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Kootenay Valley Financial Services

Kootenay Valley Financial Services. What do You Need?. GO. AL. What do You Have?. A$$ETS. Two Great Questions in Life. Principles for Long Term Investment Success. Asset class performance is ________________ over long time frames. PREDICTABLE. RANDOM.

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Kootenay Valley Financial Services

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  1. Kootenay Valley Financial Services

  2. What do You Need? GO AL What do You Have? A$$ETS Two Great Questions in Life

  3. Principles for Long Term Investment Success Asset class performance is ________________ over long time frames. PREDICTABLE RANDOM Mutual Funds are ____________ within asset classes. EFFICIENT Diversification is not always ____________ . MORE Investment expense are ________ important than returns. ______________ asset classes based on volatility enhances return. COMBINING

  4. Taxes WILLalways go up, not down. ______ ______ To be financially SECURE income must keep pace with inflation. ______ ______ Life expectancies AREgreater than ever. ______ ______ Managed Equities ARE safer than CD’s and Bonds. ______ ______ Risk is a necessary evil. ______ ______ What are Your CORE BELIEFS? Yes No X X X X X

  5. 1. 3. _______________ 2. _______ To achieve a consistent investment return – You must avoid the BIG MISTAKE! Investors typically have THREE types of Capital Foundation Speculative Core

  6. The S&P Average Market Return over the last 10 Years? 12.7% Ibbotson, Morningstar and Fidelity studies show Average Investor Returns over the last 10 Years. 2.3%

  7. FRICTION INVESTMENT The THREE Barriers to financial success • _____________________ • _____________________ • _____________________ Taxes Inflation Inefficient Diversification

  8. Notice the huge impact TAXES can have on your wealth Let’s look at TAXES!!! If $1 doubles every year for 20 years $100 = In a 40% Tax Bracket $12,089 In a 28% Tax Bracket $51,353 $1,048,576

  9. What is RISK? Name the TWO kinds of risk: 1. _____________________________ Loss of Capital Loss of Purchasing Power 2. _____________________________

  10. What Causes LOSS of CAPITAL? It’s all about Volatility

  11. Whose Numbers are those? They are not Yours - UNLESS You are Buying or Selling

  12. Index High 29% Low - 5% +17% +29% -17% - 5% How do you measure Volatility? Average ROR +/- 12% 17 12% Average ROR Risk is ALL ABOUT Volatility

  13. A V ERAGE 3.6% 4.8% 3.4% Now let’s look at INFLATION 13.0% 9.0% 6.8% 4.8% 7.0% 12.2% 8.8% 3.4% 3.4% 5.5% 6.1% 4.7% 3.0% 3.3% 1.9% 1.2% 1.7% 1.2% 0.7% 1.5% 1.5% 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 1984 1983 1982 1981 1980 3.0% 2.7% 1.6% 1.7% 3.3% 2.7% 2.7% 2.8% 3.0% 3.1% 6.1% 4.6% 4.4% 4.4% 1.1% 3.8% 4.0% 3.8% 3.9% 8.9% 12.4% 1979 1978 1977 1976 1975 1974 1973 1972 1771 1970 1969 1968 1967 1966 1965 1964 1963 1962 1961 1960 1959 1.8% 3.0% 2.0% 0.4% - 0.5% 0.6% 0.9% 5.9% 5.8% - 1.8% 2.7% 9.0% 18.2% 2.2% 2.1% 3.2% 9.3% 9,7% 1.0% - 0.5% - 2.8% 1958 1957 1956 1955 1954 1953 1952 1951 1950 1949 1948 1947 1946 1945 1944 1943 1942 1941 1940 1939 1938

  14. Does History Really Repeat Itself? COMMODITY 1970 TODAY INFLATION $ .50 $ 85.00 $235,000 $ 25,000 $ 2.39 $ 2.15 $ 18,500 5.85% 8.43% 7.76% 6.68% 8.12% 4.98% 4.66% Stamp Woman’s Skirt House Car Loaf of Bread ½ Gal Milk Median Income $ .09 $ 7.50 $25,000 $ 3,400 $ .23 $ .50 $ 4,594 What is the TRUE Inflation rate?

  15. ? % Over age 65 Living to age 90 24% 14% The longer people live The longer people live 7% the higher the risk they the higher the risk they will “Run Out of Money” will “Run Out of Money” 1940 1960 1980 2000 Why is Inflation such a PROBLEM?

  16. The ‘Real’ Return of a GIC GIC yearly return GIC after marginal tax rate (40%) GIC Real Return (after inflation) Source: DataStream, Dec 2001 ($ Cdn)

  17. Real Return on $1000 Invested 1981-2001 GIC Real Return 20 yr avg 0.84% MSCI Real Return 20 yr avg 6.6% TSE 300 Real Return 20 yr avg 4.3% S&P 500 Real Return 20 yr avg 10% $6726.13 $3604.68 $2333.26 $1000 invested in 1981 $1166.97 Source: DataStream, Dec 2001 ($ Cdn)

  18. Retirement But Remember – Risk is also Inflation So, which Risk is Guaranteed to Happen?

  19. 94% 100 80 60 40 2% 4% 20 0 Asset Allocation Stock Selection Timing What IMPROVES Portfolio Performance Brinson Study

  20. 1. 2. 3. Where should I invest my MONEY? Name THREE basic Asset Classes? Cash Stocks Bonds

  21. Stocks Domestic International Large Medium Small Value Blend Growth

  22. Small Cap Large Cap Corporate Bonds Gov’t Bonds Inflation Is asset class performance PREDICTABLE? Historical Return on Investment Volatility Index 5 Year 1 Year 12.4% 39.62% 16.61% 11.3% 20.17% 8.51% 5.6% 8.78% 4.57% 5.1% 9.43% 4.69% 3.3% 4.42% 3.29%

  23. The Lipper Study The Lipper Study Mutual Funds in the same asset class eventually Earn the same average rate of return. REGRESSION TO THE MEAN

  24. -1 Zero +1 Positive – Moves in the SAME direction Totally Random – no relationship Negative – Moves in opposite directions Some asset classes move in OPPOSITE directions

  25. U.S. vs. International U.S. vs. International Rolling 12-Month U.S. outperforms International Returns 40% 30% 20% 10% 0% 10% 20% 30% 40% 50% 60% 70% 72 76 80 84 86 90 94 98 International outperforms U.S.

  26. ASIA 1992 1993 1994 1995 1996 1997 1998 1999 2000 ASIA 30.7 ASIA 108.3 ASIA 60.1 ASIA -9.3 ASIA -8.3 ASIA 3.4 ASIA -45.9 ASIA -4.5 ASIA -39.8

  27. Small Cap 1992 1993 1994 1995 1996 1997 1998 1999 2000 Small Cap 30.2 Small Cap 27.7 Small Cap 23.8 Small Cap 4.0 Small Cap 25 Small Cap 0.8 Small Cap 16.9 Small Cap 14.3 Small Cap 4.4

  28. Nasdaq 1992 1993 1994 1995 1996 1997 1998 1999 2000 Nasdaq 36.2 Nasdaq 47.4 Nasdaq 77.4 Nasdaq 27.0 Nasdaq 23.3 Nasdaq 26.9 Nasdaq 2.7 Nasdaq 19.3 Nasdaq -36.9

  29. S&P 500 1992 1993 1994 1995 1996 1997 1998 1999 2000 S&P 500 39.2 S&P 500 33.9 S&P 500 7.5 S&P 500 23.5 S&P 500 37.8 S&P 500 18.4 S&P 500 14.0 S&P 500 -5.6 S&P 500 14.5

  30. Canadian Bond 1992 1993 1994 1995 1996 1997 1998 1999 2000 Canadian Bond 13.0 Canadian Bond 26.3 Canadian Bond 11.6 Canadian Bond 22.1 Canadian Bond 18.5 Canadian Bond 12.8 Canadian Bond 14.2 Canadian Bond -7.4 Canadian Bond -6.0

  31. Global Bond 1992 1993 1994 1995 1996 1997 1998 1999 2000 Global Bond 10.2 Global Bond 9.8 Global Bond 20.7 Global Bond 9.2 Global Bond 18.1 Global Bond 12.3 Global Bond 9.6 Global Bond -4.3 Global Bond -1.1

  32. T-Bills 1992 1993 1994 1995 1996 1997 1998 1999 2000 T-Bills 5.4 T-Bills 5.5 T-Bills 7.1 T-Bills 4.7 T-Bills 4.7 T-Bills 7.6 T-Bills 4.8 T-Bills 3.2 T-Bills 5.5

  33. Europe 1992 1993 1994 1995 1996 1997 1998 1999 2000 Europe 8.8 Europe 29.6 Europe 38.4 Europe 35.3 Europe 22.2 Europe -4.9 Europe 18.8 Europe 5.2 Europe 9.8

  34. Dow Jones 1992 1993 1994 1995 1996 1997 1998 1999 2000 Dow Jones 26.0 Dow Jones 33.5 Dow Jones 25.2 Dow Jones 22.6 Dow Jones 16.1 Dow Jones 2.1 Dow Jones -6.2 Dow Jones 4.2 Dow Jones 13.7

  35. TSE 300 1992 1993 1994 1995 1996 1997 1998 1999 2000 TSE 300 28.3 TSE 300 31.7 TSE 300 7.4 TSE 300 32.5 TSE 300 15 TSE 300 -0.2 TSE 300 14.5 TSE 300 -1.4 TSE 300 -1.6

  36. International 1992 1993 1994 1995 1996 1997 1998 1999 2000 Int’l 14.5 Int’l 38.6 Int’l 29.2 Int’l 20.3 Int’l 8.5 Int’l 6.9 Int’l 6.6 Int’l -11.0 Int’l -3.1

  37. 1993 1993 1993 1993 1993 1993 1993 1993 1993 1993 1993 1993 1994 1994 1994 1994 1994 1994 1994 1994 1994 1994 1994 1994 1995 1995 1995 1995 1995 1995 1995 1995 1995 1995 1995 1995 1996 1996 1996 1996 1996 1996 1996 1996 1996 1996 1996 1996 1997 1997 1997 1997 1997 1997 1997 1997 1997 1997 1997 1997 1998 1998 1998 1998 1998 1998 1998 1998 1998 1998 1998 1998 1999 1999 1999 1999 1999 1999 1999 1999 1999 1999 1999 1999 2000 2000 2000 2000 2000 2000 2000 2000 2000 2000 2000 2000 2000 2001 2000 2000 2000 2000 2000 2000 2000 2000 2000 2000 2002 ASIA 108.3 Int’l 14.5 Nasdaq 36.2 TSE 300 28.3 S&P 500 39.2 Nasdaq 47.4 Nasdaq 77.4 Canadian Bond 13.0 Canadian Bond 8.1 Global Bond 18.5 Int’l 38.6 Europe 8.8 S&P 500 33.9 Dow Jones 26.0 Europe 29.6 Europe 38.4 ASIA 60.1 Global Bond 10.2 Global Bond 5.2 Canadian Bond 10.5 Europe 35.3 S&P 500 7.5 Dow Jones 33.5 S&P 500 23.5 Small Cap 27.7 S&P 500 37.8 TSE 300 31.7 TSE 300 7.4 T-Bills 4.7 T-Bills 2.5 TSE 300 32.5 T-Bills 5.4 Canadian Bond 26.3 Nasdaq 23.3 Nasdaq 26.9 Int’l 29.2 Dow Jones 25.2 T-Bills 5.5 Dow Jones -7.1 ASIA -8.2 Small Cap 23.8 Small Cap 4.0 Small Cap 25 Europe 22.2 Dow Jones 22.6 Dow Jones 16.1 Int’l 20.3 Small Cap 0.8 Small Cap -11.5 TSE 300 -12.4 Canadian Bond 22.1 Nasdaq 2.7 Global Bond 20.7 Small Cap 16.9 Canadian Bond 18.5 Canadian Bond 12.8 Small Cap 14.3 Europe -4.9 S&P 500 -11.9 Int’l -14.9 Nasdaq 19.3 Dow Jones 2.1 Europe 18.8 Canadian Bond 14.2 TSE 300 15 Global Bond 9.2 S&P 500 14.0 S&P 500 -5.6 TSE 300 -12.6 Dow Jones -16.8 Global Bond 18.1 TSE 300 -0.2 TSE 300 14.5 Global Bond 12.3 Global Bond 9.6 T-Bills 4.7 Europe 9.8 Dow Jones -6.2 Europe -15.0 Europe -17.5 S&P 500 14.5 Global Bond -4.3 Int’l 8.5 Int’l 6.9 Int’l 6.6 Small Cap 4.4 T-Bills 4.7 Int’l -11.0 Int’l -16.5 Small Cap -20.5 Dow Jones 13.7 Canadian Bond -7.4 T-Bills 7.6 T-Bills 4.8 T-Bills 3.2 TSE 300 -1.6 Global Bond -1.1 Nasdaq -36.9 ASIA -23.8 S&P 500 -22.1 T-Bills 5.5 ASIA -9.3 ASIA -8.3 ASIA 3.4 ASIA -45.9 ASIA -4.5 Canadian Bond -6.0 ASIA -39.8 Nasdaq -28.5 Nasdaq -37.6

  38. VALUE TIME Why are Correlation Coefficients important? This is Called INEFFICIENT Diversification

  39. VALUE B TIME We need to create DISSIMILAR Price Movements A&B A This is Called EFFICIENT Diversification

  40. YEAR RETURN RETURN 14% 15% 13% 16% 4% 1 2 3 4 5 25% 25% 25% 25% -30% 14.00% 12.40% Average ROI IRR IRR 11.3% 11.3% 12.2% 12.2% Determine the REAL rate of return

  41. IRR IRR 11.3% 11.3% 12.2% 12.2% Determine the REAL rate of return of $100,000 YEAR RETURN RETURN 25% - $125,000 25% - $156,250 25% - $195,312 25% - $244,140 14% - $114,000 15% - $131,100 13% - $148,143 16% - $171,846 1 2 3 4 5 -30% - $170,898 4% - $178,719 12.40% Average ROI 14.00%

  42. AVERAGE RATE OF RETURN FOR 9 YRS. OF 11.9% INTERNAL RATE OF RETURN ????????

  43. VALUE TIME Why is this IMPORTANT? This effect can ONLY be consistently achieved with EFFICIENT Diversification

  44. Discover your optimal risk allocation YEARS 30 25 20 15 10 5 1 100% Stocks 80% Stocks/20% Bonds 60% Stocks/40% Bonds 50% Stocks/50% Bonds 40% Stocks/60% Bonds 20% Stocks/80% Bonds 100% Bonds 35 40 45 50 55 60 65 70 AGE

  45. Nobel Prize Three Professors from the Chicago School of Economics (Miller, Sharpe and Markowitz) received the in 1990 for these NOBEL PRIZE research conclusions: 1. Reduce Investment Risk 2. Increase Return 3. Create Dissimilar Price Movements 4. Use Asset Allocation

  46. Optimum Mix  What is the EFFICIENT FRONTIER?  100% International Return 100%  Large Cap Risk

  47. US GDP and S&P 500 Recession Ends Source: Datastream Recession #1 – 1974/75

  48. US GDP and S&P 500 RecessionEnds Source: Datastream Recession #2 : 1981/1982

  49. US GDP and S&P 500 Recession Ends Source: Datastream Recession #3: 1990/1991

  50. Market bottom S&P +1 year Recession End Dec 1974 + 47% Q2 ’75 Aug 1982 + 67% Q1 ’83 Sept 1990 + 34% 1H ’91 A Tale of Three Recessions

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