5 “New Year” Resolutions

1. 5 “New Year” Resolutions OMAC Breakfast 1st Quarter 2010

2. May your troubles last as long as your New Year resolutions do…

3. Less Financial Security? We feel vulnerable to foreign financial crises Even long standing companies don’t seem as strong as they used to be Members’ futures are vulnerable…

4. More Uncertainty? There is less predictability and more uncertainty? “We must do something!”

5. Circumstances changeThe basics of good financial management don’t

6. Resolution #1 Don’t underestimate the power of compound interest

7. Compound Interest How long does it take to double your money?

8. Compound Interest How long does it take to double your money?

9. Compound Interest How much could we earn in 10 years?

10. Compound Interest How much did we earn in 10 years?

11. Compound Interest What would R1000 have become in 10 years?

12. Compound Interest Not bad going for a decade with IT bubble and burst Rand crisis and impact September 11 and global fears 2 market “crashes” Global Credit Crunch Regime Change Recession

13. What if this could continue for theLong term?

14. Compound Interest

15. Compound Interest

16. Compound Interest

17. Don’t Underestimate the Danger of Inflation

18. 2000 White Bread (700g) R3.12 Brown Bread (700g) R2.56 Maize Meal (10kg) R25.26 Rice (1 kg) R6.63 Cooking Oil (750ml) R4.16 Full Cream Milk (1l) R2.56 Fresh Chicken Whole R11.94 Apples (1.5kg) R6.30 Onions (per kg) R2.57 Potatoes (10kg) R13.55 White Sugar (2.5kg) R9.39 Ricoffy Coffee (750g) R23.02 Total R111.06 Today R5.79 R4.99 R47.00 R7.99 R8.99 R6.29 R28.00 R16.95 R5.99 R41.99 R15.39 R51.99 R241.36 Inflation Incr. 186% 195% 186% 121% 216% 246% 235% 269% 233% 310% 164% 226% 217% p.a. 6.4% 6.9% 6.4% 1.9% 8.0% 9.4% 8.9% 10.4% 8.8% 12.0% 5.1% 8.5% 8.1%

19. Inflation In January 2000 Petrol cost R2.88 per litre and Diesel cost R2.47 per litre At February 2010 Petrol was R7.85 per litre and Diesel cost R6.99 per litre An increase of 173% (10.5% p.a.) for Petrol and 183% (11% p.a.) for Diesel

20. Today 10 years Bread R10 R18 Movie R40 R72 Petrol (l) R8 R14 Education R21k R37.6k Car R100k R179k House R950k R1700k 30 Years 40 Years R57 R102 R230 R411 R46 R82 R120.6k R211k R574k R1028k R5545k R9771k Inflation

21. Inflation

22. Inflation

23. Time in the Market Is Still the Most PowerfulDriver of Wealth

24. Resolution #2Resolution #3 Don’t Over-react to Volatile Markets Refine Fund Strategy First, then Review Asset Manager

25. Keep the Long-Term View What tempts us to deviate from our long-term strategies…? We are bombarded with daily financial information and market information Our natural inclination is to avoid loss and uncertainty We start to think we must/can time the market

26. Information Overload We are living in the information age… • Market and financial information is reported • Daily (Newspapers, TV) • Hourly (Radio, Internet, Mobile Phone) • Real-time (Internet, Mobile Phone) • Some of the most well known statistics in SA are: • Rand/$ Exchange rate • ALSI • Gold and Platinum Price • Oil Price

27. Information Overload Our focus is pulled to the short term by Repetitive reporting of short term “Expert” analysis of short-term Predictions that are short-term Amplification of Uncertainty

29. Human Nature Loss Aversion Self Serving Bias Anchoring Framing

30. Market Volatility What happens next?

31. Market Volatility What happens next?

32. Market Volatility To 31 January 2010

33. Human Nature Which do you prefer? • Return of 5% for the year • One third chance of 15% return and two third chance of 0% return for the year • Loss of 10% for the year • One third chance of 0% return and two third chance of 15% loss for the year

34. Human Nature Loss Aversion Losses hurt more than gains Prefer to avoid losing R1000 than gain R1000 Self Serving Bias We take personal credit for success, but blame failures on others Poor performance means a bad manager Anchoring Focus on a reference point which becomes the norm Extended bull run becomes normal Framing Investment choices and opinion changes depending on context of situation Answer to same question can change

35. Market Volatility To 31 January 2010 13% 21% 24% 18% 12% 8% -9% 20% -5% -20% -13% -20% 30% 29% -4% -8% -36% -20%

36. Human Nature Losses really hurt! We must avoid further losses… Move to Cash Loss Aversion Fire Manager By moving out of equity, we avoid others’ incompetence and do something useful… Move to Cash Self-serving Bias Fire Manager Compared to the Bull market, all performance seems sub-standard. Equities lose their charm… Move to Cash Anchoring Fire Manager The uncertainty of the market and potential losses make certainty, at any return attractive… Move to Cash Framing Fire Manager

37. Long Term View

38. Timing the Market

39. Timing the Market If your fund offers investment choice… How well do you think your members are doing in timing the market?

40. Timing the Market How well do you think your asset managers are doing in timing the market?

41. Long Term View

42. Long Term View

43. Market Timing

44. Resolution #4 Take On An Appropriate Level of Risk

45. Market Volatility To 31 January 2010 13% 21% 24% 18% 12% 8% -9% 20% -5% -20% -13% -20% 30% 29% -4% -8% -36% -20%

46. Investment Risk Feeling nervous about equities? Equities have historically outperformed other asset classes in the long term Prices do deviate from true value from time to time Bubbles and corrections

47. Investment Risk

48. Investment Risk One can lose money OR One can lose out on money

49. Derivatives Equity Property Smooth Bonus Gilts Cash Investment Risk Return Volatility Risk (Exit Risk) Volatility

50. Derivatives Equity Property Smooth Bonus Gilts ILG Cash Investment Risk Return Inflation Risk (Growth Risk) Volatility