Kootenay Valley Financial Services Inc. Click to progress through presentation.
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Transcript of Kootenay Valley Financial Services Inc. Click to progress through presentation.
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Kootenay Valley Financial Services Inc.
Click to progress through presentation
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Two Great Questions in Life
A$$ETSWhat do What do
You Have?You Have?What do What do
You Have?You Have?
GOAL What do What do You Need?You Need?What do What do
You Need?You Need?
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Principles for Long Term Investment Success
Asset class performance is ________________over long time frames.
Investment expense are ________ importantthan returns.
Diversification is not always ____________ .
Mutual Funds are ____________ within asset classes.
______________ asset classes based on volatility enhances return.
PREDICTABLE
MORE
EFFICIENT
RANDOM
COMBINING
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What are Your CORE BELIEFS?
Taxes WILL always go up, not down. ______ ______
To be financially SECURE incomemust keep pace with inflation. ______ ______
Life expectancies ARE greater than ever. ______ ______Managed Equities ARE safer than CD’s and Bonds. ______ ______
Risk is a necessary evil. ______ ______
Yes No
XX
XX
XX
XXXX
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Speculative
Foundation
Investors typically have THREE types of Capital
To achieve a consistent investment return – You must avoid the BIG MISTAKE!
3. _______________ 2. _______
1.
Core
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The S&P Average MarketReturn over the last 10 Years?
12.7%
Ibbotson, Morningstar andFidelity studies show
Average Investor Returns over the last 10 Years.
2.3%
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The THREE Barriers to financial success
1. _____________________
2. _____________________
3. _____________________
Taxes
InflationInefficient
Diversification
INVESTMENT FRICTION
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Let’s look at TAXES!!!
If $1 doubles every year for 20 years
$1,048,576$100 =In a
40% Tax Bracket$12,089
In a28% Tax Bracket
$51,353
Notice the huge impact TAXES can have on your wealth
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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%
200019991998199719961995199419931992199119901989198819871986198519841983198219811980
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%
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%
197919781977197619751974197319721771197019691968196719661965196419631962196119601959
195819571956195519541953195219511950194919481947194619451944194319421941194019391938
Now let’s look at INFLATION
AVERAGE 3.6% 4.8% 3.4%
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StampWoman’s SkirtHouseCarLoaf of Bread½ Gal MilkMedian Income
$ .06$ 7.50$25,000$ 3,400$ .23$ .50$ 4,594
$ .33$ 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%
COMMODITY 1970 TODAY INFLATION
Does History Really Repeat Itself?
What is the TRUE Inflation rate?
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24%?
1940 1960 1980 2000
7%
14%
% Over age 65Living to age 90
Why is Inflation such a PROBLEM?
The longer people livethe higher the risk theywill “Run Out of Money”
The longer people livethe higher the risk theywill “Run Out of Money”
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How does inflation IMPACT you?
45 65
20 yrs 10 yrs10 yrs
85
$50,000
Age:
$18,000
$32,000
It’s the 2nd TEN Years of Retirement that matters
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What is RISK?
Name the TWO kinds of risk:
1. _____________________________
2. _____________________________
Loss of Capital
Loss of Purchasing Power
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What Causes LOSS of CAPITAL?
It’s all about Volatility
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Whose Numbers are those?
They are notYours - UNLESSYou are Buying orSelling
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How do you measure Volatility?
Average ROR
Index
Average ROR+/-
12% 17
+17%-17% 12%
High 29% Low - 5%
+29%- 5%
Risk is ALL ABOUT VolatilityRisk is ALL ABOUT VolatilityRisk is ALL ABOUT VolatilityRisk is ALL ABOUT Volatility
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Retirement
But Remember – Risk is also Inflation
So, which Risk is Guaranteed to Happen?
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What can you do to PROTECT yourWhat can you do to PROTECT yourPurchasing power?Purchasing power?
Return onReturn onInvestmentInvestment
ROI ROI adjusted foradjusted for
InflationInflation
~2.2 x~4 x
Small Cap
Large Cap
Corporate Bonds
Gov’t Bonds
Inflation
12.4%
11.3%
5.6%
5.1%
3.3%
9.1%
8.0%
2.3%
1.8%
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Brinson Study
60
80
100
0
20
40
Timing
2%2%
StockSelection
4%4%
AssetAllocation
94%94%
What IMPROVES Portfolio PerformanceWhat IMPROVES Portfolio Performance
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1.
2.
3.
Where should I invest my MONEY?Where should I invest my MONEY?
Name THREE basic Asset Classes?
Cash
Stocks
Bonds
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HistoricalHistoricalReturn on Return on InvestmentInvestment
Volatility IndexVolatility Index
Small Cap
Large Cap
Corporate Bonds
Gov’t Bonds
Inflation
Is asset class performance PREDICTABLE?Is asset class performance PREDICTABLE?
12.4%
11.3%
5.6%
5.1%
3.3%
39.62%
20.17%
8.78%
9.43%
16.61%
8.51%
4.57%
4.69%
1 Year 5 Year
4.42% 3.29%
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The Lipper StudyThe Lipper Study
Mutual Funds in the same asset class eventuallyEarn the same average rate of return.
REGRESSION TO THE MEAN
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Some asset classes move in Some asset classes move in OPPOSITE directionsOPPOSITE directions
-1 Zero +1
Negative – Moves in opposite directionsTotally Random – no relationshipPositive – Moves in the SAME direction
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U.S. vs. InternationalU.S. vs. International
Rolling
12-Month
40%
30%
20%
10%
0%
10%
20%
30%
40%
50%
60%
70%
Returns
72 76 80 84 86 90 94 98
International outperforms U.S.
U.S. outperforms International
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Why are Correlation CoefficientsWhy are Correlation Coefficientsimportant?important?
VA
LU
EV
AL
UE
TIMETIME
This is Called INEFFICIENT Diversification
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We need to create DISSIMILARWe need to create DISSIMILARPrice MovementsPrice Movements
This is Called EFFICIENT Diversification
VA
LU
EV
AL
UE
TIMETIME
AA
AA && BB
BB
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Average return vs. Internal Rate of ReturnAverage return vs. Internal Rate of Return
YEARYEAR
1122334455
RETURNRETURN
Ave ROIAve ROIIRRIRR
10%10%10%10%10% 10% 10% 10% 10% 10%
10%10%10%10%
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Average return vs. Internal Rate of ReturnAverage return vs. Internal Rate of Return
YEARYEAR
1122334455
20%20%- 5%- 5%- 10% - 10% 20% 20% 25% 25%
Ave ROIAve ROIIRRIRR
RETURNRETURN
10%10%9.05%9.05%
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Determine the REAL rate of returnDetermine the REAL rate of return
YEARYEAR
1122334455
25%25% 25%25% 25%25% 25%25%-30%-30%
RETURNRETURN
Average ROIAverage ROI 14.00%14.00%
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Determine the REAL rate of returnDetermine the REAL rate of return
YEARYEAR
1122334455
14%14% 15%15% 13%13% 16%16% 4%4%
RETURNRETURN
Average ROIAverage ROI 12.40%12.40%
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Determine the REAL rate of returnDetermine the REAL rate of return
YEARYEAR
1122334455
25%25% 25%25% 25%25% 25%25%-30%-30%
RETURNRETURN
14%14% 15%15% 13%13% 16%16% 4%4%
RETURNRETURN
Average ROIAverage ROI 14.00%14.00% 12.40%12.40%
IRRIRRIRR 11.3%11.3% 12.2%12.2%
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Why is this IMPORTANT?Why is this IMPORTANT?
This effect can ONLY be consistently achieved with EFFICIENT Diversification
VA
LU
EV
AL
UE
TIMETIME
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What is the EFFICIENT FRONTIER?What is the EFFICIENT FRONTIER?
100%100% InternationalInternational
100% 100% Large CapLarge Cap
Retu
rn
Risk
Optimum MixOptimum Mix
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100% Stocks100% Stocks
80% Stocks/20% Bonds80% Stocks/20% Bonds
60% Stocks/40% Bonds60% Stocks/40% Bonds
100% Bonds100% Bonds
20% Stocks/80% Bonds20% Stocks/80% Bonds
40% Stocks/60% Bonds40% Stocks/60% Bonds
50% Stocks/50% Bonds50% Stocks/50% Bonds
YEARS
30
25
20
15
10
5
1
35 40 45 50 55 60 65 70AGE
Discover your optimal risk allocationDiscover your optimal risk allocation
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Three Professors from the Chicago School of Economics (Miller, Sharpe and Markowitz) received the NOBEL PRIZE in 1990 for these
research conclusions:
1. Reduce Investment Risk
2. Increase Return
3. Create Dissimilar Price Movements4. Use Asset Allocation
NobelPrize