3. There is a difference Financial Planning Discipline Requires a focus/discipline Risk Management Financial Plan Asset Allocation Long term focus Scenario approach Customized portfolio Rational expectations Managing Money Arbitrary Focus on reward No plan Performance Driven Responsive to noise Betting on a single outcome Follow the crowd Adaptive expectations Make Money
4. Personal Investment Policy Statement . . . your personal “roadmap” to successful investing. Step 1. The Foundation Investing for a lifetime requires a...
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6. Focus and Commitment . . . to help with decision-making in all market conditions Step 2. The Discipline Investing for a lifetime also requires...
7. Principles of Investing Focus On Asset Allocation Staying Invested Multi-Dimensional Diversification Realistic Returns Avoid Performance Chasing Concentrating Risk Short Term Noise The Media Hype
8. Asset Allocation is the Critical Factor Focus on Portfolios More than 90% of a portfolio’s variability depends on asset mix Market Timing 2.1 % Other Factors 1.8 % Stock Selection 4.6 % Asset Allocation 91.5 % Long-term portfolio performance is most influenced by asset allocation and less influenced by market timing and stock selection Source: Brinson, Singer, Beebower Study; Financial Analysts Journal, Feb. 91
9. Average Holding Period For Mutual Funds Has dropped from 5.5 years (in 1996) to 2.5 years (in 2002) Average Holding Period for US Stocks Source: New York Stock Exchange Fact Book Short Term Thinking is Proliferating * most recent data In 1960 the average holding period of a NYSE-listed stock was more than eight years, versus the current average of 11 months 0 15 30 45 60 75 90 105 1960 1970 1980 1990 2000 2005 Average Holding Period (in months)
10. The First Shall Be Last . . . Reversion to the Mean in Fund Performance Rank Ann.Ret. Rank Ann.Ret. 1998-99 2000-01 Source : Bogle Financial Center 1,413 U.S. Equity funds with $100 million + in assets 1 208% 1413 -71% 2 115% 1408 -49% 3 105% 1406 -43% 4 93% 1401 -36% 5 93% 1395 -34% 6 92% 1402 -37% 7 90% 1341 -26% 8 87% 1309 -24% 9 84% 1370 -29% 10 79% 1347 -27%
11. The Bottom Line 3.7% cagr 12.3% cagr Chasing hot funds cost the average investor significantly Performance Chasing Source : Bogle Financial Center (U.S. data) 915 107 Average Stock Fund Average Fund Investor
12. Multi-Dimensional Diversification Equities Global Specialty Small Cap Growth Fixed Income Domestic Core Large Cap Value Diversification can reduce portfolio volatility... … without reducing return
13. Value of Investment ($) S&P/TSX vs. Sc.McL. Universe Bond Index Fixed Income and Equities Bonds can outperform Equities Source: I.G. Investment Management, Ltd.; Scotia Capital; TSE 17.3 4.1 2005 2006 Annual Returns S&P/TSX Sc.McL. Univ. Bond Index 2001 1995 1996 1997 1998 1999 14.5 28.3 15.0 -1.6 31.7 20.7 12.3 9.6 9.2 -1.1 2003 26.7 6.7 2000 7.4 10.2 -12.6 -12.4 8.7 2002 2004 14.5 7.2 24.1 6.5 8.1 2007 9.8 3.7
14. Domestic and Global Data to December 31, 2007 Performance of 5 Geographic Markets ($Cdn) Different Markets Outperform Year-to-Year Calendar Returns ($Cdn.) Source: I.G. Investment Management, Ltd.; Bloomberg S&P500 $2,838 MSCI Emrg. Mkts. $2,444 MSCI Asia Pac Free $1,132 MSCI Europe $3,215 S&P/TSX $4,178
15. Highest Return 1997 1998 1999 2000 Lowest Return Large Cap and Small Cap Cap Size Performance Changes Year-to-Year Source: I.G. Investment Management, Ltd.; Barra 2001 2002 2003 2004 2005 2006 2007 Cdn. Barra Large Cap Growth Cdn. Barra Large Cap Value Cdn. Barra Small Cap Growth Cdn. Barra Small Cap Value LC Growth 2.12 LC Growth 42.81 LC Growth 3.99 LC Growth -5.68 LC Growth -21.39 LC Growth -13.08 LC Growth 24.07 LC Growth 12.07 LC Growth 23.44 LC Growth 14.60 LC Growth 12.00 LC Value 28.65 LC Value -1.58 LC Value 2.76 LC Value 31.69 LC Value 5.06 LC Value -11.49 LC Value 29.47 LC Value 16.99 LC Value 25.58 LC Value 19.30 LC Value 9.12 SC Growth 39.21 SC Growth 4.62 SC Growth -19.25 SC Growth 3.43 SC Growth -8.02 SC Growth -12.72 SC Growth 47.79 SC Growth 11.03 SC Growth 15.58 SC Growth 22.32 SC Growth 8.24 SC Value 23.48 SC Value 6.91 SC Value -22.79 SC Value 5.25 SC Value 25.24 SC Value 2.07 SC Value 40.23 SC Value 23.52 SC Value 20.41 SC Value 18.20 SC Value -5.87
16. Value and Growth Value Can Outperform Growth Can Outperform Canadian Barra Rolling 12 Month Relative Returns As of December 31, 2007 % Source: I.G. Investment Management, Ltd.; Barra
17. You Can’t Predict Next Year’s Winner The Bottom Line Concentrating Risk
18. Staying Invested Don’t Get Caught on the Sidelines 90% of market moves occur in only 10% of trading days Source: I.G. Investment Management, Ltd.; Bloomberg
19. Costly Mistake S&P 500 Index From 01/03/77 Through 12/31/07 Annualized Price-Only Performance Source: I.G. Investment Management, Ltd.; Bloomberg Over 90% of the potential return was lost if you missed less than 1% of the trading days
20. Time Reduces Volatility Source: I.G. Investment Management, Ltd.; Scotia Capital; TSE Range of Return (1956 – 2007) 1 Year 5 Years 10 Years 20 Years 30 Years 3 Years Holding period to minimize a negative return in the equity market: Just over 5 years
21. 731 One-month periods 720 One-Year periods 696 Three-Year periods 672 Five-Year periods The likelihood of receiving a negative return diminishes as the investment term lengthens. Since 1962, the TSX has had only positive 15 Year returns. In comparison, since 1947, only 61% of the 731 monthly returns were positive. 552 Fifteen-Year periods 612 Ten-Year periods *Past performance is not indicative of future performance TSX Composite Total Return Source: Portfolio Analytics As of December 31, 2007 100 % 100 % 99 % 92 % 8 % 73 % 27 % Positive Returns Negative Returns 39 % 61 %
22. Encouraged Confident Excited Jubilation Agitated Distressed Despair Nauseous Dejected Encouraged Confident Maximum Financial Opportunity Maximum Financial Risk Stay Focused “ I’m brilliant.” “ Sell the farm.” “ No problem. I’ll double down.”
23. Time in the Market creates Wealth The Bottom Line Short Term Noise
24. Realistic Returns However, we all have a different propensity for risk We all have the same propensity for return
25. Historical Reference Last 47 Years Annualized Rates (1956-2007) Source: I.G. Investment Management, Ltd.; Bloomberg; Scotia Capital %
26. Focus on - Realistic Expectations Investor expectations are heavily influenced by recent returns. Historical data suggests these expectations are not realistic. Source: I.G. Investment Management, Ltd.; Bloomberg; Scotia Capital **As of December 31,2007 1930’s 0.0 1.4 1.5 5.5 1.4 1940’s 9.2 18.4 11.2 3.8 0.5 1950’s 19.4 16.9 15.6 1.0 2.0 1960’s 7.8 15.5 10.0 3.4 4.5 1970’s 5.8 11.5 10.4 7.5 7.1 1980’s 17.6 15.8 12.2 13.7 11.7 1990’s 18.2 14.9 10.6 11.6 6.3 Avg. 1930-99 11.1 13.5 10.2 6.2 4.8 2000/07** 1.7 10.0 8.4 8.8 3.5 *Returns based on U.S. $ U.S. Large U.S. Small Canadian Canadian Canadian Cap Stocks* Cap Stocks* Stocks Bonds T-Bills
27. January 1802 - December 2007 The “ REAL” Opportunity Source: “ Stocks for the Long Run”, by Jeremy J. Siegel (U.S. $)
28. ‘ 90% percent of the game is half mental.’ Yogi Berra
29. Recap of Important Points Have a plan and stick to it Single best determinant of success is the appropriate asset mix Diversification is a guiding principle Time in the market…not market timing creates wealth The challenges are many but none so great as removing the behaviors that negatively impact the decision-making process
There are many roadblocks that have an effect on portfolio performance which which consequently contradict client goals. Many of these road blocks manifest themselves in the form of the clients own behavior. Discus each point How a client will react to different scenarios will differ. In many every day situations these behaviors tend to be useful, but not in the investment world. As they pertain to investing these behavior need to be harnessed and properly channeled in order to achieve client goals
The investment world is as complicated as ever as financial and currency markets continue to exhibit varying levels of volatility. In order for investors to achieve their investment goals, adopting a disciplined investment approach is critical as it keeps them focused on their goal as opposed to chasing short term financial rewards that are rarely attainable. In 1960 the average holding period of a stock trading on the New York stock exchange was more than eight years. Motivated by irrational behaviors, investors pour money into equity funds on market upswings and are quick to sell on downturns As a result, the holding period of a stock trading on the New York stock exchange is eleven months There are a couple of steps you can take to stop or limit the influence of emotions on your investing success. when investor emotions want to chase a hot fund, remind your clients of their investing objectives. Any trades should be measured against the plan to see if they meet their objectives or not. Hold up any investment decision to the plan to see if it fits or not.
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