2011 Cabot Investor Conference - Cabot Financial Planning 2011

CABOT’S 22ND ANNUAL INVESTMENT CONFERENCE & LUNCHEON Friday, September 23, 2011

Presented by:TOM VAUTIN, CFA, CFP®, EA - Senior Financial PlannerGREG STEVENS, CFP® - Senior Financial CounselorFINANCIAL PLANNING DURINGUNCERTAIN ECONOMIC TIMES

Planning in an Uncertain Environment • Taxes: Nowhere to Go But Up! – Income Taxes: • “Reprieve” until 2013 • After 2012, higher brackets likely for some taxpayers? • Dividends and capital gains back to 2001 levels? – Payroll Taxes • Temporary tax “cut” in an effort to spur growth • Where do things go from here? – Estate Taxes • Exemption raised to $5 million • Added benefit of portability • Uncertainty after 2012 = need for planning now!*Please refer to the Appendix at the end of this presentation for disclosures.

Not much has changed since 2008 • The Economy and Stock Prices – Recovery, double dip, or long-lasting depression? – Unemployment – Real estate prices – Energy prices – Inflation – Interest rates*Please refer to the Appendix at the end of this presentation for disclosures.

BOTTOM LINE:There is a Lot of Uncertainty Out There!

WHY DO WE INVEST? TO MAKE MONEY! We expect investing will benefit us over the long-term. Range of S&P 500 returns, 1926-2009 (Source: www.schwab.com)*Please refer to the Appendix at the end of this presentation for disclosures.

WHY DO WE INVEST?• But, How Much Money is Enough? – It depends on a few uncertain things: • Investment returns • Inflation • Tax policy – And some certain things: • Your asset allocation • Tax minimization • Most importantly – your financial goals!*Please refer to the Appendix at the end of this presentation for disclosures.

WHY DO WE INVEST?• To Meet Our Financial Goals – Long-term expenses • Retirement • College planning – Shorter-term expenses • Wedding • New car • Medical expenses*Please refer to the Appendix at the end of this presentation for disclosures.

DEVELOP A ROADMAP  The starting point is your current financial situation.  Your goals are the finish line.  Bridge the gap between start and finish.  Which route should you take?*Please refer to the Appendix at the end of this presentation for disclosures.

DEVELOP A ROADMAP• Make realistic assumptions for the uncertain variables. – Historical inflation = 3% – Investment returns based on historical averages – Taxes: Current laws with an educated guess about the future*Please refer to the Appendix at the end of this presentation for disclosures.

WHY DO WE INVEST?• But, How Much Money is Enough? – It depends on a few uncertain things: • Investment returns • Inflation • Tax policy – And some certain things: • Your asset allocation • Tax minimization • Most importantly – your financial goals!*Please refer to the Appendix at the end of this presentation for disclosures.

FOCUS ON WHAT IS MORE CERTAIN • Take inventory of your goals and what you want to accomplish! – Retirement – Vacation home – College expenses – Leaving a legacy*Please refer to the Appendix at the end of this presentation for disclosures.

FOCUS ON WHAT IS MORE CERTAIN• Multi-Year Tax Planning – Keep tax-inefficient investments in tax-deferred accounts • Traditional IRAs • Roth IRAs (Conversion?) • Employer-sponsored plans (401(k), profit sharing plans, etc.) – Always know your marginal tax rate. How much will your next dollar of taxable income cost you? • Tax bracket published in the IRS tables • Phaseouts of tax benefits • Alternative Minimum Tax • State income tax rate*Please refer to the Appendix at the end of this presentation for disclosures.

FOCUS ON WHAT IS MORE CERTAIN• Determine an Appropriate Asset Allocation – Will significantly impact your investment returns over the long-term. – Investment returns in the short-term are uncertain. – Performance of a broad asset allocation over the long- term can be estimated with more confidence. – There is no free lunch. Higher returns come with a price – higher volatility.*Please refer to the Appendix at the end of this presentation for disclosures.

THE EFFICIENT FRONTIER For a given target rate of return, get the most bang for your buck.*Please refer to the Appendix at the end of this presentation for disclosures.

HYPOTHETICAL 50% STOCK PORTFOLIO Asset Class % Money Market Funds 5% US Core Equities 25% US Aggressive Equities 10% US Bonds 20% Foreign Bonds 5% Foreign Equities (Developed) 10% Foreign Equities (Emerging) 5% Alternative 20%*Please refer to the Appendix at the end of this presentation for disclosures.

THE IMPACT OF VOLATILITYAll else equal, lower volatility will result in ahigher portfolio value at the end of the plan. Example: Assume two portfolios with value of $100,000 invested over a 30-year period with an average rate of return of 8% but different volatilities: Portfolio: Higher Volatility Portfolio: Lower Volatility Average Yearly Return 8% 8% Standard Deviation 13% 8% Ending Portfolio Value $819,319 $927,937*Please refer to the Appendix at the end of this presentation for disclosures.

DEVELOP A ROADMAP• Which Allocation Should You Choose? – Quantitative Factors: What the numbers say… • Short-term goals may call for a low-risk and low-return combination or vice-versa for long-term goals – Qualitative Factors: • Is there a certain level of volatility that will keep you awake at night? – More than one possible allocation may result in success.*Please refer to the Appendix at the end of this presentation for disclosures.

DEVELOP A ROADMAP• Potential tradeoff between the math and the “sleep at night” factor. – Investors have recently become more risk averse at the wrong time (sell low and buy high). – EXAMPLE: Retirees may have a longer time horizon than they realize and might benefit from having a riskier portfolio than they are comfortable with.*Please refer to the Appendix at the end of this presentation for disclosures.

TACTICAL ASSET ALLOCATION• An active manager may choose to deviate slightly from the target allocation on a short- term basis. – Attempt to boost investment performance in excess of a benchmark (Alpha). • Overweight or underweight certain asset classes (including cash) • Overweight or underweight certain economic sectors – The manager could be right or wrong. – Examples: Tech bubble rise and fall, recent financial crisis*Please refer to the Appendix at the end of this presentation for disclosures.

MARKET TIMING CAN BE RISKY S&P 500, 1926-2009 (Source: www.schwab.com)*Please refer to the Appendix at the end of this presentation for disclosures.

PUTTING IT ALL TOGETHER• Run Monte Carlo Simulation to find the success rate of your plan – The simulation runs thousands of trials based on the variables: • Taxes • Inflation • Projected investment returns / Asset allocation • Goals – Some of the trials are successful and some are not. A “probability of success” is estimated.*Please refer to the Appendix at the end of this presentation for disclosures.

PUTTING IT ALL TOGETHER• If the estimated success rate is not adequate, make adjustments with the things you can control. – Asset allocation • Expected rate of return • Expected volatility – Goals • Change future standard of living • Change current standard of living (saving rate)*Please refer to the Appendix at the end of this presentation for disclosures.

PUTTING IT ALL TOGETHER CURRENT PLAN: WHAT-IF PLAN: Probability of Success: 46% Probability of Success: 80% Below Confidence Zone In Confidence Zone*Please refer to the Appendix at the end of this presentation for disclosures.

Don’t Forget about Estate Planning• Revocable Trusts – Helps with probate – Offers a vehicle for estate tax planning – Lets you control how your assets are split and who controls them• Beneficiary Designations – Do they fit in with the scope of your overall plan?• Durable Power of Attorney/HC Proxy – Designate who will step in to handle your affairs if you are incapacitated• Advanced Planning – GRAT, CRAT, QPRT, etc. – Annual gifts ($13K per person) – Transfer assets now to exclude future growth from your estate

SUMMARY• In an uncertain environment, you can do things to minimize the uncertainty: • Focus on what you can control. • Remember that the markets historically have gone up more often than they have gone down. • Diversification still works. • Create a multi-year tax minimization strategy. • Develop a roadmap and monitor your progress to gain peace of mind!*Please refer to the Appendix at the end of this presentation for disclosures.

THANK YOU!

APPENDIX: DISCLOSURES• Past performance is not indicative of future results. Investments are not insured and may lose value.• No amount of asset or sector allocation or diversification can protect against principal loss.• Individual security selection may result in returns that deviate from the security’s corresponding benchmark.

2011 Cabot Investor Conference - Cabot Financial Planning 2011

by cabotmoney on Nov 11, 2011

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2011 Cabot Investor Conference - Cabot Financial Planning 2011 — Presentation Transcript