Intro on Behavioral Finance and the systems that TPC uses to aid in helping deal with the emtions of investing.

1. TPC Lecture IVPrinciples Of Behavioral Finance 9/16/2010

3. Refreshments

4. Restrooms

5. Time for Q&A at the end

6. Who is here from TPC

7. Client Survey = more education

9. TPC Meeting Structure Purpose Review Personal Plan Group Discussion on various topics Educational Who we are and how to use us Who Current Clients Current Clients Current & prospective clients New & Prospective Clients Frequency 1- 4 per year As needed 1 -2 per year As needed Review Meetings TPC Cafe TPC Lecture Series TPC Intro Series

10. The Various Lectures I.O.U.S.A. – National Deficit (Spring 2009) Knowledge, Control, Perception, Mindset (Fall 2009) Fundamentals of Academic Investing (Spring 2010) Principles of Behavioral Finance (Fall 2010)

11. Main Points from Lecture III Active vs. Passive Diversify Risk and Return are related Structure helps explain performance But there is more to the story…

12. Why talk about behavior? Behavior Gap Behavior Gap DALBAR Research – Quantitative Analysis of Investor Behavior 1990-2009

13. Our Natural Tendencies… 2000 2007 ? 2002 2009 ?

14. Are we hard-wired for failure?(the amygdala) Dough and Dope Loss and Death For more info, see Your Money and Your Brain by Jason Zweig

15. Anchoring Holding on to positions Remembering the “high point” of the portfolio Holding on to the past – not addressing today’s realities

16. Overconfidence Driving survey We think we are better than we really are This applies to everyone

17. OverconfidenceHome Bias Global Market Cap How People Invest

18. OverconfidenceHindsight Bias 2002 Survey of 800 investors Half said it had “definitely” been a “bubble” Another third said “probably” a bubble Sit on the sidelines or… Every single one had bought highly priced telecommunications stocks Hindsight makes surprises vanish Fools us into thinking the future is more predictable than it is I knew I should have bought Google!!!

19. Control Illusion of control Returns Inflation Future Income Taxes Macroeconomic Trends Other? What We Control Behavior Decisions

20. Prediction Pattern recognition = fundamental function of the brain – “the baby’s hungry” Problems: Leap to conclusions Happens unconsciously Automatic Uncontrollable Leads to thinking we know what will happen

21. Prediction

22. What does all this mean? Humans aren’t naturally good investors Processes and systems can help in decision making Combine research from economics & behavioral finance for best results

23. TPC Inv. Mgt. Process Risk profiling Assess needs Model Portfolio Rebalancing Adjusting model to the plan Monitor historical valuations

24. TPC Inv. Mgt. Process 1. Risk Profiling Psychometric profiling – built by psychologists Risk preference Starting point Take the time to understand and build it correctly Tool

25. TPC Inv. Mgt. Process 2. Assess Needs Financial Plan & Goal-based investing How much risk is needed How much risk might jeopardize plan Monte Carlo simulation Tool

26. TPC Inv. Mgt. Process 3. Model Portfolio Bonds vs. Stocks Large vs. Small Growth vs. Value U.S. vs. Int’l vs. Emerging Structure helps explain performance Tool Source: Dimensional Fund Advisors - http://www.dfaus.com/

27. TPC Inv. Mgt. Process 4. Rebalancing Set target % for each asset class Establish 20% tolerance bands Rebalance based on volatility Net effect after transaction costs & taxes? Tool No trades needed in this range 8% 12% 10% Buy enough to get back to target % Sell enough to get back to target %

28. TPC Inv. Mgt. Process 5. Adjust Model to Goal Re-run financial Planning projections Proactive review process Address the realities of today Financial Planning vs. a Financial Plan Tool

29. TPC Inv. Mgt. Process 6. Monitor Valuations Average = 16.3 Source: http://www.econ.yale.edu/~shiller/data.htm

30. It Takes Both!!! Economics Active vs. Passive Diversify Risk and Return are related Structure helps explain performance Behavioral Finance Wired to make mistakes Bad behavior can have a large negative impact on performance Systems, policies and procedures can aid in decision making process

31. A Different Perspective… Holistic Planning Traditional Planning

32. Let’s discuss any questions or thoughts! Special thanks to Carl Richards @ www.behaviorgap.com