® ©copyright 2001, financeware, inc. all rights reserved using wealthcare to unlock concentrated...

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©Copyright 2001, Financeware, Inc. All rights reserved

Using Wealthcare to Unlock

Concentrated Stock Positions

Applying Wealthcare: Concentrated Stock Positions

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© WEALTHCARE CAPITAL MANAGEMENT 2004 ALL RIGHTS RESERVED PAGE 2

Main Issues

Clients With Concentrated Holdings Need Wealthcare Too…

Its Just Harder For Them to Pull the Trigger

Wealthcare is About Making the Most of The One Life Investors Have

Without Needless Compromises

And Without Unnecessary Investment Risk

If You Connect On the Value Proposition…

If You Understand Their Goals

If You Understand How They Prioritize Their Goals

They Will Buy Your Recommendation


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Risk of Single Stocks vs. the “Market”

Predicted Risk of an Average Stock by Universe vs. S&P 500 Index

Source: BARRA & Parametric 6/02

35%38%

45%49%

65%

16%

0%

10%

20%

30%

40%

50%

60%

70%

S&P 500Stock

Russell 1000Stock

Russell 3000Stock

Russell 2000Stock

EntireUniverse

S&P 500Index


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Problems With Obtaining Standard Deviation

Pop Quiz: What is the Standard Deviation of the S&P 500?

A) 15% B) 18% C) 20% D) 30%

S&P500 IBM GE MO*52 WK High 32% 40% 40% 95%52 WK Low 11% 18% 18% 17%

What Standard Deviation Do You Use?

*MO – Philip Morris


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Financeware Asset Allocation Page

Alternative / Other Assets

Concentrated Large Cap

Standard Dev and Arithmetic Mean

And Their Impact on the Geometric Mean


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Arithmetic vs. Geometric Returns1st Example:

Starting With $100Year 1 Return +100% $100 + ($100 * 1) = $200Year 2 Return -50% $200 + ($200 * -.5) = $100Ending Value $100

Geometric Return ((Ending Value - Starting Value) - Starting Value) / Starting

Value = 0%Arithmetic Return(Year 1 Rtn + Year 2 Rtn) / 2 = 25%

The Geometric Return Reflects Compounding…


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Arithmetic vs. Geometric

2nd Example

A B

Arithmetic Mean 12% 12%

Standard Deviation 18% 54%

Resulting Geometric Mean 10.58% 0.89%

The Higher The Volatility, The Greater The Delta Between The Geometric & Arithmetic Means

Arithmetic Means Are Used In Monte Carlo Simulation

Geometric Means Are Used In Most Marketing Material


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Measuring Confidence Against Inflation

What are the ODDS of beating INFLATION over a 10 Year Time Horizon? Any One Stock: 42%


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What are the ODDS of beating INFLATION over a 10 Year Time Horizon? Any One Stock: 42%Entire Universe of Stocks: 94%


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What are the ODDS of beating INFLATION over a 10 Year Time Horizon? Any One Stock: 42%Entire Universe of Stocks: 94%Balanced (60/40): 98%


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Why Wealthcare?

»We Know The Risk Of Holding is High

»But, The Tax Cost to Diversify Can Be High

»And The Emotional Cost To Sell Can Be High

»With the deck stacked against us, how can we provide Comfort?


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Case Study – Gary and Terrie Jones

»Gary – Age 58 & Terrie – Age 56

-no children, but love their pets»Household Income $325,000 (Gary – Circuit City Executive

& Terrie – Veterinarian)»Total Investment Assets

IRAs (saving $30k per year) $2,250,000

Brokerage Accounts (saving $10k per year) $1,200,000

Comfortable With Current Savings Levels ($40k per year)

Current Bear Market Has Been PAINFUL

Looking Forward To A “RELAXING RETIREMENT”


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»GOALS:

Retire @ 60, but no later than 65

Spend $140k, but $120k would be enough

Reduce Savings by $10k, but could save $10k more

Ideally Spend Month In Australian Outback ($30k)

Minimum Vacation of a Week ($10k)

Leave Large Estate (To Build an Animal Shelter)

preferably $1,000,000, but at least $250,000

Minimize Investment Risk


» GOALS:

Retire @ 60, but no later than 65

Spend $140k, but $120k would be enough

Reduce Savings by $10k, but could save $10k more

PRIORITIES:

Ideally Spend Month In Australian Outback ($30k)

Minimum Vacation of a Week ($10k)

Leave Large Estate (To Build an Animal Shelter)

preferably $1,000,000, but at least $250,000

Minimize Investment Risk


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Because you focused on what they valued most, THEY BUY YOUR ADVICE…

Knowing their Goals and Priorities, building a Recommendation is Simple…


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Implementation

Portfolio Components

Your Recommended Portfolio:» Risk Averse Allocation

Gary Reminds You Of His Employer: CIRCUIT CITY…and that in March 2000, CC was $43.48 per share…and now in January 2004, CC is $10.35 per share

While he indicated his goal was “Minimize Investment Risk!” and it was a Priority

…he does not want to sell their stock for such a loss…

DOES THIS SOUND FAMILIAR?


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Comparison of Recommendations

6 Times

Standard Deviation

10 Times

Downside Risk

Recommended = Comfort

Concentrated = Uncertain


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Using Our Crystal Ball…

What Does the Future Hold for The Jones Family?

Their Stock Could Help Them Leave $60 Million More


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Their Stock Could Help Them Leave $60 Million MoreOr…The Results Could Be The Same, But With More Pain


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Their Stock Could Help Them Leave $60 Million MoreOr…The Results Could Be The Same, But With More PainOr…they could run out of money @ age 85


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Their Stock Could Help Them Leave $60 Million MoreOr…The Results Could Be The Same, But With More PainOr…they could run out of money @ age 85Or…they could run out of money @ age 73

Which Market Will Occur?


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Comparison of Recommendations

To Have Comfort…

>>Work 3 Years Longer

>>Spend $60,000 Less

>>Lose the Animal Shelter

>>Save $70,000 More

>>No More Safari Trips

What Would It Cost Them To Keep Their Stock?


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In Conclusion

Don’t Let Your Clients Gamble Their Future…Use Wealthcare To Unlock Their Highly Concentrated Positions

With Concentrated Positions…

Experience Unnecessary Pain (and likely Un-Rewarded Pain)

Confidence and Comfort Compromised (Coin-Flip)

Contradictory to Making The Most of Their Life

With Wealthcare…

Avoid Unnecessary Investment Risk

Achieve Comfort and Confidence

Live Life Without Needless Sacrifice


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Questions?

® ©copyright 2001, financeware, inc. all rights reserved using wealthcare to unlock concentrated...

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