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Investing as a Gift Planner: Key Principles and Strategies

Discover the importance of investments in gift planning, how to build credibility, and the competitive advantages. Learn about basic asset classes, diversification, and special gift planning issues.

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Investing as a Gift Planner: Key Principles and Strategies

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  1. 15th Annual DC Planned Giving DaysMay 2007What I Need to Know about Investing as a Gift Planner and WhyDonald Kent, PrincipalBernstein Global Wealth Management

  2. Why Should I Care About Investments? • Build credibility and open the door to discuss assets with prospects and their advisors • Dynamic relationship between gift planning and investment planning • Competitive advantage • Meeting your own objectives

  3. Key Principles to Master • Basic asset classes • Volatility vs. return • Diversification • Time horizon, risk tolerance, spending needs and other key factors in investment planning and gift planning • Special Gift Planning issues • Alternative Investments

  4. Establish time horizon Understand the nature of risk Create an asset balance that meets investment objectives Investment-Planning Policy

  5. Why Stocks? • Superior long-term returns historically • Short-term volatility mandates long-term investing Past performance does not guarantee future results.

  6. Stocks Have Won over Long Term Annualized Returns 1926–2006 Stocks: $3,071 Stocks 10.4% Bonds 5.4 T-Bills 3.9 Inflation 3.0 Bonds: $71 T-Bills: $22 Inflation: $11 $1 Logscale 26 34 43 52 61 70 79 88 97 06 Past performance does not guarantee future results. Stocks are represented by the S&P 500; bonds by long-term government bonds through 1962 and by five-year Treasuries thereafter; T-bills by three-month Treasury bills; and inflation by the Consumer Price Index.Source: Bureau of Labor Statistics; Center for Research in Security Prices; Compustat; Roger G. Ibbotson and Rex A. Sinquefield, “Stocks, Bonds, Bills, and Inflation: Year-by-Year Historical Returns,” University of Chicago Press Journal of Business (January 1976); and AllianceBernstein

  7. Stock Returns Have Been Volatile over the Short Term S&P 500: Annual Returns Average12% Best Year 54% Worst Year (43)% Past performance does not guarantee future results. Source: Compustat; Roger G. Ibbotson and Rex A. Sinquefield, “Stocks, Bonds, Bills, and Inflation: Year-by-Year Historical Returns,” University of Chicago Press Journal of Business (January 1976); and AllianceBernstein

  8. Major Declines in the Stock Market S&P 500 $63.6 Mil. (41)% (15)% (15)% (30)% (17)% (43)% (29)% (16)% (22)% (15)% Growth of$100,000 Past performance does not guarantee future results. Source: Compustat; Roger G. Ibbotson and Rex A. Sinquefield, “Stocks, Bonds, Bills, and Inflation: Year-by-Year Historical Returns,” University of Chicago Press Journal of Business (January 1976); and AllianceBernstein

  9. Five-Year Losses Have Been Rare S&P 500: Rolling Five-Year Periods (Annualized) Average10% Best Case 29% Worst Case (12)% Past performance does not guarantee future results. Source: Compustat; Roger G. Ibbotson and Rex A. Sinquefield, “Stocks, Bonds, Bills, and Inflation: Year-by-Year Historical Returns,” University of Chicago Press Journal of Business(January 1976); and AllianceBernstein

  10. Stocks Have Not Lost Money over the Long Term S&P 500: Rolling Periods (Annualized) 15 Years Best Case 19% Worst Case 1% Average11% 20 Years Average11% Best Case 18% Worst Case 3% 30 Years Best Case 14% Worst Case 8% Average11% Past performance does not guarantee future results. Source: Compustat; Roger G. Ibbotson and Rex A. Sinquefield, “Stocks, Bonds, Bills, and Inflation: Year-by-Year Historical Returns,” University of Chicago Press Journal of Business (January 1976); and AllianceBernstein

  11. Percent of Times Beating Inflation 1926–2006 One Year 10 Years 20 Years Stocks 68% 90% 100% T-Bills 64% 67% 68% Bonds 62% 68% 69% Past performance does not guarantee future results. Treasury securities are guaranteed by the United States government as to the timely payment of interest and principal if held to maturity. Stocks are represented by the S&P 500; bonds by long-term government bonds through 1962 and by five-year Treasuries thereafter; and T-bills by three-month Treasury bills. Source: Bureau of Labor Statistics; Center for Research in Security Prices; Compustat; Federal Reserve; Roger G. Ibbotson and Rex A. Sinquefield, “Stocks, Bonds, Bills, and Inflation: Year-by-Year Historical Returns,” University of Chicago Press Journal of Business (January 1976); and AllianceBernstein

  12. Why International? • Low correlation to US markets • Access to successful markets/industries • Reduced volatility • Historical risk/return “sweet spot”

  13. Benefits of Global Diversification Growth of $1 Annualized: 1976–2006 US Stocks • Global stocks produce strong returns with reduced risk… Return Risk Global Stocks US Stocks 12.6% 14.8% Global Stocks 12.6 13.6 Developed Foreign 11.6 16.4 Emerging Markets 11.0 21.7 Developed Foreign Emerging Markets Developed Foreign Emerging Markets US Emerging Markets • …while underlying markets trade places Past performance does not guarantee future results. US stocks are represented by the S&P 500; developed foreign markets by the Morgan Stanley Capital International (MSCI) EAFE Index of major stock markets in Europe, Australasia and the Far East, with countries weighted by market capitalization and currencies unhedged; and emerging markets by a Bernstein simulation through 1984, by the International Finance Corp. (IFC) World Bank Global Index from 1985 to 1987 (IFC Index was reconstructed for the period April–Dec 1984) and by the MSCI Emerging Markets Index thereafter. Global stocks comprise 70% S&P 500, 25% EAFE, and 5% MSCI Emerging Markets Index. An investor cannot invest directly in an index, and index performance does not represent the performance of any Alliance or Bernstein mutual fund. Source: Compustat, IFC, MSCI, Standard and Poor’s and AllianceBernstein

  14. Benefits of Global Diversification Non-US Share of Industry* Stocks: Market Value* 91% Automobiles • Over half of the world’s market capitalization is outside the US,including leaders in key industries 83% Banking US45% Non-US55% 68% Telecommunications 63% Real Estate Energy 57% Correlations with US Stock Market:** 1990–2006 High Correlation 1.0 Emerging Markets • Low correlation adds diversification International Currency*** No Correlation 0 Past performance does not guarantee future results. As of December 31, 2006 *MSCI All Country World Index **Correlation between the S&P 500 and other asset classes, which are calculated using monthly returns and are represented by the following—International: MSCI EAFE; Emerging Markets: MSCI Emerging Markets Index; Currency: exchange value of the US dollar against a broad group of foreign currencies from major markets. ***Currency data are through September 2006. Source: MSCI, Zephyr Style Advisor and AllianceBernstein

  15. Volatility of US/Foreign Stock Mixes 1990–2006 % US Stocks 100 90 80 70 60 50 40 30 20 10 0 % Foreign Stocks 0 10 20 30 40 50 60 70 80 90 100 US stocks are represented by the S&P 500; foreign stocks by the MSCI EAFE Index, with countries weighted by market capitalization and currencies unhedged. Source: Compustat, MSCI and AllianceBernstein

  16. Why Style Diversification? • Reduce volatility • Increase predictability of beating market

  17. No Market Always Wins Major Markets: Annualized Returns 1981–84 1985–86 1987–88 1989–91 1992–96 1997–99 2000–06 REITs22.3% Emerging12.1% Value7.8% Bonds6.5% Foreign4.4% Growth(4.9)% REITs*19.5% Bonds*15.1% US Value Stocks*14.5% Foreign Stocks* 6.2% US Growth Stocks*5.3% Emerging Markets* (7.7)% Foreign62.7% Value25.6% Growth23.8% Emerging20.0% REITs19.1% Bonds18.6% Foreign26.4% Emerging26.3% Value11.3% Growth8.2% Bonds5.3% REITs4.6% Emerging33.1% Growth24.2% Bonds13.1% Value12.8% REITs7.7% Foreign(1.7)% Value17.3% REITs17.1% Growth13.4% Emerging12.7% Foreign8.2% Bonds7.0% Growth34.1% Value18.8% Foreign15.7% Bonds5.7% Emerging3.2% REITs(1.8)% Best Performer Worst Performer Past performance does not guarantee future results. *The following asset classes are represented by the respective indexes—REITs: National Association of Real Estate Investment Trusts (NAREIT) Index; Bonds: Lehman Brothers Aggregate Bond Index; US Value Stocks: Russell 1000 Value Index; Foreign Stocks: MSCI EAFE Index of major foreign markets, with countries weighted by market capitalization and currencies unhedged; US Growth Stocks: Russell 1000 Growth Index; Emerging Markets: 1985–87, IFC World Bank Global Index (1981–84, IFC Index reconstructed), MSCI Emerging Markets Index thereafter. An investor cannot invest directly in an index, and index performance does not represent the performance of any Alliance or Bernstein mutual fund. Source: IFC, Lehman Brothers, MSCI, NAREIT, Russell Investment Group and AllianceBernstein

  18. INVESTMENT CHALLENGE • Can you diversify your investments to increase return and reduce risk? Return Return Investment Portfolio Risk Risk

  19. The Benefit of Combination Value 50/50 Value/Growth High High • Combining imperfectly correlated assets—such as growth and value—smooths the return… Growth Return Return Low Low Time Time Growth Value 50/50 Growth $121 $117 $112 Year 1 Year 2 AverageAnnual Return Full-Period Return 40% (20) 10 12 (10)% 30 10 17 15% 5 10 21 50/50 • …and with less volatility, you compound your gains $100 Value Year 1 Year 2 Source: AllianceBernstein

  20. Growth and Value Have Traded Leadership US Stocks Dec 1980–Sep 85 Dec 1988–Nov 91 Growth$1.74 Value $2.42 Value$1.31 Growth $1.38 $1 $1 Dec 1991–Aug 93 Sep 1993–Mar 2000 Apr 2000–Dec 06 Value $1.63 Value $1.90 Growth $4.34 $1 Growth $0.86 Value $2.27 Growth $1.18 $1 $1 Past performance does not guarantee future results. These charts illustrate the growth of $1 invested over the indicated time frames. Growth stocks are represented by the top 30% of all stocks publicly traded on American exchanges, ranked by price-to-book ratios; value stocks by the bottom 30%. No fees or expenses are reflected in the above examples. Source: Fama/French and AllianceBernstein

  21. Power of Diversification • A mix has beaten the market more often % of Periods Ahead of S&P 5001982–2006 Value Growth 50/50 Value Growth 50/50 Value Growth 50/50 One-Year Periods Three-Year Periods Five-Year Periods Past performance does not guarantee future results. Manager data based on the median US large-cap growth and the median US large-cap value manager returns from Mercer Investment Consulting’s universe for those managers whose track records begin no later than January 1981 (the inception of Mercer’s universe). Total number of managers is 43. Source: Mercer Investment Consulting

  22. The Power of Diversification: Risk and Return 1960s 1970s 100%Value 100%Value 50/50 50/50 100%Growth 100%Growth 1980s 1990s 100%Value 100%Growth 50/50 50/50 100%Growth 100%Value Past performance does not guarantee future results. Growth stocks are represented by the top 30% of all stocks publicly traded on American exchanges, ranked by price-to-book ratios;value stocks are the bottom 30%. Source: Compustat; Fama/French; Roger G. Ibbotson and Rex A. Sinquefield, “Stocks, Bonds, Bills, and Inflation: Year-by-Year Historical Returns,” University of Chicago Press Journal of Business (January 1976); and AllianceBernstein

  23. Diversifying US stocks with Value and Growth and adding international stocks raised return while reducing risk • 60/40 stock/bond mix is the classic risk/return trade-off The Power of Diversification 1970–2006 100% Stocks Diversified withGrowth, Value, and International 100% US Stocks 80/20 70/30 60/40 50/50 100% Bonds Past performance does not guarantee future results. US stocks are represented by the S&P 500; diversified stocks by 35% Fama/French Growth, 35% Fama/French Value (growth stocks are the top 30% of all stocks publicly traded on American exchanges, ranked by price-to-book ratios; value stocks are the bottom 30%) and 30% international stocks, represented by the MSCI EAFE Index, with countries weighted by market capitalization and currencies unhedged; and bonds by five-year Treasuries. Source: Center for Research in Security Prices, Compustat, Fama/French, Federal Reserve, MSCI and AllianceBernstein

  24. Reduce volatility Provide stability of income Preserve capital Why Bonds?

  25. Municipal Bonds: The Best Maturities Municipal Expected Return* +0.7% • The pickup in return has been substantial at the shorter end of the spectrum... +1.1% +0.7% Cash Short Intermediate Long Frequency of Negative Returns: 1990–2006** Money Market 0.0% Short Bonds—2 years 0.0 Intermediate Bonds—6 years 4.2 Long Bonds—30 years 9.4 • …yet their risk has remained low Past performance does not guarantee future results. *Expected returns based on 10-year averages for period ending December 2006 **Lehman Brothers municipal indexes were used to calculate the frequency of negative returns in one-year rolling returns for the period between January 1990 and December 2006. Source: Delphis Hanover Corp., Lehman Brothers, Municipal Market Data Corp. and AllianceBernstein

  26. Factors Governing Bond Return: The Effects of Duration Short Duration* Intermediate Duration* Duration 1.3 Years 1.3 Years 4.1 Years 4.1 Years ×Change in Yield 1.0% (1.0)% 1.0% (1.0)% =Change in Price (1.3)% 1.3% (4.1)% 4.1% + Income 3.5 3.5 3.7 3.7 =Total Return 2.2% 4.8% (0.4)% 7.8% As of December 31, 2006 *AAA–insured municipal par bonds Source: AllianceBernstein

  27. Rolling 12-Month Bond Returns Merrill Lynch 1–3-Year Index Rolling 12-Month Periods—Descending Order Past performance does not guarantee future results. Source: Merrill Lynch and AllianceBernstein

  28. Rolling 12-Month Bond Returns Lehman Brothers Gov’t/Corp Index Rolling 12-Month Periods—Descending Order Year-over-year changes in yield; past performance does not guarantee future results. Source: Lehman Brothers and AllianceBernstein

  29. Long term: Beat inflation by 5 percentage points Limit the annual loss potential to -10% Overall Objectives An Example

  30. Real (Above Inflation) Returns 1951–2006 Bonds 70% Bonds/ 30% Stocks 40% Bonds/ 60% Stocks Stocks Past performance does not guarantee future results. Bonds are represented by US long-term government bonds prior to 1972 and US intermediate government bonds thereafter; stocks by the S&P 500. Source: Bureau of Labor Statistics; Compustat; Roger G. Ibbotson and Rex A. Sinquefield, “Stocks, Bonds, Bills, and Inflation: Year-by-Year Historical Returns,” University of Chicago Press Journal of Business (January 1976); Lehman Brothers; and AllianceBernstein

  31. Performance During Down Stock Market Years 1951–2006 100% Stocks 30% Stocks/70% Bonds 40/60 50/50 60/40 70/30 1953 2.3% 1.9% 1.4% 0.9% 0.5% (1.0)% 1957 1.9 0.1 (1.8) (3.6) (5.4) (10.8) 1962 2.4 0.8 (0.7) (2.3) (3.9) (8.7) 1966 (0.6) (1.9) (3.3) (4.7) (6.0)(10.1) 1969 (6.0) (6.4) (6.7) (7.1) (7.5) (8.8) 1973 (2.2) (4.0) (5.8) (7.6) (9.4) (14.7) 1974 (3.7) (7.2) (10.6) (13.9) (17.1) (26.5) 1977 (0.1) (1.1) (2.1) (3.1) (4.2) (7.2) 1981 5.9 4.3 2.8 1.2 (0.4) (4.9) 1990 5.9 4.6 3.4 2.1 0.8 (3.1) 2000 4.5 2.5 0.6 (1.4) (3.3) (9.1) 2001 2.4 0.4 (1.7) (3.7) (5.7) (11.9) 2002 (0.4) (3.6) (6.9) (10.0) (13.1) (22.1) 1951–2006* 7.6 8.2 8.8 9.4 10.0 11.6 Growth of $100,000 $5.9 Mil. $8.3 Mil. $11.5 Mil. $15.7 Mil. $21.1 Mil. $48.3 Mil. Past performance does not guarantee future results. Stocks are represented by the S&P 500 Index; bonds are US long-term government bonds prior to 1972 and US intermediate government bonds thereafter. *Compound annualized return Source: Compustat; Roger G. Ibbotson and Rex A. Sinquefield, “Stocks, Bonds, Bills, and Inflation: Year-by-Year Historical Returns,” University of Chicago Press Journal of Business (January 1976); Lehman Brothers; Standard & Poor’s; and AllianceBernstein

  32. The Severity of Deep Bear Markets Peak to Trough 100% Bonds 100% Stocks 30/70 40/60 50/50 60/40 70/30 Dec 1968–Jun 1970 (8.0)% (14.6)% (16.7)% (18.9)% (21.0)% (23.1)% (29.1)% Jan 1973–Sep 1974 5.6 (11.5) (16.7) (21.6) (26.2) (30.7) (42.7) Sep 1987–Nov 1987 2.3 (7.8) (11.0) (14.2) (17.4) (20.5) (29.6) Apr 2000–Mar 2003 30.4 4.2 (3.5) (10.8) (17.6) (24.0) (40.9) Past performance does not guarantee future results. Stocks are represented by the S&P 500 Index; bonds by US long-term government bonds prior to 1972 and US intermediate government bonds thereafter. Source: Compustat; Roger G. Ibbotson and Rex A. Sinquefield, “Stocks, Bonds, Bills, and Inflation: Year-by-Year Historical Returns,” University of Chicago Press Journal of Business(January 1976); Lehman Brothers; Standard & Poor’s; and AllianceBernstein

  33. Global Balanced Portfolios 1973–2006 BestYear WorstYear Annualized Return Volatility Number of Loss Years Growth of $100,000 25.4% (1.7)% 8.0% 5.5% 1 $1,315,570 24.3 (1.2) 8.4 5.5 1 1,517,101 23.2 (0.7) 8.8 6.0 2 1,734,438 24.3 (2.7) 9.2 6.9 3 1,965,851 26.4 (6.0) 9.5 8.0 4 2,208,929 28.5 (9.2) 9.8 9.3 5 2,460,553 30.6 (12.5) 10.1 10.7 6 2,716,890 32.7 (15.7) 10.4 12.2 6 2,973,416 34.9 (19.0) 10.6 13.7 7 3,224,969 37.0 (22.2) 10.8 15.3 7 3,465,841 39.1 (25.5) 11.0 16.9 7 3,689,911 100% Bonds 90% Bonds–10% Stocks 80% Bonds–20% Stocks 70% Bonds–30% Stocks 60% Bonds–40% Stocks 50% Bonds–50% Stocks 40% Bonds–60% Stocks 30% Bonds–70% Stocks 20% Bonds–80% Stocks 10% Bonds–90% Stocks 100% Stocks Past performance does not guarantee future results. Bonds are represented by Lehman Intermediate Governments; stocks by 70% S&P 500 and 30% MSCI EAFE Index, with countries weighted according to market capitalization and currencies unhedged. Source: Compustat, Lehman Brothers, MSCI, Standard & Poor’s and AllianceBernstein

  34. Losses Have Usually Been Made Up Quickly Months to Break Even Length(Months) Total Return(S&P 500) First YearAfter Decline End ofBear Market Start ofBear Market Bear Markets Nov 1948–May 1949 7 (10.0)% 42.4% 4 11 Jan 1953–Aug 1953 8 (8.7) 35.0 5 13 Aug 1957–Dec 1957 5 (15.0) 43.4 7 12 Jan 1960–Oct 1960 10 (8.4) 32.6 2 12 Jan 1962–Jun 1962 6 (22.3) 31.2 10 16 Feb 1966–Sep 1966 8 (15.6) 30.6 6 14 Dec 1968–Jun 1970 19 (29.1) 41.8 9 28 Jan 1973–Sep 1974 21 (42.7) 38.2 21 42 Jan 1977–Feb 1978 14 (14.2) 16.5 5 19 Dec 1980–Jul 1982 20 (17.2) 59.5 3 23 Sep 1987–Nov 1987 3 (29.6) 23.4 18 21 Jun 1990–Oct 1990 5 (14.7) 33.5 4 9 Apr 2000–Mar 2003 36 (40.9) 35.1 21 57 Average 12 (20.6)% 35.6% 9 21 Past performance does not guarantee future results.Source: Compustat; Roger G. Ibbotson and Rex A. Sinquefield, “Stocks, Bonds, Bills, and Inflation: Year-by-Year Historical Returns,” University of Chicago Press Journal of Business(January 1976); Standard & Poor’s; and AllianceBernstein

  35. Institutional Asset Allocation, Spending Policies, Donor Recognition and the “Ask” Charitable Remainder Trusts and Gift Annuities Special Gift Planning Considerations

  36. Offers the potential of powerful diversification, lowering volatility and increasing return, BUT… Hedge Funds: Too Much of a Good Thing? Alternative Investments

  37. Appendix # XYZZY

  38. Market Timing Is Hazardous to Your Wealth Average Monthly Return S&P 500: 1926–2006 Full 972 months 1.0% Best 60 months (6% of the time) 12.0 All other months (94% of the time) 0.3 • Miss enough peaks and you lose all the advantage... Annualized Return Growth of $100,000 Strategy:* 1926–2006 Exit when market declines; 8.4% $57.7 Mil.stay out until market has a decent year Exit when market is “too high”; 8.4 62.1stay out until after correction (a down year) Stay in market steadily, through ups and downs 10.4 257.5 • …and both popular “market-timing” approaches havefallen short *The first timing approach involved switching from stocks to T-bills following any year in which the stock market declined and returning to stocks after the market earned at least 10% for a year. The second approach involved switching from stocks to T-bills following a combined two-year stock market rise of 40% or more and returning to stocks after the market declined for a year—or after two years, in any event. Source: Compustat; Roger G. Ibbotson and Rex A. Sinquefield, “Stocks, Bonds, Bills, and Inflation: Year-by-Year Historical Returns,” University of Chicago Press Journal of Business(January 1976); Lehman Brothers; Standard & Poor’s; and AllianceBernstein

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