Market Volatility And The Long Term Investor

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Market Volatility and the Long Term Investor

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Market Volatility And The Long Term Investor

  1. 1. George Salter, CFP® Financial Planning Specialist Guided Portfolio Manager george.salter@smithbarney.com (925) 930-3849 James E. Salter Financial Planning Associate james.salter@smithbarney.com (925) 930-3889 Market Volatility and the Long-Term Investor INVESTMENT PRODUCTS: NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE
  2. 2. 10 /9 1,000 1,100 1,200 1,300 1,400 1,500 1,600 1,700 10 /0 7 /2 3/ 11 07 /6 11 /0 7 /2 0/ 12 07 / 12 4/0 /1 7 8/ 0 1/ 7 1/ Data Source: Consulting Group 1/ 08 15 1/ /0 8 29 / 2/ 0 8 12 / 2/ 0 8 26 3/ /0 8 11 / 3/ 0 8 25 /0 4/ 8 8 4/ /08 22 /0 5/ 8 6/ 5/ 08 20 /0 Past performance is not a guarantee of future results. For informational purposes only. 6/ 8 S&P 500: 10/9/07 to 9/30/08 3/ 6/ 08 The Recent Downturn 17 /0 7/ 8 1 7/ /08 15 / 7/ 0 8 29 / 8/ 0 8 12 8/ /0 8 26 /0 9/ 8 9/ 9/ 08 23 -25.6% /0 8 2
  3. 3. The Medium-Term Focus S&P 500: 9/30/02 to 9/30/08 1,600 1,500 +42% 1,400 1,300 1,200 1,100 1,000 900 800 700 600 2002 2003 2004 2005 2006 2007 2008 Past performance is not a guarantee of future results. For informational purposes only. 3 Data Source: Consulting Group
  4. 4. The Long-Term Focus S&P 500: 9/30/77 to 9/30/08 1,800 1,600 1,400 1,200 1,000 +1,107% 800 600 400 200 0 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 Past performance is not a guarantee of future results. For informational purposes only. 4 Data Source: Consulting Group
  5. 5. A Clearer Perspective S&P 500 on a Percentage Log Scale 2000 to 2002 1987 Bear Market Crash 1973 to 1974 Bear Market 1973 1978 1983 1988 1993 1998 2003 2008 5 Past performance is not a guarantee of future results. For informational purposes only. Data Source: Consulting Group
  6. 6. Is the Market Getting Riskier? “Postponing an attractive purchase because of fear of what the general market might do will, over the years, prove very costly.” Philip A. Fisher 6
  7. 7. Volatility Cycles 1977-2007 Number of Daily Moves in the S&P 500 Index of More Than 1% 150 125 100 75 30-Year Average: 50 57 25 0 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 Past performance is not a guarantee of future results. For informational purposes only. 7 Data Source: Consulting Group
  8. 8. What About the Down Side? Monthly Returns on the S&P 500 January 1978 Through December 2007 100 83 Number of Monthly Returns 77 73 80 60 47 43 37 40 20 0 1/78 - 12/87 1/88 - 12/97 1/98 - 12/07 Positive Monthly Returns Negative Monthly Returns 8 Past performance is not a guarantee of future results. For informational purposes only. Data Source: Consulting Group
  9. 9. A Look at Some Other Popular Asset Classes • Treasury Bonds • Corporate Bonds • Treasury Bills • Other Cash Instruments 9
  10. 10. And the Winner Is . . . Cumulative Return on an Invested Dollar: 1926 Through 2007 $100,000 $15,092 $10,000 $3,255 $1,000 $100 $77 $20 $10 $12 $1 $0 1926 1931 1936 1941 1946 1951 1956 1961 1966 1971 1976 1981 1986 1991 1996 2001 2007 Small Cap Large Cap LT Gov Bonds T-Bills Inflation 10 Past performance is not a guarantee of future results. For informational purposes only. Data Source: Consulting Group
  11. 11. Rates of Return Annualized Returns: 1926 Through 2007 12.5% 10.4% 5.4% 3.7% 3.1% LT Gov Small Large Inflation T-Bills Bonds Stocks Stocks 11 Past performance is not a guarantee of future results. For informational purposes only. Data Source: Consulting Group
  12. 12. Leader of the Pack Top-Performing Asset Class 12/31/45 Through 12/31/07 50 44 43 43 40 Number of Periods 36 30 20 15 11 10 7 10 5 2 0 0 0 Annual Rolling 5 Year Rolling 10 Year Rolling 20 Year LT Gov Stocks T-Bills 12 Bonds Past performance is not a guarantee of future results. For informational purposes only. Data Source: Consulting Group
  13. 13. Where Do We Go From Here? “An investor who has all the answers doesn't even understand the questions.” Sir John Templeton 13
  14. 14. The Bear Facts Declines of 20% or More in the S&P 500: 1950 Through 2007 Decline Recovery (in months) (in months) Peak-to-Trough Date 2000-02 -49% 30.5 57 1990 -20% 3 4 1987 -34% 3 20 1980-82 -27% 19 3 1973-74 -48% 21 70 1968-70 -36% 18 21 1966 -22% 8 7 1962 -28% 6 14 1956-57 -22% 15 11 Average: -31.8% 13.7 23.0 14 Past performance is not a guarantee of future results. For informational purposes only. Data Source: Consulting Group
  15. 15. The Real Story “The true objective for any long-term investor is maximum total real return after taxes.” Sir John Templeton 15
  16. 16. The Case for Waiting Out the Storm Cumulative Growth of Three Portfolios Dec. 31, 1972 Through September 1984 $351,758 Investor #2 Investor #3 stays in stocks $244,301 adds $25,000 $100,000 $93,451 Investor #1 sells stocks, earns 5% return 72 73 74 75 76 77 78 79 80 81 82 83 16 The above represents a hypothetical investment and does not reflect the deduction for investment-management fees or transaction costs. Actual results would be reduced by these costs. Each customer’s specific situation, goals and results may differ. Past performance is not a guarantee of future results. For informational purposes only. Data Source: Consulting Group
  17. 17. Buying at the Top Cumulative Growth January 1962 Through December 2007 $10,000 $2.74 million $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $502,716 62 67 72 77 82 87 92 97 02 07 Treasury Bills Stocks 17 The above represents a hypothetical investment and does not reflect the deduction for investment-management fees or transaction costs. Actual results would be reduced by these costs. Each customer’s specific situation, goals and results may differ. Past performance is not a guarantee of future results. For informational purposes only. Data Source: Consulting Group
  18. 18. Buying at the Bottom Cumulative Growth December 1961 Through December 2007 $10,000 $3.68 million $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $469,367 62 67 72 77 82 87 92 97 02 07 Treasury Bills Stocks 18 The above represents a hypothetical investment and does not reflect the deduction for investment-management fees or transaction costs. Actual results would be reduced by these costs. Each customer’s specific situation, goals and results may differ. Past performance is not a guarantee of future results. For informational purposes only. Data Source: Consulting Group
  19. 19. What the Experts Say About Market Timing “I have never met a person who could forecast the market.” Warren Buffett “Don’t try to buy at the bottom and sell at the top. This can’t be done—except by liars.” Bernard Baruch “There is no basis for assuming the average investor can anticipate market movements more successfully than the general public, of which he is a part.” Benjamin Graham 19
  20. 20. And the Losers . . . “It’s no trick at all to be right on the market.” Jesse Livermore A famous Wall Street trader during the “Roaring ’20s,” Livermore lost his entire fortune in a failed effort to time the stock market. 20
  21. 21. Easy Boat to Miss Annualized Increase in the S&P 500: 1980 Through 2007 20% Net of Dividends 14.4% 15% 11.3% 9.0% 10% 7.0% 5.2% 3.6% 5% 0% Full Period Less the 10 Less the 20 Less the 30 Less the 40 Less the 50 Biggest Up Biggest Up Biggest Up Biggest Up Biggest Up Days Days Days Days Days 21 Past performance is not a guarantee of future results. For informational purposes only. Data Source: Consulting Group
  22. 22. On the Rebound 10 Worst Days for the S&P 500: 1950 Through 10/30/2008 Following Following Following Date Decline Day Week Year -20.5% #1 Oct. 19, 1987 +5.3% +1.3% +23.2% -9.0% #2 Oct. 15, 2008 +4.3% -1.2% NA -8.8% #3 Sept. 29, 2008 +5.3% -4.5% NA -8.3% #4 Oct. 26, 1987 +2.4% +12.3% +37.9% -7.6% #5 Oct. 9, 2008 -1.2% +4.0% NA -6.9% #6 Oct. 27, 1997 +5.1% +7.1% +26.1% -6.8% #7 Aug. 31, 1998 +3.9% +6.9% +7.5% -6.8% #8 Jan. 8, 1988 +1.7% +3.6% -4.8% -6.7% #9 May 28, 1962 +4.6% +3.7% -12.8% -6.6% #10 Sept. 26, 1955 +2.3% -0.3% +17.6% Average: -8.8% +3.3% +13.5% +3.4% 22 Past performance is not a guarantee of future results. For informational purposes only. Data Source: Consulting Group
  23. 23. The Costs of Short-Term Investing Returns on a Buy-and-Hold Approach Versus a Market-Timing Strategy December 1977 Through December 2007 $3.87 million $1.71 million 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 Buy and Hold Market Timing 23 The above represents a hypothetical investment and does not reflect the deduction for investment-management fees or transaction costs. Actual results would be reduced by these costs. Each customer’s specific situation, goals and results may differ. Past performance is not a guarantee of future results. For informational purposes only. Data Source: Consulting Group
  24. 24. A Bad Time for Bad Timing • Bear markets can be points of maximum vulnerability to poor market-timing decisions. • Historically, net cash outflows by investors have marked major market bottoms. 24
  25. 25. A Winning Hand “The stock market is like a gambling casino where the odds are rigged in favor of the players.” Burton Malkiel 25
  26. 26. The Odds Favor the Long-Term Investor Distribution of Returns on the S&P 500: 1926 Through 2007 2006 2004 1993 Up Years: 59 (72%) 1988 2003 1997 2000 Down Years: 23 (28%) 1986 1999 1995 1990 2007 1979 1981 1998 1991 2005 1994 1972 1996 1989 1977 1983 1985 1969 1992 1971 1962 1968 1982 1980 1987 1953 1984 1965 1976 1975 1964 1967 1955 1978 1946 2001 1970 1940 1959 1963 1950 1973 1960 1939 1952 1961 1945 1966 1934 1956 1938 1949 1951 1958 2002 1957 1943 1932 1974 1948 1944 1936 1935 1954 1927 1933 1930 1942 1928 1929 1941 1926 1937 1947 1931 -40% -20% 0% +10% +20% +30% +40% +50% -10% -30% 0% 26 -50% -30% -20% -10% +10% +20% +30% +40% +50% +60% -40% Past performance is not a guarantee of future results. For informational purposes only. Data Source: Consulting Group
  27. 27. More Hits Than Misses Probabilities of Various Annual Returns 1926 Through 2007: Up 10% or more: about 3 in 5 Up 20% or more: about 2 in 5 Up 30% or more: about 1 in 5 Down 10% or more: 1 in 8 Down 20% or more: 1 in 16 Down 30% or more: 1 in 40 27 Past performance is not a guarantee of future results. For informational purposes only. Data Source: Consulting Group
  28. 28. Time Pieces Positive and Negative Returns on the S&P 500: 1945 Through 2007 One-Year Five-Year Ten-Year Periods Periods Periods 48 53 5 53 14 Positive Returns Negative Returns 28 Past performance is not a guarantee of future results. For informational purposes only. Data Source: Consulting Group
  29. 29. In a Nutshell: • Volatility is a fact of life in the stock market. • Over the long run, stocks have offered significantly higher returns than bonds or T-bills. • Market timing can be an expensive undertaking. • Historically, the odds have favored the bulls. “Patience is a necessary ingredient of genius.” Benjamin Disraeli 29
  30. 30. Important Smith Barney Disclosures Past performance is not a guarantee of future results. Each customer’s specific situation, goals and results may differ. This data is presented for informational purposes only. Historical returns do not necessarily account for fees or transaction costs, which may be charged when investing in an actual portfolio or securities. Although the statements of fact and data in this presentation have been obtained from, and are based upon, sources that the firm believes to be reliable, we do not guarantee their accuracy, and any such information may be incomplete or condensed. All opinions included in this presentation constitute the firm’s judgment as of the date of this presentation and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. The charts depicted within this presentation are not indicative of future performance. The data do not reflect the material differences between stocks, bonds, bills and inflation, such as fees (including sales and management fees), expenses or tax consequences. Common stocks generally provide an opportunity for more capital appreciation than fixed income investments but are also subject to greater market fluctuations. Corporate bonds, US Treasury bills and US government bonds fluctuate in value but, if held to maturity, offer a fixed rate of return and a fixed principal value. Government securities are guaranteed as to the timely payment of interest and provide a guaranteed return of principal. The principal value and interest on treasury securities are guaranteed by the US government if held to maturity. The Standard & Poor’s 500 Index is a market capitalization-weighted index of 500 widely held common stocks. Investors cannot directly invest in an index. Actual results may vary based on an investor’s investment objectives and portfolio holdings. Citigroup Inc. and its affiliates do not provide tax or legal advice. To the extent that this material or any attachment concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Any such taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor. Bonds are affected by a number of risks, including fluctuations in interest rates, credit risk and prepayment risk. In general, as prevailing interest rates rise, fixed income securities prices will fall. Bonds face credit risk if a decline in an issuer's credit rating, or creditworthiness, causes a bond's price to decline. High yield bonds are subject to additional risks such as increased risk of default and greater volatility because of the lower credit quality of the issues. Finally, bonds can be subject to prepayment risk. When interest rates fall, an issuer may choose to borrow money at a lower interest rate, while paying off its previously issued bonds. As a consequence, underlying bonds will lose the interest payments from the investment and will be forced to reinvest in a market where prevailing interest rates are lower than when the initial investment was made. To the extent the investments discussed herein represent international securities, you should be aware that there may be additional risks associated with international investing involving foreign economic, political, monetary and/or legal factors. International investing may not be for everyone. (c) 2008 Citigroup Global Markets Inc., Member SIPC (“CGMI”). Securities are offered through CGMI. Smith Barney, Consulting Group and Investment Advisory Services are divisions of CGMI. CGMI and Citibank are affiliated companies under the common control of Citigroup Inc. Smith Barney is a service mark of CGMI and its affiliates and is used and registered throughout the world. Citi and Citi with Arc Design are trademarks and service marks of Citigroup Inc. or its affiliates, and are used and registered throughout the world. 111108 30

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