1. Key principles to improve your odds of
success.
Pursuing a Better Investment
Experience
2. Pursuing a Better Investment Experience
Presented by:
Gregg A Hancock Jr.
Vice President Wealth Management
Trust Business Development Officer
ghancock@senb.com
(o) 309-743-1201
3. Pursuing a Better Investment Experience
How is it possible that?
30 Year Return of the S&P 500 Index
Long Term US Inflation Rate
30 Year Return of the Average
Equity Investor
10.35%
2.6%
3.66%
DALBAR’s 22nd Annual Quantitative Analysis of Investor Behavior
4. Pursuing a Better Investment Experience
Humans Are Not Wired for
Disciplined Investing
When people follow their
natural instincts, they tend
to apply faulty reasoning
to investing.
5. Pursuing a Better Investment Experience
They Act on Impulse
“I can’t take this bear market—
I’m getting out!”
“Everyone’s making money—
I want a piece of the action.”
6. Pursuing a Better Investment Experience
They Are Swayed by the Media
“How to Reach
$1 Million”
Money, 08/2012
“The Death of Equities”
Business Week, 08/13/1979
“The Crash of ’98
Can the US Economy Hold Up?”
FORTUNE, 09/28/1998
“Retire Rich – A Simple
Plan to Have it All”
FORTUNE, 08/16/1999
7. Pursuing a Better Investment Experience
They Try to Predict the Future
“I have a proven system for
picking winning stocks.”
“The market is primed for a retreat.”
“That sector will continue
advancing through next year.”
8. Pursuing a Better Investment Experience
THE CAUSES OF
POOR DECISION
MAKING
When discussing
investor behavior it is
helpful to first
understand the specific
thoughts and actions
that lead to poor
decision-making.
INVESTOR PSYCHOLOGY
Source: DALBAR QUANTITATIVE ANALYSIS OF INVESTOR BEHAVIOR
9. Pursuing a Better Investment Experience
Many Investors Follow Their Emotions
NervousnessOptimism
Fear
Elation
Optimism
People may struggle to separate their emotions
from their investment decisions.
Following a reactive cycle of excessive optimism and
fear may lead to poor decisions at the worst times.
10. Pursuing a Better Investment Experience
How do we
change this?
10 Key principles to improve your investment experience.
11. Pursuing a Better Investment Experience
World Equity Trading in 2016 (daily average)
1. Embrace Market Pricing
Number
of Trades 82.7
MILLION
Dollar
Volume $346.4
BILLION
The market is an effective
information-processing
machine.
Millions of participants buy and
sell securities in the world
markets every day, and the
real-time information they
bring helps set prices.
In US dollars. Source: World Federation of Exchanges members, affiliates, correspondents, and non-members. Trade data from the global electronic order book. Daily averages were computed using
year-to-date totals as of December 31, 2016, divided by 250 as an approximate number of annual trading days.
12. Pursuing a Better Investment Experience
People Trust Market Pricing Every Day
The daily price of fish may
vary based on buyer and
seller expectations of
market forces.
We accept the price as an
accurate estimate of current
value and make decisions
accordingly.
The same is true of a stock
price, which reflects all
known information about a
company.
13. Pursuing a Better Investment Experience
“All the time and effort that people devote to picking
the right fund, the hot hand, the great manager,
have in most cases led to no advantage.”
Peter Lynch
Peter Lynch is an American investor, mutual fund manager, and philanthropist. As the manager of the Magellan
Fund at Fidelity Investments between 1977 and 1990, Lynch averaged a 29.2% annual return, consistently more
than doubling the S&P 500 market index and making it the best performing mutual fund in the world. During his
tenure, assets under management increased from $18 million to $14 billion.
14. Pursuing a Better Investment Experience
Let the Market Work for You
When you try to outwit the
market, you compete with
the collective knowledge
of all investors.
By harnessing the market’s
power, you put their knowledge
to work in your portfolio.
16. Pursuing a Better Investment Experience
Outsmarting other investors is tough
Few mutual funds survive and beat their benchmarks
15-year performance period ending December 31, 2016
EQUITY FUNDS FIXED INCOME FUNDS
2,587 funds at beginning 958 funds at beginning
Beginners Survivors OutperformersBeginners Survivors Outperformers
57%
Survive
18%
Outperform
17%
Outperform
48%
Survive
17. Pursuing a Better Investment Experience
Picking the Fastest Lane Is
a Stressful Guessing Game
Likewise, trying to anticipate the
movement of the market adds
anxiety and undue risk.
18. Pursuing a Better Investment Experience
The Conventional Approach Attempts
to Outguess the Market
Buys a selection of individual
securities manager thinks
will outperform.
Sells securities when deemed
overvalued.
Can lead to high turnover and
excess costs.
Investing involves risks such as fluctuating value and potential loss of principal value. There is no guarantee strategies will be successful.
Market
20. Pursuing a Better Investment Experience
At the end of each year, funds are sorted within their category based on their five-year total return. The tables show the percentage of funds in the top quartile (25%) of five-year performance that ranked in
the top quartile of one-year performance in the following year. Example: For 2007, only 30% of equity funds in the top quartile of previous five-year returns through the end of 2006 maintained a top-quartile
ranking for one-year returns in 2007. US-domiciled open-end mutual fund data is from Morningstar and Center for Research in Security Prices (CRSP) from the University of Chicago. Past performance is
no guarantee of future results. See Data Appendix for more information.
Past Performance Is Not Enough to Predict Future Results
Percentage of top five-year performers that also ranked in the top quartile of annual performance
in the following year
TOP
25%
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
PREVIOUS
5 YEARS
FOLLOWING
YEAR
23%
AVERAGE
100%
30%
11%
24%
23%
20%
18%
39%
22%
23%
18%
EQUITY FUNDS
21. Pursuing a Better Investment Experience
At the end of each year, funds are sorted within their category based on their five-year total return. The tables show the percentage of funds in the top quartile (25%) of five-year performance that ranked in the
top quartile of one-year performance in the following year. Example: For 2007, only 33% of fixed income funds in the top quartile of previous five-year returns through the end of 2006 maintained a top-quartile
ranking for one-year returns in 2007. US-domiciled open-end mutual fund data is from Morningstar and Center for Research in Security Prices (CRSP) from the University of Chicago. Past performance is no
guarantee of future results. See Data Appendix for more information.
Past Performance Is Not Enough to Predict Future Results
Percentage of top five-year performers that also ranked in the top quartile of annual
performance
in the following year
TOP
25%
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
PREVIOUS
5 YEARS
FOLLOWING
YEAR
27%
AVERAGE
100%
33%
17%
9%
39%
20%
40%
14%
41%
23%
37%
FIXED INCOME FUNDS
22. Pursuing a Better Investment Experience
4. Let Markets Work for You4. Let Markets Work for You
The financial markets
have rewarded long-term
investors. People expect
a positive return on the
capital they supply, and
historically, the equity and
bond markets have provided
growth of wealth that has
more than offset inflation.
1926 1936 1946 1956 1966 1976 1986 1996 2006 2016
Growth of a Dollar, 1926–2016
(compounded monthly)
$20,544
US Small Cap
$6,031
US Large Cap
$134
Long-Term
Government Bonds
$21
Treasury Bills
$13
US Inflation
23. Pursuing a Better Investment Experience
5. Consider the Drivers of Returns
Academic research has
identified these equity and
fixed income dimensions,
which point to differences
in expected returns.
Investors can pursue higher
expected returns by
structuring their portfolio
around these dimensions.
Dimensions of Expected Returns
EQUITIES
Market (Equity premium—stocks vs. bonds)
Company Size (Small cap premium—small vs. large companies)
Relative Price (Value premium—value vs. growth companies)
Profitability (Profitability premium—high vs. low profitability companies)
FIXED INCOME
Term (Term premium—longer vs. shorter maturity bonds)
Credit (Credit premium—lower vs. higher credit quality bonds)
26. Pursuing a Better Investment Experience
Data provided by Bloomberg. Market cap data is free-float adjusted and meets minimum liquidity and listing requirements. Many nations not displayed. Totals may not equal 100% due to rounding. For
educational purposes; should not be used as investment advice. China market capitalization excludes A-shares, which are generally only available to mainland China investors.
Diversification Helps You Capture
What Global Markets Offer
Percent of world market capitalization as of December 31, 2016
The global equity market is large and represents a world of investment opportunity.
27. Pursuing a Better Investment Experience
The “All stocks” portfolio consists of all eligible stocks in all eligible Developed and Emerging Markets. The portfolio for January to December of year t includes stocks whose free float market capitalization as of December t-1 is greater than
$10mln in developed markets and $50mln in emerging markets and with non-missing price returns for December of year t-1. Annual portfolio returns are value-weighted averages of the annual returns on the included securities. The
portfolios “Excluding the top 10%” and “Excluding the top 25%” are constructed similarly. Individual security data are obtained from Bloomberg, London Share Price Database, and Centre for Research in Finance. The eligible countries are:
Australia, Austria, Belgium, Brazil, Canada, Chile, China, Colombia, Czech Republic, Denmark, Egypt, Finland, France, Germany, Greece, Hong Kong, Hungary, India, Indonesia, Ireland, Israel, Italy, Japan, Republic of Korea, Malaysia,
Mexico, Netherlands, New Zealand, Norway, Peru, Philippines, Poland, Portugal, Russia, Singapore, South Africa, Spain, Sweden, Switzerland, Taiwan, Thailand, Turkey, United Kingdom, and the United States. Diversification does not
eliminate the risk of market loss. Past performance is no guarantee of future results.
Diversification May Prevent You
from Missing Opportunity
Compound average annual returns: 1994-2016
Attempting to identify that
group of future winners is
a guessing game.
Diversification improves
the odds of holding the
best performers.
7.3%
2.9%
-5.2%
All stocks
Excluding the
top 10%
of performers
each year
Excluding the
top 25%
of performers
each year
28. Pursuing a Better Investment Experience
Diversification Reduces Risks That Have
No Expected Return
Diversification does not eliminate the risk of market loss.
Concentrating in one stock
exposes you to
unnecessary risks.
Diversification reduces the
impact of any one
company’s performance on
your wealth.
29. Pursuing a Better Investment Experience
Diversification Smooths Out
Some of the Bumps
Illustrative examples. Diversification does not eliminate the risk of market loss.
A well-diversified
portfolio
can provide the
opportunity
for a more stable
outcome
than a single security.
31. Pursuing a Better Investment Experience
8. Manage Your Emotions
Many people struggle to
separate their emotions
from investing. Markets go
up and down. Reacting to
current market conditions
may lead to making poor
investment decisions.
For illustrative purposes only.
Avoid Reactive Investing
Optimism
Fear
Elation
OptimismNervousness
32. Pursuing a Better Investment Experience
9. Look beyond the Headlines
Daily market news and
commentary can challenge
your investment discipline.
Some messages stir anxiety
about the future while
others tempt you to chase
the latest investment fad.
When headlines unsettle
you, consider the source
and maintain a
long-term perspective.
For illustrative purposes only.
RETIRE RICH
SELL STOCKS NOW!
THE LOOMING RECESSION
THE TOP 10 FUNDS TO OWN
MARKET HITS RECORD HIGH!
HOUSING MARKET BOOM!
33. Pursuing a Better Investment Experience
10. Focus on What You Can Control
Diversification does not eliminate the risk of market loss. There is no guarantee investment strategies will be successful. For illustrative purposes only.
No one can reliably forecast
the market’s direction or predict
which stock or investment
manager will outperform.
A wealth advisor can help
you create a plan and focus
on actions that add value.
34. Pursuing a Better Investment Experience
The sample includes funds at the beginning of the five-, 10-, and 15-year periods ending December 31, 2016. Funds are sorted into quartiles within their category based on average expense ratio over the
sample period. The chart shows the percentage of winner and loser funds by expense ratio quartile for each period, where winners are funds that survived and outperformed their respective Morningstar
category benchmark and losers are funds that either did not survive or did not outperform their respective Morningstar category benchmark. US-domiciled open-end mutual fund data is from Morningstar and
Center for Research in Security Prices (CRSP) from the University of Chicago. Past performance is no guarantee of future results. See Data Appendix for more information.
High Costs Can Reduce Performance
Equity fund winners and losers based on expense ratios (%)
Average
Expense
Ratio (%) 0.75 1.03 1.22 1.61 0.78 1.07 1.28 1.81 0.82 1.14 1.38 1.99
Low Med.
Low
Med.
High
High Low Med.
Low
Med.
High
High Low Med.
Low
Med.
High
High
5 YEARS 10 YEARS 15 YEARS
42
34
26
20
31 27
18
12
28
20 17
9
58
66
74
80
69 73
82
88
72
80 83
91
Winners Losers
35. Pursuing a Better Investment Experience
The sample includes equity funds at the beginning of the five-, 10-, and 15-year periods ending December 31, 2016. Funds are sorted into quartiles within their category based on average turnover during
the sample period. The chart shows the percentage of winner and loser funds by turnover quartile for each period, where winners are funds that survived and outperformed their respective Morningstar
category benchmark and losers are funds that either did not survive or did not outperform their respective Morningstar category benchmark. US-domiciled open-end mutual fund data is from Morningstar
and Center for Research in Security Prices (CRSP) from the University of Chicago. Past performance is no guarantee of future results. See Data Appendix for more information.
High Trading Costs Can Also Impact Returns
Equity fund winners and losers based on turnover (%)
Average
Turnover
(%) 19.9 42.4 67.4 139.1 25.8 53.2 80.9 171.4 27.4 55.2 83.1 174.2
Low Med.
Low
Med.
High
High Low Med.
Low
Med.
High
High Low Med.
Low
Med.
High
High
5 YEARS 10 YEARS 15 YEARS
36
30 28 27
36
24
16 13
35
15 13 10
64
70 72 73
64
76
84 87
65
85 87 90
Winners Losers
37. Pursuing a Better Investment Experience
Create a investment plan based on your goals
and objectives.
Embrace the market for the long term.
Turn off the noise, and stay disciplined!
Globally diversify.
Minimize fees, taxes, turnover,
and expenses.
38. Southeast National Bank Wealth Management Services
Southeast National Bank
Wealth Management
3535 Avenue of the Cities
Moline, IL 61265
(o) 309-743-1201
Investment Management
Fiduciary Services
Financial Planning
Retirement Plan Services
Thank You !
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