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Burton G. Malkiel Chemical Bank Chairman’s Professor of Economics Princeton University

Burton G. Malkiel Chemical Bank Chairman’s Professor of Economics Princeton University “Investing in a Restrained Market” University of Pennsylvania January 17, 2006. Exhibit 1. Exhibit 2. January, 2006. Exhibit 3. Exhibit 4. Exhibit 5. Exhibit 6. So Does Rebalancing. Exhibit 7.

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Burton G. Malkiel Chemical Bank Chairman’s Professor of Economics Princeton University

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  1. Burton G. Malkiel Chemical Bank Chairman’s Professor of Economics Princeton University “Investing in a Restrained Market” University of Pennsylvania January 17, 2006

  2. Exhibit 1

  3. Exhibit 2 January, 2006

  4. Exhibit 3

  5. Exhibit 4

  6. Exhibit 5

  7. Exhibit 6 So Does Rebalancing

  8. Exhibit 7

  9. Exhibit 8 Asset Allocation for Person in Mid-Fifties

  10. Exhibit 9 Suggested Asset Allocation Retirement Portfolio

  11. Exhibit 10 BOW TO THE WISDOM OF THE MARKET • Markets are reasonably efficient • Index Funds Outperform • Past is not prologue

  12. Percent of Large Capitalization Equity Funds Outperformed by Index Ending December 31, 2004. 1 Yr 3 Yrs 5 Yrs 10 Yrs 20 Yrs S&P vs. Large Cap Equity 74% 76% 63% 86% 90% Funds The Case for Indexing continues to be strongThe Case for Active Management continues to be weak Exhibit 11

  13. Exhibit 12 Index Funds tend to outperform by Over Two Percentage Points Comparison of Returns-Average Equity Fund vs. Indexes 10 Yrs 20 Yrs to 12/31/04 to 12/31/04 S&P 500 Index 12.00% 12.78% Average Equity Fund* 9.30% 10.54% S&P 500 Advantage 2.70 2.48 (percentage points) Source: Lipper, Wilshire, & the Vanguard Group. *Consists of ALL Lipper equity categories.

  14. Exhibit 13

  15. Exhibit 14 Getting Burned by Hot Funds

  16. Exhibit 15

  17. Percentage of Actively Managed Bond Funds Outperformed by Benchmark 10 Years Ended 12/31/04 Gov’t. Corp. GNMA High-Yield Short-term 98% 100% 90% 83% Intermediate-term 90 99 Long-term 75 83 Source: Lipper Inc. and Morningstar, Inc. Exhibit 16

  18. Exhibit 17 How to Buy Bonds Taxable vs. Tax Exempt Mutual Funds NJ/PA Money Market Fund NJ/PA (insured) Long-Term Bond Fund Buy Bonds Directly Only buy insured new issues Yields today about 4½% for insured bonds (AAA)

  19. DON’T BE YOUR OWN WORST ENEMY AVOID STUPID INVESTOR TRICKS Exhibit 18 • Overconfidence • Herding • Loss Aversion • A couple of other common errors • - Hot tip Investing • - New Issue Investing

  20. Exhibit 19 Buy Annuities Pro: Surest way to guarantee you won’t Outlive your money Con: Expensive, inflexible, and inconsistent With a bequest motive. Retirement Strategies Do it Yourself 1. Determine the takeout rate Assume Portfolio half equities (7 ½ % return) and half bonds (5% return). Average return 6 ¼ % Minus Inflation Adjustment 2 % Takeout rate 4 ¼ % 2. Rebalance– Take money out of best performing asset class

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