Material prepared by Raymond James for use by our financial advisors. Rational Investing in Irrational Times
Why We’re Here … Understand the current economic situation Assess the implications Provide perspective Look toward the future Answer what questions we can
Something to Think About … “ Be fearful when others are greedy, and be greedy when others are fearful. “ I haven’t the faintest idea as to whether stocks will be higher or lower in a month – or a year – from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up.” – Warren Buffett New York Times op-ed October 16, 2008
What Happened? 2008 saw the fall of once-strong financial institutions. In the United States alone: 1/11 3/16 7/11 9/7 9/14 Lehman Brothers declared $600 billion bankruptcy. Treasury and Fed bailed out AIG . FDIC seized WaMu in the largest-ever U.S. bank failure. Wells Fargo acquired Wachovia . Bank of America announced plan to buy Countrywide . JP Morgan Chase purchased Bear Stearns . FDIC seized IndyMac . U.S. government announced takeover of Freddie Mac and Fannie Mae . Bank of America acquired Merrill Lynch . 9/15 9/16 9/25 10/10
Where We Are Now The Dow Jones Industrial Average is an unmanaged index of 30 widely held stocks. Investors cannot invest directly in an index. Past performance is not indicative of future results. Dow Jones Industrial Average
Looking Forward The historical average annual inflation rate during the time periods where the country was in recession. (Source: InflationData.com) Past Recessions and Inflation
Unemployment Rate Concern Source: Bureau of Labor Past Recessions and Unemployment
But Foreign Trade Adds to Real GDP Growth … Source: Department of Commerce Contribution of Net Foreign Trade to Real GDP Growth, Two-Year Moving Average
And Recent Oil Price Declines Help Oil Price per Barrel
What the Government’s Doing Source: Federal Reserve Fed Funds Rate
… While Experiencing Dramatic Ups and Downs Source: Ibbotson Rolling 12 Quarter Standard Deviation for 50 Years Ended June 30, 2008
Why Market Timing Is So Difficult All investing involves risk and you may incur a profit or a loss. Past performance is not a guarantee of future results. Source: The Hartford, Ned Davis Research. The S&P 500 Index measures changes in stock market conditions based on the average performance of 500 widely held common stocks. It is a market-weighted index calculated on a total return basis with dividend reinvested. The S&P 500 represents approximately 75% of the investable U.S. equity market. Indices are not available for direct investment. Occurred during a bear market Occurred during the rest of a bull market Occurred during the first two months of a bull market S&P 500 Index: The 50 Best Days from 1978 to 2007
Impact of Missing the Market All investing involves risk and you may incur a profit or a loss. Past performance is not a guarantee of future results. Source: The Hartford, Ned Davis Research. The S&P 500 Index measures changes in stock market conditions based on the average performance of 500 widely held common stocks. It is a market-weighted index calculated on a total return basis with dividend reinvested. The S&P 500 represents approximately 75% of the investable U.S. equity market. Indices are not available for direct investment. S&P 500 Index Average Annual Total Returns: 1978 to 2007
Asset Allocation Can Help Manage Risk This table illustrates the issue with following, or “buying into”recent performance. Investors were buying large growth, represented above by the S&P 500 / Barra Growth Index, following four years of outperformance as an asset class. It subsequently performed poorly relative to other asset classes. An investor who sold their large growth holdings in 2002 for a traditionally less volatile asset class such as bonds, represented by the Lehman Brothers Aggregate Bond Index, would have been disappointed yet again by poor relative performance of that asset class in 2003 through 2005. Index returns do not reflect the deduction of fees, trading costs or other expenses. The indices illustrated above are for informational purposes only; the composition of each index is different from the composition of the accounts managed by the investment manager. Investors may not make direct investments into any index. Index performance is for illustrative purposes only and is not indicative of the performance of any security. Past performance is no guarantee of future results. Source: Callan Associates Inc.
Definitions • S&P 500 Index measures the performance of large capitalization U.S. stocks. The S&P 500 is index of 500 stocks, weighted by market value, that are traded on the NYSE, AMEX and NASDAQ. The weightings make each company’s influence on the Index performance directly proportional to that company’s market value. • S&P/Citigroup 500 Growth and S&P/Citigroup 500 Value Indices measure the performance of the growth and value styles of investing in large-cap U.S. stocks. The indices are constructed by dividing the market capitalization of the S&P 500 Index into Growth and Value indices, using style “factors” to make the assignment. The Value index contains those S&P 500 securities with a greater-than-average value orientation, while the Growth index contains those securities with a greater-than-average growth orientation. The indices are weighted by market capitalization. The constituent securities are NOT mutually exclusive. • Russell 2000 Index measures the performance of small-capitalization U.S. stocks. The Russell 2000 is an index, weighted by market value, of the 2,000 smallest stocks in the broad-market Russell 3000 Index. These securities are traded on the NYSE, AMEX and NASDAQ. • Russell 2000 Value and Russell 2000 Growth Indices measure the performance of the growth and value styles of investing in small-cap U.S. stocks. The indices are constructed by dividing the market capitalization of the Russell 2000 Index into Growth and Value indices, using style “factors” to make the assignment. The Value index contains those Russell 2000 securities with a greater-than-average value orientation, while the Growth index contains those securities with a greater-than-average growth orientation. Securities in the Value index generally have lower price-to-book and price-earnings ratios than those in the Growth index. The constituent securities are NOT mutually exclusive. • MSCI EAFE is a Morgan Stanley Capital International Index that is designed to measure the performance of the developed stock markets of Europe, Australasia and the Far East. • LB Agg is the Lehman Brothers Aggregate Bond Index. This index includes U.S. government, corporate and mortgage-backed securities with maturities of at least one year. Asset allocation and diversification do not ensure a profit or protect against a loss. Source: Callan Associates Inc.
Recommendations for Investors Don’t overreact: The temptation to “exit the market” may be nearly overwhelming. Think long term: As Buffett – and history – tell us, at some point, the markets will turn. We don’t know when … or to what degree. So be wary of selling at the bottom – and missing opportunities as the market recovers. Assess your situation: Evaluate your short-term financial needs and reaffirm your longer-term goals. Evaluate your investments: Review your financial plan and your portfolio to help put current events into perspective – and if you conclude it’s needed – make necessary adjustments. Look for opportunities: Once you’ve thoroughly assessed the situation, your holdings and your personal circumstances, you may want to start identifying opportunities for future investment. Securities issued by fundamentally solid companies, backed by expert management and sound policies, may be at historically low prices now. But as the economy turns, they could offer significant potential for appreciation.
Raymond James Financial While no financial firm can be totally unscathed by recent market and economic events, Raymond James Financial continues to fare well in this challenging environment. We attribute this strength in large part to the conservative business principles and thoughtful management strategies that have shaped our company since its inception. We believe that the key to our success lies in our commitment to our clients as well as to these fundamental tenets: • Understanding the whole picture • Long-term perspective • Research & due diligence • Diversification & asset allocation • Risk management • Manager selection & monitoring • Account protection • Planning for the future
Disclosures Holding stocks for the long term does not ensure a profitable outcome. Investing involves risk and investors may incur a profit or a loss. Standard deviation measures the fluctuations of returns around the arithmetic average return of investment. The higher the standard deviation, the greater the variability (and thus risk) of the investment returns. An inverse relationship typically exists between interest rate movements and fixed income prices. Generally, when interest rates rise, fixed income prices fall, and when interest rates fall, fixed income prices generally rise. Investing in small-cap stocks generally involves greater risks and, therefore, may not be appropriate for every investor. U.S. government bonds and Treasury bills are guaranteed by the U.S. government and, if held to maturity, offer a fixed rate of return and guaranteed principal value. U.S. government bonds are issued and guaranteed as to the timely payment of principal and interest by the federal government. Treasury bills are certificates reflecting short-term (less than one year) obligations of the U.S. government.