The following presentation dispells the myth behind stock picking, market timing and track record investing. It also shows the millions that has been lost by investors who have believed the myth.
5. MYTH 1: STOCK SELECTION THE MYTH: Investment advisors can consistently and predictably add value by exercising “superior skill” in individual Stock selection. Stock Selection : Choosing stocks based on a belief they will do well in the future.
6. Average of all US Equity funds available in the CRSP Survivor- Bias Free US Mutual Fund Database, data ending Dec. 2007 S&P 500 Index and CRSP Market Index data obtained from DFA Returns software 12/07 Past performance is no guarantee of future results and investors may experience a loss. Wealth Lost to Active Stock Picking $1,388,024 $3,824,323 $2,436,299
7. Average of all mutual funds available in the CRSP Survivor- Bias Free US Mutual Fund Database, data ending Dec. 2007 Hypothetical Portfolios based on data in endnote 8. Past performance is no guarantee of future results and investors may experience a loss. 8 $6,358,777 $3,813,099 $1,242,204 $2,168,746 $9,134,358
8. Total Number of Funds Open 2007 20,316 Total Number Born 32,076 Total Number Killed 11,760 Survivorship Bias For illustrative purposes only. Mutual fund data provided by CRSP Survivor Bias Free Mutual Fund Database. CRSP data provided by the Center for Research in Security Prices, University of Chicago. PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS AND INVESTORS MAY EXPERIENCE A LOSS. 1218 1258 20,316 2007 974 2062 20,276 2006 1067 1847 19,188 2005 851 1576 18,408 2004 1081 1532 17,683 2003 1019 1860 17,232 2002 1002 1806 16,391 2001 865 2185 15,587 2000 56 1805 14,267 1999 489 1838 12,518 1998 537 1950 11,169 1997 507 1632 9756 1996 498 1440 8631 1995 234 1977 7689 1994 160 1655 5946 1993 174 955 4451 1992 115 555 3670 1991 186 457 3230 1990 118 251 2959 1989 80 364 2826 1988 35 457 2542 1987 24 437 2120 1986 17 326 1707 1985 19 255 1398 1984 25 194 1162 1983 24 189 993 1982 16 117 828 1981 20 73 727 1980 Number of Dead Funds Number of New Funds Number of Funds Year 0 5 143 1951 0 7 138 1950 0 14 131 1949 0 4 117 1948 0 10 113 1947 0 5 103 1946 0 5 98 1945 0 6 93 1944 0 0 87 1943 0 0 87 1942 0 1 87 1941 0 8 86 1940 0 7 78 1939 0 9 71 1938 0 3 62 1937 0 2 59 1936 0 9 57 1935 0 2 48 1934 0 11 46 1933 0 15 35 1932 0 3 20 1931 0 1 17 1930 0 6 16 1929 0 4 10 1928 0 0 6 1927 0 1 6 1926 0 1 5 1925 0 3 4 1924 0 1 1 1923 Number of Dead Funds Number of New Funds Number of Funds Year 0 39 383 1966 25 51 674 1979 26 32 648 1978 27 39 642 1977 25 56 630 1976 31 24 599 1975 47 32 606 1974 36 28 621 1973 35 29 629 1972 32 45 635 1971 23 59 622 1970 8 98 586 1969 1 76 496 1968 0 38 421 1967 0 25 344 1965 0 16 319 1964 0 10 303 1963 0 13 293 1962 33 26 280 1961 0 17 287 1960 0 25 270 1959 0 18 245 1958 0 20 227 1957 0 18 207 1956 0 3 189 1955 0 20 186 1954 0 13 166 1953 0 10 153 1952 Number of Dead Funds Number of New Funds Number of Funds Year
9. For illustrative purposes only. Mutual fund data provided by CRSP Survivor Bias Free Mutual Fund Database. CRSP data provided by the Center for Research in Security Prices, University of Chicago. PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS AND INVESTORS MAY EXPERIENCE A LOSS.
10. The Worst 200 Dead Mutual Funds - 73.9 % AVERAGE RETURN For illustrative purposes only. Mutual fund data provided by CRSP Survivor Bias Free Mutual Fund Database. CRSP data provided by the Center for Research in Security Prices, University of Chicago. PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS AND INVESTORS MAY EXPERIENCE A LOSS.
11. MYTH 2: TRACK-RECORD INVESTING Track-Record Investing : The use of performance history to determine the best investments for the future. THE MYTH: Finding funds that did well in the past is a reliable method of indicating which funds will do well in the future.
12. Track Record Investing Top 30 Funds Average Return All Funds Average Return S&P 500 Index CRSP 1-10 Index Total Funds 1988-1997 Total Funds 1998-2007 1988-1997 23.13 15.82 18.86 18.60 572 1998-2007 6.20 6.98 7.23 7.68 2228
13. Track Record Investing Top 30 Funds Average Return All Funds Average Return S&P 500 Index CRSP 1-10 Index No. of Funds 1990-1994 18.77 9.40 8.69 9.04 569 1995-1999 21.66 22.24 28.55 27.42 1,524
14. A manager’s ability to pick stocks in the past has ZERO CORRELATION with his/her ability to do so in the future.
15. MYTH 3: MARKET TIMING Market Timing : Any attempt to alter or change the mix of assets based on a prediction or forecast about the future. THE MYTH: Money managers are able to utilize market timing to effectively predict up & down markets.
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19. CHARLES D. ELLIS “ The evidence on investment managers’ success with market timing is impressive - and overwhelmingly negative.” Charles D. Ellis, Investment Policy , 1993 Charles D. Ellis is a managing partner of Greenwich Associates, the leading consulting firm specializing in financial services worldwide. B.A. Yale, M.B.A (with distinction) Harvard and Ph.D. New York University
20. MYTH 4: COSTS OF INVESTING Costs of Investing : Fees incurred by investors to buy, sell, and own stocks or mutual funds. THE MYTH: What you don’t see can’t hurt you.
23. BID/ASK SPREAD What Your Broker Won’t Tell You Source: Reuters Trading Systems (Apr. 30, 2007) The Bid/Ask Spread as a percent of price is a conservative estimate of actual trading costs. This estimate is almost 80 times as great for the smallest market segment as for the largest market segment (2.40 vs 0.03). 0.24 17.92 163-521 0.06 51.32 1,800-4,454 0.03 62.86 25,456-446,994 2.40 7.95 0-163 0.11 31.11 521-1,800 0.05 58.72 4,454-25,456 Percent Spread Average Price Market Cap Range ($Millions)
24. CONSUMER “NO LOAD” MUTUAL FUNDS “ The key question under the new rules of the game is this: How much better must a[n]...[actively trading]... manager be to at least recover the cost of...[portfolio turnover]? The answer is daunting.” Source: Charles D. Ellis, Investment Policy - How to Win the Loser's Game , 1985 1. Mutual fund trading plus bid/ask spread cost taken from Investment Policy - How to Win the Loser’s Game , 2nd Edition by Charles D. Ellis (1993) p.8-9.
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26. THE STORY OF INVESTING: FREE MARKET PORTFOLIO THEORY
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35. DR. HARRY MARKOWITZ As a graduate student in economics at the University of Chicago in the 1950's, Dr. Markowitz won acclaim for his studies on portfolio design and risk reduction. These concepts were later crucial for the development of Modern Portfolio Theory. Nobel Prize Winner 1990
36. MARKOWITZ EFFICIENT FRONTIER Maximizing Expected Returns for Any Level of Volatility 6 8 10 12 14 16 18 20 6 8 10 12 14 16 One Year Standard Deviation (Volatility) Annualized Compound Return Growth Aggressive S&P 500 Conservative Moderate
38. ASSET CLASS CORRELATION Example Portfolio Time Value Investment A Investment B Portfolio 50/50 Combined Portfolio
39. INCREASE RETURNS AND REDUCE VOLATILITY Source: DFA Returns Software 12/07 Return(%) Simplified Example Of Low Correlation Benefits January 1971 - December 2007 (in $U.S.) Standard Deviation Large U.S. 100% S&P 500 Index 1,7 11.27 16.78 70% S&P 500 1,7 30% EAFE 1,5 Large U.S. EAFE 16.35 11.61 70% S&P 500 1 ,7 20% EAFE 1 ,5 10% Int'l Small 1 ,3,4 Large U.S. EAFE Small Int'l 16.28 12.32
46. CREATING A DIVERSIFIED PORTFOLIO Portfolio 1 100% Equity Mutual Funds 1988-2007 Portfolio 1 4.48 15.79 Annualized Return (%) Annualized Standard Deviation (%) 60% 40% Actual Investor Results 100% Equity Mutual Funds Dalbar Investor Results Research for period 1988-2007 Portfolio 1- Data from DALBAR, Inc. Quantitative Analysis of Investor Behavior, 2007 Past performance is no guarantee of future results.
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53. THE 20 MUST-ANSWER QUESTIONS FOR YOUR JOURNEY TOWARD PEACE OF MIND Directions: Answer each question “Yes” or “No.” Your Answer must be 100% “Yes” to qualify as “Yes.”
54. QUESTION 1 Have you discovered your True Purpose for Money, that which is more important than money itself?
The Purpose for Leading this Presentation is to explain the common misconceptions about investing and introduce Free Market Portfolio Theory. At this point I’d like to spend about 45 minutes showing you the key concepts that have led to my conclusion about this new investment solution. First, we have to discuss the myths that are so frequently taught to the average, unsuspecting investor and then I’ll contrast that with the truth about successful investing.