Rational Investing
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  • The origins of the financial crisis become evident in late 2006, when U.S. real estate prices began declining following a wave of unsustainable appreciation. First affecting subprime mortgages and, subsequently, the residential housing market, the crisis soon spread throughout the U.S. and international credit markets. These events sent major financial institutions – as well as financial markets – into a tailspin. As recession became reality, the government not only bailed out some of the nation’s largest companies, but became a stakeholder in a number of them. Debate over fundamental changes in the Federal Reserve’s role proliferated, while consumers, investors and businesses whipsawed between cautious confidence and increasing concern.
  • 2008 was the worst year for stocks in more than 50 years. Toward the end of 2008, the Dow bounced back slightly, closing the year at 8,776.39. On June 8, Cisco Systems and Travelers replaced General Motors and Citigroup as components of the DJIA. In 2009, the Dow closed under 7,000 for the first time since 1997, hitting a low of 6,547.05 on March 9, before recovering slightly.
  • Real GDP decreased at a rate of 5.5% in Q1, slightly better than preliminary estimates of -5.7%, while Core inflation stayed below 2% year-over-year through May and was expected to show a slight decline in June. The June 9, 2009, survey by Blue Chip Economic Indicators found that 86% of the economists it polled expect the U.S. recession to end this year. These economists expect the turnaround to be driven in large part by increased consumer spending bolstered by the government's stimulus package. The Obama administration has committed to spending 70%, or $550.9 billion of the $789 billion, of the funds from the recovery program, signed by the president on February 17, 2009, within the program’s first two years. As of June, the government has reported spending more than $10 billion in stimulus money, and officials have said that the speed will increase as the program grows.
  • Existing home sales rose in May 2009, as increasingly affordable home prices and a first-time tax credit brought buyers in from the sidelines. The National Association of Realtors reported that existing home sales ticked up 2.4% last month to a seasonally adjusted annual rate of 4.77 million units compared to the downwardly revised rate of 4.66 million in April. The June unemployment rate, however, showed no signs of improving, rising to 9.5%, its highest level since 1983.
  • The central bank left the federal funds and discount rates unchanged at its most recent meeting and appears to be waiting to see whether the economy is nearing a turning point, as the pace of contraction slows. Reflecting its increasing involvement in the financial services sector, the Federal Reserve has boosted hiring in its banking supervision arm from 2,674 last year to a budgeted headcount of 2,876 in 2009. In June, the Treasury Department disbursed $3.79 billion in TARP funds to banks. Of that total, it pumped $3.4 billion into Hartford Financial Services (HIG) and distributed the remaining $390 million among 35 smaller banks. In July, the Obama administration continued to push for a Consumer Financial Protection Agency, establish a new authority to unwind large financial institutions and give the Federal Reserve new authority to monitor institutions that may pose a systemic risk to markets and the economy.
  • An 83-year examination of past capital market returns provides historical insight into the performance characteristics of various asset classes. This graph illustrates the hypothetical growth of inflation and a $1 investment in four traditional asset classes over the time period January 1, 1926, through December 31, 2008. Large and small stocks have provided the highest returns and largest increase in wealth over the past 83 years. As illustrated in the image, fixed-income investments provided only a fraction of the growth provided by stocks. However, the higher returns achieved by stocks are associated with much greater risk, which can be identified by the volatility or fluctuation of the graph lines. Government bonds and Treasury bills are guaranteed by the full faith and credit of the U.S. government as to the timely payment of principal and interest, while stocks are not guaranteed and have been more volatile than the other asset classes. Furthermore, small stocks are more volatile than large stocks, are subject to significant price fluctuations and business risks, and are thinly traded.
  • Between the years 1926 and 2008 – which included some notable economic downturns – large-cap stocks generated positive returns with far greater frequency than they posted losses. During this 83-year period, total returns posted increases in 59 years, and decreases in only 24. In addition, with relatively few exceptions, the increases were more pronounced than the losses.
  • Market timing is basically a strategy attempting to predict future price movements through various fundamental and technical analysis tools. However, regardless of the sophistication of the tools used, stock prices do not always move for logical or predictable reasons – making market timing a speculative endeavor.
  • No precise formula exists for determining either aggregate market movements or the ups and downs of individual stocks. That means that if you decide to sell in a down market, you run the risk of being out of the market on the days that your holdings would have performed the best.
  • Ceasing regular investing during market downturns can sometimes deprive you of future opportunities. The image illustrates that, over an 82-year period, there have been four times when the market failed to reach returns above zero for two or more consecutive years. In all four instances, negative returns have been followed by above-average positive returns. This pattern is not guaranteed to repeat itself, but does illustrate the market's potential – and one of the reasons to stay focused on your investment plan. A disciplined investment approach is still the best strategy for handling market downturns. This includes maintaining a well-diversified portfolio and using dollar-cost averaging, instead of lump-sum purchases, to ease into new investments. Finally, staying focused on a long-term investment plan may enable investors to participate in recoveries. Diversification does not eliminate the risk of investment losses. Dollar-cost averaging does not ensure a profit or protect against a loss in declining markets. Dollar-cost averaging involves continuous investment regardless of fluctuating prices, so investors should consider their financial ability to continue purchases through periods of low price levels. Stocks are not guaranteed and have been more volatile than the other asset classes. Stocks in this example are represented by the Standard & Poor’s 500 ® , which is an unmanaged group of securities and considered to be representative of the stock market in general. An investment cannot be made directly in an index. The data assumes reinvestment of all income and does not account for taxes or transaction costs.
  • A historic account of past downturns and recoveries can present a better picture of potential market performance. There have been many U.S. equity market downturns over time with varying levels of severity and different lengths of recovery period. The most severe downturn marked the start of the Great Depression, where stocks lost more than 80% of their value. In this case, the recovery period was over 12 years. More recently, stocks lost 44.7% of their value during the early 2000 bear market. This recovery period, lasting four years, was the second longest in history. Stocks lost 40.0% during the recent 2007–2008 bear market; the length of this downturn and the beginning of a recovery are yet to be determined. It is evident that stocks are prone to sudden declines in value. These declines seem to happen at random, and there are many different reasons offered for stock market crashes and bear markets. Sometimes stocks recover their value quickly, while other times the decline lasts for quite a while. The recovery period may be painfully long. Often, the decline is preceded by a period of high returns, which lulls investors into a false sense of security. Because no one can predict market declines with certainty, a diversified portfolio is the best solution for a long–term investor who is concerned about both return and risk. Returns and principal invested in stocks are not guaranteed.
  • Diversification can be defined as spreading your risk across similar securities. For example, two core asset classes are stocks and bonds. However, within each of these asset classes are subcategories. For example, stocks can be from large, small or foreign companies, while bonds may be issued by corporations or government entities and have long- or short-term maturities. Diversification, of course, does not ensure a profit or protect against loss in a declining market.
  • Allocating assets across an array of different investment types that perform differently during changing economic or market conditions can help you manage risk through downturns.
  • Research and Due Diligence. Understanding the nature of the investments, the accompanying risks, potential returns, the state of the market and the characteristics of the people who manage the investments you are considering can greatly increase your prospects for success. Manager Selection and Monitoring. Closely allied to the research and due diligence effort is manager selection, which entails a thorough understanding of the manager’s background, record, strategy and performance – as well as how that manager’s characteristics dovetail with those of other managers employed in your portfolio. Carefully monitoring selected managers to ensure they remain aligned with your standards and expectations is essential. Diversification and Asset Allocation. We’ve already discussed the importance of diversification. Taking that concept one step further brings us to asset allocation – selecting different types of investments, some categories of which tend to perform differently than others under a specific set of market conditions. This strategy is designed to curb a portfolio’s downside potential, while also tending to put a lid on potential appreciation. Risk Management. This process can take many forms, but typically entails analyzing exposure to risk and determining how to best handle that exposure, often by using quantitative tools and statistical modeling techniques. Long-Term Perspective. While investors must also take into consideration short-term cash-management and liquidity needs, adopting a long-term perspective is a powerful tool for building appreciation. Trying to time the markets or reacting emotionally to market volatility are typically not winning strategies. Instead, keeping focused on longer-term objectives while understanding that volatility – although sometimes dramatic – cannot be avoided, is the likelier path to investment success. Account Protection. In today’s turbulent markets, it’s important to know that the institutions that custody your investments carry the appropriate insurance, are themselves financially sound and prudently managed, and at that all possible steps have been taken to safeguard your privacy and your financial information. For details on how Raymond James works to protect your accounts, please ask me for a copy of our brochure, “How Raymond James Protects Your Account.”

Rational Investing Rational Investing Presentation Transcript

  • 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?
    • The collapse of both the subprime lending market and the real estate "bubble" led to widespread credit problems.
    • Many once-strong U.S. financial institutions declared bankruptcy, failed or were acquired in 2008, prompting the Troubled Asset Relief Program (TARP), a $700-billion bailout plan to cope with the bad debt left behind.
    • In December 2008, the National Bureau of Economic Research declared that the United States had been in a recession since December 2007.
    • In February, President Obama signed a $787-billion economic stimulus program – $350 billion of which came from the existing bailout fund and the rest from private investors and the Federal Reserve, making use of its ability to print money.
    • On March 2, 2009, the Dow Jones Industrial Average fell below 7,000 for the first time since October 1997.
    • On June 8, 2009, General Motors and Citigroup were removed from the Dow Jones Industrial Average, replaced by Cisco Systems, Inc. and Travelers Companies, Inc.
    • In July, the American Bankers Association reported credit card and home-equity delinquencies had hit record levels.
  • 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. Source: Dow Jones Dow Jones Industrial Average
  • Looking Forward Source: FactSet as of 5/29/09 Past Recessions and Inflation
  • Unemployment Rate Concern Past Recessions and Unemployment Source: FactSet as of 6/30/09
  • What Has the Government Done? Source: Federal Reserve Fed Funds Rate
  • Historically, Most Markets Show Long-Term Gains … Past performance is no guarantee of future results. • An investment cannot be made directly in an index. • Hypothetical value of $1 invested at the beginning of 1926. Assumes reinvestment of income and no transaction costs or taxes. This is for illustrative purposes only and not indicative of any investment. • Source: Created by Raymond James using Ibbotson Presentation Materials. ©2009 Morningstar, Inc. All rights reserved. Used with permission.
  • Calendar-Year Total Returns for Large Company Stocks 1 (1926 to 2008) … While Experiencing Dramatic Ups and Downs Source: Ibbotson 1 Large company stocks represented by S&P 500 ® Index. The S&P 500 Index is widely regarded as the standard for measuring large-cap U.S. stock performance, and includes a representative sample of leading companies in leading industries. The index is unmanaged and is not available for direct investment. Past performance is not indicative of future results.
  • 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 dividends 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
  • 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, Ibbotson Associates, Inc. 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 dividends reinvested. The S&P 500 represents approximately 75% of the investable U.S. equity market. Indices are not available for direct investment. Impact of Missing the Market S&P 500 Index Average Annual Total Returns: 1978 to 2008
  • Periods of Consecutive Negative Stock Returns, 1926 to 2008 Past performance is no guarantee of future results. • An investment cannot be made directly in an index. • This art is for illustrative purposes only and not indicative of any investment. 3/1/2009 • Source: Created by Raymond James using Ibbotson Presentation Materials. ©2009 Morningstar, Inc. All rights reserved. Used with permission.
  • Market Downturns and Recoveries, 1926 to 2008 Past performance is no guarantee of future results. • An investment cannot be made directly in an index. • This art is for illustrative purposes only and not indicative of any investment. 3/1/2009 • Source: Created by Raymond James using Ibbotson Presentation Materials. ©2009 Morningstar, Inc. All rights reserved. Used with permission. -83.4% -21.8% -10.2% -15.0% -22.3% -15.6% -29.3% -42.6% -14.3% -16.5% -29.6% -14.7% -15.4% -44.7% % Loss -40.1% 34 Months 6 Months 7 Months 5 Months 6 Months 8 Months 19 Months 21 Months 14 Months 20 Months 3 Months 5 Months 2 Months 25 Months Downturn 14 Months 1 51 Months 35 Months 5 Months 7 Months 1 0 Months 6 Months 9 Months 21 Months 5 Months 3 Months 1 8 Months 4 Months 49 Months TBD 3 Months Recovery TBD *Nov 2007 – Dec 2008 Sep 1929 – Jun 1932 Jul 1932 – Jan 1945 Jun 1946 – Nov 1946 Dec 1946 – Oct 1949 Aug 1956 – Feb 1957 Mar 1957 – Jul 1957 Aug 1957 – Dec 1957 Jan 1958 – Jul 1958 Jan 1962 – Jun 1962 Jul 1962 – Apr 1963 Feb 1966 – Sep 1966 Oct 1966 – Mar 1967 Dec 1968 – Jun 1970 Jul 1970 – Mar 1971 Jan 1973 – Sep 1974 Oct 1974 – Jun 1976 Jan 1977 – Feb 1978 Mar 1978 – Jul 1978 Dec 1980 – Jul 1982 Aug 1982 – Oct 1982 Sep 1987 – Nov 1987 Dec 1987 – May 1989 Jun 1990 – Oct 1990 Nov 1990 – Feb 1991 Jul 1998 – Aug 1998 Sep 1998 – Nov 1998 Sep 2000 – Sep 2002 Oct 2002 – Oct 2006
  • Diversification Can Help Provide Consistent Returns Past performance is no guarantee of future results. • An investment cannot be made directly in an index. • Time period illustrated is from 1956 to 1962. This time period was chosen as a dramatic illustration of stock and bond return behavior and how their often-opposite movements reduced portfolio volatility. This is for illustrative purposes only and not indicative of any investment. • Source: Created by Raymond James using Ibbotson Presentation Materials. ©2008 Morningstar, Inc. All rights reserved. Used with permission.
  • Asset Allocation Can Help Manage Risk
  • Index Descriptions
  • 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 and due diligence • Diversification and asset allocation • Risk management • Manager selection and 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. Diversification does not ensure a profit or protect against a loss.