Transcript Six Strategic Steps

Roadmap for Investing Wisely
Leslie Lum
[email protected]
www.bellevuecollege.edu/financialeducation
1
The Roadmap
•
•
•
•
•
•
Save
Focus on financial goals
Understand returns
Understand risk
Evaluate and asset allocation
Monitor your investments
2
You are the “influencers”
• Many of you can directly benefit from
this presentation
• Many of you have successfully
navigated the financial journey
• We need you to be the “influencers” of
those around you
3
Rule #1: You can make more
money saving aggressively than
you can investing aggressively.
4
How much does a typical family make?
5
What happens to your income over your life?
6
How are we doing at savings?
Savings rate as a percent of disposable income
30
25
20
15
10
5
0
1929
1934
1939
1944
1949
1954
1959
1964
1969
-5
Source: http://www.bea.gov/bea/dn/nipaweb/TableView.asp#Mid
7
1974
1979
1984
1989
1994
1999
2004
Could we save more?
2004 Household Saving Rates
(as a percent of disposable income)
United States
Switzerland
Sweden
Norway
Netherlands
Korea
Japan
Italy
Ireland
Germany
France
Finland
Canada
Austria
Australia
-4.0
-2.0
0.0
2.0
4.0
6.0
http://stats.oecd.org/WBOS/default.aspx?DatasetCode=REFSERIES
8
8.0
10.0
12.0
14.0
Rule #2: If you don’t have goals,
you won’t achieve them.
9
Lay out your goals
(Yours/your kids/your grandkids)
•
•
•
•
•
•
Down payment on house
Wedding
College tuition
Starting your own business
Retirement
Estate (Inheritance or charity)
10
Rule #3: Know how to measure
returns (it will make you less
susceptible to fraud.)
11
Returns
Always calculate returns on an annualized
basis
12
Calculate the return
• You will get your paycheck next week
but you need $100 now. You arrange for
a payday loan paying a fee of $15 for
the use of $100. The payday loan
company will collect the $100
electronically from your bank account
when your pay check is deposited next
week. What is the annual rate charged?
13
Calculate the lost return
You are a typical employee in your 20s
who when you left your job in 2005
cashed out (66% do) your 401K account
of less than $10,000. What is the cost of
cashing out your account if your
balance was $8000?
14
Rule #4: Understand risk
15
Investment Risks
•
•
•
•
•
•
Market risk
Business risk
Interest rate
Inflation risk
Political risk
Fraud risk
16
Cash
Annual Return on Cash
(Treasury Bill Total Return 1971-2000)
50%
45%
40%
35%
30%
25%
20%
About 70% of returns fall within one
standard deviation of the average
15%
10%
Standard Deviation 2.7%
Average 6.7%
5%
Source: Global Financial Data, www.globalfindata.com
17
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
1979
1978
1977
1976
1975
1974
1973
1972
1971
0%
Bonds
Annual Return on Bonds
(Total Return Government Bonds 1971-2000)
50%
40%
30%
About 70% of returns fall within one
standard deviation of the average
20%
Standard
Deviation
9.3%
Average 9.9%
10%
-10%
Source: Global Financial Data
18
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
1979
1978
1977
1976
1975
1974
1973
1972
1971
0%
Stocks
Annual Return on Stocks
(Total Return S&P 500 1971-2000)
50%
40%
30%
Standard
Deviation
16.5%
20%
Average 14.5%
10%
-10%
-20%
About 70% of returns fall within one
standard deviation of the average
-30%
Source: Global Financial Data
19
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
1979
1978
1977
1976
1975
1974
1973
1972
1971
0%
Return versus Risk
The more return you need, the more risk you take.
The more risk you take, the more return you need.
Lessons to learn:
Major Asset Classes (1971-2000)
18%
If you want a higher
return, you need to
invest in riskier
Return
assets (stocks)
16%
Stocks
Average Annual Return 14.5%
Standard Deviation 16.5%
14%
12%
(Annual Return)
10%
The more return, the
more risk.
322% gain
guaranteed?
Only if 322% loss
guaranteed!
Bonds
Average Return 9.9%
Standard Deviation 9.3%
8%
6%
4%
T-Bills
Average Return 6.7%
Standard Deviation 2.7%
2%
0%
0%
2%
4%
6%
8%
Risk
(Standard Deviation)
20
10%
12%
14%
16%
Given the same return, the investment with less
risk is better
21
The Northwest is the best.
www.riskgrades.com
For advanced analysis of risk return
22
How do you get both a good
return and low risk?
23
Risk of loss in stocks is high year to year
Annual Stock Price Changes from 1900 to 2006
(Percent change year to year in S&P 500)
45%
25%
5%
1900
1910
1920
1930
1940
1950
-15%
-35%
-55%
24
1960
1970
1980
1990
2000
Over 5 years, risk of loss is lower
Average Previous Five Years S&P 500 Gains
30%
25%
20%
15%
10%
5%
0%
1900
1910
1920
1930
1940
1950
-5%
-10%
-15%
25
1960
1970
1980
1990
2000
Over 10 years, risk of loss is small
Average Previous Ten Years S&P 500 Gains
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
1900
-2%
1910
1920
1930
1940
1950
-4%
26
1960
1970
1980
1990
2000
Buy low, sell high or Buy high, sell low?
Source: John Bogle testimony to US Senate 11/3/03
27
Lesson?
• Buy and hold market index funds
(doesn’t work for individual stocks)
• Have an emergency fund (3 to 6
months) to tide you over
• Have other sources of income so you
don’t have to cash out during down
markets
28
Rule #5: Asset allocate
29
All eggs in one basket?
• 34.6 percent of families had stock in
only one company
• 59.5 percent had stock in three or fewer
companies
• 9.5 percent had stock in fifteen or more
companies
Source: 2004 Consumer
Finance Survey
30
Two investments – double risk?
The key is
having two
investments
which aren’t
correlated.
31
Adding a riskier investment to your portfolio
Adding 10% stock to a T-bill portfolio
8.5%
Reduces
risk!
90% T-Bill, 10% Stock
Return (Average Annual %)
8.0%
Increases
return.
7.5%
100% T-Bill
7.0%
6.5%
6.0%
2.0%
2.2%
2.4%
2.6%
2.8%
3.0%
3.2%
Risk (Standard Deviation)
Data based on 20 years of returns.
32
3.4%
3.6%
3.8%
4.0%
If you allocate the right amount you reduce risk
and increase return!
Adding stock to a T-bill portfolio
21.0%
100% Stock
19.0%
90%
80%
17.0%
70%
60%
15.0%
50%
40%
13.0%
30%
11.0%
20% stock gives more
return with about the
same amount of risk
as 0% stock.
20% Stock
9.0%
10% Stock
7.0%
5.0%
1.5%
0% Stock
3.5%
Data based on 20 years of returns.
5.5%
7.5%
9.5%
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11.5%
13.5%
15.5%
Pension Fund Portfolio
California Pension
System $230.3 Billion
Direct
Partnership, 6%
Real Estate, 8%
Cash, 1%
International
Equities, 23%
Global Fixed
Income, 23%
Domestic
Equities, 40%
Source: www.calpers.ca.gov Investment Portfolio Market Value as of Dec. 31, 2006
34
“Millionaires” Portfolio
Households with
investable assets
of
Commodities,
$1 million to $10
1%
million
Hedge Funds,
1%
Other, 2%
Private Equity,
5%
Investment real
estate, 7%
Stocks
45%
International
equities, 11%
Source: Fortune, 3/5/2007
Bonds
15%
35
Cash, 13%
401K Allocations by Age
Fixed Income
Company stock
Asset allocation for participants in their
20s
Balanced funds
Equity funds
20%
52%
Asset allocation for participants in
their 60s
13%
13%
Equity funds, 37%
Balanced funds, 10%
Source: Investment Company Institute
36
Fixed Income, 38%
Company stock, 13%
Lessons learned
• Don’t try to time the market
• Allocate between asset classes based
on your income requirements, your
financial goals and your time horizon
• Ladder your fixed income investments
• Rebalance your portfolio (at least
annually) to sell at highs and buy at
lows
37
Rule # 6: Always watch your
money.
38
Evaluating funds
•
•
•
•
Fund company/manager reputation
Fund expenses
Past performance (asset class)
Fund risks
For information, check out
www.morningstar.com
39
Use indices to monitor your portfolio
Philadelphia
GoldSilver
Annual Returns of Selected Asset Classes
S&P Midcap
50%
Russell 2000 Small
Cap
40%
S&P 500
30%
EAFE International
Developed
20%
NAREIT Real
Estate
10%
0%
2002
2003
2004
-10%
-20%
-30%
40
2005
2006
Investment Advice
• According to the Consumer Federation
about one-third of mutual fund investors
rely completely on their advisors to
choose investments and do not read
about or research their investments
• Is this good?
41
Investment Advice
• Spend time and take care in choosing
your advisor
• Read all your statements, keep good
records, and check for errors
• Only invest in what you understand
(Warren Buffet rule #1)
• Assess your portfolio at least once a
year against your cash requirements,
financial goals and time horizon
42
The Roadmap
•
•
•
•
•
•
Save
Focus on financial goals
Understand returns
Understand risk
Asset allocation
Monitor your investments
43