Final 4th quarter 2012 commentary

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Richard Schroeder of Schroeder, Braxton & Vogt reviews the investment markets in the fourth quarter of 2012.

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  • ----- Meeting Notes (1/12/13 12:09) -----Welcome to Schroeder, Braxton & Vogt's review of the investment markets during the fourth quarter of 2012. I'm Richard Schroeder, executive vice president and certified financial planner with SBV.
  • ----- Meeting Notes (1/12/13 12:09) -----I'd like to take a look at the environment in which markets operated during the end of 2012, and the performance of various investment asset classes in that environment. We are going to focus on how we at SBV were able to take advantage of extra returns offered by asset classes that we emphasize in our portfolios: including small and value stocks, international diversification, commercial real estate, and commodities. We will end by examining the excuses we hear some investors use for not staying fully invested in a rational, well diversified portfolio.
  • ----- Meeting Notes (1/14/13 11:06) -----This page shows why we can't judge the progress of our diversified portfolios by looking at the action in the Dow Jones Industrial or S&P 500 aerages. At left you can see that big U.S. stocks, the kind that make up the Dow and the S&P, gained just a quarter of a percentage point in the third quarter. Yet stocks in Europe and Asia gained almost 6 percent, following by emerging markets stocks with a gain of 5.6 percent and global commercial real estate gaining 3.8 percent. Our portfolios hold all three of these asset classes. The action in U.S. bonds also doesn't predict how our portfolios will do, because we also hold international bonds. You can see here that global bonds were ahead of domestic bonds during the fourth quarter.
  • ----- Meeting Notes (1/14/13 11:06) -----As usual, there was plenty to worry about in the fourth quarter. A recession in Europe, slowing growth in China, and the U.S. fiscal cliff did their best to scare investors out of the markets. SBV's clients held on and profited handsomely.
  • ----- Meeting Notes (1/14/13 11:06) -----The progress of indexes that track world investment asset classes really demonstrate why we diversify. The S&P 500 Index lost a fraction of a point during the quarter, while world value stocks gained almost 7 percent. In fact, every asset class listed here did well except for cash and large U.S. stocks.
  • ----- Meeting Notes (1/14/13 11:06) -----We have long believed in diversifying among small value stocks and large value stocks. That diversification paid off in the fourth quarter, as you can see in the upper right. Down below we see an even stronger case for diversification into small stocks. Note that small stocks gained almost 10 percent per year over the last decade, while large cap stocks gained about 7 percent per year.
  • ----- Meeting Notes (1/14/13 11:06) -----Although we heard a lot about troubles in Europe, Japan, and China last year, their markets did pretty well. Look at the one year returns in the bottom right corner - they easily outpaced U.S. stocks. International diversification helped SBV's portfolios during 2012.
  • ----- Meeting Notes (1/14/13 11:06) -----Emerging markets stocks include the stocks of smaller countries like Singapore, Chile, Mexico, and those of big developing countries like China and India. These markets turned in a good overall performance in the fourth quarter. During 2012 and over the last 10 years their performance has been nothing short of spectacular, as you can see in the lower right corner.
  • ----- Meeting Notes (1/14/13 11:06) -----I like this chart because it illustrates why it is so hard to predict markets. For several years we have been hearing about how Greece is headed for total bankruptcy and an exit from the Eurozone. Yet what was the best market to invest in during the fourth quarter? Greece, of course, with a gain of almost 18 percent in just three months. And the worst developed markets? The U.S. and Canada, with paltry returns.
  • ----- Meeting Notes (1/14/13 11:09) -----Here is another asset class we use, commercial real estate investment trusts. These trusts own commercial office buildings, hospitals, even prisons, and profit from collecting rent and selling properties for capital gains. In recent years we diversified from holding just U.S. REITS to holding international REITS as well. This helped us in the fourth quarter, when international REITS beat their U.S. counterparts by a three to one margin.
  • ----- Meeting Notes (1/14/13 11:09) -----We also diversify into commodities, as asset class that often runs counter to the stock market. That's what happened during the fourth quarter, when most commodities lost value. It is interesting to note that today's sexy commodity, gold, lost ----- Meeting Notes (1/14/13 11:13) -----nearly 6 percent during the quarter while distinctly un sexy lean hogs gained nearly 8 percent.
  • ----- Meeting Notes (1/14/13 11:13) -----This is a very important slide for those who are trying to predict the economy. In the upper left panel we see the current U.S. Treasury yield curve. It charts interest rates on U.S. Treasuries from short term - the 3 month treasury bills at the far left, to 30 year Treasury Bonds at the far right. This is what's know as a steeply sloped yield curve, meaning the line ascends from left to right indicating that higher interest rates are being paid on long term Treasuries than on short term Treasuries. This means that bond market participants, who are considered the savviest investors, are betting that the economy will continue to grow in the near future and that no recession is imminent.
  • ----- Meeting Notes (1/14/13 11:15) -----Finally, this slide shows that investors were paid for taking risks during the quarter, during the year 2012, and over the last 10 years. A portfolio 100 percent invested in stocks grew by 3 percent in the quarter, almost 17 percent during the year and by 8.7 percent per year over the last 10 years. meanwhile, a portfolio in cash, represented by short term U.S. Treasury Bills, gained next to nothing in the quarter, the year, and just 1.7 percent per year over the last 10 years. This shows there is a price to be paid by hiding in "safe" cash. The price is a loss in purchasing power to inflation.
  • ----- Meeting Notes (1/14/13 11:32) -----We hear a lot of these money excuses from clients, friends and relatives. It's worth taking your time to read all of these and identifying those you have used in the past. In our opinion they are all portfolio killers.Its worth noting those that would have hurt you last quarter, such as No one, I just want to wait till things become clearer. We heard that applied to the fiscal cliff crisis. Some of you wanted to wait to see how it would turn out before committing more money to a portfolio But the price of waiting was big, given that we literally didn't know how things would turn out until the last hours of the year. By that time, the markets had jumped strongly. In order to profit from the fiscal cliff one needed to accept some risk and invest when the outlook was not yet clear. Also, look at number 7, But the newspaper said, and number 8, the guy at the bar/my uncle/my boss told me. News headlines, as usual, screamed out doom and gloom during the quarter. And people we know picked up on that. I was told by a number of people that they wanted to get out of the market because so and so had told them a financial apocalypse was nigh. Yet, as is often the case, things turned out better than expected. There is no certainty when investing. That's why we have developed diversified portfolios that dont risk everything in any one market and that have a better chance of weathering different market conditions and economic climates. Thanks for taking the time to go back over the fourth quarter with us. Enjoy the new year.
  • Final 4th quarter 2012 commentary

    1. 1. Schroeder, Braxton & Vogt Inc. Q4 Quarterly Market Review Fourth Quarter 2012
    2. 2. Quarterly Market ReviewFourth Quarter 2012This report features world capital market performance Overview:and a timeline of events for the last quarter. It begins witha global overview, then features the returns of stock and Market Summarybond asset classes in the US and international markets. Timeline of EventsThe report also illustrates the performance of globallydiversified portfolios and features a topic of the quarter. World Asset Classes US Stocks International Developed Stocks Emerging Markets Stocks Select Country Performance Real Estate Investment Trusts (REITs) Commodities Fixed Income Global Diversification Quarterly Topic: The Top Ten Money Excuses
    3. 3. Market SummaryFourth Quarter 2012 Index Returns International Emerging Global US Stock Developed Markets Global US Bond Bond Market Stocks Stocks Real Estate Market Market +0.25% +5.93% +5.58% +3.82% +0.22% +0.89% STOCKS BONDSPast performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio.Market segment (index representation) as follows: US Stock Market (Russell 3000 Index), International Developed Stocks (MSCI World ex USA Index [net div.]), Emerging Markets (MSCI Emerging Markets Index [netdiv.]), Global Real Estate (S&P Global REIT Index), US Bond Market (Barclays US Aggregate Bond Index), and Global Bond Market (Barclays Global Aggregate Bond Index [Hedged to USD]). The S&P data are provided byStandard & Poors Index Services Group. Russell data copyright © Russell Investment Group 1995–2012, all rights reserved. MSCI data copyright MSCI 2012, all rights reserved. Barclays data provided by Barclays Bank PLC.US long-term bonds, bills, and inflation data © Stocks, Bonds, Bills, and Inflation Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield). 3
    4. 4. Timeline of Events: Quarter in ReviewFourth Quarter 2012 Swiss bank UBS agrees Euro zone unemployment to pay $1.5 billion in fines continues to rise, to international regulators reaching new high of in connection with US Congress Hurricane Sandy Consumer debt in Canada 11.6% in September. LIBOR scandal. struggles to devastates portions reaches record 166% of disposable income. come to deal to of Caribbean and avert “fiscal Mid-Atlantic coast of US. cliff.” Japan launches additional stimulus to help boost country’s declining GDP. Growth in China’s economy Euro zone officially continues to slow for Barack Obama falls back into seventh straight quarter. re-elected recession, marking its second downturn president of in four years. United States. S&P 500 Index1,444 1,42609/30/2012 12/31/2012The graph illustrates the S&P 500 Index price changes over the quarter. The return of the price-only index is generally lower than the total return of the index that also includes the dividend returns. Source: The S&P data areprovided by Standard & Poors Index Services Group. The events highlighted are not intended to explain market movements. 4
    5. 5. World Asset ClassesFourth Quarter 2012 Index ReturnsGlobal equity markets followed a strong third quarter with positive returns in the fourth quarter, as most major global indices ended the yearwith gains. Developed markets outside the US led equity returns, followed by global REITs. MSCI World ex USA Value Index (net div.) 6.96 S&P Global ex US REIT Index (net div.) 6.19 MSCI World ex USA Index (net div.) 5.93 MSCI Emerging Markets Index (net div.) 5.58 MSCI Emerging Markets Small Cap Index (net div.) 5.10 MSCI World ex USA Small Cap Index (net div.) 4.84 MSCI Emerging Markets Value Index (net div.) 4.70 Dow Jones US Selected REIT Index 2.31 Russell 2000 Index 1.85 Russell 1000 Value Index 1.52 Barclays US Aggregate Bond Index 0.22 One-Month US Treasury Bills 0.02 -0.38 S&P 500 IndexPast performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio.Market segment (index representation) as follows: US Large Cap (S&P 500 Index), US Small Cap (Russell 2000 Index), US Value (Russell 1000 Value Index), US Real Estate (Dow Jones US Select REIT Index), Global RealEstate (S&P Global ex US REIT Index), International Developed Large, Small, and Value (MSCI World ex USA, ex USA Small, and ex USA Value Indexes [net div.]), Emerging Markets Large, Small, and Value (MSCI EmergingMarkets, Emerging Markets Small, and Emerging Markets Value Indexes), US Bond Market (Barclays US Aggregate Bond Index), and Treasury (One-Month US Treasury Bills). The S&P data are provided by Standard & PoorsIndex Services Group. Russell data copyright © Russell Investment Group 1995–2012, all rights reserved. MSCI data copyright MSCI 2012, all rights reserved. Dow Jones data (formerly Dow Jones Wilshire) provided by DowJones Indexes. Barclays data provided by Barclays Bank PLC. US long-term bonds, bills, and inflation data © Stocks, Bonds, Bills, and Inflation Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G.Ibbotson and Rex A. Sinquefield). 5
    6. 6. US StocksFourth Quarter 2012 Index ReturnsUS small cap stocks and US value stocks experienced Ranked Returns for the Quarter (%)positive performance in the fourth quarter, whichcontributed to slightly positive broad market returns of Small Cap Value 3.220.25%. Large cap and large cap growth stocks had Small Cap 1.85negative returns of -0.38% and -1.32%, respectively.Small cap value stocks enjoyed the best performance, Large Cap Value 1.52up 3.22% for the quarter. Small Cap Growth 0.45US stocks across the board were positive for the year Marketwide 0.25ended December 31, 2012. -0.38 Large Cap -1.32 Large Cap Growth World Market Capitalization—US Period Returns (%) * Annualized Asset Class 1 Year 3 Years** 5 Years** 10 Years** Marketwide 16.42 11.20 2.04 7.68 Large Cap 16.00 10.87 1.66 7.10 46% US Market Large Cap Value Large Cap Growth 17.51 15.26 10.86 11.35 0.59 3.12 7.38 7.52 $15.7 trillion Small Cap 16.35 12.25 3.56 9.72 Small Cap Value 18.05 11.57 3.55 9.50 Small Cap Growth 14.59 12.82 3.49 9.80Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio.Market segment (index representation) as follows: Marketwide (Russell 3000 Index), Large Cap (S&P 500 Index), Large Cap Value (Russell 1000 Value Index), Large Cap Growth (Russell 1000 Growth Index), Small Cap(Russell 2000 Index), Small Cap Value (Russell 2000 Value Index), and Small Cap Growth (Russell 2000 Growth Index). World Market Cap: Russell 3000 Index is used as the proxy for the US market. Russell data copyright ©Russell Investment Group 1995–2012, all rights reserved. The S&P data are provided by Standard & Poors Index Services Group. 6
    7. 7. International Developed StocksFourth Quarter 2012 Index ReturnsInternational developed equities posted strong Ranked Returns for the Quarter (%) US Currency Local Currencyperformance, with all major asset classes showinggains for the quarter. 6.96 Value 7.87The US dollar appreciated relative to most major foreigndeveloped currencies. 5.93 Large Cap 6.90Across the size and style spectrum, large caps 4.90outperformed small caps and value outperformed growth. Growth 5.95 4.84 Small Cap 6.68 World Market Capitalization—International Developed Period Returns (%) * Annualized Asset Class 1 Year 3 Years** 5 Years** 10 Years** Large Cap 16.41 3.65 -3.43 8.60 41% International Small Cap Value 17.48 17.29 7.19 2.78 -0.70 -3.72 12.04 9.06 Growth 15.48 4.46 -3.18 8.05 Developed Market $13.8 trillionPast performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio.Market segment (index representation) as follows: Large Cap (MSCI World ex USA Index), Small Cap (MSCI World ex USA Small Cap Index), Value (MSCI World ex USA Value Index), and Growth (MSCI World ex USAGrowth). All index returns are net of withholding tax on dividends. World Market Cap: Non-US developed market proxies are the respective developed country portions of the MSCI All Country World IMI ex USA Index. Proxiesfor the UK, Canada, and Australia are the relevant subsets of the developed market proxy. MSCI data copyright MSCI 2012, all rights reserved. 7
    8. 8. Emerging Markets StocksFourth Quarter 2012 Index ReturnsEmerging markets returned 5.58%, with all other major Ranked Returns for the Quarter (%) US Currency Local Currencyequity sub-classes posting positive returns. The growtheffect was mixed across the size spectrum. Value 6.42outperformed growth in mid cap and small cap stocks Growth 6.20but underperformed in large caps. 5.58 Large CapThe US dollar depreciated against most of the main 5.33emerging markets currencies. 5.10 Small Cap 4.82 4.70 Value 4.43 World Market Capitalization—Emerging Markets Period Returns (%) * Annualized Asset Class 1 Year 3 Years** 5 Years** 10 Years** Large Cap 18.22 4.66 -0.92 16.52 13%Emerging Small Cap Value 22.22 15.87 4.21 4.06 0.21 0.07 17.27 18.17 Growth 20.56 5.24 -1.95 14.84 Markets $4.4 trillionPast performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio.Market segment (index representation) as follows: Large Cap (MSCI Emerging Markets Index), Small Cap (MSCI Emerging Markets Small Cap Index), Value (MSCI Emerging Markets Value Index), and Growth (MSCIEmerging Markets Growth Index). All index returns are net of withholding tax on dividends. World Market Cap: Emerging markets proxies are the respective emerging country portions of the MSCI All Country World IMI ex USAIndex. MSCI data copyright MSCI 2012, all rights reserved. 8
    9. 9. Select Country PerformanceFourth Quarter 2012 Index ReturnsEurope led developed markets returns, as the IMF, ECB, and EU provided additional aid to Greece. Egypt, the worst-performing emergingmarkets country, recently ratified a new Islamist-backed constitution, which has resulted in violent uprisings from opposition forces.The best-performing emerging market was Turkey, which experienced its first investment-grade rating in almost two decades. Developed Markets (% Returns) Emerging Markets (% Returns) Greece 17.87 Turkey 17.66 Austria 16.79 China 13.65 Portugal 12.68 Colombia 12.25 Finland 11.93 Poland 11.88 France 10.89 Philippines 11.48 Spain 9.77 Thailand 6.67 Netherlands 9.59 Italy 9.56 Peru 6.39 Germany 8.66 Mexico 6.06 Ireland 8.05 South Africa 5.82 Switzerland 7.90 Korea 4.12 Australia 6.60 Brazil 3.63 Belgium 6.45 Malaysia 3.28 Hong Kong 5.96 Russia 2.44 Japan 5.13 Sweden 4.94 Morocco 1.84 UK 4.47 Taiwan 1.02 New Zealand 4.28 India 0.88 Singapore 3.65 Indonesia 0.87 Denmark 3.14 Chile 0.05 Norway 1.63 -1.41 Hungary Israel 0.38 -2.70 Czech Republic US 0.25 Canada 0.21 -10.88 EgyptCountry performance based on respective indices in the MSCI All Country World IMI Index (for developed markets), Russell 3000 Index (for US), and MSCI Emerging Markets IMI Index. All returns in USD and net of withholdingtax on dividends. MSCI data copyright MSCI 2012, all rights reserved. Russell data copyright © Russell Investment Group 1995–2012, all rights reserved. 9
    10. 10. Real Estate Investment Trusts (REITs)Fourth Quarter 2012 Index ReturnsInternational REITs continued to outperform Ranked Returns for the Quarter (%)US REITs in the fourth quarter, posting a positivereturn of 6.19% vs. 2.31%.US REITs rebounded from four consecutive months of Global REITs (ex US) 6.19negative returns, while international REITs posted theirfifth straight positive quarter. US REITs 2.31 Total Value of REIT Stocks Period Returns (%) * Annualized Asset Class 1 Year 3 Years** 5 Years** 10 Years** US REITs 17.12 17.94 5.08 11.48 42% World ex US 58% Global REITs (ex US) 31.92 12.12 -1.28 10.43 $303 billion US 165 REITs $413 billion (19 other 83 REITs countries)Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio.Number of REIT stocks and total value based on the two indices. All index returns are net of withholding tax on dividends. Dow Jones US Select REIT Index data provided by Dow Jones ©. S&P Global ex US REIT Index dataprovided by Standard and Poor’s © 2012. 10
    11. 11. CommoditiesFourth Quarter 2012 Index ReturnsCommodities sold off in the fourth quarter, erasing much Individual Commodity (% Returns)of the ground gained in the prior period. Concerns aboutthe pace of global economic growth generally drove Lean Hogs 8.29values lower. Cotton 5.36 Live Cattle 2.91Hard commodities fell. Values for petroleum-based Brent Oil 0.07commodities also generally fell, reflecting slower global -0.29 Unleaded Gasconsumption patterns and recessionary economic -2.17 WTI Crude Oilconditions in various markets. -2.44 ZincSoft commodities offered a mixed experience for -3.09 Heating Oilinvestors. Lean hogs, cotton, and cattle advanced, while -3.12 Coppercoffee, wheat, and soybeans suffered large declines. -3.26 Aluminum -4.46 Sugar -5.65 Gold -7.18 Soybean OilPeriod Returns (%) * Annualized -8.02 Corn Asset Class Q4 1 Year 3 Years** 5 Years** 10 Years** -8.05 Nickel Commodities -6.33 -1.06 0.07 -5.17 4.09 -11.15 Natural Gas -11.83 Soybean -12.80 Silver -15.19 Wheat -19.90 CoffeePast performance is not a guarantee of future results. Index is not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. All indexreturns are net of withholding tax on dividends. Dow Jones-UBS Commodity Index Total Return data provided by Dow Jones ©. 11
    12. 12. Fixed IncomeFourth Quarter 2012 Index ReturnsGlobal bonds outperformed the US Treasury Yield Curve Bond Yields across Different IssuersUS bond market in the fourthquarter, and investors’ hunger 3 12/30/11 3.58 12/30/12for yield remained strong. 9/30/12Non-US government bonds 2 1.76significantly outperformed US 1.31Treasuries, as European political 0.59and economic conditions 1appeared to stabilize. 10-Year US State and AAA-AA A-BBBLow credit quality corporate bonds 0 Treasury Local Corporates Corporates 3M Municipalsoutperformed in both the US anddeveloped markets, as marketparticipants sought yield in a global Period Returns (%) * Annualizedenvironment of low rates. Asset Class 1 Year 3 Years** 5 Years** 10 Years**The US TIPS Index generated One-Month US Treasury Bills (SBBI) 0.06 0.07 0.40 1.65a positive return. US TIPS have Bank of America Merrill Lynch Three-Month T-Bills 0.11 0.11 0.52 1.78outpaced nominal US Treasury Bank of America Merrill Lynch One-Year US Treasury Note 0.24 0.55 1.42 2.19returns over both short- and Citigroup World Government Bond 1-5 Years (hedged) 2.10 2.13 3.04 3.32long-term horizons. US Long-Term Government Bonds (SBBI) 3.31 13.42 9.33 7.50 Barclays Corporate High Yield 15.81 11.86 10.34 10.62 Barclays Municipal Bonds 6.78 6.57 5.91 5.10 Barclays US TIPS Index 6.98 8.90 7.04 6.66Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Yieldcurve data from Federal Reserve. State and local bonds are from the Bond Buyer Index, general obligation, 20 years to maturity, mixed quality. AAA-AA Corporates represent the Bank of America Merrill Lynch USCorporates, AA-AAA rated. A-BBB Corporates represent the Bank of America Merrill Lynch US Corporates, BBB-A rated. Barclays data provided by Barclays Bank PLC. US long-term bonds, bills, inflation, and fixed incomefactor data © Stocks, Bonds, Bills, and Inflation (SBBI) Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield). Citigroup bond indices copyright 2012 by Citigroup. TheMerrill Lynch Indices are used with permission; copyright 2012 Merrill Lynch, Pierce, Fenner & Smith Incorporated; all rights reserved. 12
    13. 13. Global DiversificationFourth Quarter 2012 Index ReturnsThese portfolios illustrate the performance of different Ranked Returns for the Quarter (%)global stock/bond mixes and highlight the benefits ofdiversification. Mixes with larger allocations to stocks 100% Stocks 3.01are considered riskier but also have higher expected 75/25 2.26returns over time. 50/50 1.51 25/75 0.77 100% Treasury Bills 0.02 Growth of Wealth: The Relationship between Risk and Return Stock/Bond Mix 60,000 100% StocksPeriod Returns (%) * Annualized 50,000 75/25 Asset Class 1 Year 3 Years** 5 Years** 10 Years** 40,000 50/50 100% Stocks 16.80 7.19 -0.61 8.66 25/75 30,000 75/25 12.57 5.66 0.10 7.16 100% Treasury Bills 50/50 8.37 3.95 0.50 5.48 20,000 25/75 4.19 2.09 0.59 3.64 100% Treasury Bills 0.06 0.07 0.40 1.65 10,000 01/1988 01/1992 01/1996 01/2000 01/2004 01/2008 01/2012Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect expenses associated with the management an actual portfolio. Assetallocations and the hypothetical index portfolio returns are for illustrative purposes only and do not represent actual performance. Global Stocks represented by MSCI All Country World Index (gross div.) and TreasuryBills represented by US One-Month Treasury Bills. Globally diversified portfolios rebalanced monthly. Data copyright MSCI 2012, all rights reserved. Treasury bills © Stocks, Bonds, Bills, and Inflation Yearbook™, IbbotsonAssociates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield). 13
    14. 14. The Top Ten Money ExcusesFourth Quarter 2012 Human beings have an astounding facility for 3) "I WANT TO LIVE TODAY. TOMORROW 8) "THE GUY AT THE BAR/MY UNCLE/MY self-deception when it comes to our own money. CAN LOOK AFTER ITSELF.” BOSS TOLD ME…” Often used to justify a reckless purchase, its The world is full of experts; many recycle stuff We tend to rationalize our own fears. So instead not either/or. You can live today and mind your theyve heard elsewhere. But even if their tips of just recognizing how we feel and reflecting on savings. You just need to keep to your budget. are right, this kind of advice rarely takes your the thoughts that creates, we cut out the middle circumstances into account. man and construct the façade of a logical-sounding 4) "I DONT CARE ABOUT CAPITAL GAIN. argument over a vague feeling. I JUST NEED THE INCOME.” 9) "I JUST WANT CERTAINTY.” Income is fine. But making income your sole Wanting confidence in your investments is fine. These arguments are often elaborate, short-term focus can lead you down a dangerous road. But certainty? You can spend a lot of money trying excuses that we use to justify behavior that runs Just ask anyone who recently invested in to insure yourself against every possible outcome. counter to our own long-term interests. collateralized debt obligations. While it cannot guard against every risk, its cheaper to diversify your investments. Here are ten of these excuses: 5) "I WANT TO GET SOME OF THOSE LOSSES BACK.” 10) "IM TOO BUSY TO THINK ABOUT THIS.” 1) "I JUST WANT TO WAIT TILL THINGS Its human nature to be emotionally attached to We often try to control things we cant change—like BECOME CLEARER.” past bets, even losing ones. But, as the song market and media noise—and neglect areas where Its understandable to feel unnerved by volatile says, you have to know when to fold em. our actions can make a difference—like the costs of markets. But waiting for volatility to "clear" before investments. Thats worth the effort. investing often results in missing the return that 6) "BUT THIS STOCK/FUND/STRATEGY can accompany the risk. HAS BEEN GOOD TO ME.” Given how easy it is to pull the wool over our own We all have a tendency to hold on to winners eyes, it can pay to seek independent advice from 2) "I JUST CANT TAKE THE RISK ANYMORE.” too long. But without disciplined rebalancing, someone who understands your needs and By focusing exclusively on the risk of losing money your portfolio can end up carrying much more circumstances and who holds you to the promises and paying a premium for safety, we can end up risk than you bargained for. you made to yourself in your most lucid moments. with insufficient funds for retirement. Avoiding risk can also mean missing an upside. 7) "BUT THE NEWSPAPER SAID…” Call it the "no more excuses" strategy. Investing by the headlines is like dressing based on yesterdays weather report. The market has usually reacted already and moved on to worrying about something else.Adapted from “The Top Ten Money Excuses” by Jim Parker, Outside the Flags column on Dimensional’s website, October 2012. This information is provided for educational purposes only and should not be consideredinvestment advice or a solicitation to buy or sell securities. Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission. 14

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