know your number presented by john forney source: created by raymond james using ibbotson...

Know Your Number

Presented by John Forney

Source: Created by Raymond James using Ibbotson Presentation Materials • © 2010 Morningstar, Inc.All rights reserved. Used with permission.

What We Know


Ideally…START EARLY!!


The Earlier You Start Investing, the Easier It Is to Reach Your Goals Monthly savings needed to accumulate $1 million by age 65

This is for illustrative purposes only and not indicative of any investment. • Source: Created by Raymond James using Ibbotson Presentation Materials • © 2010 Morningstar. All Rights Reserved. 3/1/2010

25-Year-Old 35-Year-Old 45-Year-Old 55-Year-Old

$6,000

5,000

4,000

3,000

2,000

1,000

0

$5,778

$1,920

$820

$381

History Tells Us Much


0.10

1

10

100

1,000

$10,000

1926 1936 1946 1956 1966 1976 1986 1996 2006

Ibbotson® SBBI®

Stocks, Bonds, Bills, and Inflation 1926 – 2009

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 • © 2010 Morningstar. All Rights Reserved. 3/1/2010

$12,231

$2,592

$84

$21

$12

Compound Annual Return

Small Stocks 11.9% Large Stocks

Government Bonds

Treasury Bills

• Inflation

9.8

5.4

3.7

3.0

Taxes Significantly Reduce Returns1926 – 2009

Past performance is no guarantee of future results. • An investment cannot be made directly in an index. • This is for illustrative purposes only and not indicative of any investment. • Source: Created by Raymond James using Ibbotson Presentation Materials • © 2010 Morningstar. All Rights Reserved. 3/1/2010

7.7%

5.4%

3.4%3.7%

3.0%

0

2

4

6

8

10%

Stocks Stocks AfterTaxes

Bonds AfterTaxes

Bonds Cash Cash AfterTaxes

Inflation

9.8%

2.3%

The Current Retirement Picture


Most Americans Are Not Saving Enough for Retirement Personal savings rate 1947 – 2009

1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007

0

2

4

6

8

10

14%

12

Source: Created by Raymond James using Ibbotson Presentation Materials • © 2010 Morningstar. All Rights Reserved. 3/1/2010

Retirees Should Plan for a Long RetirementProbability of a 65-year-old living to various ages

0

25

50

75

100%

65 Years Old 70 75 80 85 90 95 100 105

• Male

• Female

• At least one spouse

78 86

85 91

91 96

81

88

93

Source: Annuity 2000 Mortality Tables. • Created by Raymond James using Ibbotson Presentation Materials • © 2010 Morningstar. All Rights Reserved. 3/1/2010

Social Security is Under StrainNumber of beneficiaries per 100 covered workers

Low-cost – assumes relatively rapid economic growth, low inflation, and favorable (from the standpoint of program financing) demographic and program-specific conditions; Intermediate – represents the Trustees’ best estimates of likely future demographic, economic, and program-specific conditions; High-cost – assumes relatively slow economic growth, high inflation, and unfavorable demographic and program-specific conditions. • Source: Created by Raymond James using Ibbotson Presentation Materials • © 2010 Morningstar. All Rights Reserved. 3/1/2010

20501960 1970 1980 1990 2000 2010 2020 2030 2040

Historical Estimated

60

40

30

20

0

10

50

• Low Cost• Intermediate• High Cost

Inflation Significantly Erodes Purchasing Power Over TimeEffects of 3% inflation on purchasing power

Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. • Source: Created by Raymond James using Ibbotson Presentation Materials • © 2010 Morningstar. All Rights Reserved. 3/1/2010

$100k

80

60

40

20

0

0 Years 5 10 15 20 25 30

$73,742

$63,325

$54,379

$46,697

$40,101

$85,873

Inflation and Taxes Reduce ReturnsCompound annual returns,1926 – 2009

Past performance is no guarantee of future results. • An investment cannot be made directly in an index. • Assumes reinvestment of income and no transaction costs. Inflation rate over the time period 1926 – 2009 was 3.0%. This is for illustrative purposes only and not indicative of any investment. • Source: Created by Raymond James using Ibbotson Presentation Materials • © 2010 Morningstar. All Rights Reserved. 3/1/2010

CashBondsStocks

-2

0

2

4

6

8

10%

Return AfterInflation

After Taxes& Inflation





9.8%

6.6%

4.6%

5.4%

2.3%

0.3%

3.7%

0.6%

-0.7%

How Much to Withdraw?


Withdrawal Rate You Can Sustain May Be Lower Than You ThinkAverage: 1926 – 2009

6.05%

5.20%

4.33%

0

1

2

3

4

5

6%

75% Stocks/25% Bonds 50% Stocks/50% Bonds 25% Stocks/75% Bonds

Past performance is no guarantee of future results. • An investment cannot be made directly in an index. •


High Withdrawal Rates Will Quickly Deplete Your AssetsSimulated portfolio values (90% confidence level)

Withdrawal Rate: 8% 7% 6% 5% 4%

$1 Mil

500k

100

50

10

65 Years Old 100959085807570

An investment cannot be made directly in an index. • IMPORTANT: Projections generated by Morningstar regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Results may vary over time and with each simulation. This is for illustrative purposes only and not indicative of any investment. • Source: Created by Raymond James using Ibbotson Presentation Materials • © 2010 Morningstar. All Rights Reserved. 3/1/2010

High Withdrawal Rates Will Quickly Deplete Your AssetsAge to which a portfolio may last based on withdrawal rate (90% confidence level)

74

75

77

79

82

86

94

100+

• Portfolio:Stocks 50%Bonds 40Cash 10

10%Withdr.Rate

9

8

7

6

5

4

3

Age 65 70 75 80 85 90 95 100


Probability of Meeting Income NeedsVarious withdrawal rates and portfolio allocations over a 25-year retirement

85%

34%

4%

0%

0%

97%

72%

28%

5%

0%

96%

81%

54%

28%

12%

93%

80%

62%

44%

28%

90%

78%

64%

50%

38%

4% Withdrawal Rate

5%

6%

7%

8%

100%Bonds

75% B25% S

50% B50% S

25% B75% S

100%Stocks


What is Your Risk Tolerance?And How to Manage Risk


Reduction of Risk Over Time1926 – 2009

Past performance is no guarantee of future results. • An investment cannot be made directly in an index. • Each bar shows the range of compound annual returns for each asset class over the period 1926–2009. This is for illustrative purposes only and not indicative of any investment. • Source: Created by Raymond James using Ibbotson Presentation Materials • © 2010 Morningstar. All Rights Reserved. 3/1/2010

Small Stocks Large Stocks Government Bonds Treasury Bills

-60

-30

0

30

60

90

120

150%

1-Year

Holding Period

5-Year 20-Year 1-Year 5-Year 20-Year 1-Year 5-Year 20-Year 1-Year 5-Year 20-Year

Compound Annual Return:11.9% 9.8%

5.4% 3.7%

Potential to Reduce Risk or Increase Return1970 – 2009

Past performance is no guarantee of future results. • An investment cannot be made directly in an index. • Risk and return are measured by standard deviation and compound annual return, respectively. They are based on annual data over the period 1970 – 2009. This is for illustrative purposes only and not indicative of any investment. • Source: Created by Raymond James using Ibbotson Presentation Materials • © 2010 Morningstar. All Rights Reserved. 3/1/2010

Lower Risk Portfolio Higher Return PortfolioFixed Income Portfolio

Return: 8.0%Risk: 5.8%



15%

85%

19%27%

37%

12%

44% 61%

• Stocks• Bonds• Cash

Diversified Portfolios in Various Market ConditionsPerformance during and after select bear markets

Past performance is no guarantee of future results. • An investment cannot be made directly in an index. • Diversified portfolio: 35% stocks, 40% bonds, 25% Treasury bills. Hypothetical value of $1,000 invested at the beginning of January 1973 and Nov 2007, respectively. This is for illustrative purposes only and not indicative of any investment. • Source: Created by Raymond James using Ibbotson Presentation Materials • © 2010 Morningstar. All Rights Reserved. 3/1/2010

Mid-1970s Recession (Jan 1973 – Jun 1976) 2008 Bear Market (Nov 2007 – Mar 2009)

$1,150

$1,014

$844

$491

$1,250

1,000

750

250 Jan1973

Jan1974

Jan1975

Jan1976

Nov 2007

Mar 2008

Jul2008

Nov 2008

• Stocks

• Diversified Portfolio

500

Mar 2009

Investor Behavior – How it Affects Your Number


Seeing Is Not Believing

Which gray circle is bigger? Which gray bar is longer? Are the gray horizontal lines parallel?



Rational Minds Can Act Irrationally

They are the same size. They are the same size. The horizontal lines are parallel.

Patterns of Investor Irrationality

• Overconfidence

• Hindsight bias

• Short-term focus

• Regret

• Mental accounting

• Hot-hand fallacy


Definition

• Rating oneself as above average when it comes to selecting investments

Implications

• Miscalculating the probability of good outcomes

• Focusing on the potential upside of investments

• De-emphasizing the potential downside of investments

Overconfidence


Overconfidence: False PerceptionHistorical performance of emerging-market stocks 2004 – 2009

80% Return

60

20

0

-20

-60

40

-40

26.0%

34.5% 32.6%

39.8%

-53.2%

79.0%

2004 2005 2006 2007 2008 2009



Hindsight Bias

Definition

• Believing that unpredictable past events, in retrospect, were obvious and predictable

Implications

• Feelings of anger and regret

• Failure to avoid what appears to have been foreseeable

• Overconfidence


Hindsight Bias: Technology and Real Estate BubblesAn examination of technology stocks and home values

Technology Bubble Real Estate Bubble*

$367

$200

$2,000

1,000

100

1992 19911994 1996 1998 2000 2002

100

200

$300

1995 1999 2003 2007

Past performance is no guarantee of future results. • An investment cannot be made directly in an index. • *Data available through November 2009. • This is for illustrative purposes only and not indicative of any investment. • Source: Created by Raymond James using Ibbotson Presentation Materials • © 2010 Morningstar. All Rights Reserved. 3/1/2010

Short-Term Focus

Definition

• Inappropriately focusing on short-term risk versus long-term risk

Implications

• Many investors talk long term but act short term.

• Overly sensitive to interim volatility regardless of time horizon

• May tend to behave as though their time horizon is far shorter than it truly is


When shown a distribution of one-year returns, investors allocated 40% to stocks.

When shown a distribution of 30-year returns, investors allocated 90% to stocks.

• Stocks

Short-Term Focus: Avoiding Potential Near-Term LossesChoice of asset allocation after examining different return distributions

40%

60%

10%

90%

• Bonds

Source: Shlomo Benartzi and Richard H. Thaler, “Risk Aversion or Myopia? Choices in Repeated Gambles and Retirement Investments,” March 1999. • Created by Raymond James using Ibbotson Presentation Materials • © 2010 Morningstar. All Rights Reserved. 3/1/2010

Short-Term Focus: Coping with Near-Term Fluctuations Probability of losing money in the market 1990–2009

50% Probability

0

Daily

40

30

20

10

Monthly Quarterly Annually

46%

36%

31%

25%



Regret

Definition

• Having illogical feelings of guilt because of a poor outcome

Implications

• Investors’ future investment decisions might be affected.

• Can cause investors to become more risk averse/risk tolerant

• These individuals may blame advisors for perceived mistakes.


Mental Accounting

Definition

• Mentally compartmentalizing investments while ignoring the aggregate portfolio

Implications

• Investors tend to disaggregate a diversified portfolio.

• Risk and return components are viewed in a vacuum.

• Leads to heightened concern about the riskiness of a component of a portfolio


Mental Accounting: Sum of the PartsRisk and return characteristics 1970 – 2009

Total Portfolio


Large Stocks

Return:Risk:

Small Stocks

Return:Risk:

Bonds

Return:Risk:

Cash

Return:Risk:

International Stocks

Return:Risk:

10.2%23.1%

8.6%11.9%

5.7%3.0%

9.9%18.1%

12.1%23.6%



Hot-Hand Fallacy

Definition

• Perceiving trends where none exist and consequently taking action on this faulty observation

Implications

• Investors desire to invest in last year’s winners.

• Favoring a “hot” money manager or asset class

• Skill is inferred from a random pattern of chance.

• Can lead to erroneous assumptions and predictions


Hot-Hand Fallacy: Asset-Class Winners and LosersAnnual performance of various asset classes 1995 – 2009

2007

11.6

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

37.6% 23.0 33.4 28.6 29.8 21.5 22.8 17.8 60.7 20.7 14.0 26.9

2008

25.9

9.934.5 17.6 22.8 20.3 27.3 5.9 3.8 1.6 39.2 18.4 7.8 16.2 1.6

5.531.7 10.3 15.9 13.1 21.0 0.6 3.7 -6.5 28.7 12.0 7.3 15.8 -0.7

23.8 5.46.4 15.9 12.2 14.3 -3.6 -0.8 -13.3 24.8 10.9 5.7 12.9 -36.7

4.711.6 5.2 5.3 4.9 4.7 -9.1 -11.9 -15.7 1.4 8.5 4.9 4.8 -37.0

-5.25.6 -0.9 2.1 -7.3 -9.0 -14.0 -21.2 -22.1 1.0 1.2 3.0 1.2 -43.1

2009

32.5

28.1

26.5

14.0

0.1

-14.9

HighestReturn

LowestReturn

• Small Stocks • Large Stocks • International Stocks • Long-Term Government Bonds • Treasury Bills • Diversified Portfolio



Hot-Hand Fallacy: Chasing Fund Performance Wealth versus cash flows 2000 – 2009

• Growth of $10,000

• Cash Flows10-Year Fund Total Return = 8.47%

10-Year Average Investor Return = -22.26%

-100

0

50

100

150

200

250

$300m

-50

20082000 2001 2002 2003 2004 2005 2006 2007 2009

0

10

20

25

40

$45k

35

30

15

5



Find Calculators to Find Your Number at www.forneyfs.com/number


Summary

• Investor misconceptions can be dangerous.

• They need to be identified early and countered in an appropriate manner.

• Markets and investing must be viewed in a rational and productive manner.


• Investors should carefully consider the investment objectives, risks, charges and expenses of mutual funds before investing. The prospectuses contain this and other information about mutual funds. The prospectuses are available from our office and should be read carefully before investing.

• Investing in small-cap stocks generally involves greater risks and, therefore, may not be appropriate for every investor.

• International investing involves special risks, including currency fluctuations, different financial accounting standards, and possible political and economic volatility.

• Investing in emerging markets can be riskier than investing in well-established foreign markets.

• Asset allocation and diversification do not ensure a profit or guarantee against a loss.

• There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices generally rise.

• Holding stocks for the long-term does not insure a profitable outcome. Investing in stocks always involves risk, including the possibility of losing one's entire investment.

Disclosures

March 1, 2010 • Source: Created by Raymond James using Ibbotson Presentation Materials © 2010 Morningstar, Inc. All rights reserved. Used with permission. 2010 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC • 2010 Raymond James Financial Services, Inc., member FINRA/SIPC

Continued on next slide

• 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.

• Companies engaged in the technology sector are subject to fierce competition and their products and services may be subject to rapid obsolescence.

• Declines in the value of real estate, economic conditions, property taxes, tax laws and interest rates all present potential risks to real estate investments.

Disclosures (continued)

March 1, 2010 • Source: Created by Raymond James using Ibbotson Presentation Materials © 2010 Morningstar, Inc. All rights reserved. Used with permission. 2010 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC • 2010 Raymond James Financial Services, Inc., member FINRA/SIPC

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