Is This What Buying Low Feels Like

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  • 1. Perseverance in challenging times. E D U C AT E D I N V E S T O R Is This What Buying Low Feels Like? We regularly hear the investment mantra “buy low and sell high,” which sounds like an easy strategy to follow. However, many investors fail to execute that rule because times like these show us what buying low really feels like — it’s emotionally hard. As many wonder whether we have reached the bottom of the bear market and what may happen next, now is a crucial time for investors to make decisions about how they will position their portfolios going forward. Below, we provide several historical examples that may help investors decide if now is the right time to “buy low.” Reasons for Investing in the Equity Markets Now Trying to Time the Market Bottom Many investors worry about timing the investment of their assets in the markets. During periods of extreme volatility, they wonder whether they should wait until they are sure the market has bounced back from its low before investing their money. We believe timing the tops and bottoms of markets is difficult to achieve with any precision. Let’s look at some illustrations to evaluate the effectiveness and potential drawbacks of trying to identify a market bottom. This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities.
  • 2. *TRadITIoNaL vs. CoRE First, let’s take a look at the scenario of investing $1 million halfway into the aNd saTELLITE INvEsTINg decline of the 2000-2002 bear market, a period in which the S&P 500 declined a traditional portfolio by approximately 48% at its worst point. In this example, that $1 million would typically involves a mix of have grown to approximately $1.5 million five years later if invested in a traditional U.S. stocks, investment portfolio. Alternatively, a $1 million investment in a more broadly diversified Core grade bonds and perhaps and Satellite* portfolio would have grown to $1.8 million in 2006. So, although some international stocks. this hypothetical investor “got in too early” by investing before the equity market In Core and satellite portfolio hit bottom, they actually realized attractive gains after waiting through the design, core investments subsequent decline and recovery. provide a broad foundation comprising U.S. stocks, U.S. EXHIBIT 1: S&P 500 — InveSTIng $1 MIllIon (MM) Half-Way DoWn 3/24/2000–10/23/2006 fixed income and developed market international equities. Value of $1MM Investment at Peak: The main types of risk inherent S&P 500 Index = $1.00MM Traditional = $1.48MM in these investments are Index Levels Core/Satellite = $1.80MM those naturally associated with bond and stock 1500 market returns — interest Invest $1MM at bear rate and equity market market mid-point 1300 risk (similar to the risk in a traditional portfolio). 1100 Investors then surround their core holdings with 900 satellite investments such as emerging market debt, real 700 6/24/01 6/24/00 6/24/04 6/24/06 6/24/03 6/24/02 6/24/05 estate securities and high yield bonds, etc. although these investments introduce Source: gSaM 3/24/00-10/23/06. Please see appendix for asset allocation breakdowns for Traditional and Core/ new types of portfolio risk, Satellite Portfolios. they can also offer strong Returns include cash returns from peak to mid point. The hypothetical historical returns were created with the diversification benefits and benefit of hindsight using the percentage allocations shown in the appendix. Simulated performance results do not reflect actual trading and have inherent limitations. Please see additional disclosures. any changes will have opportunities for skilled an impact on the hypothetical historical performance results, which could be material. Hypothetical performance portfolio managers to capture results have many inherent limitations and no representation is being made that any investor will, or is likely to excess returns. Whatever achieve, performance similar to that shown. In fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved. Portfolios are comprised of underlying indices. the combination of satellites See appendix for Benchmarks and Blend allocation. added to complement the core of a portfolio, the goal is to Now, let’s contrast these figures to a hypothetical investor who said “I’m going to ensure that investors benefit wait until the markets have clearly bounced back before investing my money” and from the risk they assume. deployed their $1 million halfway up during the recovery. 2 This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities.
  • 3. EXHIBIT 2: S&P 500 — InveSTIng $1 MIllIon (MM) Half-Way UP 3/24/2000–10/23/2006 Value of $1MM Investment at Peak: S&P 500 Index = $1.00MM Traditional = $1.43MM Index Levels Core/Satellite = $1.52MM 1500 Invest $1MM at bear market mid-point 1300 1100 900 700 6/24/01 6/24/03 6/24/04 6/24/06 6/24/00 6/24/02 6/24/05 Source: gSaM. Please see appendix for asset allocation breakdowns for Traditional and Core/Satellite Portfolios. Returns include cash returns from peak to mid point of recovery. The hypothetical historical returns were created with the benefit of hindsight using the percentage allocations shown in the appendix. Simulated performance results do not reflect actual trading and have inherent limitations. Please see additional disclosures. any changes will have an impact on the hypothetical historical performance results, which could be material. Hypothetical performance results have many inherent limitations and no representation is being made that any investor will, or is likely to achieve, performance similar to that shown. In fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved. Portfolios are comprised of underlying indices. See appendix for Benchmarks and Blend allocation. In this example, that $1 million would have grown to approximately $1.4 million by October 2006 if invested in a traditional portfolio as compared to approximately $1.5 million if invested in a more broadly diversified Core and Satellite portfolio. Compared to the previous hypothetical investor who invested while the market was still headed downward, this investor had accumulated less wealth regardless of their chosen portfolio structure. The bottom line? In this example, trying to guess the “right” time to get into the market, and/or waiting until the worst was over and the market began to rebound, did not prove to be an effective strategy. This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities. 3
  • 4. avoid the Possibility of Missing the Rebound Although bear markets can be painful for investors, from a historical perspective, they are less prevalent than market gains using the S&P 500 Index as a proxy. Consider that from 1926 through 2008, investors have been rewarded over time with more positive years than negative years. In addition, the positive return years, on average, have been greater than the negative return years. EXHIBIT 3: S&P CalenDaR yeaRS 1926 –2008 negaTIve yeaRS PoSITIve yeaRS average Return –14% +22% number of years 24 (29%) 59 (71%) Source: gSaM, lipper So let’s visit some of the specific “buy low” examples from the past. The picture below highlights some of the worst periods of U.S. equity performance in history, similar to what investors experienced in 2008. For those investors who were able to overcome their emotions and “buy low,” they were rewarded with large port- folio gains in the subsequent year. For investors who could not maintain a long term investment focus and reduced their equity exposure, they locked in losses by “buying high and selling low,” the exact opposite of what they say they want to do. EXHIBIT 4: S&P 500 CalenDaR yeaR anD ToTal annUalIZeD ReTURnS S&P 500 CALENDAR YEAR AND TOTAL ANNUALIZED RETURNS DURING DURIng ReSPeCTIve BeaR MaRKeT PeRIoDS BEAR MARKET PERIODS 1930: –24.9% 1931: –43.3% 1932: –8.2% 1930–1932: –61.0% 1933: 54.0% 1937: –35.0% 1938: 31.1% 1973–1974: –37.2% 1973: –14.7% 1974: –26.5% 1973–1974: –37.2% 1975: 37.2% 2000: –9.1% 2001: –11.9% 2002: –22.1% 2000–2002: –37.6% 2003: 28.7% 2008: –38.5% ??? Source: gSaM, lipper In summary, we believe that although “buying low and selling high” may be hard to execute from an emotional perspective, it is important to work with one’s financial advisor to follow that age-old advice when appropriate. And, if you do decide this is a good opportunity to “buy low,” we believe a broadly diversified Core and Satellite investment approach offers a prudent strategy to help investors achieve their long-term investment goals. For more information on how to diversify your portfolio with a Core and satellite approach, please contact your Financial advisor. 4 This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities.
  • 5. Risk Considerations equity securities are more volatile than bonds and subject to greater risks. Small and mid-sized company stocks involve greater risks than those customarily associated with larger companies. Bonds are subject to interest rate, price and credit risks. Prices tend to be inversely affected by changes in interest rates. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity. emerging markets securities may be less liquid and more volatile and are subject to a number of additional risks, including but not limited to currency fluctuations and political instability. foreign securities may be more volatile than investments in U.S. securities and will be subject to a number of additional risks, including but not limited to currency fluctuations and political developments. High-yield, lower-rated securities involve greater price volatility and present greater credit risks than higher-rated fixed income securities. an investment in real estate securities is subject to greater price volatility and the special risks associated with direct ownership of real estate. appendix exHIBITS 1, 2 TRadITIoNaL CoRE/saTELLITE assET CLassEs BENCHMaRk PoRTFoLIo PoRTFoLIo U.S. large Cap S&P 500 Index 55.0% 16.7% U.S. Mid Cap Russell Mid Cap — 6.6% U.S. Small Cap value Ibbotson associates — 1.8% compiled U.S. Small Cap growth Ibbotson associates — 1.8% compiled International equity MSCI eafe 15.0% 22.1% U.S. fixed Income Barclays aggregate 30.0% 21.0% Bond Commodities S&P/gSCI — 6.3% U.S. ReITs fTSe naReIT — 1.5% U.S. High yield Bond Ibbotson associates — 1.6% compiled emerging Markets equity MSCI eMf — 6.8% emerging Markets Debt JPM eMBI — 7.4% International Small Cap S&P/Citi eMI World ex — 3.9% US TR International ReITs fTSe glbl ReITs ex US — 2.5% 100% 100% This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities. 5
  • 6. Index definitions The s&P 500 Index is the Standard & Poor’s 500 Composite Index of 500 stocks, an unmanaged index of common stock prices. The Index is unmanaged and the figures for the Index do not include any deduction for fees, expenses or taxes. It is not possible to invest directly in an unmanaged index. Ibbotson associates® is a leading authority on asset allocation with expertise in capital market expectations and portfolio implementation. approaching portfolio construction from the top-down through a research-based investment process, its experienced consultants and portfolio managers serve mutual fund firms, banks, broker-dealers, and insurance companies worldwide. Ibbotson associates’ methodologies and services address all investment phases, from accumulation to retirement and the transition between the two. The unmanaged MsCI EaFE Index (unhedged) is a market capitalization-weighted composite of securities in 21 developed markets. The Index is unmanaged and the figures for the Index do not include any deduction for fees, expenses or taxes. It is not possible to invest directly in an unmanaged index. The Barclays Capital U.s. aggregate Index represents an unmanaged diversified portfolio of fixed- income securities, including U.S. Treasuries, investment-grade corporate bonds, and mortgage-backed and asset-backed securities. The Index figures do not reflect any deduction for fees, expenses or taxes. It is not possible to invest directly in an unmanaged index. U.s. Three-Month Treasury Bills mature in three months. like zero-coupon bonds, they do not pay interest prior to maturity; instead they are sold at a discount of the par value to create a positive yield to maturity. Many regard Treasury bills as the least risky investment available to U.S. investors. The FTsE NaREIT U.s. Real Estate Index series is designed to present investors with a comprehensive family of ReIT performance indexes that span the commercial real estate space across the U.S. economy, offering exposure to all investment and property sectors. The s&P goldman sachs Commodity Index (gsCI) is a composite index of commodity sector returns which represents a broadly diversified, unleveraged, long-only position in commodity futures. Standard & Poor’s® and S&P ® are registered trademarks of The Mcgraw-Hill Companies, Inc. and gSCI™ is a trademark of The Mcgraw-Hill Companies, Inc. and have been licensed for use by goldman, Sachs & Co. The Russell Midcap Index measures the performance of the mid-cap segment of the U.S. equity universe. The Russell Midcap Index is a subset of the Russell 1000® Index. It includes approximately 800 of the smallest securities based on a combination of their market cap and current index membership. The Russell Midcap Index represents approximately 31% of the total market capitalization of the Russell 1000 companies. The MsCI EMF Index is the Morgan Stanley Capital International’s market capitalization weighted index composed of companies representative of the market structure of 26 emerging market countries in europe, latin america, and the Pacific Basin. The MSCI eMf Index excludes closed markets and those shares in otherwise free markets that are not purchasable by foreigners. The JP Morgan Emerging Markets Bond Index (JPM EMBI) covers U.S.dollar-denominated Brady bonds, loans and eurobonds. Brady Bonds are dollar-denominated bonds, issued mostly by latin american countries in the 1980s, named after U.S. Treasury Secretary nicholas Brady. s&P Citigroup EMI global Ex-U.s. measures the bottom 20% of institutionally investable capital of developed and emerging (after 9/30/1994) countries, selected by the index sponsor, outside the United States. The FTsE global REIT ex-U.s. Index measures the stock performance of companies engaged in the ownership, disposure and development of the Canadian, european and asian real estate markets. 6 This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities.
  • 7. disclosures These examples are for illustrative purposes only and are not actual results. If any assumptions used do not prove to be true, results may vary substantially. Simulated performance is hypothetical and may not take into account material economic and market factors that would impact the adviser’s decision-making. Simulated results are achieved by retroactively applying a model with the benefit of hindsight. The results reflect the reinvestment of dividends and other earnings, but do not reflect fees, transaction costs, and other expenses, which would reduce returns. actual results will vary. Indices are unmanaged. The figures for the index reflect the reinvestment of dividends but do not reflect the deduction of any fees or expenses which would reduce returns. Investors cannot invest directly in indices. This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. Please see additional disclosures. This material has been prepared by gSaM and is not a product of the goldman Sachs global Investment Research (gIR) Department. The views and opinions expressed may differ from those of the gIR Department or other departments or divisions of goldman Sachs and its affiliates. Investors are urged to consult with their financial advisors before buying or selling any securities. This information may not be current and gSaM has no obligation to provide any updates or changes. opinions expressed are current opinions as of the date appearing in this material only. no part of this material may, without gSaM’s prior written consent, be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorized agent of the recipient. This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities. although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness. We have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public sources. views and opinions expressed are for informational purposes only and do not constitute a recommendation by gSaM to buy, sell, or hold any security. views and opinions are current as of the date of this presentation and may be subject to change, they should not be construed as investment advice. IRs Circular 230 disclosure: goldman Sachs does not provide legal, tax or accounting advice. any statement contained in this communication (including any attachments) concerning U.S. tax matters is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties imposed on the relevant taxpayer. Clients of goldman Sachs should obtain their own independent tax advice based on their particular circumstances. This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities. 7
  • 8. Copyright 2009, goldman, Sachs & Co. all Rights Reserved. Date of first Use: february 20, 2009 / 18685.Mf / PeRS-eI3