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This talk is intended for educational purposes only.

DISCLAIMER. This talk is intended for educational purposes only. It reflect our opinions and are based on our best judgment, but no warranty is given or implied as to their accuracy. Past performance does not guarantee future performance.

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This talk is intended for educational purposes only.

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  1. DISCLAIMER This talk is intended for educational purposes only. It reflect our opinions and are based on our best judgment, but no warranty is given or implied as to their accuracy. Past performance does not guarantee future performance. No investment or trading advice whatsoever is implied by our commentary, coverage, or charts.

  2. Made possible by a grant from the Financial Industry Regulatory Authority (FINRA) Investor Education Foundation and the American Library Association (ALA) Shana Madoff, served on Finra’s Compliance Advisory Group

  3. ASSET ALLOCATION For (NOT SO) DUMMIES Larry Kirsch [email protected]

  4. True or False Increasing wealth is all about Investment Returns False Increasing Wealth is all about managingRISK “But in all my experience, I have never been in any accident of any sort worth speaking about.. nor was I ever in any predicament that threatened to end in disaster of any sort” — E J Smith, captain RMS Titanic, 1907

  5. CATEGORIES OF RISK INVESTMENT INTEREST RATE INFLATION LIQUIDITY DEFAULT CURRENCY BLACK SWAN

  6. WHO HAS YOUR INTEREST AT HEART? FINANCIAL ADVISOR STOCK BROKERMUTUAL FUND THEY ALL MAKE THEIR LIVING SELLINGYOU SERVICES WHETHER OR NOT YOU MAKE MONEY

  7. MYTHS & TRUTHS STOCKS ALWAYS RISE IS THE LONG TERM BUY AND HOLD STOCKS- YOU CAN’T TIME THE MARKET INCREASED RISK – INCREASED RETURN

  8. MYTH 1 STOCKS ALWAYS RISE IS THE LONG TERM S&P500 1/1/1966 93 1/1/1978 91 S&P500 1/1/1999 1228 1/1/2009 880

  9. MYTH 2 BUY AND HOLD STOCKS- YOU CAN’T TIME THE MARKET

  10. AARP Bulletin I’ve been hearing that trying to “time the market” doesn’t work ... I could miss out … YES

  11. S&P 10 Biggest Days (1950-2008) Winners 10/21/1987 9.099 7/24/2002 5.733 7/29/2002 5.408 10/20/1987 5.333 10/28/1997 5.115 9/8/1998 5.090 5/27/1970 5.022 1/3/2001 5.010 10/29/1987 4.925 3/16/2000 4.765 Losers 10/19/1987 -20.467 10/26/1987 -8.279 10/27/1997 -6.866 8/31/1998 -6.801 1/8/1988 -6.768 5/28/1962 -6.676 9/26/1955 -6.618 10/13/1989 -6.117 4/14/2000 -5.828 6/26/1950 -5.381

  12. S&P RETURN 1980-2003 % per year Buy-and-Hold 9.55 Missed 10 best days 7.03 Missed 40 best days 2.12 Missed 10 worst days 13.44 Missed 40 worst days 18.75

  13. SIMPLE ARITHMETIC I LOSE I HAVE TO EARN (to break even) 10% 11% 35% 54% 50% 100%

  14. Don’t Try to Time the Market (Yahoo-Retirement) -44% LOSS 79% BREAK EVEN

  15. 10/11/29 352 126 days later 290 +46% 7/12/32 42 -88% 11/13/29 198 -44%

  16. MYTH 3 INCREASED RISK – INCREASED RETURN CORROLLARY DECREASED RISK – DECREASED RETURN

  17. INCREASED RISK – INCREASED RETURN

  18. 3 YEAR RISK/RETURN LARGE CAP GROWTH FUNDS S&P R E T U R N 58% FAIL TO OUTPERFORM INDEXES RISK- STANDARD DEVIATION

  19. 3 YEAR RISK/RETURN MULTI-CAP CORE FUNDS R E T U R N RISK- STANDARD DEVIATION

  20. The NOT so SECRETS of RISK MANAGEMENT ASSET ALLOCATION MARKET TIMING (Belt and Suspenders Approach)

  21. INDEXES WHAT DO I MEAN- “THE MARKET WAS UP TODAY” “AVERAGES” CALCULATED IN VARIOUS WAYS THAT REFLECT PART OR ALL OF THE MARKET PRICE LARGE CAPITALIZATION STOCKS DOW JONES INDUSTRIAL AVERAGE 30 STOCKS STANDARD & POORS 500 (S&P500) 500 STOCKS SMALL CAPITALIZATION STOCKS RUSSELL 2000 2000 STOCKS FOREIGN STOCKS EUROPE, AUSTRALASIA & FAR EAST (EAFE)

  22. RISK REDUCTION 1 INDEXES ALLOW US TO LOOK AT THE BEHAVIOR OF LARGE PARTS OF THE MARKET WITHOUTPROBLEMS UNIQUE TO INDIVIDUAL STOCKS

  23. PORTFOLIO OF PINK & BLUE STOCKS/INDEXES $1.50  $50 +323% $21  $21 0%

  24. PORTFOLIO OF PINK & BLUE ASSETS $50  $1.50 -97% $21  $21 0%

  25. The “UP” Portfolio and the “DOWN” Portfolio share a common characteristic CORRELATION = +1

  26. The “MIXED” Portfolio is different CORRELATION = -1

  27. RISK REDUCTION 2 ASSET ALLOCATION CORRELATION = -1 But I don’t make any money

  28. PORTFOLIO OF PINK & BLUE ASSETS CORRELATION = -1

  29. RISK REDUCTION 3 MARKET TIMING BUY/HOLD ASSETS WHICH ARE RISING SELL ASSETS WHICH ARE FALLING IF CORRELATION = -1 then some of each

  30. BUT THAT TAKES TIME AND EFFORT Lazy Portfolio’s http://www.marketwatch.com/lazyportfolio

  31. CORRELATIONS IN THE REAL WORLD Large Cap (Big) Stocks vs. Small Cap Stocks U.S. Stocks vs. Foreign Stocks Stocks vs. Bonds vs Real Estate CORRELATION CHANGES OVER TIME Let’s look at some indexes

  32. CORRELATION BETWEEN LARGE CAP AND SMALL CAP 1987-2000 0.80 2000-2008 0.84

  33. BUT I CAN’T CALCULATE CORRELATIONS -LOOK AT DATA -WEB SITE http://www.sectorspdr.com/correlation/

  34. CORRELATION BETWEEN DOMESTIC AND FOREIGN 1970-2000 0.32 2000-2008 0.69

  35. CORRELATION BETWEEN STOCKS AND BONDS Correlation = 0.05

  36. PORTFOLIO WITH REDUCED CORRELATION STOCKS U.S. FOREIGN EMERGING MARKET BONDS U.S. TREASURY CORP. REAL ESTATE REIT COMMODITIES CASH

  37. CREATING AN ACTUAL PORTFOLIO INDIVIDUAL SECURITIES HIGHLY CORRELATED EVENT RISK MUTUAL FUNDS COSTS CAN BE HIGH LIMITED TRADING ACTIVE MGMT EXCHANGED TRADED FUNDS (ETF) LOW COST CONSTANT TRADING INDEX CONTENT

  38. ETF SYMBOLS STOCKS U.S SPY, IWM FOREIGN EFA EMERGING MARKET EEM BONDS U.S. TREASURY TLT CORP. AGG INFLATION PROT. TIP REAL ESTATE DOMESTICIYR FOREIGN RWR COMMODITIESDBC

  39. Most Assets Crashed in 2008!

  40. MARKET TIMING WHAT MARKET TIMING IS NOT NOT AN ATTEMPT TO PREDICT MARKETS WHAT MARKET TIMING IS WHERE THE MARKET HAS BEEN WHERE THE MARKET IS NOW TREND FOLLOWING SIMPLEST EXAMPLE- MOVING AVERAGE

  41. S&P500 MA(200) MA(50)

  42. COMMODITY ETF DJP

  43. A SIMPLE STRATEGY BUY ASSET PRICE GREATER THAN MA(200) SELL ASSET PRICE LESS THAN MA(200) and STAY IN CASH

  44. BUT I CAN’T CALCULATE MOVING AVERAGE MANY WEB SITES WILL DO IT FOR YOU

  45. SIMPLE PORTFOLIO-EQUAL AMOUNTS US STOCKFOREIGN STOCK BONDSCOMMODITIES REAL ESTATE

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