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Kootenay Valley Financial Services Inc.
Click to progress through presentation
Two Great Questions in Life
A$$ETSWhat do What do
You Have?You Have?What do What do
You Have?You Have?
GOAL What do What do You Need?You Need?What do What do
You Need?You Need?
Principles for Long Term Investment Success
Asset class performance is ________________over long time frames.
Investment expense are ________ importantthan returns.
Diversification is not always ____________ .
Mutual Funds are ____________ within asset classes.
______________ asset classes based on volatility enhances return.
PREDICTABLE
MORE
EFFICIENT
RANDOM
COMBINING
What are Your CORE BELIEFS?
Taxes WILL always go up, not down. ______ ______
To be financially SECURE incomemust keep pace with inflation. ______ ______
Life expectancies ARE greater than ever. ______ ______Managed Equities ARE safer than CD’s and Bonds. ______ ______
Risk is a necessary evil. ______ ______
Yes No
XX
XX
XX
XXXX
Speculative
Foundation
Investors typically have THREE types of Capital
To achieve a consistent investment return – You must avoid the BIG MISTAKE!
3. _______________ 2. _______
1.
Core
The S&P Average MarketReturn over the last 10 Years?
12.7%
Ibbotson, Morningstar andFidelity studies show
Average Investor Returns over the last 10 Years.
2.3%
The THREE Barriers to financial success
1. _____________________
2. _____________________
3. _____________________
Taxes
InflationInefficient
Diversification
INVESTMENT FRICTION
Let’s look at TAXES!!!
If $1 doubles every year for 20 years
$1,048,576$100 =In a
40% Tax Bracket$12,089
In a28% Tax Bracket
$51,353
Notice the huge impact TAXES can have on your wealth
3.0% 2.7% 1.6% 1.7% 3.3% 2.7% 2.7% 2.8% 3.0% 3.1% 6.1% 4.6% 4.4% 4.4% 1.1% 3.8% 4.0% 3.8% 3.9% 8.9%12.4%
200019991998199719961995199419931992199119901989198819871986198519841983198219811980
13.0% 9.0% 6.8% 4.8% 7.0% 12.2% 8.8% 3.4% 3.4% 5.5% 6.1% 4.7% 3.0% 3.3% 1.9% 1.2% 1.7% 1.2% 0.7% 1.5% 1.5%
1.8% 3.0% 2.0% 0.4% - 0.5% 0.6% 0.9% 5.9% 5.8% - 1.8% 2.7% 9.0% 18.2% 2.2% 2.1% 3.2% 9.3% 9,7% 1.0% - 0.5% - 2.8%
197919781977197619751974197319721771197019691968196719661965196419631962196119601959
195819571956195519541953195219511950194919481947194619451944194319421941194019391938
Now let’s look at INFLATION
AVERAGE 3.6% 4.8% 3.4%
StampWoman’s SkirtHouseCarLoaf of Bread½ Gal MilkMedian Income
$ .06$ 7.50$25,000$ 3,400$ .23$ .50$ 4,594
$ .33$ 85.00$235,000$ 25,000$ 2.39$ 2.15$ 18,500
5.85%8.43%7.76%6.68%8.12%4.98%4.66%
COMMODITY 1970 TODAY INFLATION
Does History Really Repeat Itself?
What is the TRUE Inflation rate?
24%?
1940 1960 1980 2000
7%
14%
% Over age 65Living to age 90
Why is Inflation such a PROBLEM?
The longer people livethe higher the risk theywill “Run Out of Money”
The longer people livethe higher the risk theywill “Run Out of Money”
How does inflation IMPACT you?
45 65
20 yrs 10 yrs10 yrs
85
$50,000
Age:
$18,000
$32,000
It’s the 2nd TEN Years of Retirement that matters
What is RISK?
Name the TWO kinds of risk:
1. _____________________________
2. _____________________________
Loss of Capital
Loss of Purchasing Power
What Causes LOSS of CAPITAL?
It’s all about Volatility
Whose Numbers are those?
They are notYours - UNLESSYou are Buying orSelling
How do you measure Volatility?
Average ROR
Index
Average ROR+/-
12% 17
+17%-17% 12%
High 29% Low - 5%
+29%- 5%
Risk is ALL ABOUT VolatilityRisk is ALL ABOUT VolatilityRisk is ALL ABOUT VolatilityRisk is ALL ABOUT Volatility
Retirement
But Remember – Risk is also Inflation
So, which Risk is Guaranteed to Happen?
What can you do to PROTECT yourWhat can you do to PROTECT yourPurchasing power?Purchasing power?
Return onReturn onInvestmentInvestment
ROI ROI adjusted foradjusted for
InflationInflation
~2.2 x~4 x
Small Cap
Large Cap
Corporate Bonds
Gov’t Bonds
Inflation
12.4%
11.3%
5.6%
5.1%
3.3%
9.1%
8.0%
2.3%
1.8%
Brinson Study
60
80
100
0
20
40
Timing
2%2%
StockSelection
4%4%
AssetAllocation
94%94%
What IMPROVES Portfolio PerformanceWhat IMPROVES Portfolio Performance
1.
2.
3.
Where should I invest my MONEY?Where should I invest my MONEY?
Name THREE basic Asset Classes?
Cash
Stocks
Bonds
HistoricalHistoricalReturn on Return on InvestmentInvestment
Volatility IndexVolatility Index
Small Cap
Large Cap
Corporate Bonds
Gov’t Bonds
Inflation
Is asset class performance PREDICTABLE?Is asset class performance PREDICTABLE?
12.4%
11.3%
5.6%
5.1%
3.3%
39.62%
20.17%
8.78%
9.43%
16.61%
8.51%
4.57%
4.69%
1 Year 5 Year
4.42% 3.29%
The Lipper StudyThe Lipper Study
Mutual Funds in the same asset class eventuallyEarn the same average rate of return.
REGRESSION TO THE MEAN
Some asset classes move in Some asset classes move in OPPOSITE directionsOPPOSITE directions
-1 Zero +1
Negative – Moves in opposite directionsTotally Random – no relationshipPositive – Moves in the SAME direction
U.S. vs. InternationalU.S. vs. International
Rolling
12-Month
40%
30%
20%
10%
0%
10%
20%
30%
40%
50%
60%
70%
Returns
72 76 80 84 86 90 94 98
International outperforms U.S.
U.S. outperforms International
Why are Correlation CoefficientsWhy are Correlation Coefficientsimportant?important?
VA
LU
EV
AL
UE
TIMETIME
This is Called INEFFICIENT Diversification
We need to create DISSIMILARWe need to create DISSIMILARPrice MovementsPrice Movements
This is Called EFFICIENT Diversification
VA
LU
EV
AL
UE
TIMETIME
AA
AA && BB
BB
Average return vs. Internal Rate of ReturnAverage return vs. Internal Rate of Return
YEARYEAR
1122334455
RETURNRETURN
Ave ROIAve ROIIRRIRR
10%10%10%10%10% 10% 10% 10% 10% 10%
10%10%10%10%
Average return vs. Internal Rate of ReturnAverage return vs. Internal Rate of Return
YEARYEAR
1122334455
20%20%- 5%- 5%- 10% - 10% 20% 20% 25% 25%
Ave ROIAve ROIIRRIRR
RETURNRETURN
10%10%9.05%9.05%
Determine the REAL rate of returnDetermine the REAL rate of return
YEARYEAR
1122334455
25%25% 25%25% 25%25% 25%25%-30%-30%
RETURNRETURN
Average ROIAverage ROI 14.00%14.00%
Determine the REAL rate of returnDetermine the REAL rate of return
YEARYEAR
1122334455
14%14% 15%15% 13%13% 16%16% 4%4%
RETURNRETURN
Average ROIAverage ROI 12.40%12.40%
Determine the REAL rate of returnDetermine the REAL rate of return
YEARYEAR
1122334455
25%25% 25%25% 25%25% 25%25%-30%-30%
RETURNRETURN
14%14% 15%15% 13%13% 16%16% 4%4%
RETURNRETURN
Average ROIAverage ROI 14.00%14.00% 12.40%12.40%
IRRIRRIRR 11.3%11.3% 12.2%12.2%
Why is this IMPORTANT?Why is this IMPORTANT?
This effect can ONLY be consistently achieved with EFFICIENT Diversification
VA
LU
EV
AL
UE
TIMETIME
What is the EFFICIENT FRONTIER?What is the EFFICIENT FRONTIER?
100%100% InternationalInternational
100% 100% Large CapLarge Cap
Retu
rn
Risk
Optimum MixOptimum Mix
100% Stocks100% Stocks
80% Stocks/20% Bonds80% Stocks/20% Bonds
60% Stocks/40% Bonds60% Stocks/40% Bonds
100% Bonds100% Bonds
20% Stocks/80% Bonds20% Stocks/80% Bonds
40% Stocks/60% Bonds40% Stocks/60% Bonds
50% Stocks/50% Bonds50% Stocks/50% Bonds
YEARS
30
25
20
15
10
5
1
35 40 45 50 55 60 65 70AGE
Discover your optimal risk allocationDiscover your optimal risk allocation
Three Professors from the Chicago School of Economics (Miller, Sharpe and Markowitz) received the NOBEL PRIZE in 1990 for these
research conclusions:
1. Reduce Investment Risk
2. Increase Return
3. Create Dissimilar Price Movements4. Use Asset Allocation
NobelPrize