Cornerstones of Investing Building a long-term investment strategy September 2009 Diane Farber, CFP® CIMA® – First Vice President – Investments Advisory & Brokerage Services 325 North Old Woodward Ave, Ste. 200 Birmingham, MI 48009-6169 248-645-7048 [email_address]
Diane Farber, CFP ® , CIMA ® , First Vice President- Investments Birmingham, MI
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
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.
” Benjamin Graham The intelligent investor is likely to need considerable willpower to keep from following the crowd. “
Cornerstones of Investing Define specific goals Diversify among investment types Stay invested Periodically review your portfolio
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: Between 1970 and 2004, the average amount of time spent in retirement increased by 48% (from 13 to 19.2 years). 1 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
Inflation impacts the returns of stocks, bonds and cash Average 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.
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. Historical Review of Market Leadership – Year by Year: 1992 – 2008 Mid Growth -44.3% Int’l -43.4% Small Growth -38.5% Mid Value -38.4% Large Growth -38.4% S&P 500 -37.0% Large value -36.9% Small value -28.9% HFRI 1 -26.4% U.S. Bonds 5.2% 2008 Small Value -9.8% U.S. Bonds 4.3% U.S. Bonds 2.4% U.S. Bonds 4.3% U.S. Bonds 4.1% Small Growth -30.3% Int’l -21.4% Small Growth -22.4% Small Value -1.5% Small Value -6.5% Int’l 1.8% U.S. Bonds 3.6% Int’l 11.2% U.S. Bonds -2.9% Large Growth 2.9% Int’l -12.2% Mid Value -1.4% Large Growth 9.1% Small Growth 4.2% Large Growth 6.3% HFRI 20.5% Large Growth -27.9% Large Growth -20.4% Large Growth -22.4% U.S. Bonds -0.8% Small Growth 1.2% U.S. Bonds 9.7% Int’l 6.1% U.S. Bonds 18.5% Small Growth -2.4% U.S. Bonds 9.8% Large Growth 5.0% Large Value -0.2% Mid Growth 10.7% Small Value 4.7% HFRI 7.7% S&P 500 28.7% Mid Growth -27.4% Mid Growth -20.2% Int’l -14.2% Mid Value -0.1% Mid Value 5.1% Small Growth 13.0% Small Growth 11.3% Small Value 25.8% Mid Growth -2.2% S&P 500 10.1% U.S. Bonds 7.4% S&P 500 5.5% HFRI 11.7% S&P 500 4.9% S&P 500 10.9% Large Growth 29.8% S&P 500 -22.1% S&P 500 -11.9% Mid Growth -11.8% Large Value 7.4% U.S. Bonds 8.7% Mid Growth 22.5% Mid Growth 17.5% HFRI 31.0% Mid Value -2.1% Mid Growth 11.2% S&P 500 7.6% U.S. Bonds 7.0% Small Growth 13.4% Large Growth 5.3% Small Growth 14.3% Large Value 30.0% Int’l -15.9% Small Growth -9.2% S&P 500 -9.1% S&P 500 21.0% Large Value 15.6% HFRI 23.4% Mid Value 20.3% Small Growth 31.0% Large Value -2.0% Small Growth 13.4% Small Growth 7.8% Small Growth 7.1% S&P 500 15.8% Large Value 7.1% Mid Growth 15.5% Mid Value 38.1% Large Value -15.5% Large Value -5.6% Large Value 7.0% Int’l 27.0% HFRI 16.0% Large Growth 30.5% Small Value 21.4% Mid Growth 34.0% Small Value -1.6% Mid Value 15.6% Mid Growth 8.7% HFRI 10.5% Mid Value 20.2% HFRI 10.6% Large Value 16.5% Int’l 38.6% Small Value -11.4% HFRI 0.4% HFRI 9.1% Large Growth 33.2% Mid Growth 17.9% Small Value 31.8% Large Value 21.6% Mid Value 34.9% S&P 500 1.3% Large Value 18.1% Large Value 13.8% Int’l 11.2% Large Value 22.3% Mid Growth 12.1% Int’l 20.3% Mid Growth 42.7% Mid Value -9.7% Mid Value 2.3% U.S. Bonds 11.6% Small Growth 43.1% Int’l 20.0% S&P 500 33.4% HFRI 21.8% Large Growth 37.2% HFRI 2.6% Small Value 23.8% HFRI 21.3% Mid Growth 11.4% Small Value 23.5% Mid Value 12.7% Small Value 22.3% Small Value 46.0% HFRI -4.7% U.S. Bonds 8.4% Mid Value 19.2% HFRI 44.2% S&P 500 28.6% Mid Value 34.4% S&P 500 23.0% S&P 500 37.6% Large Growth 2.7% HFRI 27.9% Mid Value 21.7% Large Growth 11.8% Int’l 26.3% Int’l 13.5% Mid Value 23.7% Small Growth 48.5% U.S. Bonds 10.3% Small Value 14.0% Small Value 22.8% Mid Growth 51.3% Large Growth 38.7% Large Value 35.2% Large Growth 23.1% Large Value 38.4% Int’l 7.8% Int’l 32.6% Small Value 29.1% 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992
The myth of the success of the average investor How 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. Average annual total returns: 1988-2007
Feast or Famine: “Average” returns rarely occur year-by-year S&P 500 Index year-by-year total returns from 1926 to 2008 1 (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.
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
A 360° view of your financial life A 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 needs Review your investments and asset allocation strategy Address estate planning needs A financial plan is not set in stone
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
Lessons learned … investment disciplines to follow
Emotion is the biggest obstacle to investor success
Periodic and painful declines are part of equity investing
Diversification is never out of style
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
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