Ohio Valley Financial

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  • Ohio Valley Financial

    1. 1. Market Perspective Duane E. Lee, II "The average long-term experience in investing is never surprising, but the short-term experience is always surprising."
    2. 2. Bear Markets <ul><li>Since 1896 there have been  20 Bear Markets ( declines of 20% or more ) and  35 Market Corrections ( declines of less than 20% ) </li></ul><ul><li>That means a Correction every 2.9 years and a Bear Market every 5.1 years on average. </li></ul><ul><li>The average Correction is a loss of 12.3% and the average Bear Market generates a loss of 36.3%. </li></ul><ul><li>The average Correction lasts  1.5 months and the average Bear Market has a duration of 18.7 months. </li></ul>
    3. 3. Bear Markets <ul><li>New highs are achieved coming off the bottom of a Correction on average in 2.5 months and coming off the bottom of the Bear Market it takes 18.6 months on average to reach new peaks. </li></ul><ul><li>As of November 2008 the S&P 500 at 741 is down 52.9% from its peak of 1,576 in October of 2007. Making it the worst Bear Market in modern history, and it may still go lower. </li></ul><ul><li>The 2 nd worst Bear Market in modern history (post WW II) was 1973-74 and the market dropped 48.2% , followed by the 3 rd worst with a 40.2% drop during the 2000-02 Bear Market </li></ul>
    4. 4. Bear Markets <ul><li>Which means we are 15 months into the Bear Market. </li></ul><ul><li>Coming out of the Bear Market the average. Bull Market lasts 5.4 years and generates a return of 186.4%. Taking S&P 500 to 2,122 </li></ul><ul><li>Bull Markets usually begin when things look their worst. </li></ul><ul><li>Another perspective is to study the Business Cycle not just the Stock Market. </li></ul>
    5. 5. Business Cycle <ul><li>We have had 33 complete cycles (4-phases: Expansion, Peak, Contraction, Trough) in the U.S. since 1854 . </li></ul><ul><ul><li>Full cycle: </li></ul></ul><ul><ul><ul><li>Average: 56 months ( 5 years ) </li></ul></ul></ul><ul><ul><ul><li>Shortest: 30 months (2.5 years) </li></ul></ul></ul><ul><ul><ul><li>Longest: 117 months (9.75 years) </li></ul></ul></ul><ul><ul><li>Expansion phase ( 68% of the cycle ): </li></ul></ul><ul><ul><ul><li>Average: 38 months ( 3.2 years ) </li></ul></ul></ul><ul><ul><ul><li>Longest: 106 months (8.8 years) </li></ul></ul></ul><ul><ul><ul><li>Shortest: 10 months </li></ul></ul></ul>
    6. 6. Business Cycle <ul><ul><li>Contraction phase ( 32% of the cycle ): </li></ul></ul><ul><ul><ul><li>Average: 17 months ( 1.4 years ) </li></ul></ul></ul><ul><ul><ul><li>Longest: 65 months (5.4 years) </li></ul></ul></ul><ul><ul><ul><li>Shortest: 6 months </li></ul></ul></ul><ul><ul><li>Stock market anticipated ( leads ) Contraction and declines: </li></ul></ul><ul><ul><ul><li>Average: 7 months </li></ul></ul></ul><ul><ul><ul><li>Longest: 13 months </li></ul></ul></ul><ul><ul><ul><li>Shortest: <1 month </li></ul></ul></ul>
    7. 7. Business Cycle <ul><ul><li>Stock market anticipated ( leads ) Expansion and rises: </li></ul></ul><ul><ul><ul><li>Average: 5 months </li></ul></ul></ul><ul><ul><ul><li>Longest: 8 months </li></ul></ul></ul><ul><ul><ul><li>Shortest: 3 months </li></ul></ul></ul>
    8. 8. Last 12 S&P 500 Bear Markets Source: Global Financial Data; price index returns <ul><li>26 months </li></ul>
    9. 9. Last 12 S&P 500 Bull Markets Source: Global Financial Data <ul><li>61% Return to break-even from here </li></ul><ul><li>2,122 on S&P 500 </li></ul>
    10. 10. Generic “V” Shape of a Typical Bear Market Source: For illustrative purposes only. Not drawn to scale. Not to be interpreted as a forecast.
    11. 11. The Hardest Hit Bounce the Highest Source: Global Financial Data, S&P 500 industry returns
    12. 12. S&P 500 Performance Around Recessions -51%
    13. 13. S&P 500 Performance Pattern Around Recessions Source: Ned Davis Research, Inc.
    14. 14. S&P 500 Performance Following Recession Lows Source: Ned Davis Research, Inc.
    15. 15. Ibbotson ® SBBI ® Stocks, Bonds, Bills, and Inflation 1926–2007 0.10 1 10 100 $10,000 1,000 1926 1946 1966 1986 1936 1956 1976 1996 2006 $15,091 $3,246 $79 $20 $12 Compound annual return • Small stocks 12.5 % • Large stocks • Government bonds • Treasury bills • Inflation 10.4 5.5 3.7 3.0
    16. 16. Equities have been the best defense against taxes and inflation
    17. 17. Power of Reinvesting 1988–2007 <ul><li>Past performance is no guarantee of future results. Hypothetical value of $1,000 invested at the beginning of 1988. Data does not account for taxes or transaction costs. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008 </li></ul>$20k 1 1988 1991 1994 1997 2000 2003 2006 $9,330 $5,943 $5,892 $1,638 10 11.8% 9.3 9.3 2.5 Compound annual return • Stocks with reinvestment • Stocks without reinvestment • Bonds with reinvestment • Bonds without reinvestment
    18. 18. -3%
    19. 19. Recoveries are front loaded 
    20. 20. Progress Toward Goal More Important Than Short-Term Performance
    21. 21. Snapback Strength <ul><li>Record high on 10-24-08 of 89, was 46 on Monday 2-1-09 </li></ul>
    22. 22. What is Asset Allocation? <ul><li>Asset allocation is the process of combining asset classes such as stocks, bonds, and cash in a portfolio in order to meet your goals. </li></ul>© 2008 Morningstar, Inc. All rights reserved. 3/1/2008 <ul><li>Most important decision for each investor. </li></ul><ul><li>Primary purpose is “Risk Control” </li></ul>Stocks Bonds Cash
    23. 23. Reduction of Portfolio Risk <ul><li>Past performance is no guarantee of future results. Risk is measured by standard deviation. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008 </li></ul>(17%) (11%) (6%) (5%) (1%) 0 2 4 6 8 10 12 14% Risk 1 2 3 4 5 6 7 8 Number of randomly selected assets in portfolio 12.1% 10.0% 8.9% 8.4% 8.0% 7.9% 7.7% 7.5%
    24. 24. Potential to Reduce Risk or Increase Return 1970–2007 <ul><li>Past performance is no guarantee of future results. Risk and return are measured by standard deviation and compound annual return, respectively. They are based on annual data over the period 1970–2007. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008 </li></ul><ul><li>Same return, </li></ul><ul><li>Risk reduction 27% </li></ul><ul><li>Return increase 11%, </li></ul><ul><li>Same risk </li></ul>Lower risk portfolio Higher return portfolio Fixed income portfolio Return: 8.2% Risk: 5.5% Return: 9.1% Risk: 7.5% Return: 8.2% Risk: 7.5% 15% 85% 21% 30% 43% 20% 36% 50% • Stocks • Bonds • Cash
    25. 25. The Case for Diversifying <ul><li>Past performance is no guarantee of future results. Time period illustrated is from 1956–1962. 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. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008 </li></ul>7 50% Return 40 30 20 10 0 – 10 – 20 Year 1 2 3 4 5 6 Compound annual return 1.9 • Stocks • 50/50 portfolio • Bonds 8.5% 5.8
    26. 26. Stocks and Bonds: Risk Versus Return 1970–2007 <ul><li>Past performance is no guarantee of future results. Risk and return are measured by standard deviation and arithmetic mean, respectively. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008 </li></ul><ul><li>Same risk level, greater return </li></ul>13% Return 12 11 10 9 10% Risk 11 12 13 14 15 16 17 Maximum risk portfolio: 100% Stocks 80% Stocks, 20% Bonds 60% Stocks, 40% Bonds 50% Stocks, 50% Bonds 100% Bonds Minimum risk portfolio: 25% Stocks, 75% Bonds
    27. 27. Diversification in Bull and Bear Markets <ul><li>Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008 </li></ul><ul><li>Capture 69% of gain </li></ul><ul><li>Take only 4% of loss </li></ul>$3,000 Bull market 2,500 2,000 1,500 1,000 500 1996 1997 1998 1999 2000 2001 2002 250 500 750 1,000 1,250 $1,500 Bear market $1,484 $985 $624 $1,181 $1,763 $2,555 • Stocks • 50/50 portfolio • Bonds
    28. 28. Diversified Portfolios and Bear Markets <ul><li>Past performance is no guarantee of future results. Diversified portfolio: 35% stocks, 40% bonds, 25% Treasury bills. Hypothetical value of $1,000 invested at the beginning of January 1973 and July 2000, respectively. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008 </li></ul><ul><li>13% higher ending value </li></ul><ul><li>37% higher ending value </li></ul>Mid-1970s recession (Jan 1973–Jun 1976) Early-2000s bear market (July 2000–Dec 2003) $1,149 $1,014 $1,101 $806 $1,250 1,000 750 500 Jan 1973 Jan 1974 Jan 1975 Jan 1976 July 2000 July 2001 July 2002 July 2003 • Stocks • Diversified portfolio
    29. 29. Stock Market Contractions and Expansions 1973–2007 <ul><li>Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008 </li></ul><ul><li>Tall & Wide, average 149% </li></ul><ul><li>Short & Narrow, average (26%) </li></ul>0 1 10 $100 2005 2001 1997 1993 1989 1985 1981 1977 1973 • Contraction • Expansion • Stocks – 4 2.6% – 1 4.1% – 1 6.9% – 2 9.5% – 1 4.7% – 1 5.4% – 4 4.7% 0 200 400% 85.9% 86.5% 281.5% 71.2% 354.8% 62.6% 98.3% – 200
    30. 30. Market Downturns and Recoveries 1926–2007 <ul><li>Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008 </li></ul>– 83.4% – 21.8% – 10.2% – 15.0% – 22.3% – 15.6% – 29.3% – 42.6% – 14.1% – 16.9% – 29.5% – 14.7% – 15.4% – 44.7% % Loss 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 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 3 months Recovery Sep 1929–Jun 1932 Jul 1932–Jan 1 945 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
    31. 31. Periods of Consecutive Negative Stock Returns 1926–2007 <ul><li>Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008 </li></ul>20% 37% 29% 54% – 25% – 12% – 0.4% – 10% – 26% – 8% – 43% – 8% – 15% – 9% – 12% – 22% Average stock market return from 1926  2007 was 10.4% – 50 – 40 – 30 – 20 – 10 0 10 20 30 40 50 60% Return 1939 1940 1941 1942 2000 2001 2002 2003 1973 1974 1975 1929 1930 1931 1932 1933
    32. 32. Stock Performance During Recessions 1946–2007 <ul><li>Past performance is no guarantee of future results. Hypothetical value of $1 invested at the beginning of 1946. Assumes reinvestment of income and no transaction costs or taxes. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008 </li></ul><ul><li>10 Recessions </li></ul>Shaded regions denote economic recessions 0.10 1 10 1 00 $1 ,000 1 946 1 956 1 966 1 976 1 986 1 996 2006 1949 1954 1958 1960 1970 1974 1980 1982 1990 2001
    33. 33. Stock Performance After Recessions 1945–2007 <ul><li>Past performance is no guarantee of future results. Cumulative returns of large and small stocks after recessions 1945–2007. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008 </li></ul>3.8% 20.1% 33.7% 74.0% 2.2% 11.4% 19.1% 47.7% After 3 years After 1 year After 6 months After 1 month 0 10 20 30 40 50 60 70 80% Return • Small stocks • Large stocks
    34. 34. Importance of Rebalancing 1987–2007 <ul><li>Past performance is no guarantee of future results. Stocks: 50% large and 50% small stocks. Data is represented as of year-end 1987.Bonds: intermediate-term government bonds. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008 </li></ul>50% 50% 55% 45% 69% 31% 62% 38% 73% 27% 0 10 20 30 40 50 60 70 80% 2002 2007 1997 1992 1987 • Stock allocation • Bond allocation
    35. 35. Controlling Risk With Portfolio Rebalancing The risk and return of rebalanced versus non-rebalanced portfolios <ul><li>Past performance is no guarantee of future results. Risk and return are measured by annualized standard deviation and compound annual return, respectively. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008 </li></ul>(19%) (21%) (16%) (2.7%) (3.4%) (3.2%) Return 0 2 4 6 8 10 12 14% Jan 1970– Dec 2007 Jan 1980– Dec 2007 Jan 1990– Dec 2007 Jan 1970– Dec 2007 Jan 1980– Dec 2007 Jan 1990– Dec 2007 Risk 12.6% 12.4% 10.7% 10.2% 9.8% 9.0% 11.0% 11.7% 9.1% 10.7% 11.3% 8.8% • Non-rebalanced portfolio • Rebalanced portfolio
    36. 36. Dangers of Market Timing Hypothetical value of $1 invested from 1926–2007 <ul><li>Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008 </li></ul><ul><li>81 Years, 972 Months, Miss 40 or 4% </li></ul><ul><li>Return falls below T-bills </li></ul>2,500 $3,246 $19.23 $20.19 0 500 1,000 1,500 2,000 3,000 $3,500 Stocks Stocks minus best 40 months Treasury bills
    37. 37. Dangers of Market Timing Hypothetical value of $1 invested from 1988–2007 <ul><li>Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008 </li></ul><ul><li>19 Years, 228 Months, Miss 18 or 8% </li></ul><ul><li>Return falls below T-bills </li></ul>$9.33 $2.36 $2.41 0 2 4 6 8 $10 Stocks Stocks minus best 18 months Treasury bills
    38. 38. Market-Timing Risk The effects of missing the best month of annual returns <ul><li>Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008 </li></ul><ul><li>Greater losses, smaller gains </li></ul>– 40 – 30 – 20 – 10 0 10 20 30 40% Return 1988 1994 2000 2006 1982 1976 1970 • Annual return • Annual return minus best month
    39. 40. FALLACY OF MARKET TIMING <ul><li>0.4% </li></ul><ul><li>0.8% </li></ul><ul><li>1.2% </li></ul>
    40. 41. Asset Allocation <ul><li>40 Year Look at Market Timing </li></ul><ul><li>  </li></ul><ul><li>Assumptions: </li></ul><ul><li>  </li></ul><ul><li>$1,000 invested in S&P 500 - beginning January 1, 1965 </li></ul><ul><li>  </li></ul><ul><li>on January 1 annually ≈ 11.0% </li></ul><ul><li>  </li></ul><ul><li>at market high annually ≈ 10.6% </li></ul><ul><li>  </li></ul><ul><li>at market low annually ≈ 11.7% </li></ul>
    41. 42. Asset Allocation <ul><li>50 Year Look at Market Timing </li></ul><ul><li>  </li></ul><ul><li>January 1. 1954 - December 31, 2004 </li></ul><ul><li>  </li></ul><ul><li>50 Years </li></ul><ul><li>600 months </li></ul><ul><li>  </li></ul><ul><li>S&P 500 11.4% </li></ul><ul><li>  </li></ul><ul><li>less 10 best months 8.3% </li></ul><ul><li>  </li></ul><ul><li>less 20 best months 6.1% </li></ul><ul><li>  </li></ul><ul><li>less 40 best months 2.7% </li></ul>

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