1. LWI Financial, Inc. (“Loring Ward”). Securities offered through Loring Ward Securities, Inc. (or your advisor’s affiliates) Member FINRA/SIPC #07-427 (4/09)
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6. Risks associated with investing in stocks potentially include increased volatility (up and down movement in the value of your assets) and loss of principal. Indexes are unmanaged baskets of securities that investors cannot directly invest in. Past performance is no guarantee of future results. Hypothetical value of $1 invested at the beginning of 1927 and kept invested through December 31, 2008. 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. Total returns in U.S. dollars. Long Term Government Bonds, One-Month US Treasury Bills, and US Consumer Price Index (inflation), source: Morningstar’s 2007 Stocks, Bonds, Bills, And Inflation Yearbook (2008); Fama/French Total U.S. Market Index provided by Fama/French from Center for Research in Security Prices (CRSP) data. Includes all NYSE securities (plus Amex equivalents since July 1962 and NASDAQ equivalents since 1973), including utilities. Invest in Stocks Growth of $1 Jan. 1, 1927 – Dec. 31, 2008
7. Indexes are unmanaged baskets of securities that investors cannot directly invest in. Past performance is no guarantee of future results. Hypothetical value of $1 invested at the beginning of 1927 and kept invested through December 31, 2008. 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. Total returns in U.S. dollars. Fama/French Total U.S. Market Index provided by Fama/French from Center for Research in Security Prices (CRSP) data. Includes all NYSE securities (plus Amex equivalents since July 1962 and NASDAQ equivalents since 1973), including utilities. The Standard & Poor's 500 Index is an unmanaged market value-weighted index of 500 stocks that are traded on the NYSE, AMEX and NASDAQ. The weightings make each company's influence on the index performance directly proportional to that company's market value. The Center for Research in Security Prices (CRSP) ranks all NYSE companies by market capitalization and divides them into 10 equally-populated portfolios. AMEX and NASDAQ National Market stocks are then placed into deciles according to their respective capitalizations, determined by the NYSE breakpoints. CRSP Portfolios 6-10 represent small caps. Standard deviation is a statistical measurement of how far the return of a security (or index) moves above or below its average value. The greater the standard deviation, the riskier an investment is considered to be. Emphasize Small Companies Growth of $1 Jan. 1, 1927 – Dec. 31, 2008 Small company stocks have higher expected returns and risk than larger company stocks U.S. Large Cap Total U.S. Market U.S. Small Cap CRSP Deciles 1-5 Index Fama/French Total CRSP Deciles 6-10 Index U.S. Market Index Annualized Compound Return 9.3% 9.5% 11.1% Annualized Standard Deviation 18.5% 18.7% 27.5% $1,459 $1,694 $5,641
8. Indexes are unmanaged baskets of securities that investors cannot directly invest in. Past performance is no guarantee of future results. Hypothetical value of $1 invested at the beginning of 1927 and kept invested through December 31, 2008. 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. Total returns in U.S. dollars. CRSP is the Center for Research in Security Prices. CRSP ranks all NYSE companies by market capitalization and divides them into 10 equally-populated portfolios. AMEX and NASDAQ National Market stocks are then placed into deciles according to their respective capitalizations, determined by the NYSE breakpoints. Value is represented by companies with a book-to-market ratio in the top 30% of all companies. Growth is represented by companies with a book-to-market ratio in the bottom 30% of all companies. The CRSP Value and Growth divisions within the CRSP 1-5 Portfolios are employed to formulate the Fama/French U.S Large Value Index and Fama/French U.S Large Growth Index. Fama/French Total U.S. Market Index provided by Fama/French from Center for Research in Security Prices (CRSP) data. Includes all NYSE securities (plus Amex equivalents since July 1962 and NASDAQ equivalents since 1973), including utilities. Fama/French U.S. Large Growth Index provided by Fama/French from Center for Research in Security Prices (CRSP) data. Includes the upper-half range in market cap and the lower 30% in book-to-market of NYSE securities (plus Amex equivalents since July 1962 and NASDAQ equivalents since 1973), excluding utilities. Fama/French U.S. Large Value Index provided by Fama/French from CRSP data. Includes the upper-half range in market cap and the higher 30% in book-to-market of NYSE securities (plus Amex equivalents since July 1962 and NASDAQ equivalents since 1973), excluding utilities. Standard deviation is a statistical measurement of how far the return of a security (or index) moves above or below its average value. The greater the standard deviation, the riskier an investment is considered to be. “ Value” stocks have higher expected returns and risk than “Growth” stocks Emphasize Value Companies Growth of $1 Jan. 1, 1927 – Dec. 31, 2008 U.S. Large Growth U.S. Total Market U.S. Large Value Fama/French Fama/French Total Fama/French U.S. Large Growth Index U.S. Market Index U.S. Large Value Index Annualized Compound Return 8.6% 9.5% 10.0% Annualized Standard Deviation 19.0% 18.7% 26.1% $891 $1,694 $2,559
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10. Highest Return Lowest Return The Need for Diversification Asset Class Index Performance 1987-2007 Diversification does not guarantee a profit or protect against a loss. Data Sources: Center for Research in Security Prices (CRSP), BARRA Inc. and Morgan Stanley Capital International, December 2008. All investments involve risk. Foreign securities involve additional risks, including foreign currency changes, political risks, foreign taxes, and different methods of accounting and financial reporting. Past performance is not indicative of future performance. Treasury bills are guaranteed as to repayment of principal and interest by the U.S. government. This information does not constitute a solicitation for sale of any securities. CRSP is the Center for Research in Security Prices. CRSP ranks all NYSE companies by market capitalization and divides them into 10 equally-populated portfolios. AMEX and NASDAQ National Market stocks are then placed into deciles according to their respective capitalizations, determined by the NYSE breakpoints. CRSP Portfolios 1-5 represent large-cap stocks; Portfolios 6-10 represent small caps; Value is represented by companies with a book-to-market ratio in the top 30% of all companies. Growth is represented by companies with a book-to-market ratio in the bottom 30% of all companies. S&P 500 Index is the Standard & Poor’s 500 Index. The S&P 500 Index measures the performance of large-capitalization U.S. stocks. The S&P 500 is an unmanaged market value-weighted index of 500 stocks that are traded on the NYSE, AMEX and NASDAQ. The weightings make each company’s influence on the index performance directly proportional to that company’s market value. The MSCI EAFE Index (Morgan Stanley Capital International Europe, Australasia, Far East Index) is comprised of over 1,000 companies representing the stock markets of Europe, Australia, New Zealand and the Far East, and is an unmanaged index. EAFE represents non-U.S. large stocks. Foreign securities involve additional risks, including foreign currency changes, political risks, foreign taxes and different methods of accounting and financial reporting. Consumer Price Index (CPI) is a measure of inflation. REITs, represented by the NAREIT Equity REIT Index, is an unmanaged market cap-weighted index comprised of 151 equity REITS. Emerging Markets index represents securities in countries with developing economies and provide potentially high returns. Many Latin American, Eastern European and Asian countries are considered emerging markets. Indexes are unmanaged baskets of securities without the fees and expenses associated with mutual funds and other investments. Investors cannot directly invest in an index. Although indexes do not have fees and expenses, the average operating expense ratio for each category, as contained in Morningstar’s database of mutual funds (as of November 2008), was deducted.
11. U.S. and International Markets Perform Differently Rolling 12-month Variance (Jan 1972 – Dec 2008) International Outperforms U.S. Outperforms Past Performance is not indicative of future results. All investments involve risk. Foreign securities involve additional risks including foreign currency changes, taxes and different accounting and financial reporting methods. International market performance represented by the MSCI EAFE Index (Morgan Stanley Capital International Europe, Australasia, Far East Index), comprised of over 1,000 companies representing the stock markets of Europe, Australia, New Zealand and the Far East, and is an unmanaged index. EAFE represents non-U.S. large stocks. U.S. market performance represented by the Standard & Poor's 500 Index, an unmanaged market value-weighted index of 500 stocks that are traded on the NYSE, AMEX and NASDAQ. The weightings make each company's influence on the index performance directly proportional to that company's market value. Global Market Capitalization Source: Center for Research in Security Prices (CRSP) January, 2009 *Source: Impact of an Aging Population on the Global Economy Jeremy J. Siegel CFA Institute Conference Proceedings Quarterly (09/07 ) 1970 _________________ U.S. 66% International 34% 2007 _________________ U.S. 47% International 53% 2050* (Projected)* _________________ U.S. 17% International 83%
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16. The Cycle of Market Emotions Emotion often leads to trying to time markets For Illustration Purposes Only
18. Average stock investor and average bond investor performances were used from a DALBAR study, Quantitative Analysis of Investor Behavior (QAIB), 12/2008. QAIB calculates investor returns as the change in assets after excluding sales, redemptions, and exchanges. This method of calculation captures realized and unrealized capital gains, dividends, interest, trading costs, sales charges, fees, expenses, and any other costs. After calculating investor returns in dollar terms (above), two percentages are calculated: Total investor return rate for the period and annualized investor return rate. Total return rate is determined by calculating the investor return dollars as a percentage of the net of the sales, redemptions, and exchanges for the period. The fact that buy-and-hold has been a successful strategy in the past does not guarantee that it will continue to be successful in the future. Stay the Course Average Investor vs. Major Indices 1987 - 2008 11.8% 7.6% 4.5% 3.0% 1.6%
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Editor's Notes
Thank you all for being here today. I’ve met many of you already, but for those who may not know me, my name is… [Introduce yourself] I’m so glad you could join us for this presentation on Structured Investing. Structured Investing is more than a style of investing. It is a fundamental way of looking at markets and thinking about economics and human behavior that is grounded in reason and prudence and focused on creating a well-executed plan for your financial future. Before we begin, let me tell you a little bit about myself and my background. [Discuss background] LWI Financial, Inc. (“Loring Ward”). Securities offered through Loring Ward Securities, Inc. (or your advisor’s affiliates) Member FINRA/SIPC #08-143 (06/08)
Above all, Structured Investing is a deliberate and thoughtful investment process designed to help you achieve your lifetime financial goals and focus on what matters most to you, whether it is putting your children through college, philanthropy or a secure retirement. Structured Investing combines extensive research from academics and economists with practical application and experience. It is based on: • 80+ years of financial market data • Nobel Prize-winning economic research • In-depth studies of investor psychology and behavior There are five key concepts that play a vital role in the construction of all Structured Investing portfolios: Accept Market Efficiency Take 3 Risks Worth Taking Effectively Diversify Customize Your Portfolio Exercise Patience & Discipline We’ll look at each of these five concepts in depth, beginning with “Accept Market Efficiency.”
In 1965, University of Chicago economics professor Eugene Fama developed The Efficient Markets Hypothesis, which states that current securities prices rapidly reflect all available information and expectations. Also in 1965, MIT professor Paul Samuelson examined the behavior of securities prices and found that market prices are the best estimates of value and that price changes are random and unpredictable. For this work, Samuelson was awarded the Nobel Prize for Economics in 1970. Fama’s and Samuelson’s theories suggest that active investment management cannot consistently add value through security selection and market timing. In other words: Don’t try to beat the market. Instead…we seek to capture market rates of return by investing in large numbers of stocks in selected asset classes, resulting in portfolios with thousands of stocks. However, unlike index funds, we don’t buy every stock in an asset class. We exclude certain groups of stocks with heightened risk or inefficiency, including new stocks (IPOs), financially distressed and bankrupt companies and illiquid stocks. We also focus on minimizing trading costs. We own representation in the selected asset classes and hold onto them, rather than frequently buying and selling. And, as mentioned, we don’t attempt to track indexes, as this can result in significant trading costs. Finally, our portfolio managers have flexibility on when to add or remove individual stocks from asset classes.
Experience shows that even highly-experienced, highly-compensated mutual fund managers have a hard time beating the market. As you can see, the majority of managers have failed to beat their indices. [Read chart on slide]
Markets can be chaotic, but over time they have shown a strong relationship between risk and reward. This means that the compensation for taking on increased levels of risk is the potential to earn greater returns. According to academic research by Professors Eugene Fama and Ken French, there are three “factors” or sources of potentially higher returns with higher corresponding risks: 1. Invest in Stocks 2. Emphasize Small Companies 3. Emphasize Value Companies Let’s look at each of these factors…
The first factor (or risk worth taking) is investing in stocks instead of bonds. One of the safest places you can put your money is in a short-term Treasury bill. You will receive whatever interest is guaranteed by the particular T-Bill, and it will be backed by the full faith and credit of the U.S. Government. This is often referred to as the risk-free rate. Investing in the stock market is much riskier – there are no government guarantees, no guaranteed returns. Because of this increased risk, theory and common sense suggest that investors should be compensated with the potential for greater reward. While past performance is no guarantee of future results, if you had the foresight and longevity to invest $1 in 1927 in the S&P 500, as shown in this chart, your investment would have grown to $2,676 by 2007. If you’d taken that same $1 and invested in One-Month Treasury Bills, you would have $19. The $2,257 difference between these two investments, is a clear demonstration of the potential power of risk and reward. But risk does mean that there will not always be rewards. As you can see, compared with Treasury Bills, there was substantially more up and down movements (volatility) in the S&P 500, including some severe declines such as the Great Depression. Because of the strong, overall historic performance of stocks, they are the backbone of many portfolios, especially long-term portfolios focused on such important goals as retirement.
Over the last 80+ years, smaller companies have outperformed large companies by 1.5% annually. In dollar terms, over time, this makes for a substantial difference as you can see from this chart. This is the second factor (or risk worth taking). However, as you would expect, this higher long-term return from small cap stocks was accompanied by greater volatility. Small companies are usually defined as domestic and international companies with a market capitalization in the bottom 10% of their countries. Unlike large companies, small companies tend to have shorter track records, tend to be less diversified, focusing on only one or two lines of business, and are covered by only a handful of Wall Street analysts. Small companies may become the large companies of tomorrow – they could also go out of business. All these factors mean that they tend to be riskier investments than large companies. Because of this – they must offer greater potential reward in order to attract investment. As we’ve seen, most investors tend not to take uncompensated risks. Though they are riskier than large companies, investing in a cross-section of small companies in the U.S. and major international markets can help you build a diversified portfolio.
The third and final factor (or risk worth taking) is investing in value companies. Historically, lower-priced value stocks have outperformed higher-priced growth stocks. And small value companies have tended to outperform large value companies. However, investing in value companies may involve greater risk of price fluctuation and potential loss. Value stocks are usually associated with corporations that have experienced slower earnings growth or sales, or have recently experienced business difficulties, causing their stock prices to fall. These value companies are often regarded as turnaround opportunities, where a change in management, strategy or other factors could improve the company’s prospects and its earnings. Historically, the earning streams of value stocks have been much more uncertain than growth stocks. This means the market has to assign them lower prices in order to attract investors. Though they are riskier than growth companies, emphasizing value companies in a portfolio may lead to both increased diversification and the expectation of potentially higher returns. As you can see, historically, large value has grown an average of 11.2% per year, vs. 9.4% annually for large growth.
“ Don’t put all of your eggs in one basket.” As an investor, you may have heard this old saying used to emphasize the need for a diversified portfolio. Though most investors today understand the importance of diversification, University of Chicago professor, Harry Markowitz, won a Nobel Prize in Economics for his groundbreaking work in this area. Though diversification does not guarantee a profit or protect against a loss, a combination of asset classes may reduce your portfolio's sensitivity to market swings because different assets - such as bonds and stocks - will react differently to adverse events. For example, the stock and bond markets tend to move in opposite directions; and even when they move in the same direction, they usually don’t move to the same degree. So if your portfolio is diversified across both markets, downward movements in one may be offset by positive results in another. We believe there are 4 primary ways to diversify your portfolio to decrease volatility: [Read rest of slide]
The world may be unstructured, but investing does not have to be. This chart shows the returns (from highest to lowest) for major asset classes over the last twenty years. It is impossible to find any kind of pattern or trend in these results. One year an asset class is the top performer, the next year it is the worst. Instead of trying to guess which asset classes will and won’t do well, we believe it is important instead to diversify widely across multiple asset classes.
While the U.S. stock market is one of the world’s largest, if you invest only in America, you are only getting half (actually 47% ) of the story. From automobile manufacturers to electronics to pharmaceuticals, some of the biggest companies in the world are headquartered outside the United States. By 2050, experts predict the United States will account for only 17% of global market capitalization. In addition, as you can see on the right, international markets and asset classes within those markets have not—historically—moved in unison with the U.S. market. When the U.S. is underperforming, international may outperform…and vice versa. This means that incorporating both international and domestic equities into a portfolio potentially increases diversification and lowers volatility.
The primary role of bonds in a Structured Investing long-term portfolio is to reduce the portfolio’s volatility. Bonds may also provide a steady flow of income that will generally be higher than the yield from stock dividends. This can be an important consideration for many investors, especially if you are retired. But not all bonds are created equal. As the chart demonstrates, bond investments with maturities longer than five years generally entail more risk than shorter maturity bonds. More troubling, investors are not typically compensated for this additional risk. That is why we recommend, instead, high-quality, short-term fixed income to dampen overall portfolio volatility.
Outlining your goals, identifying your risk tolerance, and setting expectations can help you stay successfully invested through bull and bear markets and strong and weak economic environments. The process we use to help our clients plan for a secure future begins with a discussion of their goals and risk tolerance as well as some of their personal experiences with volatility and how these experiences affected the way they invest? We cover issues such as… [Read rest of slide]
[Read slide]
Investing should be a rational process, but as Nobel-prize winning work by Professor Daniel Kahneman found, the more emotional an event is, such as a strong bear market, the less rational or sensible people tend to be. This is why it is so important to exercise patience and discipline when it comes to your investments. The fact is, most successful investors stay focused on the long term. Trying to time the market can affect your long-term investing success. We will review your portfolio regularly and update you on your progress. We will also make adjustments depending on changes in your life. And we will rebalance your portfolio periodically to help keep it aligned with your goals. Investing can be overwhelming, but you don’t have to go it alone. We can help you stay on track and focused on your long-term goals.
Structured Investing is a deliberate and thoughtful process – but the very nature of markets, their sometimes sharp and erratic movements, can make even the most rational, coolheaded investor panic…or in a strong bull market, give way to irrational exuberance. It is not easy to stay focused on the long-term when the short-term consumes our thoughts and emotions. This cycle of market emotions is probably familiar to anyone who has investments, whether in stocks or real estate or even collectibles. Our emotions lead us to trying to time the market -- buying when markets are doing well, and selling when they are doing poorly. But this can have detrimental consequences, including dramatic underperformance, for a portfolio.
Sometimes, even inaction can work against our best interests. As this chart shows, missing even a few of the best days of the market can have a substantial impact on a portfolio. If you had invested $1,000 in 1970, it would be worth $54,116 in 2007. Missing just five of the best days would have cut your returns by about $14,000 to $40,194. No one knows when those “best days” will happen, yet many people prefer to try and ride out a bear market by pulling out of the market or just staying uninvested on the sidelines. Even if you’d missed just one day – the single best day—between 1970 and 2007, you would have made a $4514 mistake. For a $100,000 portfolio, that mistake grew to $451,400…and again, that was just missing the one best day.
A DALBAR 2007 study found that from 1987 – 2006, the average investor did substantially worse than major indices. In this study, the average investor returns were calculated as the change in assets after excluding sales, redemptions and exchanges during the period. This method of calculation captures realized and unrealized capital gains, dividends, interest, trading costs, sales charges, fees, expenses, and any other costs. According to this study, the average equity investor had annual returns of just 4.3% Over the same period, the S&P 500, returned an annual average of 11.8% . This 63% decrease in average annual returns experienced by the average investor is the cost of not exercising patience and discipline. Even in fixed income, investors made expensive mistakes. While the Long-Term Government Bond Index returned 8.6% over this period, the average fixed income investor had an annual return of 1.7%, underperforming even inflation. It is important to note that the fact that buy-and-hold has been a successful strategy in the past does not guarantee that it will continue to be successful in the future.
Rebalancing is an important step that many people neglect when they try to manage their own investments. It helps ensures that your portfolio remains aligned with your goals, risk tolerance and time horizon Because of the movements in markets, your portfolio will also tend to change or “drift” over time and move away from your original asset allocation – unless it is rebalanced. For example, as this illustration shows, if you had started in 1986 with a portfolio that was 50% stocks and 50% bonds…and done nothing, twenty one years later in 2007, this same portfolio would be 72% stocks and only 28% bonds. In other words, your moderate portfolio was now an aggressive one.
Your life and your goals don’t stand still; that why it is critical to work with a financial advisor who regularly monitors your portfolio. [Read slide]
For many of us, our portfolios are tied to our most deeply held goals and dreams. That is why it is important to be deliberate and thoughtful when making investment decisions. As an independent Financial Advisor… [Read slide] Ultimately, the success of your portfolio is measured by whether or not it helps you accomplish your objectives. With our Structured Investing approach, the noise and confusion of the markets can be subdued by simplicity, prudence and confidence as you build a strong investment foundation for your future Thank you so much for joining us today. We have a couple of minutes left, and I’d be happy to answer a couple of questions.
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