Transcript Slide 1

FIRST WESTERN TRUST BANK
Investment Pools – Best Practices
Guy W. Holman, CPA, CFP®
Sr. Vice President – Portfolio Manager
5460 S. Quebec St., Suite 200
Greenwood Village, CO 80111
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INVESTMENT OBJECTIVE
Meet Financial Goals with Appropriate Financial Vehicles
Extremes:
• Pay as You Go
• Endowments
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UNDERSTANDING INVESTMENTS
Key Concepts
– Time Horizon
– Diversification/Asset Allocation
– Risk and Reward
– Discipline
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TIME HORIZON
Financial Vehicles each Have Unique Characteristics
• Short-Term (< 1 Year) – Bank Deposits, Money
Market, CDs
• Intermediate Term (1-3 Years) – CDs, Fixed Income
• Long Term (> 3 Years) – Diversified Portfolio
including Equities, Risk Assets
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DIVERSIFICATION/ASSET ALLOCATION
Determinants Beyond Time Horizon:
• Liquidity Needs
• Income Needs
• Risk Tolerance
– Emotional (Risk Appetite)
– Economic Capacity
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INVESTMENT PRINCIPLES
• Different investment vehicles
– Stocks, Bonds, Real Estate, Cash Equivalents
• Varying levels of risk associated with different
investments
• Reduce risk with Asset Allocation and
Diversification
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RISK AND RETURN
• Cash
– Stable Value Fund
Lower Risk
• Bonds
– Government
– Corporate
• Real Estate
– REITS
• Stocks
– Large Companies
– Mid & Small Companies
– International Companies
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Higher Risk
MANAGING RISK
Asset allocation takes diversification a step further
The Impact of Various Factors on the Variability of Investment Results
Source: Financial Advisors Study, 1991; Confirmed by Ibbotson Associates, 1999.
No investment strategy, such as asset allocation, can guarantee
a profit or protect against loss in periods of declining values.
Study results are based on historical data and past
performance is not a guarantee of future results.
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THE “LOST DECADE” OF INVESTING?
Diversification and compounding returns helped
10 Years Ending March 2010
$5.0
4%
11%
6%
10%
2%
-1%
10 Year
Annualized
Returns
$4.5
Annualized
returns hide the
impact of
compounding
returns over time
$4.0
Growth of $1
60/40 Portfolio return
smoothed by diversification
$3.5
$3.0
$2.5
50%
195%
10 Year
Cumulative
Returns
84%
162%
60/40
Portfolio
$0.5
-1%
40%
90%
US Equity
Emerging Market Equity
Public Real Estate (REITs)
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



$1.5
$1.0
18%
-10%
$2.0
140%
190%
Developed Non-US Equity
Fixed Income
60/40 Portfolio
$-
Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10
US Equity
Emerging Market Equity
Public Real Estate (REIT's)
Developed Non-US Equity
Fixed Income
60/40 Portfolio*
10 year US equity return of -0.07% (annualized) challenging to say the least.
US equity is not the entire story in a diversified portfolio.
Other diversifiers witnessed stronger returns that pulled up total return for a diversified portfolio.
Don’t confuse annualized returns with cumulative returns. The compounding nature of returns can work in your favor.
Will the next 10 years look like the past 10 years? That’s why you diversify and try to increase your odds.
Diversification does not assure a profit and does not protect against loss in declining markets.
Indexes are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment.
US Equity: R3000; Developed Non-US Equity: MSCI EAFE; Emerging Markets: MSCI EM; Fixed Income: BC Aggregate; Real Estate: FTSE NAREIT Equity;
60/40 Portfolio: 36% US Equity, 16% EAFE, 3% EM, 5% FTSE NAREIT, 40% BC Aggregate
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TRACKING INDEX PORTFOLIO RECOVERY
Did staying the course make sense?
Sept 30, 2008
Three options:
1) 60/40 stay the course
2) Move to 100% Cash
3) Move to 100% Treasuries
$110,000
October 9, 2007
US Equity Market Peak
July 11, 2008
Oil closes at
record high
of $147 barrel
May 29, 2009
US Equity market
turns positive for
2009
$90,000
Mar 14, 2008
JPMorgan
purchases
Bear Stearns
Feb 17, 2009
Obama signs
$787b stimulus
Sept 14, 2008
Lehman Brothers
Bankruptcy
Returns Oct 08 - Dec 09
US Equity
-0.9%
Non-US Equity +10.9%
US Bonds
+10.8%
Treasuries
+4.9%
Cash
+0.3%
$70,000
Mar 18, 2009
Cash after Sept 08
Fed plan to buy up to
$1 trillion in treasuries
and mortgages
Nov 21, 2008
2008 Market Low
March 9, 2009
Treasuries after Sept 08
Dec-09
Nov-09
Aug-09
Jul-09
Jun-09
May-09
Apr-09
Mar-09
Feb-09
Jan-09
Dec-08
Nov-08
Oct-08
US Equity Market Low
Sep-08
Aug-08
Jul-08
Jun-08
May-08
Apr-08
Mar-08
Feb-08
Jan-08
Dec-07
$50,000
Oct-07
$60,000
Nov-07
Portfolio Values on Dec 31, 2009
60/40 Balanced Portfolio:
$92,771
Cash Portfolio:
$85,353
Treasuries:
$89,213
Oct-09
$80,000
Sep-09
Portfolio Value ($)
$100,000
60/40 Balanced Portfolio
Treasuries: BC Treasury Index, Cash: BC 1-3 Month T-bill, 60/40: 40% Russell
3000, 20% Russell Global xUS Equity Index, 40% BC Aggregate Index
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This hypothetical example is for illustration only and is not intended to reflect the return of any actual investment. The 60/40 Balanced Index portfolio does not reflect a deduction for expenses or
fees, had it done so, returns would have been lower.
Index returns represent past performance and are not a guarantee of future performance.
HISTORICAL EQUITY RETURNS
Calendar Year S&P 500
Returns: 1926-2009
1931
-50%
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-40%
2001
1973
1966
1957
1941
2002
1974
1930
2008
1937
-30%
2000
1990
1981
1977
1969
1962
1953
1946
1940
1939
1934
1932
1929
-20%
-10%
2007
2005
1994
1992
1987
1984
1978
1970
1960
1956
1948
1947
0%
10%
Rates of Return
x
2006
2004
1993
1988
1986
1979
1972
1971
1968
1965
1964
1959
1952
1949
1944
1926
2009
2003
1999
1998
1996
1983
1982
1976
1967
1963
1961
1951
1943
1942
20%
1997
1995
1991
1989
1985
1980
1975
1955
1950
1945
1938
1936
1927
30%
1958
1935
1928
40%
1954
1933
50%
60%
After 2008 and early 2009, who would have believed such a strong year for equities?
Average calendar year return +11.8%
Note the distribution of returns to the right of 0%
Over time, it is extremely difficult to time the market to avoid years like 2008 and be invested to enjoy years
like 2009
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Indexes are unmanaged and cannot be invested in directly.
Returns represent past performance, are not a guarantee of future
performance, and are not indicative of any specific investment.
MAKING THE INVESTMENT DECISION
Rules of the Road Have Not Changed
• Diversify
• Take risk appropriately to your time horizon
• Stay disciplined - respond to your plan AND avoid
emotional reactions to news of the day
• Make investment changes when your situation or
needs change
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INVESTMENT SOLUTIONS
Investment
Solution
Management
Solution
Reason
Investment Portfolio < $100,000
Bank Deposits, CDs
Investment Portfolio - $100,000 - $250,000
Single Style-Allocation Fund Frank Russell Company
LifePoints Funds
Investment Portfolio - $250,000 - $750,000
US Swim Asset Allocation
Frank Russell Company
Institutional Funds
Investment Portfolio – Over $750,000
Customized Asset Allocation Frank Russell Company
Funds
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Lower cost
Greater diversification
Master IPS – lower cost
Customized IPS
Institutional pricing
QUESTIONS
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