Copyright ©2005 Ibbotson Associates, Inc. Principles of Investing Securities offered through...

Copyright ©2005 Ibbotson Associates, Inc.

Principles of Investing

Securities offered through Lincoln Financial Advisors Corp., a broker/dealer,1300 S. Clinton Street, Fort Wayne, IN 46802-3506, Phone 800-454-6265.

Insurance offered through Lincoln affiliates and other fine companies.Lincoln Financial Group is the marketing name for Lincoln National Corporation and its affiliates.

CRN200510-1003372

This is for illustrative purposes only and not indicative of any investment.An investment cannot be made directly in an index.Past performance is no guarantee of future results. 3/1/2005


3.3%

Bonds without reinvestment

$1,907

Power of reinvesting1984–2004

Hypothetical value of $1,000 invested at year-end 1984. Data does not account for taxes or transactions costs.The average return represents a compound annual return.

$100

$1,000

$10,000

$100,000

1984 1989 1994 1999 2004


Averagereturn

Endingwealth

Stocks without reinvestment

10.4%$7,249

10.8%$7,798

Stocks with reinvestment

13.2%$11,994

Bonds with reinvestment



Stocks: 50% large and 50% small company stocks. Bonds: intermediate-term government bonds.

Stock allocation

Bond allocation

Po

rtfo

lio

we

igh

tin

gs

Target asset mix: 50% stocks/50% bonds

1984–2004Importance of rebalancing

50%

72%

28%

75%

25%

58%

42%

55%

45%50%

0%

20%

40%

60%

80%

100%

1984 1989 1994 1999 2004



Non-rebalanced portfolio

Rebalanced portfolio

Jan 1970–

Dec 2004

Jan 1980–

Dec 2004

Jan 1990–

Dec 2004

Rebalancing versus not rebalancingThe risk and return of rebalanced versus non-rebalanced portfolios

Risk Return

Jan 1970–

Dec 2004

Jan 1980–

Dec 2004

Jan 1990–

Dec 2004

Risk is measured by annualized standard deviation. Return is measured by compound annual return.

11.3%12.1%

9.4%11.0%11.7%

8.8%

0%

2%

4%

6%

8%

10%

12%

14%12.8% 12.7%

11.1%

9.4%10.4% 10.1%

0%

2%

4%

6%

8%

10%

12%

14%



Hypothetical value of $1 invested from year-end 1925–2004Dangers of market timing

$2,533

$17.87

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

S&P 500

$17.75

S&P minus best 38 months

Treasury Bills



Dangers of market timingHypothetical value of $1 invested from year-end 1984–2004

$5

$15

$10

$11.99

$2.57

S&P 500

$0

$2.39

S&P 500 minusbest 19 months

Treasury bills



Annual return minus best month

Annual returnThe effects of missing the best month on annual returnsMarket timing risk

Return if the best month is missed

Co

mp

ou

nd

an

nu

al

retu

rn

Return if investedfor the whole year

Return if investedfor the whole year

Return if the best month is missed

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

1970 1975 1980 1985 1990 1995 2000 2004



$40,000

$60,906

$20,000

$124,550

$150,000

Power of compounding

Total amount invested

Compounded value at year-end 2004

Investor B

10

$4,000

Year-end 1994–2004

Investor A

10

$2,000

Year-end 1984–2004

Years contributing:

Annual amount contributed:

$0

$100,000

$50,000

Hypothetical investment in stocks



*Assumes capital gains tax rate of 15%.

$(3,500)

$(2,500)

$(1,500)

$(500)

$500

$1,500

$2,500

$3,500

$4,500

$5,500

$2,000

$300

($3,000)

($450)

$5,000Taxable gain (loss)

Investment with gain

Investment with loss

Results of harvesting losses

Taxes paid (credit)*

$750

+ =

Tax-loss harvesting



Each bar shows the range of compound annual returns for each asset class over the period 1926–2004.

1-year holding periods

Smallcompany

stocks

Largecompanystocks

Governmentbonds

Treasury bills

-75%

-50%

-25%

0%

25%

50%

75%

100%

125%

150%



10.4%12.7%5.4% 3.7%

Compound annual return

1926–2004Reduction of risk over time



Can you stay on track?

Bonds

$600

$800

$1,200

$1,400

1971 1972 1973 1974

$1,000

$1,091

$15,382

$100

$1,000

$10,000

$100,000Stocks

$747

$47,517

1974 1984 1994 2004

$912

50/50 portfolio

$29,945



Returns before and after inflation1926–2004

Co

mp

ou

nd

an

nu

al

retu

rn

Stocks Bonds Cash

0%

4%

8%

12%

10%

6%

2%

Before inflation10.4%

5.4%

3.7%

7.2%

2.3%

0.7%

After inflation

Assumes reinvestment of income and no transaction costs or taxes.

Copyright ©2005 Ibbotson Associates, Inc. Principles of Investing Securities offered through...

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