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Current Market Conditions & Investor Behavior

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A 4th quarter guide to current market and economic conditions. Lessons from

A 4th quarter guide to current market and economic conditions. Lessons from

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  • 1. Current Market Conditions and Investor Behavior Barry Mendelson, CFP® 925-988-0330 x22 [email_address] As of September 30, 2010
  • 2. Opinions expressed are those of Barry Mendelson, CFP® and Just Plans Etc. This presentation should not be construed as investment advice. The information contained in this presentation is compiled from sources believed to be reliable. Investments in securities involve the risk of loss. Past performance is no guarantee of future results. The markets can remain irrational longer than you can remain solvent. Disclosures
  • 3. Barry Mendelson, CFP® Investment management and personal finance guru. More than 15 years experience working for leading financial services companies including Charles Schwab, AXA Rosenberg, Neuberger Berman, and Franklin Templeton. Prior to joining Just Plans Etc. in 2010, was a Vice President in Charles Schwab & Co’s $200 billion investment management division. Certified Financial Planner™ certificate holder since 2008. B.A. in Business Economics & Accounting from U.C. Santa Barbara in 1995. Just Plans Etc. Founded in 1982 and based in Walnut Creek, California - Just Plants Etc. is a fee-only wealth management firm and SEC registered investment advisor. Just Plans provides investment management and financial planning services to more than 100 individual, families, and companies. As a fiduciary, the firm puts the interests of the client above all else. About
  • 4. Agenda
    • Current Market Environment
    • Current Economic Environment
    • Historical Perspective
    • Lessons for the Future
  • 5. Agenda
    • Current Market Environment
  • 6. Returns by Style Jan-10 Mar-10 May-10 Jul-10 Sep-10 1,000 1,050 1,100 1,150 1,200 1,250 Source: Russell Investment Group, Standard & Poor’s, FactSet, J.P. Morgan Asset Management. All calculations are cumulative total return, including dividends reinvested for the stated period. Since Market Peak represe nts period 10/9/07 – 9/30/10 , illustrating market returns since the most recent S&P 500 Index high on 10/9/07. Since Market Low represents period 3/9/09 – 9/30/10 , illustrating market returns since the S&P 500 Index low on 3/9/09. Returns are cumulative returns, not annualized. For all tim e periods, total return is based on Russell - style indexes with the exception of the large blend category, which is reflected by th e S&P 500 Index. Past performance is not indicative of future returns . Data are as of 9/30/10. Jan-07 Jan-08 Jan-09 Jan-10 600 800 1,000 1,200 1,400 1,600 S&P 500 Index S&P 500 Index 2010: +3.9% 3Q10 : +11.3% Since 10/9/07 Peak: - 22.0% 3Q 2010 Since Market Low (March 2009) YTD 2010 Since Market Peak (October 2007) Charts reflect index levels (price change only). All returns and annotations reflect total return, including dividends. Since 3/9/09 Low: +74.3% Value Blend Growth Value Blend Growth Large 10.1% 11.3% 13.0% Large 4.5% 3.9% 4.4% Mid 12.1% 13.3% 14.6% Mid 11.1% 11.0% 10.9% Small 9.7% 11.3% 12.8% Small 7.9% 9.1% 10.2% Value Blend Growth Value Blend Growth Large -27.5% -22.0% -14.8% Large 80.8% 74.3% 73.7% Mid -16.1% -14.6% -14.0% Mid 114.1% 106.0% 98.7% Small -17.9% -16.5% -15.5% Small 103.0% 101.3% 99.5%
  • 7. S&P 500 Index at Inflection Points '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 600 800 1,000 1,200 1,400 1,600 Index level 1,527 1,565 1,141 P/E Ratio (fwd) 25.6x 15.2x 12.3x Dividend yield 1.1% 1.8% 2.1% 10 - yr. Treasury 6.2% 4.7% 2.5% Source: Standard & Poor’s, First Call, Compustat , FactSet, J.P. Morgan Asset Management. Dividend yield is calculated as the annualized dividend rate divided by price, as provided by Compustat . Forward Price to Earnings Ratio is a bottom - up calculation based on the most recent S&P 500 Index price, divided by consensus estimates for earnings in the next twelve months (NTM), and is p rov ided by FactSet Market Aggregates. Returns are cumulative and based on S&P 500 Index price movement only, and do not include the reinvestment of dividends. Past pe rformance is not indicative of future results. Data are as of 9/30/10. S&P 500 Index - 49% Oct. 9, 2002 P/E (fwd) = 14.1 777 Mar. 24, 2000 P/E (fwd) = 25.6 1,527 Dec. 31, 1996 P/E (fwd) = 16.0 741 Sep. 30, 2010 P/E (fwd) = 12.3 1,141 +101% Oct. 9, 2007 P/E (fwd) = 15.2 1,565 - 57% Mar. 9, 2009 P/E (fwd) = 10.3 677 +69% Characteristic Mar - 2000 Oct - 2007 Sep - 2010
  • 8. Equity Scenarios: Bull, Bear, and In-Between 39 . 7 % 19 . 6 % 13 . 6 % 10 . 7 % 9 . 0 % 7 . 9 % 7 . 1 % 6 . 5 % 6 . 1 % 5 . 7 % 1 Yrs 2 Yrs 3 Yrs 4 Yrs 5 Yrs 6 Yrs 7 Yrs 8 Yrs 9 Yrs 10 Yrs 10/9/07 Peak 1,565 Distance Left to Peak 424 S&P 500 Index: Return Needed to Reach 2007 Peak Source: Standard & Poor’s, J.P. Morgan Asset Management. ( Left) Data assume 2.5% annualized dividend yield. Implied values reflect the average geometric total returns required for the S&P 5 00 to reach its 10/9/07 peak of 1,565 over each stated time period. Chart is for illustrative purposes only. Past performance does not guaran tee future results. ( Right) A bear market is defined as a peak - to - trough decline in the S&P 500 Index (price only) of 20% or more. The bull run data reflect the market expansion from the bear market low to the subsequent market peak. All returns are S&P 500 Index returns, and do not include d ivi dends. *Current bull run from 3/9/09 through 9/30/10. Implied avg. annualized total return Implied cumulative total return X% Analysis as of Sep. 30, 2010. Index has risen 68.7% since low of 677. X% 39.7% 43.1% 64.6% 50.3% 54.0% 57.9% 61.8% 65.9% 70.0% 74.3% Recovery So Far 464 Decline Peak to Trough 888 9/30/10 Level 1,141 3/9/09 Trough 677 Bear Market Cycles vs. Subsequent Bull Runs Market Peak Market Low Bear Market Return Length of Decline Bull Run Length of Run Yrs to Reach Old Peak 5/29/46 5/19/47 -28.6% 12 257.6% 122 3.1 yrs 7/15/57 10/22/57 -20.7% 3 86.4% 50 0.9 yrs 12/12/61 6/26/62 -28.0% 6 79.8% 44 1.2 yrs 2/9/66 10/7/66 -22.2% 8 48.0% 26 0.6 yrs 11/29/68 5/26/70 -36.1% 18 74.2% 31 1.8 yrs 1/5/73 10/3/74 -48.4% 21 125.6% 74 5.8 yrs 11/28/80 8/12/82 -27.1% 20 228.8% 60 0.2 yrs 8/25/87 12/4/87 -33.5% 3 582.1% 148 1.6 yrs 3/24/00 10/9/02 -49.1% 31 101.5% 60 4.6 yrs 10/9/07 3/9/09 -56.8% 17 68.7%* - - Average: -35.0% 14 mo's 176.0% 68 mo's 2.2 yrs
  • 9. Various Asset Class Returns 10-yrs 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 3Q10 YTD '00 - '09 Real Estate Real Estate DJ UBS Cmdty MSCI EME Real Estate MSCI EME Real Estate MSCI EME Barclays Agg MSCI EME MSCI EME Real Estate Real Estate 26.4% 13.9% 23.9% 56.3% 31.6% 34.5% 35.1% 39.8% 5.2% 79.0% 18.2% 19.1% 174.5% DJ UBS Cmdty Market Neutral Barclays Agg Russell 2000 MSCI EME DJ UBS Cmdty MSCI EME MSCI EAFE Market Neutral MSCI EAFE MSCI EAFE MSCI EME MSCI EME 24.2% 9.3% 10.3% 47.3% 26.0% 17.6% 32.6% 11.6% 1.1%* 32.5% 16.5% 11.0% 162.0% Market Neutral Barclays Agg Market Neutral MSCI EAFE MSCI EAFE MSCI EAFE MSCI EAFE DJ UBS Cmdty Asset Alloc. Real Estate Real Estate Russell 2000 Market Neutral 15.0% 8.4% 7.4% 39.2% 20.7% 14.0% 26.9% 11.1% -23.8% 28.0% 12.8% 9.1% 108.7% . Barclays Agg Russell 2000 Real Estate Real Estate Russell 2000 Real Estate Russell 2000 Market Neutral Russell 2000 Russell 2000 DJ UBS Cmdty Barclays Agg Barclays Agg 11.6% 2.5% 3.8% 37.1% 18.3% 12.2% 18.4% 9.3% -33.8% 27.2% 11.6% 7.9% 84.8% Asset Alloc. MSCI EME Asset Alloc. S&P 500 Asset Alloc. Asset Alloc. S&P 500 Asset Alloc. DJ UBS Cmdty S&P 500 S&P 500 Asset Alloc. Asset Alloc. 0.6% -2.4% -5.4% 28.7% 12.5% 8.0% 15.8% 7.3% -36.6% 26.5% 11.3% 6.0% 60.8% Russell 2000 Asset Alloc. MSCI EME Asset Alloc. S&P 500 Market Neutral Asset Alloc. Barclays Agg S&P 500 Asset Alloc. Russell 2000 S&P 500 DJ UBS Cmdty -3.0% -3.4% -6.0% 25.2% 10.9% 6.1% 14.9% 7.0% -37.0% 22.5% 11.3% 3.9% 50.9% S&P 500 S&P 500 MSCI EAFE DJ UBS Cmdty DJ UBS Cmdty S&P 500 Market Neutral S&P 500 Real Estate DJ UBS Cmdty Asset Alloc. MSCI EAFE Russell 2000 -9.1% -11.9% -15.7% 22.7% 7.6% 4.9% 11.2% 5.5% -37.7% 18.7% 9.3% 1.5% 41.3% MSCI EAFE MSCI EAFE Russell 2000 Market Neutral Market Neutral Russell 2000 Barclays Agg Russell 2000 MSCI EAFE Barclays Agg Barclays Agg DJ UBS Cmdty MSCI EAFE -14.0% -21.2% -20.5% 7.1% 6.5% 4.6% 4.3% -1.6% -43.1% 5.9% 2.5% 0.8% 17.0% MSCI EME DJ UBS Cmdty S&P 500 Barclays Agg Barclays Agg Barclays Agg DJ UBS Cmdty Real Estate MSCI EME Market Neutral Market Neutral Market Neutral S&P 500 -30.6% -22.3% -22.1% 4.1% 4.3% 2.4% -2.7% -15.7% -53.2% 4.1% 0.1% -0.6% -9.1% Asset Source: Russell, MSCI Inc., Dow Jones, Standard and Poor’s, Barclays Capital, NAREIT, J.P. Morgan Asset Management. The “Asset Allocation” portfolio assumes the following weights: 25% in the S&P 500, 10% in the Russell 2000, 15% in the MSCI EAF E, 5% in the MSCI EMI, 30% in the Barclays Capital Aggregate, 5% in the CS/Tremont Equity Market Neutral Index, 5% in the DJ UBS Commo dit y Index and 5% in the NAREIT Equity REIT Index. Balanced portfolio assumes annual rebalancing. All data except commodities repr ese nt total return for stated period. Past performance is not indicative of future returns. Please see disclosure page at end for index d efi nitions. Data are as of 9/30/10 , except for the CS/Tremont Equity Market Neutral Index, which reflects data through 8/31/10 . “10 - yrs” returns represent cumulative total return and are not annualized. These returns reflect the period from 1/1/00 – 12/31/09. *Market Neutral returns include estimates found in disclosures . Data are as of 9/30/10.
  • 10. The Federal Reserve '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 0 2 4 6 8 10 12 Fed Funds Target Rate and 10 - Year Treasury Yields Source: Federal Reserve, FactSet, J.P. Morgan Asset Management. Data are as of 9/30/10. Grey bars represent Fed tightening cycles Fed Funds Target: 0.0% to 0.25% 10 - year Treasuries: 2.53%
  • 11. Fixed Income Yields, Returns, & Risks U.S. Treasuries # of issues Mkt. Value 12/31/2009 9/30/2010 2009 3Q 2010 +1% -1% 2-Year 1.14% 0.42% 1.29% 0.60% -1.99% 0.83%* 5-Year 2.69 1.27 -1.35 3.31 -4.83 4.83 10-Year 3.85 2.53 -9.76 4.53 -8.63 8.63 30-Year 4.63 3.69 -25.88 4.71 -17.72 17.77 Sector Broad Market 8,249 $15,404 bn 3.68% 2.56% 5.93% 2.48% -4.67% 4.67% MBS 1,313 5,010 4.15 3.26 5.89 0.63 -2.94 2.92 Corporates 3,517 2,885 4.73 3.63 18.68 4.71 -6.72 6.72 Municipals 46,123 1,279 3.62 3.01 12.91 3.40 -8.08 8.08 Emerging Debt 338 524 6.59 5.27 34.23 8.14 -6.77 6.77 High Yield 1,747 882 9.06 7.80 58.21 6.71 -4.18 4.18 Yield Return Impact on Price from 1% Change in Rates Source: U.S. Treasury, Barclay’s Capital, FactSet, J.P. Morgan Asset Management. Fixed income sectors shown above are provided by Barclay’s Capital and are represented by - Broad Market: US Barclay’s Capital In dex; MBS: Fixed Rate MBS Index; Corporate: U.S. Corporates ; Municipals: Muni Bond Index; Emerging Debt: Emerging Markets Index; High Yield: Corporate High Yield Index. Treasury securi tie s data for # of issues and market value based on U.S. Treasury benchmarks from Barclay’s Capital. Yield and return information based on Bellw eth ers for Treasury securities. Change in bond price is calculated using both duration and convexity according to the following formula: New Price = (Price + (Price * - Duration * Change in Interest Rates))+(0.5 * Price * Convexity * (Change in Interest Rates)^2) *Calculation assumes 2 - Year Treasury interest rate falls 0.42% to 0.00% as interest rates can only fall to 0.00%. Chart is for illustrative purposes only. Data are as of 9/30/10. # of issues: 129 Total value : $ 3.711 tn
  • 12. Global Commodities '70 '75 '80 '85 '90 '95 '00 '05 '10 $0 $200 $400 $600 $800 $1,000 $1,200 $1,400 '70 '75 '80 '85 '90 '95 '00 '05 '10 $0 $20 $40 $60 $80 $100 $120 $140 $160 - 3% - 2% - 1% 0% 1% 2% 3% 4% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source: BLS, U.S . Department of Energy, FactSet, J.P. Morgan Asset Management. Data reflect most recently available as of 9/30/10 . Source: IMF, Bloomberg, J.P. Morgan Asset Management . Industrial metals are represented by copper and aluminum consumption. Data are as of 9/30/10. World Oil Consumption Growth Industrial Metals Consumption Growth - 6 % - 4 % - 2 % 0 % 2 % 4 % 6 % 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 EM ex. China China DM ex. US U.S. EM ex. China China DM ex. US U.S. Gold Prices - Nominal and Inflation Adjusted WTI Oil Prices - Nominal and Inflation Adjusted 9/30/10: $79.97 9/30/10: $1,307.00
  • 13. Agenda 2. Current Economic Environment
  • 14. Economic Growth & Composition of GDP - $2,000 $0 $2,000 $4,000 $6,000 $8,000 $10,000 $12,000 $14,000 $16,000 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 -8% -6% -4% -2% 0% 2% 4% 6% 8% 10% Source: BEA, J.P. Morgan Asset Management. Data reflect most recently available as of 9/30/10 . GDP values shown in legend are % change vs. prior quarter annualized and reflect revised 2Q10 GDP. Real GDP % chg at annual rate 20 - yr avg. Latest Real GDP: 2.5% 1.7 % Components of GDP 10.2% Investment ex - housing 70.6% Consumption 20.5% Gov’t Spending Billions, USD 2.5% Housing / Construction - 3.7% Net Exports
  • 15. Economic Expansions and Recessions 0 25 50 75 100 125 1900 1912 1921 1933 1949 1961 1980 2001 - 26.7% - 1.7% - 2.6% - 3.7% - 1.6% - 0.6% - 3.2% - 2.2% - 2.9% - 1.4% - 0.3% - 4.1% 0 yrs 1 yrs 2 yrs 3 yrs 4 yrs 5 yrs 1910 1930 1950 1970 1990 2010 The Great Depression and Post War Recessions Length and severity of recession Great Depression: 26.7% decline in real GDP Most Recent Recession: 4.1% decline in real GDP Source: NBER, BEA, J.P. Morgan Asset Management. Bubble size reflects the severity of the recession, which is calculated as the decline in real GDP from the peak quarter to the trough quarter except in the case of the Great Depression, where it is calculated from the peak year (1929) to the trough year (1933), due to a lack of available quarterly data. Data are as of 9/30/10 . Source: NBER, J.P. Morgan Asset Management. *Chart assumes current expansion continued through September 2010. Data for length of economic expansions and recessions obtained from the National Bureau of Economic Research (NBER). This data can be found at www.nber.org/cycles/ and reflects information through September 2010. For illustrative purposes only. Length of Economic Expansions and Recessions Average Length (months): Expansions: 43 months Recessions: 15 months *
  • 16. Contributors to GDP Growth Economy Source: BEA, NBER, J.P. Morgan Asset Management. Last 50 Years are from 2Q60 – 2Q10 . Last 7 Recessions are measured from peak real GDP to trough real GDP. Last 7 Recoveries are defined as the four quarters fo llo wing the NBER - designated trough quarter. Most Recent Recession is defined from peak real GDP in 4Q07 to trough real GDP in 2Q09. Note that contribution numbers are approximations due to the use of chain - weighted GDP, which is not designed to sum exactly. Mo st recent data as of 9/30/10 . Percent Share Percent Share Percent Share Percent Share Percent Share Overall GDP Growth 3.2 100.0% -1.8 100.0% 5.0 100.0% -4.1 100.0% 3.0 100.0% Less Cyclical Components 2.6 81.2% 0.7 -39.9% 2.0 40.1% 0.6 -15.5% -0.0 -0.8% Consumption Ex-Autos 2.1 66.6% 0.1 -4.0% 2.4 47.9% -1.0 23.4% 1.1 35.6% Commercial Construction 0.1 1.9% -0.1 3.8% -0.1 -2.3% -0.6 14.6% -0.4 -14.8% Net Exports -0.1 -2.5% 0.4 -23.8% -0.6 -12.7% 1.5 -37.4% -0.8 -26.1% Government 0.5 15.2% 0.3 -15.9% 0.4 7.2% 0.7 -16.1% 0.1 4.4% More Cyclical Components 0.6 18.8% -2.5 139.9% 3.0 59.9% -4.8 115.5% 3.0 100.8% Auto Consumption 0.1 3.1% -0.2 11.4% 0.4 7.7% -0.6 15.2% 0.1 3.3% Residential Construction 0.1 2.2% -0.5 27.3% 0.7 14.5% -1.3 32.4% 0.1 4.4% Equipment 0.4 12.9% -0.3 15.7% 0.5 9.1% -1.6 38.0% 1.1 36.1% Change in Inventories 0.0 0.6% -1.5 85.5% 1.4 28.6% -1.2 29.9% 1.7 57.0% Current Recovery (1st Yr) Last 50 Years Last 7 Recessions Last 7 Recoveries (1st Yr) Most Recent Recession
  • 17. Employment '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 -1,000 -800 -600 -400 -200 0 200 400 600 '60 '70 '80 '90 '00 '10 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% Source: BLS, J.P. Morgan Asset Management. Data reflect most recently available as of 9/30/10 . Civilian Unemployment Rate Employment - Total Private Payroll 50 - yr. avg.: 6.0% Source: BLS, J.P. Morgan Asset Management. Data reflect most recently available as of 9/30/10 . Seasonally adjusted Total job gain/loss (thousands) Jan. 2009: - 806K Aug. 2010: 67K Aug. 2010: 9.6%
  • 18. Consumer Finances 10% 11% 12% 13% 14% 15% '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 $0 $10 $20 $30 $40 $50 $60 $70 Personal Savings Rate '60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 0% 2% 4% 6% 8% 10% 12% Annual, % of disposable income Consumer Balance Sheet Trillions of dollars outstanding, not seasonally adjusted Source: ( Left) FRB, J.P. Morgan Asset Management. Data includes households and nonprofit organizations. ( Right) BEA, FRB, J.P . Morgan Asset Management . Household Debt Service Ratio Debt payments as % of disposable personal income, seasonally adjusted Total Assets: $ 67 tn Total Liabilities: $14 tn Homes: 26% Deposits: 11% Pension funds: 17% Other financial assets: 36% Other tangible: 10% Mortgages: 73% Revolving (e.g.: credit cards): 6% Non - revolving: 11% Other Liabilities: 10% YTD 2010: 5.7% 1Q80: 11.2% 3Q10*: 11.9% 3Q07: 14.0% Personal savings rate is calculated as personal savings (after - tax income – personal outlays) divided by after - tax income. Employer and employee contributions to retirement funds are included in after - tax income but not in personal outlays, and thus are implicitly included in personal savings. Savings rate data are as of August 2010. *3Q10 Household Debt Service Ratio is J.P. Morgan Asset Management estimate. All other data are as of 2Q10 .
  • 19. Federal Finances 0% 25% 50% 75% 100% 125% 1940 1950 1960 1970 1980 1990 2000 2010 2020 - 35% - 25% - 15% - 5% 5% 1940 1950 1960 1970 1980 1990 2000 2010 2020 % of GDP, 1940 – 2020 * Federal Debt (Accumulated Deficits) % of GDP, 1940 – 2020* Source: U.S. Treasury, BEA, CBO, OMB , J.P. Morgan Asset Management . 2010 numbers reflect CBO estimates for FY 2010. Other numbers are based on the Administration’s proposed 2011 budget from the OMB. Note : Years shown are fiscal years (Oct. 1 through Sep. 30). Bottom left chart displays federal debt in the hands of the public . Data reflect most recently available as of 9/30/10. Federal Budget Surplus/Deficit *Administration’s proposed 2011 budget Total Projected 2010 Budget Receipts: $2,143 billion Total Projected 2010 Budget Outlays: $3,485 billion Projected Surplus / Deficit: - $ 1,342 billion Source: CBO, J.P. Morgan Asset Management. U.S. Proposed Federal Budget Outlays - 2010 *Administration’s proposed 2011 budget Other 12% Entitlements: Social Security Medicare Medicaid 43% Defense (Discretionary) 20% Non - Defense (Discretionary) 19% Net Interest 6%
  • 20. The economic growth differential Source: J.P. Morgan Global Economics Research, IMF, J.P. Morgan Asset Management. Data are as of July 2010 and are provided by the International Monetary Fund. 2010 and 2011 data are estimates as provided by the IMF. Emerging and Developed Economy GDP growth rates represent quarterly annualized growth estimated by J.P. Morgan Global Economics Research and are as of 2Q10. Data are as of 9/30/10. U.S. GDP Growth World GDP Growth Difference World GDP Growth vs. U.S. GDP Growth Emerging and Developed GDP Growth Emerging Economies Developed Economies - 3% 0% 3% 6% 9% 1970 1975 1980 1985 1990 1995 2000 2005 2010 - 9% - 2% 5% 12% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
  • 21. Consumer Price Index '60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 -3% 0% 3% 6% 9% 12% 15% Source: BLS, J.P. Morgan Asset Management. Data reflect most recently available as of 9/30/10 . CPI values shown are % change vs. 1 year ago and reflect August 2010 CPI data. CPI component weights are as of Dec. 2009 and 12 - month change reflects data through August 2010. Core CPI is defined as CPI excluding food and energy prices. CPI and Core CPI 50 - yr. Avg. Latest Headline CPI: 4.0% 1.2% Core CPI: 4.0% 1.0% % chg vs. prior year CPI Components Weight in CPI 12-month Change Food & Bev. 14.8% 1.0% Housing 42.0% -0.2% Apparel 3.7% -0.3% Transportation 16.7% 4.8% Medical Care 6.5% 3.2% Recreation 6.4% -1.1% Educ. & Comm. 6.4% 1.9% Other 3.5% 3.0% Headline CPI 100.0% 1.2% Less: Energy 8.6% 3.8% Food 13.7% 1.0% Core CPI 77.7% 1.0%
  • 22. Agenda 3. Historical Perspective
  • 23. Monthly: January 1926-December 2009 CRSP data provided by the Center for Research in Security Prices, University of Chicago. The S&P data are provided by Standard & Poor's Index Services Group. US long-term bonds, bills, inflation, and fixed income factor data © Stocks, Bonds, Bills, and Inflation Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield). $8,201 Small Cap (CRSP 6-10 Index) $2,590 Large Cap (S&P 500 Index) $85 Long-Term Government Bonds Index $20 Treasury Bills $12 Inflation (CPI) $10,000 $1,000 $100 $10 $1 $0 1926 1936 1946 1956 1966 1976 1986 1996 2006 2009 Growth of Wealth
  • 24. January 1926 – December 2009 The S&P data are provided by Standard & Poor's Index Services Group. Indexes are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Not to be construed as investment advice. April 1999 Daily Returns Total Month of April Return: 3.9% During this month, the S&P 500 had 10 days of negative returns out of 21 trading days. 1999 Monthly Returns Total Annual Return: 21% During this year, the S&P 500 had 5 out of 12 months with negative returns.
    • Even during periods of positive stock returns, investors may experience substantial volatility.
    • Short-term volatility is a typical characteristic of stock market investing.
    • Long-term returns are the sum of short-term volatility.
    J F M A M J J A S O N D 1 15 30 -2.24% -0.49% -3.11% -2.36% -3.12% -2.74% 21.04% Stocks vs. the Risk-Free Rate S&P 500 $2,048
  • 25. Mid 1970s and Early 1980s Prior to 1979, there were no formal announcements of business cycle turning points. Indices are not available for direct investment; their performance does not reflect the expenses associated with the management of an actual portfolio. For illustrative purposes only. Past performance is not a guarantee of future results and there is always the risk that an investor will lose money. Source: National Bureau of Economic Research (NBER) for economic expansions and recessions data; the S&P data are provided by Standard & Poor’s Index Services Group; US Bureau of Labor Statistics for unemployment data. Recessionary Periods Recession Begins November 1973 Recession Ends March 1975 Unemployment Peaks at 9.0% May 1975 Recession 17 months Recession Begins July 1981 Recession Announced January 6, 1982 Unemployment Peaks at 10.8% Nov/Dec 1982 Recession 17 months Recession Ends November 1982 Recession End Announced July 8, 1983
  • 26. Early 1990s and Early 2000s Indices are not available for direct investment; their performance does not reflect the expenses associated with the management of an actual portfolio. For illustrative purposes only. Past performance is not a guarantee of future results and there is always the risk that an investor will lose money. Source: National Bureau of Economic Research (NBER) for economic expansions and recessions data; the S&P data are provided by Standard & Poor’s Index Services Group; US Bureau of Labor Statistics for unemployment data. Recessionary Periods Recession Begins July 1990 Recession Announced April 25, 1991 Unemployment Peaks at 7.8% June 1992 Recession 9 months Recession Ends March 1991 Recession End Announced December 22, 1992 Recession Begins March 2001 Recession Ends November 2001 Unemployment Peaks at 6.3% June 2003 Recession 9 months Recession Announced November 26, 2001 Recession End Announced July 17, 2003
  • 27. S&P 500 Index (USD) Daily Returns: January 1, 1926-March 31, 2010 Indices are not available for direct investment; its performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results. The S&P data are provided by CRSP (January 1, 1926-August 31, 2008) and Bloomberg (September 1, 2008-March 31, 2010). Returns include reinvested dividends. Bull and bear markets are defined in hindsight using cumulative daily returns. A bear market (1) begins with a negative daily return, (2) must achieve a cumulative return less than or equal to -10%, and (3) ends at the most negative cumulative return prior to achieving a positive cumulative return. All data points which are not considered part of a bear market are designated as a bull market. Performance data represents past performance and does not predict future performance. Average Duration Bull Market: 413 Days Bear Market: 220 Days Average Return Bull Market: 58% Bear Market: -21% Bull and Bear Markets 220% -13% -85% 20% -16% -39% 119% 88% 27% -15% -10% -13% 100% 44% -53% 25% 40% -13% -14% 26% -25% 22% -11% 23% -33% 83% -11% 99% -26% 19% -11% -16% 26% 53% 91% -13% 121% -11% 26% -13% 18% 69% -21% -11% 44% -27% 15% 96% -11% 59% -27% -10% -21% -32% 56% -12% 38% -45% 22% -13% 50% -13% 38% -15% 27% -13% 26% -10% 21% -16% 48% -20% 78% -11% 156% -33% 73% -10% 16% -19% 303% -11% 37% 50% -19% -12% 23% -11% 13% -47% 21% -14% 113% -55% 03/09/2009 -55% 3/31/2010 -20% 1% 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
  • 28. Monthly: January 1926-December 2009 The S&P data are provided by Standard & Poor’s Index Services Group. One-Month Treasury Bills © Stocks, Bonds, Bills, and Inflation Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield). Indexes 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 of future results. Values change frequently and past performance may not be repeated. There is always the risk that an investor may lose money. Even a long-term investment approach cannot guarantee a profit. Economic, political, and issuer-specific events will cause the value of securities, and the portfolios that own them, to rise or fall. Because the value of your investment in a portfolio will fluctuate, there is a risk that you will lose money. Indexes are referred to for comparative purposes only and do not represent similar asset classes in terms of components or risk exposure; thus, their returns may vary significantly. The S&P 500 Index measures the performance of large cap US stocks. One-Month T-Bills measure the performance of US government-issued Treasury bills. Percentage of All Rolling Periods Where S&P 500 Index Outperformed One-Month T-Bills Large Stocks vs. Fixed Income Rolling Time Periods 1 Year 3 Years 5 Years 10 Years 15 Years 20 Years 30 Years 40 Years Total Number of Periods 997 973 949 889 829 769 649 529 Number of Periods S&P 500 Index Outperformed One-Month T-Bills 674 731 723 751 785 769 649 529
  • 29. Historical returns by holding period - 37% - 8% - 15% 0.1% - 2% - 2% 1% 1% - 1% 1% 2% 0.5% 6% 1% 5% 0.3% 51% 43% 32% 14% 28% 23% 21% 11% 19% 16% 17% 9% 18% 12% 14% 7% - 40% - 30% - 20% - 10% 0% 10% 20% 30% 40% 50% 60% 1 - yr. 5 - yr. rolling 10 - yr. rolling 20 - yr. rolling Annual total returns, 1950 - 2009* Range of Stock, Bond, Blended and Cash Total Returns Asset Sources: Factset , Robert Shiller, Strategas/Ibbotson, Federal Reserve, J.P. Morgan Asset Management. *The 20 - yr. cash (T - Bill) returns were calculated using 20 year annualized returns from 1953 – 2009. Data are as of 9/30/10. 50/50 Portfolio 9.0% $560,441 Bonds 6.2% $333,035 Stocks 10.8% $777,670 Annual Avg. Total Return 50/50 Portfolio Bonds Stocks Cash (T - Bills) Cash (T - Bills) 2.1% $151,536 Growth of $100,000 over 20 years
  • 30. $28.6 Trillion as of December 31, 2009
    • In US dollars. Map reflects countries in the MSCI All Country World IMI Index and MSCI Frontier Markets Index.
    • Market cap data is free-float adjusted. MSCI data copyright MSCI 2009, all rights reserved. Vietnam data provided by MFMI. Many small nations not displayed. Totals may not equal 100% due to rounding. For educational purposes; should not be construed as investment advice. 1. An example large cap stock provided for comparison.
    World Market Capitalization MSCI Index Affiliation  Developed Markets  Frontier Markets  Emerging Markets SCALE Ten Billion One Trillion
  • 31. Mutual fund flows - $60 - $40 - $20 $0 $20 Aug '07 Feb '08 Aug '08 Feb '09 Aug '09 Feb '10 Aug '10 Source: Investment Company Institute, J.P. Morgan Asset Management. Data include flows through August 2010 and exclude ETFs. ICI data are subject to periodic revisions. International equity flows are inclusive of emerging market, global equity and regional equity flows. Hybrid flows include asset allocation, balanced fund, flexible portfolio and mixed income flows. Data are as of 9/30/10. Difference between net flows into stock and bond funds Net fund flows (monthly) Billions, USD, U.S. and international funds Billions, USD, U.S. and international funds Equity flows Fixed income flows Bond flows exceeded equity flows by $47 billion in Aug ’ 10 Fund Flows Billions, USD AUM YTD 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 Domestic Equity 3,471 (45) (39) (151) (48) 11 31 111 130 (25) 54 260 176 World Equity 1,242 27 31 (82) 139 148 105 67 23 (3) (22) 50 11 Taxable Bond 2,067 188 307 20 98 45 26 3 39 124 76 (36) 8 Tax-exempt Bond 513 28 69 8 11 15 5 (14) (7) 16 12 (14) (12) Hybrid 653 12 23 (19) 24 7 25 43 32 8 10 (31) (14) Money Market 2,827 (496) (539) 637 654 245 62 (157) (263) (46) 375 159 194 - $60 - $40 - $20 $0 $20 $40 $60 Aug '07 Feb '08 Aug '08 Feb '09 Aug '09 Feb '10 Aug '10
  • 32. Agenda 4. Lessons for the Future
  • 33. Lessons for the future
    • Define your goals
    • Create a plan
    • Put it into action
    • Stay on track
  • 34. Barry Mendelson, CFP® 925-988-0330 ext. 22 [email_address] www.JustPlans-Etc.com 1399 Ygnacio Valley Rd, Suite 24 Walnut Creek, CA 94598 Contact info
  • 35. Index Definitions
  • 36. Index Definitions
  • 37. Additional Risks & Disclosures Derivatives may be riskier than other types of investments because they may be more sensitive to changes in economic or market conditions than other types of investments and could result in losses that significantly exceed the original investment. The use of derivatives may not be successful, resulting in investment losses, and the cost of such strategies may reduce investment returns. There is no guarantee that the use of long and short positions will succeed in limiting an investor's exposure to domestic stock market movements, capitalization, sector swings or other risk factors. Investing using involving long and short selling strategies may have higher portfolio turnover rates. Short selling involves certain risks, including additional costs associated with covering short positions and a possibility of unlimited loss on certain short sale positions. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for accounting, legal or tax advice. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation. NOT FDIC INSURED - NO BANK GUARANTEE - MAY LOSE VALUE Past performance is no guarantee of comparable future results. Diversification does not guarantee investment returns and does not eliminate the risk of loss. Bonds are subject to interest rate risks. Bond prices generally fall when interest rates rise. The price of equity securities may rise, or fall because of changes in the broad market or changes in a company’s financial condition, sometimes rapidly or unpredictably. These price movements may result from factors affecting individual companies, sectors or industries, or the securities market as a whole, such as changes in economic or political conditions. Equity securities are subject to “stock market risk” meaning that stock prices in general may decline over short or extended periods of time. Small - capitalization investing typically carries more risk than investing in well - established "blue - chip" companies since smaller companies generally have a higher risk of failure. Historically, smaller companies' stock has experienced a greater degree of market volatility than the average stock. Mid - capitalization investing typically carries more risk than investing in well - established "blue - chip" companies. Historically, mid - cap companies' stock has experienced a greater degree of market volatility than the average stock. Real estate investments may be subject to a higher degree of market risk because of concentration in a specific industry, sector or geographical sector. Real estate investments may be subject to risks including, but not limited to, declines in the value of real estate, risks related to general and economic conditions, changes in the value of the underlying property owned by the trust and defaults by borrower. International investing involves a greater degree of risk and increased volatility. Changes in currency exchange rates and differences in accounting and taxation policies outside the U.S. can raise or lower returns. Also, some overseas markets may not be as politically and economically stable as the United States and other nations. Investments in emerging markets can be more volatile. As mentioned above, the normal risks of investing in foreign countries are heightened when investing in emerging markets. In addition, the small size of securities markets and the low trading volume may lead to a lack of liquidity, which leads to increased volatility. Also, emerging markets may not provide adequate legal protection for private or foreign investment or private property. Investments in commodities may have greater volatility than investments in traditional securities, particularly if the instruments involve leverage. The value of commodity - linked derivative instruments may be affected by changes in overall market movements, commodity index volatility, changes in interest rates, or factors affecting a particular industry or commodity, such as drought, floods, weather, livestock disease, embargoes, tariffs and international economic, political and regulatory developments. Use of leveraged commodity - linked derivatives creates an opportunity for increased return but, at the same time, creates the possibility for greater loss.