The Secrets to Long Term Investing Success - Session 1

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Learn the secrets to long-term investing success! In this seminar series Bob Sloma, MBA, Principal of Sigma Advantage, shares the investing process he developed in the mid-nineties to manage his own and his wife’s retirement investments. His process has consistently beaten the S&P 500 return on a three, five and ten year basis, making changes only once a year, with between two-thirds and three-quarters of the market’s risk!

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The Secrets to Long Term Investing Success - Session 1

  1. 1. Session 1 – Portfolio Management Facts and One Little Known “Secret”© 2012 Sigma Advantage Investmentswww.sigmadvantageinvestments.com
  2. 2. Disclosure  The Model Portfolios seek to obtain better long-term results than the S&P 500, but at a lower risk level. The depending on the portfolio, models include mutual funds or stocks and a short-term Treasuries fund as a risk-adjustment mechanism. The risk-free, short-term Treasuries fund helps ensure that the models maintain optimal risk-adjusted returns in accordance with Modern Portfolio Theory. The model portfolios allocations to this fund have ranged from 2% to 99%. The volatility of the Model Portfolios may be materially different than the benchmark because it does not invest in only equity securities tracked by the S&P 500 Index.  Model Portfolio returns shown were calculated with the mutual funds or stocks used in the Model Portfolios (“Model Portfolio”) and the allocations currently recommended by Sigma Advantage Investments, LLC (“SAI”). Historically, the Model Portfolios may have had different allocations among the mutual funds or stocks and the Treasuries mutual fund and may have had different mutual funds or stocks within a particular portfolio. The returns are not actual returns nor do they reflect actual trading. Actual results for investors who were invested in accordance with the Model Portfolios during the same time periods shown may have been higher or lower than the Model Portfolios results.  Model Portfolio performance and historical benchmarks results were calculated assuming reinvestment of all distributions and other earnings; they do not reflect the effects of income or other taxes.  The performance results shown are presented net of all costs associated with investments in the mutual funds or stocks and the Treasuries mutual fund, such as management fees, transaction costs, and custodial service costs incurred by the mutual funds and transaction costs incurred with stock investing. The Model Portfolio performance results also reflect the deduction of fees charged by SAI for investment advisory services and by its third party custodian. Investment advisor fees reflected in the Model Portfolio performance results have been calculated using SAI’s highest annual rate of 0.75% and the third party custodian fee of 0.25%. Actual SAI fees charged to clients decline from this rate based on the amount of assets invested.© 2012 Sigma Advantage Investmentswww.sigmadvantageinvestments.com 2
  3. 3. Disclosure  Benchmarks or indices are used to track current and historical market performance by specific market segment (e.g., large/small capitalization) or investment style (e.g., growth/value) and are meant to provide a basis for comparison. Indices are unmanaged, pay no transaction fees, reflect past performance and typically reflect the reinvestment of dividends or income. For comparison purposes, the unmanaged indices are fully invested and returns are gross of investment management fees. Investors cannot invest directly in these unmanaged indices.  We use the S&P 500 index because it is a capitalization-weighted index consisting of 500 stocks chosen for large market size, liquidity, and industry diversification, among other factors. It is designed to be a widely used indicator of the U.S. economy and reflects the risk/return characteristics of the large-cap universe. The S&P 500 index is unmanaged, does not incur fees, and cannot be invested in directly. Because the Model Portfolio may invest in stocks whose securities may not be tracked by this index, the volatility of the Model Portfolio may be materially different than this benchmark.  Investing in non-U.S. securities may entail higher risk due to non-U.S. currency fluctuations and political or economic uncertainty which may be especially heightened when investing in emerging markets. Diversification does not ensure against loss.© 2012 Sigma Advantage Investmentswww.sigmadvantageinvestments.com 3
  4. 4. Define the Problem How can I improve my investments’ performance?© 2012 Sigma Advantage Investmentswww.sigmadvantageinvestments.com 4
  5. 5. Define the Problem I don’t know how much risk my advisor is taking to obtain better returns.© 2012 Sigma Advantage Investmentswww.sigmadvantageinvestments.com 5
  6. 6. Define the Problem Everything I read says that… If this is true, then how can I be sure that anyone can do better than the market? Short Answer: You can’t.© 2012 Sigma Advantage Investmentswww.sigmadvantageinvestments.com 6
  7. 7. Define the Problem Efficient Market Theory says that generally stock prices already reflect all known information at any point in time, therefore index-based investing is the only way to go.© 2012 Sigma Advantage Investmentswww.sigmadvantageinvestments.com 7
  8. 8. Portfolio Management Facts Less than 50% of Portfolio Managers match or outperform their benchmarks over 3-year and 5-year periods. (Standard & Poor’s Indices Versus Active Funds (SPIVA) Scorecard, August 2011) Percentage of U.S. Equity Funds Outperformed by Benchmarks All Domestic Equity Funds vs. S&P Composite 1500 Period Ending One Year Three Years Five Years December 2011 84.07% 56.53% 61.88% June 2011 48.99% 55.16% 58.27% December 2010 49.31% 51.68% 57.63% June 2010 55.98% 55.58% 60.64% December 2009 41.67% 54.06% 60.61% Source: S&P Indices, CRSP. Outperformance is based upon equal weighted fund counts. All index returns used are total returns. Charts are provided for illustrative purposes. Past performance is not a guarantee of future results.© 2012 Sigma Advantage Investmentswww.sigmadvantageinvestments.com 8
  9. 9. Better Returns With Less RiskNote: Model portfolios do not reflect actual trading costs, the effect taxes, or other costs associated with investing in mutualfunds or stocks. See disclosure on the beginning slides for more information. © 2012 Sigma Advantage Investments www.sigmadvantageinvestments.com 9
  10. 10. How Risk Is MeasuredRisk is measured bythe StandardDeviation of aninvestment’smonthly returns.© 2012 Sigma Advantage Investmentswww.sigmadvantageinvestments.com 10
  11. 11. How To Reduce Risk Diversification Invest in a variety of assets that do not move up and down at the same time. In other words, less correlation in returns equals higher level of diversification.© 2012 Sigma Advantage Investmentswww.sigmadvantageinvestments.com 11
  12. 12. How to Reduce Risk For illustrative purposes only. Stock and portfolio returns are hypothetical and not indicative of any investment. Risk (Std Dev): 0.71% Risk (Std Dev): 1.43% Average Return: 5.00% Average Return: 5.00%© 2012 Sigma Advantage Investmentswww.sigmadvantageinvestments.com 12
  13. 13. How to Reduce Risk For illustrative purposes only. Stock and portfolio returns are hypothetical and not indicative of any investment. Perfectly Negatively Correlated Perfectly Positively Correlated Portfolio 1 Portfolio 2 Which is the better investment?© 2012 Sigma Advantage Investmentswww.sigmadvantageinvestments.com 13
  14. 14. How to Reduce Risk For illustrative purposes only. Stock and portfolio returns are hypothetical and not indicative of any investment. Perfectly Negatively Correlated Perfectly Positively Correlated Portfolio 1 Portfolio 2 Risk (Std Dev): 0.36% Risk (Std Dev): 1.07% Average Return: 5.00% Average Return: 5.00% Stock 1 Stock 2 Risk (Std Dev): 0.71% Risk (Std Dev): 1.43% Average Return: 5.00% Average Return: 5.00%© 2012 Sigma Advantage Investmentswww.sigmadvantageinvestments.com 14
  15. 15. How to Reduce Risk For illustrative purposes only. Stock and portfolio returns are hypothetical and not indicative of any investment. Highly Negatively Correlated Highly Positively Correlated Portfolio Portfolio Risk (Std Dev): 0.38% Risk (Std Dev): 1.06% Average Return: 5.00% Average Return: 5.00% Stock 1 Stock 2 Risk (Std Dev): 0.71% Risk (Std Dev): 1.43% Average Return: 5.00% Average Return: 5.00%© 2012 Sigma Advantage Investmentswww.sigmadvantageinvestments.com 15
  16. 16. How to Reduce Risk For illustrative purposes only. Stock and portfolio returns are hypothetical and not indicative of any investment. Portfolio Risk (Std Dev): 0.78% Average Return: 5.00% Stock 1 Stock 2 Risk (Std Dev): 0.71% Risk (Std Dev): 1.43% Average Return: 5.00% Average Return: 5.00%© 2012 Sigma Advantage Investmentswww.sigmadvantageinvestments.com 16
  17. 17. How to Reduce Risk For illustrative purposes only. Stock and portfolio returns are hypothetical and not indicative of any investment. Which is the best investment from a risk & return standpoint? Perfectly Negatively Correlated Perfectly Positively Correlated Highly Negatively Correlated Highly Positively Correlated© 2012 Sigma Advantage Investmentswww.sigmadvantageinvestments.com 17
  18. 18. How to Reduce Risk For illustrative purposes only. Stock and portfolio returns are hypothetical and not indicative of any investment. Which is the best investment from a risk & return standpoint? Perfectly Negatively Correlated Perfectly Positively Correlated Highly Negatively Correlated Highly Positively Correlated© 2012 Sigma Advantage Investmentswww.sigmadvantageinvestments.com 18
  19. 19. Risk’s Relationship to Return Apple Google Apple (AAPL) Google (GOOG) 140.00% Trailing 12- $60,000.0 80.00% Trailing 12- $30,000.0 120.00% Month Sales 70.00% Month Sales 3-Year Return $50,000.0 60.00% $25,000.0 100.00% 50.00% 80.00% $40,000.0 3-Year Risk $20,000.0 12 Month Sales (Millions) 12 Month Sales (Millions) Risk (Std Dev) and Return Risk (Std Dev) and Return 40.00% 60.00% $30,000.0 30.00% $15,000.0 20.00% 40.00% $20,000.0 3-Year Return $10,000.0 3-Year Risk 10.00% 20.00% 0.00% $10,000.0 6/1/2006 9/1/2006 3/1/2007 6/1/2007 6/1/2008 9/1/2008 3/1/2009 9/1/2009 3/1/2010 6/1/2010 9/1/2007 3/1/2008 6/1/2009 12/1/2006 12/1/2007 12/1/2008 12/1/2009 $5,000.0 0.00% -10.00% Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 -20.00% $- -20.00% $- 3 yr Return 3 yr Std Dev Trailing 12 mth Sales (M) 3 yr Return 3 yr Std Dev Trailing 12 mth Sales (M) Source: Yahoo Finance, Sigma Advantage Investments. Charts are provided for illustrative purposes. Past performance is not a guarantee of future results.© 2012 Sigma Advantage Investmentswww.sigmadvantageinvestments.com 19
  20. 20. The Efficient Frontier • A major component of Modern Portfolio Theory (MPT). • Shows the relationship of risk and returns of portfolios that maximize return for a given level of risk. • Composed of a range of mixes from 100% stocks to 100% bonds.© 2012 Sigma Advantage Investmentswww.sigmadvantageinvestments.com 20
  21. 21. The Efficient Frontier 1960 - 2010 Inversion! Source: Rydex | SGI, Ibbotson Associates© 2012 Sigma Advantage Investmentswww.sigmadvantageinvestments.com 21
  22. 22. The Efficient Frontier & The Capital Market Line© 2012 Sigma Advantage Investmentswww.sigmadvantageinvestments.com 22
  23. 23. The Efficient Frontier & The Capital Market Line© 2012 Sigma Advantage Investmentswww.sigmadvantageinvestments.com 23
  24. 24. The Efficient Frontier & The Capital Market Line© 2012 Sigma Advantage Investmentswww.sigmadvantageinvestments.com 24
  25. 25. Portfolio Design  With the Capital Market Line (CML) and the Efficient Frontier, you can “design” a portfolio for any given risk level.  To further increase risk and “potentially” obtain greater returns, you can leverage by borrowing money to invest in the optimal risky portfolio.  Problem with leverage approach…  you can only borrow at rates higher than the risk free rate!© 2012 Sigma Advantage Investmentswww.sigmadvantageinvestments.com 25
  26. 26. Next Session Mutual Fund Analysis, Selection & Portfolio Design  How to determine the “best” investment.  Risk Adjusted Return  Fundamental versus Technical Analysis  Available Resources© 2012 Sigma Advantage Investmentswww.sigmadvantageinvestments.com 26

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