/2022032216/55a5802a1a28ab4c618b46da/html5/thumbnails/41.jpg)
41
Questions? Comments? Experiences?
Baby Boomer Women Retirement StudyUSU IRB approved researchStep 1: Survey- return by Feb 3 for prize drawingStep 2: Focus Group ($25 compensation)
February 8 FPW: Investment Basics