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  • Hello, welcome, etc.
  • When it comes to ourfinancial futures, the decisions we make can have an enormous impact in the years ahead.
  • But there are a lot of challenges facing investors, when you design a plan, including stock market volatility
  • Wall Street and the financial media are another challenge.They can sometimes turn investing into entertainment
  • A good plan should be designed around an investor’s financial AND life goals—and as this chart shows, these goals can cover a wide variety of areas.
  • Like the story of the three little pigs—you don’t want a straw portfolio built with whatever investments are “Hot” right now in the financial media.
  • Nor do you want a “wood” portfolio which is just a collection of investments which may not work well together and don’t necessarily reflect your unique goals and needs.
  • Portfolios should be built with investments that provide proper diversification, work well together and reflect the right balance or risk and potential reward for each investor’s chosen level of risk and time horizon.
  • And we believe that science and academic research are critical to building a prudent portfolio. Great thinkers and economists such as Adam Smith, Frederich Hayek, Paul Samuelson, Merton Miller, Bill Sharpe, Daniel Kahneman and of course Harry Markowitz have provided us with powerful insights into how portfolios should be constructed.
  • When it comes to portfolio construction, we believe investors have three key decisions they need to make. Read slide.
  • From the smartphone in your pocket to the department store where you buy your clothes, many companies that are a big part of our lives are public companies that are listed for trading on a major stock exchange. Not all of them are big with well-known brand names and not all will be successful long-term. However, one of the best opportunities to grow your money over the long-term can come from making an investment in capitalism and the stock market.This chart is a good illustration of the long-term growth of US businesses over the past eighty years.
  • To be an effective “shock absorber,” the portfolio should contain:• Bonds with shorter maturities that have lower correlations historically to stocks. This means the bond typically has a 3 to 5 year “lifespan” and does not go up and down in value at the same time or to the same extent as stocks. Generally, longer maturity bonds entail more risk• Higher-quality bonds that can help dampen portfolio volatility and lower the risk of a default.The chart illustrates the risk and reward to portfolios from fixed income holdings. Of note is the lower volatility of short-term bonds that you can see represented by the standard deviation number (how much the portfolio goes up or down in a year). Note also that investors are typically not properly compensated for the additional risk of longer-term bonds.
  • Now that you understand about not putting all of your eggs in one basket, by investing in both stocks and short-term bonds it just makes sense to apply diversification to the global markets. Today, more than 56% of the total market capitalization is outside of the US markets!
  • This slide depicts the world not according to land mass, but by the size of each country’s stock market relative to the world’s total market . Population, gross domestic product, exports, and other economic measures may influence where people invest. But the map offers a different way to view the universe of equity investment opportunities. If markets are efficient, global capital will migrate to destinations that offer the most attractive risk-adjusted expected returns. Therefore, the relative size and growth of markets may help in assessing the political, economic, and financial forces at work in countries. The slide brings into sharp relief the investible opportunity of each country relative to the world. It avoids distortions that may be created or implied by attention to economic or fundamental statistics, such as population, consumption, trade balances, or GDP. By focusing on an investment metric rather than on economic reports, the chart further reinforces the need for a disciplined, strategic approach to global asset allocation. Of course, the investment world is in motion, and these proportions will change over time as capital flows to markets that offer the most attractive returns.  
  • While the US outperformed almost all other countries in 2012, the long term picture still points to a need for international diversification, with the US coming in 39th out of 45 countries in terms of 10-year stock market returns.
  • This is why we build asset class portfolios that typically contain over 9,000 companies in 45 countries, representing 36 currencies. While we love the great U.S companies, the science suggests that investing in thousands of stocks globally rather than a few can help mitigate the overall risk of the portfolio and may increase your return. The reason is simple: if you own a lot of companies around the world you will eliminate the “company specific risk” that comes when your portfolio is exposed to a reversal that may affect one company or one sector or even one country. Capitalism and creation of wealth is a worldwide phenomena and the countries with the highest — and lowest returns — change year by year. International stocks can be riskier than U.S. stocks and are subject to a variety of additional risks, including currency and political risks. That is why investors must carefully decide how they will allocate the equity portion of their portfolio between U.S. and international stocks.
  • The size and BtM – or value -- effects appear in both US and international markets—strong evidence that the risk factors are systematic across the globe.This chart demonstrates the higher expected returns offered by small cap stocks and value (high-BtM) stocks in the US, non-US developed, and emerging markets. Note that the international and emerging markets data is for a shorter time frame.Small cap stocks are considered riskier than large cap stocks, and value stocks (as defined by a higher book-to-market ratio) are deemed riskier than growth stocks. We believe these higher returns reflect compensation for bearing higher risk.
  • This is some of the key academic research we draw upon to help us build portfolios
  • This is some of the key academic research we draw upon to help us build portfolios
  • This is some of the key academic research we draw upon to help us build portfolios
  • This is some of the key academic research we draw upon to help us build portfolios
  • Rebalancing is an important step that many people neglect when they try to manage their own investments. Without rebalancing, portfolios can drift as the markets change. This drifts can add extra risk to your plan that you never intended or expected.
  • As you can see from this chart, the annually rebalanced portfolio was historically less volatile over the last twenty years. It may not have soared as much during bull markets, but it didn’t decline as much during bear markets. And overall, it offered slightly better performance with less risk than the drifting portfolio.
  • Your future is too important to play games with and take unnecessary chances. We don’t believe you should gamble by trying to time markets or pick winning managers.
  • Beating the S&P 500 isn’t easy. Of the 862 U.S. Equity Funds from 1998 – 2007, only 420, or less than half managed to beat the S&P 500. So you might think, just invest in one of those winning managers, and you’ll do fine.
  • But 5 years on, in 2012, 248 funds (almost 30%) have closed their doors, merging or going out of business.
  • And—five years later--of the original 420 funds that outperformed, 70% failed to sustain their performance or closed their doors.And a few of the underperformers even managed to beat the S&P 500. But there is no predictable pattern to any of this performance up or down. Nothing that we believe offers a sound guide to which manager to invest with for the future.
  • In summary…Read slide
  • Transcript

    • 1. There is no guarantee that the strategies set forth in this presentation will achievetheir intended objectives LWI Financial Inc. (“Loring Ward”) is an investment adviserregistered with the Securities and Exchange Commission. Securities transactionsmay be offered through Loring Ward Securities Inc., member FINRA/SIPCB 13-018 (Exp. 2/15)| |
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    • 8. 8Helping &Protecting FamilyEnjoying &Protecting LifestylePlanningAheadCreating FinancialComfortBuilding aLegacyHelping Children Income Needs Clarifying Vision Managing ResourcesWills and Powerof AttorneyAssisting Parents Leisure Planning Health Challenges Generating Income Estate TransferFunding Education Personal Health Managing Change Minimizing Taxes Charitable GivingRetirement TransitionPlanningProtecting Assetsand BusinessLife TransitionPlanningWorking with anAdvisory TeamLiving Legacy
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    • 12. 12 Diversification neither assures a profit nor guarantees against loss in a declining market.
    • 13. 13Adam SmithFrederich Hayek Paul Samuelson Merton MillerBill Sharpe Harry Markowitz
    • 14. 143
    • 15. 151Risks associated with investing in stocks potentially include increased volatility (up and down movement in the value of your assets) and loss of principal. Indexes are unmanagedbaskets of securities that investors cannot directly invest in. Past performance is no guarantee of future results. Hypothetical value of $1 invested at the beginning of 1927 and keptinvested through December 31, 2012. Assumes reinvestment of income and no transaction costs or taxes. This is for illustrative purposes only and not indicative of any investment. Aninvestment cannot be made directly in an index. Total returns in U.S. dollars. Long Term Government Bonds, One-Month US Treasury Bills, and US Consumer Price Index (inflation),source: Morningstar’s 2013 Stocks, Bonds, Bills, And Inflation Yearbook (2013); Fama/French Total U.S. Market Index provided by Fama/French from Center for Research in SecurityPrices (CRSP) data. Includes all NYSE securities (plus Amex equivalents since July 1962 and NASDAQ equivalents since 1973), including utilities.Growth of $1 Jan. 1, 1927 – Dec. 31, 2012How You Allocate Between Stocks & Short-Term Bonds
    • 16. 16How You Allocate Between Stocks & Short-Term Bonds1Source: One-Month US Treasury Bills, Five-Year US Treasury Notes, and Twenty-Year (Long-Term) US Government Bonds provided by Ibbotson Associates. Six-Month US Treasury Billsprovided by CRSP (1964-1977) and Merrill Lynch (1978-present). One-Year US Treasury Notes provided by the Center for Research in Security Prices (1964-May 1991) and Merrill Lynch (June1991-present). Morningstar data © 2013 Stocks, Bonds, Bills, and Inflation Yearbook (2013), Morningstar. The Merrill Lynch Indices are used with permission; copyright 2013 Merrill Lynch,Pierce, Fenner& Smith Incorporated; all rights reserved. Assumes reinvestment of dividends. Past performance is not indicative of future results. All investments involve risk. Standard deviationannualized from quarterly data. Standard deviation is a statistical measurement of how far the return of a security (or index) moves above or below its average value. The greater the standarddeviation, the riskier an investment is considered to be.Risk and RewardsExamined for Bonds1964–2012
    • 17. 172 How You Allocate Between U.S. & International Stocks
    • 18. 18World Market Capitalization$37.5 Trillion as of December 31, 2012Source: Dimensional Fund Advisors. In US dollars. Market cap data is free-float adjusted from Bloomberg securities data. Many small nations not displayed.Totals may not equal 100% due to rounding. Past Performance is not indicative of future results. All investments involve risk. Foreign securities involveadditional risks including foreign currency changes, taxes and different accounting and financial reporting methods.Capitalization over time($ trillions) Developed Markets Emerging MarketsFrontier MarketsBloomberg Index AffiliationHow You Allocate Between U.S. & International Stocks2
    • 19. 19Past Performance is not indicative of future results. All investments involve risk. Foreign securities involve additional risks including foreign currency changes,taxes and different accounting and financial reporting methods.How You Allocate Between U.S. & International StocksSource: Morningstar Direct 2013. Countries represented by their respective MSCI IMI (net div.). Indexes are unmanaged baskets of securities in which investors cannot directly invest; they do notreflect the payment of advisory fees or other expenses associated with specific investments or the management of an actual portfolio. Past performance is not a guarantee of future results. Allinvestments involve risk, including loss of principal. Foreign securities involve additional risks, including foreign currency changes, political risks, foreign taxes, and different methods of accountingand financial reporting.Ranking of Markets Around the WorldTen-Year Performance in US DollarsAnnualized Returns Year Ending December 31, 20122
    • 20. 20How You Allocate Between U.S. & International Stocks2
    • 21. 213The risks associated with investing in stocks and overweighting small company and value stocks potentially include increased volatility (up and downmovement in the value of your assets) and loss of principal.Your Comfort with Key Risk FactorsSmallCompanyStocksGrowthCompanyStocksValueCompanyStocksLargeCompanyStocksTotal StockMarketIncreasedExpectedReturnsDecreasedRisk andExpectedReturns
    • 22. 22Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee offuture results. US value and growth index data (ex utilities) provided by Fama/French. The S&P data are provided by Standard & Poor’s Index Services Group. CRSP data provided by theCenter for Research in Security Prices, University of Chicago. International Value and Growth data provided by Fama/French from Bloomberg and MSCI securities data. International Smalldata compiled by Dimensional from Bloomberg, StyleResearch, London Business School, and Nomura Securities data. MSCI EAFE Index is net of foreign withholding taxes on dividends;copyright MSCI 2013, all rights reserved. Emerging markets index data simulated by Fama/French from countries in the IFC Investable Universe; simulations are free-float weighted bothwithin each country and across all countries.Values change frequently and past performance may not be repeated. There is always the risk that an investor may lose money. Small company risk: Securities of small firms are often lessliquid than those of large companies. As a result, small company stocks may fluctuate relatively more in price. Emerging markets risk: Numerous emerging countries have experiencedserious, and potentially continuing, economic and political problems. Stock markets in many emerging countries are relatively small, expensive, and risky. Foreigners are often limited in theirability to invest in, and withdraw assets from, these markets. Additional restrictions may be imposed under other conditions. Foreign securities and currencies risk: Foreign securities pricesmay decline or fluctuate because of: (a) economic or political actions of foreign governments, and/or (b) less regulated or liquid securities markets. Investors holding these securities are alsoexposed to foreign currency risk (the possibility that foreign currency will fluctuate in value against the US dollar).Your Comfort with Key Risk Factors3
    • 23. 23The Key Academic Research• Defining Value and Growth: Implications for Returns and TurnoverJim Davis and Inmoo Lee, Dimensional Fund Advisors (August 2008)• The Anatomy of Value and Growth StocksFama, Eugene F., University of Chicago – Graduate School of Business and Kenneth R. French,Dartmouth College – Tuck School of Business; National Bureau of Economic Research(September 2007)• MigrationFama, Eugene and Kenneth R. French, Financial Analysts Journal (June 2007)Dissecting AnomaliesFama, Eugene F., University of Chicago – Graduate School of Business and Kenneth R. French,Dartmouth College – Tuck School of Business; National Bureau of Economic Research (June2007)• Average Returns, B/M, and Share IssuesFama, Eugene F., University of Chicago – Graduate School of Business and Kenneth R. French,Dartmouth College - Tuck School of Business; (May 2007)International Evidence of the Size EffectRizova, Savina, Dimensional Fund Advisors (August 2006)• Multi-Factor InvestingFama Jr., Eugene F., Dimensional Fund Advisors (July 2006)• The Value Premium and the CAPMFama, Eugene F., University of Chicago – Graduate School of Business and Kenneth R. French,Dartmouth College - Tuck School of Business; National Bureau of Economic Research (March2005)
    • 24. 24• The Capital Asset Pricing Model: Theory and EvidenceFama, Eugene F., University of Chicago – Graduate School of Business and Kenneth R. French,Dartmouth College - Tuck School of Business; National Bureau of Economic Research (August2003)• The Corporate Cost of Capital and the Return on Corporate InvestmentFama, Eugene F., University of Chicago – Graduate School of Business and Kenneth R. French,Dartmouth College – Tuck School of Business; (April 1998)• Value Versus Growth: The International EvidenceFama, Eugene F., University of Chicago – Graduate School of Business and Kenneth R. French,Dartmouth College – Tuck School of Business; National Bureau of Economic Research (August1997)• Cross Section of Expected Stock ReturnsFama, Eugene and Kenneth R. French, Journal ofFinance 47 (1992)• Luck Versus Skill in the Cross Section of Mutual Fund ReturnsFama, Eugene F. andFrench, Kenneth R., (December 14, 2009 )• Mutual Fund PerformanceFama, Eugene F. and French, Kenneth R.; National Bureau of Economic Research (June 30,2008)• The Cost of Active InvestingFrench, Kenneth R. (March 13, 2008)• False Discoveries in Mutual Fund Performance: Measuring Luck in Estimated AlphasL. Barras, O. Scaillet, and R. Wermers (July 2006)The Key Academic Research
    • 25. 25• The Informational Efficiency of Stock PricesDavis, James L., Dimensional Fund Advisors (April 2006)• Market Efficiency: A Theoretical Distinction and So What?Markowitz, Harry M., Financial Analysts Journal (2005)• The Efficient Market Hypothesis and Its CriticsMalkiel, Burton G. Princeton University, CEPS Working Paper No. 91 (April 2003)• Passive Investment Strategies and Efficient MarketsMalkiel, Burton G. Princeton University, Princeton University - Bendheim Center for Finance;National Bureau of Economic Research (2003)• Mutual Fund Performance and Manager Style Davis, James L., Dimensional Fund AdvisorsFinancial Analysts Journal (January / February 2001 )• Market Efficiency, Long-term Returns, and Behavioral FinanceFama, Eugene F., University of Chicago Graduate School of Business (February 1997)• Asset Management: Active vs. Passive ManagementSinquefield, Rex A., Dimensional Fund Advisors (October 1995)• The Performance of Mutual Funds in the Period 1945-1964 Jensen, Michael, The Journal ofFinance (May 1968 )• Efficient Markets Hypothesis Fama, Eugene F. ,University of Chicago (1965)• Behavior of Securities Prices — 1965Samuelson, Paul , MIT (1965)• The Statistical Properties of Internationally Diversified PortfoliosDavis, James L., Dimensional Fund Advisors (September 2004)The Key Academic Research
    • 26. 26• What Measures the Benefits of DiversificationStatman, Meir, Santa Clara University - Department of Finance and Jonathan Scheid, Loring WardAdvisor Services (May 2005)How Much Diversification is EnoughStatman, Meir Santa Clara University - Department of Finance (October 2002)• Have Individual Stocks Become More Volatile? An Empirical Exploration of IdiosyncraticRisk?Campbell, John Y., Martin Lettau, Burton G. Malkiel and Yexiao Xu, Harvard University -Department of Economics , New York University - Department of Finance , Princeton University -Bendheim Center for Finance and University of Texas at Dallas - Department of Finance &Managerial Economics (March 2000)• The Statistical Properties of Internationally Diversified PortfoliosDavis, James L., Dimensional Fund Advisors (September 2004)Several recent studies have cast doubt on the diversification benefits of• The Capital Asset Pricing Model: Theory and EvidenceFama, Eugene F., University of Chicago – Graduate School of Business and Kenneth R. French,Dartmouth College - Tuck School of Business; National Bureau of Economic Research (August2003)• What Measures the Benefits of DiversificationStatman, Meir, Santa Clara University - Department of Finance and Jonathan Scheid, Loring WardAdvisor Services (May 2005)• How Much Diversification is EnoughStatman, Meir Santa Clara University - Department of Finance (October 2002)• Diversification and Portfolio RiskHarry Markowitz, University of Chicago (1962)The Key Academic Research
    • 27. 28 The buying and selling of securities for the purpose of rebalancing may have adverse tax consequences.
    • 28. 29Rebalancing and a 50% Stocks/50% Bonds Portfolio1993 – 2012Data source: Center for Research in Security Prices (CRSP), January 2013. Past performance is no indication of future results. All investments involve risk, including loss of principal. Stocks arerepresented by the S&P 500 Index. Bonds are represented by the SBBI Long-Term Bond Index. Indexes are unmanaged baskets of securities in which investors cannot invest and do not reflectthe payment of advisory fees associated with a mutual fund or separate account. Returns assume dividend and capital gain reinvestment.Rebalancing does not guarantee a return or protect against a loss.
    • 29. 30For Illustration Purposes Only
    • 30. 31Average Investor vs. Major Indices1992 – 2012Average stock investor and average bond investor performances were used from a DALBAR study, Quantitative Analysis of Investor Behavior (QAIB),03/2013. QAIB calculates investor returns as the change in assets after excluding sales, redemptions, and exchanges. This method of calculation capturesrealized and unrealized capital gains, dividends, interest, trading costs, sales charges, fees, expenses, and any other costs. After calculating investor returnsin dollar terms (above), two percentages are calculated: Total investor return rate for the period and annualized investor return rate. Total return rate isdetermined by calculating the investor return dollars as a percentage of the net of the sales, redemptions, and exchanges for the period. The fact that buy-and-hold has been a successful strategy in the past does not guarantee that it will continue to be successful in the future. S&P 500 and Fixed Income indexreturns do not include expenses and feesEquities Behavior Gap = 3.96% Fixed Income Behavior Gap = 5.36%
    • 31. 32
    • 32. 33Can Past Performance Predict Future Results?10-Year Annualized Performance of 862 U.S. Equity Funds vs. S&P 500 1998–2007Data source: Center for Research in Security Prices(CRSP), For illustrative purposes only. Mutual fundswere placed in descending order of 10-yearannualized performance, and subsequent 5-yearperformance assumes the same ordering as the 10-year period. The number of funds for the subsequent5-year period represent existing funds from the 10-year period. Eligible universe is share classes of USEquity Open End mutual funds domiciled in the USwith prospectus benchmark of the S&P 500,classified into the US Stock mutual fund asset classby Morningstar Direct with a ten-year annualizedreturn as of Dec. 31, 2007 in Morningstar Direct.Mutual fund universe statistical data provided byMorningstar, Inc.; Indices are not available for directinvestment; therefore, their performance does notreflect the expenses associated with themanagement of an actual portfolio. Pastperformance is no guarantee of future results, andthere is always the risk that an investor may losemoney. S&P 500® is a registered trademark ofStandard & Poor’s Financial Services LLC 2012. Allinvestments involve risk, including loss of principal.
    • 33. 345 Years Later…248 Funds Have Closed Their Doors
    • 34. 355 Years Later, No Predictable Pattern of Performance5-Year Annualized Performance of 862 U.S. Equity Funds vs. S&P 500 2008 - 2012Data source: Center for Research in Security Prices(CRSP), For illustrative purposes only. Mutual fundswere placed in descending order of 10-yearannualized performance, and subsequent 5-yearperformance assumes the same ordering as the 10-year period. The number of funds for the subsequent5-year period represent existing funds from the 10-year period. Eligible universe is share classes of USEquity Open End mutual funds domiciled in the USwith prospectus benchmark of the S&P 500,classified into the US Stock mutual fund asset classby Morningstar Direct with a ten-year annualizedreturn as of Dec. 31, 2007 in Morningstar Direct.Mutual fund universe statistical data provided byMorningstar, Inc.; Indices are not available for directinvestment; therefore, their performance does notreflect the expenses associated with themanagement of an actual portfolio. Pastperformance is no guarantee of future results, andthere is always the risk that an investor may losemoney. S&P 500® is a registered trademark ofStandard & Poor’s Financial Services LLC 2012. Allinvestments involve risk, including loss of principal.
    • 35. 36In Summary
    • 36. 37Questions?37