Introduction to investing for people who are new to terms and concepts

1. WELCOME
EYES WIDE OPEN

2. 1] INTRODUCTION
2] FUN WITH NUMBERS
3] RISK AND RETURN
4] LOOKING FORWARD, LOOKING BACK
5] EFFICIENT MARKET HYPOTHESIS
6] MODERN PORTFOLIO THEORY
Break
7] GAMES THE PROS PLAY
8] INVESTOR PSYCHOLOGY
9] MUTUAL FUND MADNESS
10] A SENSIBLE APPROACH

3. INTRODUCTION

4. What is this seminar about?
Long-term investing

5. The Green-Gray Pyramid
Age 65

6. The Green-Gray Pyramid
Age 65

7. The Green-Gray Pyramid
Age 75

8. What is this seminar NOT about?
• The next hot stock
• Trading stocks
• Predicting the future
• Tax advice
• Personal finance
• Telling you what to do

9. My Basic Philosophy
• The best investors…
• You have better…
• Keep it…
• Make a few…
• Start…
• Be a long…
• Max our your…

10. Three pillars of investing
• People want to make as much money as
possible
• With as little risk as possible
• And with as little effort as possible

11. Some basic terminology
Financial asset: cash, stocks, bonds, mutual funds
Securities: tradable financial assets (stocks, bonds, etc)
Stocks: security that represents ownership, Equity
Bonds: security that represents debt, Fixed Income
Principle: the initial amount you invest
Return: interest, yield, rate, dividend
Liquidity: the ease of selling an asset

12. A little Latin
Ex post: looking backward
Ex ante: looking forward
Ceteris paribus: all else being equal

13. Assumptions
1. No taxes
2. All returns are reinvested

14. Where do these assumptions hold?
In tax-differed retirement plans
– 401(k)
– 403(b)
– Traditional IRA
– Roth IRA
– SEP IRA
– Annuity

15. Asset breakdown
Assets
Financial Assets Real Assets
Capital Markets Money Markets Real Estate
Gold
Fixed Equity Derivatives T-bills Collectibles
Income
CDs

16. FUN WITH NUMBERS

17. Numbers are how we keep score
We use percentages…
…and percentages
have problems

18. Percentages are not symmetrical
And down hurts worse than up helps
$15.00
Up 50% Down 50%
$10.00 $7.50

19. Percentages don’t add or subtract
Be careful over multi-year time frames
$22.50 $20.00
Up 50%
In 1 year
Up 100%
$15.00 In 2 years
Up 50%
In 1 year
$10.00 $10.00

20. There is more than one percentage
Arithmetic average vs geometric average
$22.50 $20.00
Up 50%
In 1 year
Up 100%
$15.00 In 2 years
Up 50%
In 1 year
$10.00 $10.00

21. Arithmetic vs geometric average
Arithmetic average = 50% per year
$20.00 $20.00
Up 100% Up 100%
In 2 years In 2 years
$10.00 $10.00
Geometric average = 41.4% per year

22. Arithmetic vs geometric average
Arithmetic average: “average”, is always
bigger, gives typical performance over any
one year
Geometric average: compound annual
(growth) rate, is always smaller, change in
wealth over time, the only one to use over
multi-year periods. “Annualized returns”

23. Arithmetic or geometric?

24. Sometimes percentages don’t help
“64% of winners
repeat”

25. Percentages carry through the years
• Fees
• Sales commissions
• Taxes
30 years at 12%
$2000 $540,000
30 years at 12%
$1900 $513,000

26. Percentages at work
• Rule of 72
• Doubling
• The 2% difference

27. Time effect on percentages
$2000
$2000
$3,660,000
Age 25 34 75
$1,720,000
$2000
$2000
Age 25 35 75

28. Issue 1: Accounting numbers
• Price earnings ratio (P/E)
• Price to book ratio
• Return on equity (ROE)
• Return on assets (ROA)

29. Issue 2: Present vs future value
• A dollar today…
• The timeshare
• The moral…

30. RISK & RETURN

31. Risk
You can’t have risk without…
Where do they come from?

32. What is risk?
Risk: the probability that you will get
something different than you expect
Risk of a financial asset: a measure of
its volatility around the expectation

33. Volatility
Asset A
Price
Time
Price
Asset B
Time

34. Finding the mean
Asset A
Price
Time
Price
Asset B
Time

35. Calculate the volatility
Asset A
Price
σ
Time
Price
Asset B
σ
Time

36. Problems with risk
• Good surprises as well as bad
• The risk of an asset going forward is assumed
to be the risk of the asset in the past

37. Sources of risk
• What causes the price of an asset to go
up and down over time?
– The economy
– The asset specific risk
– Randomness

38. Kinds of risk
• Inflation risk (economy)
• Default risk (asset specific)
• Liquidity risk (asset specific)
• Interest rate risk (economy)
• Reinvestment risk (economy)

39. Expected return
• Depends on
– Risk free rate PLUS
– a risk premium

40. Expected return
• Considers all sources of risk
• Determines the market price
Expected Return = RF+IP+DRP+LP+IRR+RR
RF=risk free rate LP=liquidity premium
IP=inflation premium IRR=interest rate risk
DRP=default risk premium RR=reinvestment risk

41. Ceteris Paribus
The higher the risk
The higher the expected return
The lower the price

42. Let’s play roulette
For the risk you take…

43. Payback schedule
Bet Type Payout (for $1) Odds Payback
Even, odds $2 18/38 94.7% (36/38)
Third of board $3 12/38 94.7%
Six numbers $6 6/38 94.7%
Four numbers $9 4/38 94.7%
Three numbers $12 3/38 94.7%
Two numbers $18 2/38 94.7%
One number $36 1/38 94.7%

44. Adjusting for risk
• You must adjust investments for risk before…
• And you must get compensated for…

45. Risk & expected return
Asset A
Price
σ
Expected Return
Time
Price
Asset B Expected Return
σ
Time

46. LOOKING FORWARD
LOOKING BACK

47. Why do we look back?
• It’s all we have
• We can learn a lot if…
• It helps set our…

48. The numbers looking back
• Average annual returns
1926-2003 Geometric Mean Arithmetic Mean
Large Company Stocks 10.4% 12.4%
Small Company Stocks 12.7% 17.5%
Long Term Corporate Bonds 5.9% 6.2%
Long Term Government Bonds 5.4% 5.8%
T-Bills 3.7% 3.8%
Assumptions: All dividends and coupons reinvested, no taxes

49. The numbers looking back
• Best year, worst year
1926-2003 Best Year Worst Year
Large Company Stocks 53.99% -43.34%
Small Company Stocks 142.87% -58.01%
Long Term Corporate Bonds 42.56% -8.09%
Long Term Government Bonds 40.36% -9.18%
T-Bills 14.71% -0.02%

50. The numbers looking back
• Risk, σ
1926-2003 Risk
Large Company Stocks 20.4%
Small Company Stocks 33.3%
Long Term Corporate Bonds 8.6%
Long Term Government Bonds 9.4%
T-Bills 3.1%

51. The numbers looking back
• Up years
1926-2003 Up Years
Large Company Stocks 70.5%
Small Company Stocks 69.2%
Long Term Corporate Bonds 79.5%
Long Term Government Bonds 73.1%
T-Bills 98.7%

52. The numbers looking back
• Rolling period returns (1926-2003)
8.68%
1926 1930
-5.10%
1927 1931
-12.47%
1928 1932
-0.57%
1999 2003
1926 2003

53. The numbers looking back
• Rolling period returns
1926-2003 5 year 10 year 20 year
Rolling Period Returns Best Worst Best Worst Best Worst
Large Company Stocks 28.55% -12.47% 20.06% -0.89% 17.87% 3.11%
Small Company Stocks 45.90% -27.54% 30.38% -5.70% 21.13% 5.74%
Long Term Corporate Bonds 22.51% -2.22% 16.32% 0.98% 12.13% 1.34%
Long Term Government Bonds 21.62% -2.14% 15.56% -0.07% 12.09% 0.69%
T-Bills 11.12% 0.07% 9.17% 0.15% 7.72% 0.42%

54. The numbers looking back
• Rolling period returns
1926-2003 30 year 40 year
Rolling Period Returns Best Worst Best Worst
Large Company Stocks 13.70% 8.47% 12.47% 8.85%
Small Company Stocks 18.83% 8.83% 17.90% 11.09%
Long Term Corporate Bonds 9.42% 2.83% 7.76% 3.42%
Long Term Government Bonds 9.39% 1.53% 7.53% 2.26%
T-Bills 6.77% 0.94% 6.11% 1.52%

55. The moral of the story
• No one can predict…
• But you can estimate…
• When assets are held…

56. Time impact
Possibility of losing money diminished
Price
Buy price
Time

57. What about market timing?
• The story of
• A hypothetical 20 year, $2000 investment
• Best day vs worst day through 1999
Best day = $387,120
Worst day = $321,569

58. What about international investing?
• Through 2003, international stocks
outperformed domestic stocks in 16 out of
25 ten year rolling periods
• The U.S. represents only 52% of the
world’s stock market capitalization

59. What about IPOs?
• A study by Kidder Peabody
• Of 1000 IPOs, 67% underperformed the
Dow.

60. What about value vs growth?
• Depends on accounting numbers
• Depends on how you define them
• And the winner is…

61. The best investors in history
• Benjamin Graham
• Peter Lynch
• Warren Buffett

62. Predictions for the future
From Ibbotson…
1999-2025 CAGR
Large Company Stocks 11.6%
Small Company Stocks 12.5%
Dow Jones at 100,000 in early 2024

63. THE EFFICIENT MARKET
HYPOTHESIS

64. Market inefficiency
• Mis-priced securities
• Normal returns vs abnormal returns

65. Market efficiency
• Information travels fast
• 100,000 covering less than 10,000
• Stocks respond instantaneously

66. The EMH at work
News affecting the risk
Instantaneous change in expected return
Instantaneous change in the price

67. Efficiency Market Hypothesis
• No uncovered bargains
• No abnormal returns
• You can’t “beat” the market

68. Three forms of market efficiency
1. Historical info does no good
– Technical analysis

69. Technical analysis
Looking for patterns in
stock charts

70. Three forms of market efficiency
1. Historical info does no good
– Technical analysis
2. Publicly available info does no good
– Fundamental analysis

71. Fundamental analysis
Uses accounting statements and forecasts
for growth

72. Three forms of market efficiency
1. Historical info does no good
– Technical analysis
2. Publicly available info does no good
– Fundamental analysis
3. Inside info does do good
– Martha Stewart

73. Inside information

74. The bottom line
• Historical info does no good
• Publicly available info does no good
• Inside info definitely does do good
• The debate continues
• The paradox

75. Issues affecting the EMH
• Only managers of large portfolios…
• Only investors that…
• Even if you were smart enough…
• Investment advice paradox…
• Winning managers are the ones that…

76. Where the EMH breaks down
• The small firm in January effect
• Low P/E effect
• Dogs of the Dow
• Pros vs the dart board
• Adding a new member to the S&P

77. Consequences of the EMH
• Articles, magazines, newspapers
• Web sites, research
• TV shows, radio shows

78. MODERN PORTFOLIO
THEORY

79. Who, what, when
• Harry Markowitz (1950s)
– Diversification
• William Sharpe (1960s)
– Expected return

80. The correlation breakthrough
• You can actually reduce risk by…
Security A
20
18
16
14
12
Value
10
8
6
4
2
0
1 2 3 4 5 6 7 8 9 10 11 12 13
Time

81. The correlation breakthrough
• You can actually reduce risk by…
Security B
16
14
12
10
Value
8
6
4
2
0
1 2 3 4 5 6 7 8 9 10 11 12 13
Time

82. The correlation breakthrough
• You can actually reduce risk by…
Combination
20
18
16
14
12
Value
10
8
6
4
2
0
1 2 3 4 5 6 7 8 9 10 11 12 13
Time

83. Diversification
σ
A portfolio of
correlation

84. Result of diversification
Two components of risk
Risk, σ
Unique risk
Market risk
20 # of stocks

85. Three kinds of risk
Unique risk: extra risk of a single security
Market risk: of a diversified “market” portfolio
Total risk: σ, total risk of a single security

86. Impact of diversification
Since all rational investors hold portfolios of
stocks and therefore only experience market
risk, a stock’s price (which is a function of
risk) is based on market risk. Investors are
not compensated for stocks held in isolation.
Ergo, it is irrational to only own one or a few
stocks.

87. Different risk
Yahoo Yahoo
Risk = σ (high) Risk = β (low)

88. Beta
• The risk of a stock held in a diversified portfolio
• Relative to the market (market = 1)
• Can also have a beta of a portfolio
ββββββββββ

89. How is beta used?
In a formula for expected return…
ER = RF + β x (market premium)

90. How is beta used?
If you want to get a higher expected return…
ER = RF + β x (market premium)

91. Where do you
find beta?
Value Line

92. Where do you find beta?

93. Problems with beta
An ex post number
Just an estimate
Changes over time
Not perfect
No perfect measure of portfolio risk

94. Portfolio performance
What determines portfolio performance?
Risk (beta)
And how do we control our portfolio risk?
Through asset allocation

95. Asset allocation
• Two types of asset allocation
– Tactical: specific securities & market timing
– Strategic: major asset types (stocks, bonds) &
asset size (small, large)
style (value, growth)

96. The cold hard facts
• Between 90% - 100% of a portfolio’s performance
over time depends on strategic asset allocation
• Less than 10% of a portfolio’s performance over
time depends on tactical asset allocation

97. A quick reminder
1926-2003 Geometric Mean Arithmetic Mean
Large Company Stocks 10.4% 12.4%
Small Company Stocks 12.7% 17.5%
Long Term Corporate Bonds 5.9% 6.2%
Long Term Government Bonds 5.4% 5.8%
T-Bills 3.7% 3.8%
Assumptions: All dividends and coupons reinvested, no taxes

98. Another reminder
1926-2003 30 year 40 year
Rolling Period Returns Best Worst Best Worst
Large Company Stocks 13.70% 8.47% 16.96% 11.97%
Small Company Stocks 18.83% 8.83% 24.55% 15.06%
Long Term Corporate Bonds 9.42% 2.83% 10.48% 4.58%
Long Term Government Bonds 9.39% 1.53% 10.16% 3.02%
T-Bills 6.77% 0.94% 8.23% 2.03%

99. PART ONE REVIEW

100. Review
• The sooner you start the better
• 2% over 40 years is worth fighting for
• Risk is just a measure of volatility
• You must get compensated for the risk you take
• You can reduce the chance of losing money by holding
securities longer
• You can reduce risk through diversification
• Stocks are a winning game over the long run
• You should own international securities

101. Review
• IPOs are losers
• Most returns are due to just a few good days
• Even investing on the worst day pays well
• You can only get abnormal returns with inside info
• The only way to “beat” the market is to assume more risk
• There are two kinds of risk: σ and β
• You don’t get compensated for a stock held in isolation
• 90%+ of return is due to strategic asset allocation

102. GAMES THE PROS PLAY

103. Types of professionals
Soothsayers Intermediaries
Financial planners Investment companies

104. Selection bias

105. Selection Bias

106. A good investment?
Price
$12
$10
Time
6/29 6/30

107. A good investment?
Price
$10
$2
Time
6/1 6/30

108. A good investment?
Price
$22
$10
Time
1/1 6/30

109. The golden penny

110. Survivorship bias
• Unique to the mutual fund industry
• Incubator funds

111. Conflicts of interest
• Pay without performance
• Financial advice
• Short term incentives
• Unnecessary risk taking
• Tweaking performance
• Justifying their existence

112. The $7 stock trade
Ever wonder how they do it?

113. The $7 stock trade???
Beware of the “spread”
Buy: $8.125
1/8 point
Sell: $8.00
1/8 point X 500 shares = $62.50

114. The $7 stock trade???
Beware of the “big spread”
Buy: $8.25
1/4 point
Sell: $8.00
1/4 point X 500 shares = $125

115. INVESTOR PSYCHOLOGY

116. Our instincts are wrong
• When is the best time to buy a house?

117. The best time to buy a house
$3000/month
More interest Less interest

118. Our instincts are wrong
• How do you feel when the market drops?

119. Basic human frailties
• Impatience
• Greed
• Cognitive dissonance
• The law of small numbers
• The disposition effect
• The diversification dilemma
• The heard mentality
• Regrets of commission
• Ego

120. Biases
• Overconfidence
• Over optimistic
• Hindsight
• Loss aversion
• Overreaction
HHHHHTTTTT HTHHTHTTHT

121. More biases
• Errors of preference
• We value changes not states
• Narrow framing

122. The madness of crowds
• Irrational exuberance
– Tulip bulbs
– Florida real estate
– The Internet

123. Conclusions
• Great investors…
– are dispassionate
– are patient
– are not greedy
– have courage to stick with their plan
– take the long view and focus on the end point

124. MUTUAL FUNDS

125. What are mutual funds?
• A portfolio of securities that (theoretically)
follows a stated objective
• Two kinds
– Open ended—buy & sell from the company
– Closed ended—buy & sell from other investors

126. The role of mutual funds
• Diversification
• Divisibility
• Record keeping
• Professional management
• Lower transaction costs

127. Breakdown of mutual funds
1. Asset type
2. Asset company size
3. Asset company location
4. Fund “style”
5. Fund objective
6. Sales fees
7. Sales classes
8. Specialty funds
9. Management

128. Asset type
• Stocks
– “Equity fund”
• Bonds
– “Fixed income fund”
• Mixture of stocks & bonds
– “Balanced fund”

129. Asset company size
• Large cap
• Mid cap
• Small cap
• Micro cap
• Multi cap

130. Asset company location
• US: the US
• International: all the world except US
• World: all the world

131. Fund “style”
• Growth
– High P/E
• Value
– Low P/E
• Blend
– Whatever

132. Fund objective
• Capital appreciation
– Growth, aggressive growth
– Stocks only
• Income
– Stocks and/or bonds
• Both
– Growth and income, equity and income, value
– Stocks and bonds

133. Bond funds
• Maturity
– Short term (1-5 years)
– Intermediate term (5-10 years)
– Long term (10-20 years)
• Borrower
– Treasury/Agency
– Municipalities
– Corporations (graded for risk)
• Risk
– High grade, high yield

134. Active vs passive management
• Passive management is called an index fund
– Pre-determined portfolio of securities
– Usually tracks one of the major indexes
• Active management lets the manager choose
– Individual securities
– Market timing

135. How can you tell the difference?

136. Specialty funds
• Sector funds
– Healthcare
– Telecommunications
– Utilities
• Regional funds
– Japan
– Euro-Pacific
– Emerging markets

137. Sales fees
• Load
– Front end: when you buy
– Back end: when you sell
– Typically 5.75%
• No load

138. Sales classes
• Investor class (Inv)
– For individual investors
• Institutional class (Inst)
– For big money managers

139. Benchmarking & Indexes
Indexes serve two purposes:
1. Serve as an investment vehicle
2. Serve as a benchmark (for active funds)

140. What are
the major
indexes?

141. Indexes as investments
• No individual security selection
• No market timing
• No management
• No biases
• Perfect diversification

142. Indexes as benchmark
Compare active funds to their benchmark
Problem: there are a lot of benchmarks

143. Large Cap Mid Cap
Russell 1000 Russell Mid Cap (800)
Russell 200 Russell 2500
S&P 500 S&P Mid Cap 400
DJIA DJ Mid Cap
DJ Large Cap Lipper Mid Cap
Wilshire Target Top 750 Wilshire Mid Cap 750
Lipper Large Cap
Indexes Small Cap Entire Market
Russell 2000 Russell 3000
as Russell Small Cap Completeness
S&P Small Cap 600
DJ Small Cap
Wilshire 5000
DJ US Total Market
S&P Supercomposite 1500
bench- Lipper Small Cap Lipper Multi Cap
Lipper Equity Income
Lipper Balanced Fund
marks
Sector International
NASDAQ Biotech MSCI EAFE Index
NASDAQ Computer MSCI Emerging Markets
NASDAQ Telecom Lipper International Fund
NYSE Financial
NYSE Healthcare
Lipper Science & Technology
S&P Utilities

144. How do you size up a mutual fund?
• Annual report
– Looking back
– Precise
– One moment in time
• Prospectus
– Looking forward
– Promises, promises
– About objectives

145. What’s in an Annual Report?
•Report from the chairman/advisor
•Profile of the fund
•Performance summary
•List of all the shares in the fund
•Accounting statements with notes
•About the people who manage the fund

146. Profile of
the fund

147. Performance summary

148. List of all the shares

149. What’s in a Prospectus?
•Objective, strategy, investment policies
•Risks
•Fees
•Performance and accounting snapshots
•About the people who manage the fund
•How to buy shares

150. Objective, strategy, investment policies
Objective: long term capital appreciation
Strategy: invests in US companies with
rapid earnings growth potential
Investment polices: what they can do and
what they can’t

151. Investment policies

152. Risks
• Stock market risk
• Style risk
• Manager risk
• Inflation risk
• Etc

153. Mutual fund fees
1. Direct
2. Indirect
3. Invisible

154. Direct fees
• Come directly out of your pocket
– Loads, commissions, sales charges
– Maintenance fees
– Larger than you think
5.75%
$2000 $1885 $115 $115/$1885 6.1%

155. Direct fee class warfare
• Class A: pay me now
• Class B: pay me later
• Class C: pay me during

156. Indirect fees
• These fees reduce the return you get
• “Expense ratio” expressed as %

157. Direct + Indirect fees

158. Invisible fees
• These fees reduce the return you get
• Not directly specified anywhere
– Soft dollars
– Trading cost

159. Invisible fees from turnover

160. Compare to index fees

161. Mutual fund performance
• Must compare apples to apples
• Compare active funds to an index
• Hard for two reasons
1. Active funds may not “match” index
2. You never know exactly what you have

162. Finding the
best index
• Standard indexes
– Use R2
Value fund

163. Finding the
best index
• Standard indexes
– Use R2
Healthcare fund

164. Finding the best index

165. Problems with assessing active funds
Large turnover leads to uncertainty in…
…securities
…beta
…R-squared
…the proper index to use

166. So what is known about active funds?
1. Bad funds tend to persist
2. Do good funds persist?
3. On average, because of market timing and security
selection, active funds add no value
4. Funds with higher fees do not increase gross returns
enough to justify the fees
5. Over the past 10 years, 25% of active funds have beaten
the benchmark
6. Over the past 20 years, 12% have beaten the benchmark

167. Other problems with mutual funds
• Survivorship bias
• Big funds become the market
• Size creep
• Style shift
• Window dressing
• Unnecessary risk
• Unpredictable management
• The successful fund issue
• The scandal

168. The Scandal
1] Market timing = high turnover rate
2] Late trading = cheating

169. Review active vs passive
Active Passive
Management fees High Low
Know what’s in portfolio No Yes
Turnover Can be high Low
Trading costs Can be high Low
Risk Unknown Market
Diversification Unknown Perfect
Manager trying to get famous? Yes No
Trying to beat the market Yes No
Size creep Yes No
Style shift Maybe No
Tax efficient No Yes
Can beat the market Maybe No
Forced buys/sells No Yes

170. got index funds?

171. What to look for in an active fund
1) No load
1a) No 12b-1
2) Low expense ratio
3) Low turnover
4) High R2
4a) Beta close to one

172. Sources of information
Morningstar.com
Lipper.com
Brill.com
Edgar (sec.gov)
Valueline.com
Ibbotson.com
Investopeida.com
Indexfunds.com

173. Mutual fund breakdown
Mutual fund family:______________________
Mutual fund name:_______________________
Asset type: Stocks Bonds Both
Asset size: Small cap Mid cap Large cap Multiple cap
Asset location U.S. World International
Style: Growth Value Blend
Objective: Apprec Income Both
Bond Maturity: Short Interm Long
Borrower: Gov’t City Corporations
Bond Risk: High grade High yield
Management Active Passive
Specialty funds Sector Regional Other______________________
Sales load Yes No
12b-1 fees Yes No
Expense ratio:_____________________________
Turnover ratio:_____________________________
Beta:______________________________________
R-squared:_________________________________

174. Exchange traded funds
• Mutual funds traded like stocks
• Advantages: ultra low expenses, buy/sell
any time, better capital gains handling
• Disadvantages: brokerage fees, dollar cost
averaging is expensive

175. A SENSIBLE APPROACH

176. What we’ve learned
1. The best time to start investing is…
2. You are younger than you think
3. Under 45, you should have ______% equities
4. There are no good ________ investment strategies
5. There are plenty of good….
6. The best person to make your investment decisions…
7. Diversify to get compensated for…
8. You can’t beat the market and…
9. Stop watching your investments and get a…

177. A simple plan
• Max out your tax deferred first
• Dollar cost average
• Diversify
• Keep it simple
• Core and explore if you must
• Portfolio rebalance once a year

178. Max our your tax deferred
401K
IRA
Annuity

179. Dollar cost average
Even once a year is dollar cost averaging

180. Diversify

181. Diversify
Investment allocation by age
20-39 40-59 60-69 70-79 80+
Bonds 0% 20% 40% 70% 80%
Growth & income 55% 45% 35% 20% 10%
funds
Mid-cap funds 15% 15% 10% 0% 0%
Small-cap funds 15% 10% 5% 5% 5%
International funds 15% 10% 10% 5% 5%

182. FYI
IRS Life Expectancy Table
Current Age Number of years you're expected to live
40 43.6
50 34.2
60 25.2
70 17.0
80 10.5
90 5.5
Source: IRS Publication 590

183. Keep it simple
Financial Assets
S&P 500 index
35%
International index
65%

184. Keep it simple
Financial Assets
Total stock market index
35%
International index
65%

185. More small caps
Financial Assets
S&P 500 index
35% 35%
International index
30% Small cap index

186. More small caps
Financial Assets
S&P 500 index
35% 35%
International index
30% Small value cap index

187. Core and explore
Finacial Assets
10%
Emerging markets
Total stock market index
30%
International index 60%

188. Core and explore
Finacial Assets
10%
Healthcare
Total stock market index
30%
International index 60%

189. One year later
Finacial Assets
Healthcare 20%
Total stock market index
15%
International index
65%

190. Portfolio rebalance
Finacial Assets
10%
Healthcare
Total stock market index
30%
International index 60%

191. What to do if no index funds
• Become an activist
• If not matching, roll it over
• Pick the best fund you can

192. The big picture
All Assets
Speculation
5%
10%
Cash
Financial assets
50%
Real estate
35%

193. SOMETHING TO
THINK ABOUT

194. THE END