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5 New Year Resolutions OMAC Breakfast 1 st Quarter 2010.

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Presentation on theme: "5 New Year Resolutions OMAC Breakfast 1 st Quarter 2010."— Presentation transcript:

1 5 New Year Resolutions OMAC Breakfast 1 st Quarter 2010

2 May your troubles last as long as your New Year resolutions do…

3 3 Less Financial Security? We feel vulnerable to foreign financial crises Even long standing companies dont seem as strong as they used to be Members futures are vulnerable…

4 4 More Uncertainty? There is less predictability and more uncertainty? We must do something!

5 Circumstances change The basics of good financial management dont

6 6 Resolution #1 Dont underestimate the power of compound interest

7 7 Compound Interest How long does it take to double your money?

8 8 Compound Interest How long does it take to double your money?

9 9 Compound Interest How much could we earn in 10 years?

10 10 Compound Interest How much did we earn in 10 years?

11 11 Compound Interest What would R1000 have become in 10 years?

12 12 Compound Interest Not bad going for a decade with IT bubble and burst Rand crisis and impact September 11 and global fears 2 market crashes Global Credit Crunch Regime Change Recession

13 What if this could continue for the Long term?

14 14 Compound Interest

15 15 Compound Interest

16 16 Compound Interest

17 Dont Underestimate the Danger of Inflation

18 18 Inflation 2000 White Bread (700g)R3.12 Brown Bread (700g)R2.56 Maize Meal (10kg)R25.26 Rice (1 kg)R6.63 Cooking Oil (750ml)R4.16 Full Cream Milk (1l)R2.56 Fresh Chicken Whole R11.94 Apples (1.5kg)R6.30 Onions (per kg)R2.57 Potatoes (10kg)R13.55 White Sugar (2.5kg)R9.39 Ricoffy Coffee (750g)R23.02 TotalR Today R5.79 R4.99 R47.00 R7.99 R8.99 R6.29 R28.00 R16.95 R5.99 R41.99 R15.39 R51.99 R Incr. 186% 195% 186% 121% 216% 246% 235% 269% 233% 310% 164% 226% 217% p.a. 6.4% 6.9% 6.4% 1.9% 8.0% 9.4% 8.9% 10.4% 8.8% 12.0% 5.1% 8.5% 8.1%

19 19 Inflation In January 2000 Petrol cost R2.88 per litre and Diesel cost R2.47 per litre At February 2010 Petrol was R7.85 per litre and Diesel cost R6.99 per litre An increase of 173% (10.5% p.a.) for Petrol and 183% (11% p.a.) for Diesel

20 20 Inflation Today10 years BreadR10R18 MovieR40R72 Petrol (l) R8R14 EducationR21kR37.6k CarR100kR179k HouseR950kR1700k 30 Years40 Years R57 R102 R230R411 R46R82 R120.6kR211k R574kR1028k R5545kR9771k

21 21 Inflation

22 22 Inflation

23 Time in the Market Is Still the Most Powerful Driver of Wealth

24 24 Resolution #2 Resolution #3 Dont Over-react to Volatile Markets Refine Fund Strategy First, then Review Asset Manager

25 25 Keep the Long-Term View What tempts us to deviate from our long-term strategies…? We are bombarded with daily financial information and market information Our natural inclination is to avoid loss and uncertainty We start to think we must/can time the market

26 26 Information Overload We are living in the information age… Market and financial information is reported Market and financial information is reported – Daily(Newspapers, TV) – Hourly(Radio, Internet, Mobile Phone) – Real-time(Internet, Mobile Phone) Some of the most well known statistics in SA are: Some of the most well known statistics in SA are: – Rand/$ Exchange rate – ALSI – Gold and Platinum Price – Oil Price

27 27 Information Overload Our focus is pulled to the short term by Repetitive reporting of short term Expert analysis of short-term Predictions that are short-term Amplification of Uncertainty

28 28

29 29 Human Nature Loss Aversion Self Serving Bias AnchoringFraming

30 30 Market Volatility What happens next?

31 31 Market Volatility What happens next?

32 32 Market Volatility To 31 January 2010

33 33 Human Nature Which do you prefer? A.Return of 5% for the year B.One third chance of 15% return and two third chance of 0% return for the year C.Loss of 10% for the year D.One third chance of 0% return and two third chance of 15% loss for the year

34 34 Human Nature Loss Aversion Losses hurt more than gains Prefer to avoid losing R1000 than gain R1000 Self Serving Bias We take personal credit for success, but blame failures on others Poor performance means a bad manager Anchoring Focus on a reference point which becomes the norm Extended bull run becomes normalFraming Investment choices and opinion changes depending on context of situation Answer to same question can change

35 35 Market Volatility 13% -36% -9% 18% 24% -20% 21% 8% -20% -13% 29% -20% 30% To 31 January % -8% -4% 12% -5%

36 36 Human Nature Loss Aversion Self-serving Bias Anchoring Framing Losses really hurt! We must avoid further losses… Move to Cash By moving out of equity, we avoid others incompetence and do something useful… Move to Cash Compared to the Bull market, all performance seems sub- standard. Equities lose their charm… Move to Cash The uncertainty of the market and potential losses make certainty, at any return attractive… Move to Cash Fire Manager

37 37 Long Term View

38 38 Timing the Market

39 39 Timing the Market If your fund offers investment choice… How well do you think your members are doing in timing the market?

40 40 Timing the Market How well do you think your asset managers managers are doing in timing the market?

41 41 Long Term View

42 42 Long Term View

43 43 Market Timing

44 44 Resolution #4 Take On An Appropriate Level of Risk

45 45 Market Volatility 13% -36% -9% 18% 24% -20% 21% 8% -20% -13% 29% -20% 30% To 31 January % -8% -4% 12% -5%

46 46 Investment Risk Feeling nervous about equities? Equities have historically outperformed other asset classes in the long term Prices do deviate from true value from time to time Bubbles and corrections

47 47 Investment Risk

48 48 Investment Risk One can lose money OR One can lose out on money

49 49 Investment Risk Cash Gilts Smooth Bonus Property Derivatives Equity Volatility Return Volatility Risk (Exit Risk)

50 50 Investment Risk Cash Gilts Smooth Bonus Property Derivatives Equity Volatility Return Inflation Risk (Growth Risk) ILG

51 51 Investment Risk Cash Gilts Smooth Bonus Property Derivatives Equity Volatility Return Capital Loss Risk (Loss Risk) Derivatives

52 52 Managing Risk Lose Money Lose Out on Money Diversification Conservative Asset Allocation Guarantees Smoothing Derivatives Absolute Return Strategies Diversification Aggressive Asset Allocation Passive Investing Life Stage Investing

53 53 Investment Risk Take the level of risk that members can afford Not more, or less…

54 54 Resolution #5 Use Good Governance as a Tool for Protection

55 55 Good Governance HEURISTIC (noun) A common sense rule (or set of rules) intended to increase the probability of solving a problem

56 56 Good Governance ReputationAgeSizeNationality (A large, 150 year plus old, American bank with a great reputation and household name should be very safe: AAA+ )

57 57 Governance Failures EnronWorldcomEishkomFidentia SA Airlink Barings Bank ExxonTyco American Airlines Valujet Airlines Lehmann Brothers Beare Sterns Bulking Deutsche Bank Pension Stripping ParmalatMadoff Societe Generale

58 58 Governance Failures

59 59 Governance Failures

60 60 Protect Members benefits from Good Governance Good Governance Good Governance BadManagement PoorServiceProviders EnvironmentRisks Ignorance

61 61 Good Governance Understand and mitigate the risks the Fund is facing Understand and mitigate the risks the Fund is facing Communicate transparently and regularly to members Communicate transparently and regularly to members Understand your service providers strengths and weaknesses Understand your service providers strengths and weaknesses Improve your knowledge as a Trustee Improve your knowledge as a Trustee Manage the members money well Manage the members money well Ensure your Insurance covers everything you need Ensure your Insurance covers everything you need

62 62 Governance Failures

63 63 Investment Risk True governance protects members best interests Ticking boxes protects Trustees from scrutiny only

64 64 5 New Year Resolutions 1.Dont underestimate the power of compound interest 2.Dont Over-react to Volatile Markets 3.Refine Fund Strategy First, then Review Asset Manager 4.Take On An Appropriate Level of Risk 5.Use Good Governance as a Tool for Protection

65 65 THANK YOU


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