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Rational Investing

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Rational Investing

  1. 1. Material prepared by Raymond James for use by our financial advisors. Rational Investing in Irrational Times
  2. 2. Why We’re Here … Understand the current economic situation Assess the implications Provide perspective Look toward the future Answer what questions we can
  3. 3. Something to Think About … “ Be fearful when others are greedy, and be greedy when others are fearful. “ I haven’t the faintest idea as to whether stocks will be higher or lower in a month – or a year – from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up.” – Warren Buffett New York Times op-ed October 16, 2008
  4. 4. What Happened? <ul><li>The collapse of both the subprime lending market and the real estate &quot;bubble&quot; led to widespread credit problems. </li></ul><ul><li>Many once-strong U.S. financial institutions declared bankruptcy, failed or were acquired in 2008, prompting the Troubled Asset Relief Program (TARP), a $700-billion bailout plan to cope with the bad debt left behind. </li></ul><ul><li>In December 2008, the National Bureau of Economic Research declared that the United States had been in a recession since December 2007. </li></ul><ul><li>In February, President Obama signed a $787-billion economic stimulus program – $350 billion of which came from the existing bailout fund and the rest from private investors and the Federal Reserve, making use of its ability to print money. </li></ul><ul><li>On March 2, 2009, the Dow Jones Industrial Average fell below 7,000 for the first time since October 1997. </li></ul><ul><li>On June 8, 2009, General Motors and Citigroup were removed from the Dow Jones Industrial Average, replaced by Cisco Systems, Inc. and Travelers Companies, Inc. </li></ul><ul><li>In July, the American Bankers Association reported credit card and home-equity delinquencies had hit record levels. </li></ul>
  5. 5. Where We Are Now The Dow Jones Industrial Average is an unmanaged index of 30 widely held stocks. Investors cannot invest directly in an index. Past performance is not indicative of future results. Source: Dow Jones Dow Jones Industrial Average
  6. 6. Looking Forward Source: FactSet as of 5/29/09 Past Recessions and Inflation
  7. 7. Unemployment Rate Concern Past Recessions and Unemployment Source: FactSet as of 6/30/09
  8. 8. What Has the Government Done? Source: Federal Reserve Fed Funds Rate
  9. 9. Historically, Most Markets Show Long-Term Gains … Past performance is no guarantee of future results. • An investment cannot be made directly in an index. • Hypothetical value of $1 invested at the beginning of 1926. Assumes reinvestment of income and no transaction costs or taxes. This is for illustrative purposes only and not indicative of any investment. • Source: Created by Raymond James using Ibbotson Presentation Materials. ©2009 Morningstar, Inc. All rights reserved. Used with permission.
  10. 10. Calendar-Year Total Returns for Large Company Stocks 1 (1926 to 2008) … While Experiencing Dramatic Ups and Downs Source: Ibbotson 1 Large company stocks represented by S&P 500 ® Index. The S&P 500 Index is widely regarded as the standard for measuring large-cap U.S. stock performance, and includes a representative sample of leading companies in leading industries. The index is unmanaged and is not available for direct investment. Past performance is not indicative of future results.
  11. 11. Why Market Timing is So Difficult All investing involves risk and you may incur a profit or a loss. Past performance is not a guarantee of future results. Source: The Hartford, Ned Davis Research. The S&P 500 Index measures changes in stock market conditions based on the average performance of 500 widely held common stocks. It is a market-weighted index calculated on a total return basis with dividends reinvested. The S&P 500 represents approximately 75% of the investable U.S. equity market. Indices are not available for direct investment. Occurred during a bear market Occurred during the rest of a bull market Occurred during the first two months of a bull market S&P 500 Index: The 50 Best Days from 1978 to 2007
  12. 12. All investing involves risk and you may incur a profit or a loss. Past performance is not a guarantee of future results. Source: The Hartford, Ibbotson Associates, Inc. The S&P 500 Index measures changes in stock market conditions based on the average performance of 500 widely held common stocks. It is a market-weighted index calculated on a total return basis with dividends reinvested. The S&P 500 represents approximately 75% of the investable U.S. equity market. Indices are not available for direct investment. Impact of Missing the Market S&P 500 Index Average Annual Total Returns: 1978 to 2008
  13. 13. Periods of Consecutive Negative Stock Returns, 1926 to 2008 Past performance is no guarantee of future results. • An investment cannot be made directly in an index. • This art is for illustrative purposes only and not indicative of any investment. 3/1/2009 • Source: Created by Raymond James using Ibbotson Presentation Materials. ©2009 Morningstar, Inc. All rights reserved. Used with permission.
  14. 14. Market Downturns and Recoveries, 1926 to 2008 Past performance is no guarantee of future results. • An investment cannot be made directly in an index. • This art is for illustrative purposes only and not indicative of any investment. 3/1/2009 • Source: Created by Raymond James using Ibbotson Presentation Materials. ©2009 Morningstar, Inc. All rights reserved. Used with permission. -83.4% -21.8% -10.2% -15.0% -22.3% -15.6% -29.3% -42.6% -14.3% -16.5% -29.6% -14.7% -15.4% -44.7% % Loss -40.1% 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 14 Months 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 TBD 3 Months Recovery TBD *Nov 2007 – Dec 2008 Sep 1929 – Jun 1932 Jul 1932 – Jan 1945 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
  15. 15. Diversification Can Help Provide Consistent Returns Past performance is no guarantee of future results. • An investment cannot be made directly in an index. • Time period illustrated is from 1956 to 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. • Source: Created by Raymond James using Ibbotson Presentation Materials. ©2008 Morningstar, Inc. All rights reserved. Used with permission.
  16. 16. Asset Allocation Can Help Manage Risk
  17. 17. Index Descriptions
  18. 18. Recommendations for Investors Don’t overreact: The temptation to “exit the market” may be nearly overwhelming. Think long term: As Buffett – and history – tell us, at some point, the markets will turn. We don’t know when … or to what degree. So be wary of selling at the bottom – and missing opportunities as the market recovers. Assess your situation: Evaluate your short-term financial needs and reaffirm your longer-term goals. Evaluate your investments: Review your financial plan and your portfolio to help put current events into perspective and – if you conclude it’s needed – make necessary adjustments. Look for opportunities: Once you’ve thoroughly assessed the situation, your holdings and your personal circumstances, you may want to start identifying opportunities for future investment. Securities issued by fundamentally solid companies, backed by expert management and sound policies, may be at historically low prices now. But as the economy turns, they could offer significant potential for appreciation.
  19. 19. Raymond James Financial While no financial firm can be totally unscathed by recent market and economic events, Raymond James Financial continues to fare well in this challenging environment. We attribute this strength in large part to the conservative business principles and thoughtful management strategies that have shaped our company since its inception. We believe that the key to our success lies in our commitment to our clients as well as to these fundamental tenets: • Understanding the whole picture • Long-term perspective • Research and due diligence • Diversification and asset allocation • Risk management • Manager selection and monitoring • Account protection • Planning for the future
  20. 20. Disclosures Holding stocks for the long term does not ensure a profitable outcome. Investing involves risk and investors may incur a profit or a loss. Standard deviation measures the fluctuations of returns around the arithmetic average return of investment. The higher the standard deviation, the greater the variability (and thus risk) of the investment returns. An inverse relationship typically exists between interest rate movements and fixed income prices. Generally, when interest rates rise, fixed income prices fall, and when interest rates fall, fixed income prices generally rise. Investing in small-cap stocks generally involves greater risks and, therefore, may not be appropriate for every investor. U.S. government bonds and Treasury bills are guaranteed by the U.S. government and, if held to maturity, offer a fixed rate of return and guaranteed principal value. U.S. government bonds are issued and guaranteed as to the timely payment of principal and interest by the federal government. Treasury bills are certificates reflecting short-term (less than one year) obligations of the U.S. government. Diversification does not ensure a profit or protect against a loss.

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