Principles of Investing
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© 2013 Morningstar. All Rights Reserved. 3/1/2013 Principles of Investing
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As an investor having a good understanding of the principles of investing can help one achieve their financial goals. This presentation will look at the principles of compounding, rebalancing, market timing, risk reduction, and inflation.
Transcript of Principles of Investing
© 2013 Morningstar. All Rights Reserved. 3/1/2013
Principles of Investing
Morningstar, Inc.
The images contained in the Presentations are provided as a single user license (‘Authorized User’). Images may be used in seminars and client presentations by the Authorized User, but may not be distributed electronically or without written permission from Morningstar. Printed handouts of the images may be used with individual clients and prospects, but may not be mass distributed. For additional user licenses or distribution capabilities, please contact your Morningstar sales representative.
Power of Reinvesting1993–2012
Past performance is no guarantee of future results. Hypothetical value of $1,000 invested at the beginning of 1993. Data does not account for taxes or transaction costs. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2013 Morningstar. All Rights Reserved. 3/1/2013
$10k
800
1993 1996 1999 2002 2005 2008 2011
$4,852
$3,273
$5,193
$1,818
8.2%6.18.63.0
Compound annual return
• Stocks with reinvestment• Stocks without reinvestment• Bonds with reinvestment• Bonds without reinvestment
1,000
Power of CompoundingHypothetical investment in stocks
Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2013 Morningstar. All Rights Reserved. 3/1/2013
Years contributing: 1993-2002Annual amount contributed: $2,000
Years contributing: 2003-2012Annual amount contributed: $2,000
Investor BInvestor A
$20,000
$27,820
$20,000
• Total amount invested• Compounded value at year-end 2012
0
20
40
60
$80k
1993–2012 2003–2012
$53,840
Importance of Rebalancing1992–2012
Past performance is no guarantee of future results. Stocks: 50% large and 50% small stocks. Bonds: intermediate-term government bonds. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2013 Morningstar. All Rights Reserved. 3/1/2013
0
10
20
30
40
50
60
80%
2007 2012200219971992
70
50% 50%
64%
36%
57%
43%
69%
31%
67%
33%
• Stock allocation• Bond allocation
Year End
Managing Risk With Portfolio RebalancingThe risk and return of rebalanced versus non-rebalanced portfolios
Past performance is no guarantee of future results. Risk and return are measured by annualized standard deviation and compound annual return, respectively. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2013 Morningstar. All Rights Reserved. 3/1/2013
Return
0
2
4
6
8
10
12
14%
Jan 1970–Dec 2012
Jan 1980–Dec 2012
Jan 1990–Dec 2012
Jan 1970–Dec 2012
Jan 1980–Dec 2012
Jan 1990–Dec 2012
Risk
13.0%
13.8% 14.0%
10.5% 10.4%
9.7%
• Non-rebalanced portfolio• Rebalanced portfolio
9.9%10.4%
7.9%
9.8%10.3%
7.9%
Dangers of Market TimingHypothetical value of $1 invested from 1926–2012
Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2013 Morningstar. All Rights Reserved. 3/1/2013
$20.34 $20.57
0
500
1,000
1,500
2,500
$3,500
Stocks Stocks minus best 40 months Treasury bills
2,000
$3,533
3,000
Dangers of Market TimingHypothetical value of $1 invested from 1993–2012
Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2013 Morningstar. All Rights Reserved. 3/1/2013
$4.85
0
2
4
$5
Stocks Stocks minus best 12 months Treasury bills
1
3
$1.79 $1.81
Market-Timing RiskThe effects of missing the best month of annual returns 1970–2012
Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2013 Morningstar. All Rights Reserved. 3/1/2013
–40
–30
–20
–10
0
10
20
30
40% Return
• Annual return• Annual return minus best month
1985 1995 2000 2005198019751970 1990 2010
The Cost of Market TimingRisk of missing the best days in the market 1993–2012
Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2013 Morningstar. All Rights Reserved. 3/1/2013
Invested for all5,040 trading days
10 best days missed 20 best days missed 30 best days missed 40 best days missed 50 best days missed
10% Return
5
–5
0
–10
Daily returns for all 5,040 trading days
–4
–2
8
6
4
2
0
10%Return
0.0%
8.2%
4.5%
2.1%
–1.9%
–3.7%
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Reduction of Risk Over Time1926–2012
Past performance is no guarantee of future results. Each bar shows the range of compound annual returns for each asset class over the period 1926–2012. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2013 Morningstar. All Rights Reserved. 3/1/2013
Small stocks Large stocks Government bonds Treasury bills
–60
–30
0
30
60
90
120
150%
1-year
Holding period
5-year 20-year 1-year 5-year 20-year 1-year 5-year 20-year 1-year 5-year 20-year
Compound annual return:11.9% 9.8% 5.7%
3.5%
Returns Before and After Inflation1926–2012
Past performance is no guarantee of future results. Assumes reinvestment of income and no transaction costs or taxes. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2013 Morningstar. All Rights Reserved. 3/1/2013
Stocks Bonds Cash
0
2
4
6
8
10%
Before inflation After inflationBefore inflation After inflation Before inflation After inflation
9.8%
6.7%
5.7%
2.6%
3.5%
0.5%
Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2013 Morningstar. All Rights Reserved. 3/1/2013
$28,818$1,091
$50,884
$912
$66,376
$746
600
800
1,000
$1,200
100
1k
10k
$100k
1975 1985 1995 20051972 1973 1974
• Stocks• 50/50 portfolio• Bonds
Can You Stay on Track?
© 2013 Morningstar. All Rights Reserved. 3/1/2013
Contact Us:
Contact us today to learn more about how RL Paler Investment Advisors, LLC can help you stay on track.
CA: 424-249-9290 MI: [email protected]
Morningstar, Inc.
The images contained in the Presentations are provided as a single user license (‘Authorized User’). Images may be used in seminars and client presentations by the Authorized User, but may not be distributed electronically or without written permission from Morningstar. Printed handouts of the images may be used with individual clients and prospects, but may not be mass distributed. For additional user licenses or distribution capabilities, please contact your Morningstar sales representative.
