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Know Your Number Presented by John Forney Source: Created by Raymond James using Ibbotson Presentation Materials © 2010 Morningstar, Inc. All rights reserved.

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Presentation on theme: "Know Your Number Presented by John Forney Source: Created by Raymond James using Ibbotson Presentation Materials © 2010 Morningstar, Inc. All rights reserved."— Presentation transcript:

1 Know Your Number Presented by John Forney Source: Created by Raymond James using Ibbotson Presentation Materials © 2010 Morningstar, Inc. All rights reserved. Used with permission.

2 What We Know Source: Created by Raymond James using Ibbotson Presentation Materials © 2010 Morningstar, Inc. All rights reserved. Used with permission.

3 Ideally…START EARLY!! Source: Created by Raymond James using Ibbotson Presentation Materials © 2010 Morningstar, Inc. All rights reserved. Used with permission.

4 The Earlier You Start Investing, the Easier It Is to Reach Your Goals Monthly savings needed to accumulate $1 million by age 65 This is for illustrative purposes only and not indicative of any investment. Source: Created by Raymond James using Ibbotson Presentation Materials © 2010 Morningstar. All Rights Reserved. 3/1/ Year-Old35-Year-Old45-Year-Old55-Year-Old $6,000 5,000 4,000 3,000 2,000 1,000 0 $5,778 $1,920 $820 $381

5 History Tells Us Much Source: Created by Raymond James using Ibbotson Presentation Materials © 2010 Morningstar, Inc. All rights reserved. Used with permission.

6 ,000 $10, Ibbotson ® SBBI ® Stocks, Bonds, Bills, and Inflation 1926 – 2009 Past performance is no guarantee of future results. An investment cannot be made directly in an index. Hypothetical value of $1 invested at the beginning of Assumes reinvestment of income and no transaction costs or taxes. This is for illustrative purposes only and not indicative of any investment. Source: Created by Raymond James using Ibbotson Presentation Materials © 2010 Morningstar. All Rights Reserved. 3/1/2010 $12,231 $2,592 $84 $21 $12 Compound Annual Return Small Stocks 11.9% Large Stocks Government Bonds Treasury Bills Inflation

7 Taxes Significantly Reduce Returns 1926 – 2009 Past performance is no guarantee of future results. An investment cannot be made directly in an index. This is for illustrative purposes only and not indicative of any investment. Source: Created by Raymond James using Ibbotson Presentation Materials © 2010 Morningstar. All Rights Reserved. 3/1/ % 5.4% 3.4% 3.7% 3.0% % StocksStocks After Taxes Bonds After Taxes BondsCashCash After Taxes Inflation 9.8% 2.3%

8 The Current Retirement Picture Source: Created by Raymond James using Ibbotson Presentation Materials © 2010 Morningstar, Inc. All rights reserved. Used with permission.

9 Most Americans Are Not Saving Enough for Retirement Personal savings rate 1947 – % 12 Source: Created by Raymond James using Ibbotson Presentation Materials © 2010 Morningstar. All Rights Reserved. 3/1/2010

10 Retirees Should Plan for a Long Retirement Probability of a 65-year-old living to various ages % 65 Years Old Male Female At least one spouse Source: Annuity 2000 Mortality Tables. Created by Raymond James using Ibbotson Presentation Materials © 2010 Morningstar. All Rights Reserved. 3/1/2010

11 Social Security is Under Strain Number of beneficiaries per 100 covered workers Low-cost – assumes relatively rapid economic growth, low inflation, and favorable (from the standpoint of program financing) demographic and program-specific conditions; Intermediate – represents the Trustees’ best estimates of likely future demographic, economic, and program-specific conditions; High-cost – assumes relatively slow economic growth, high inflation, and unfavorable demographic and program-specific conditions. Source: Created by Raymond James using Ibbotson Presentation Materials © 2010 Morningstar. All Rights Reserved. 3/1/ HistoricalEstimated Low Cost Intermediate High Cost

12 Inflation Significantly Erodes Purchasing Power Over Time Effects of 3% inflation on purchasing power Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. Source: Created by Raymond James using Ibbotson Presentation Materials © 2010 Morningstar. All Rights Reserved. 3/1/2010 $100k Years $73,742 $63,325 $54,379 $46,697 $40,101 $85,873

13 Inflation and Taxes Reduce Returns Compound annual returns,1926 – 2009 Past performance is no guarantee of future results. An investment cannot be made directly in an index. Assumes reinvestment of income and no transaction costs. Inflation rate over the time period 1926 – 2009 was 3.0%. This is for illustrative purposes only and not indicative of any investment. Source: Created by Raymond James using Ibbotson Presentation Materials © 2010 Morningstar. All Rights Reserved. 3/1/2010 CashBondsStocks % ReturnAfter Inflation After Taxes & Inflation ReturnAfter Inflation After Taxes & Inflation ReturnAfter Inflation After Taxes & Inflation 9.8% 6.6% 4.6% 5.4% 2.3% 0.3% 3.7% 0.6% -0.7%

14 How Much to Withdraw? Source: Created by Raymond James using Ibbotson Presentation Materials © 2010 Morningstar, Inc. All rights reserved. Used with permission.

15 Withdrawal Rate You Can Sustain May Be Lower Than You Think Average: 1926 – % 5.20% 4.33% % 75% Stocks/25% Bonds50% Stocks/50% Bonds25% Stocks/75% Bonds Past performance is no guarantee of future results. An investment cannot be made directly in an index. This is for illustrative purposes only and not indicative of any investment. Source: Created by Raymond James using Ibbotson Presentation Materials © 2010 Morningstar. All Rights Reserved. 3/1/2010

16 High Withdrawal Rates Will Quickly Deplete Your Assets Simulated portfolio values (90% confidence level) Withdrawal Rate:8%7%6%5%4% $1 Mil 500k Years Old An investment cannot be made directly in an index. IMPORTANT: Projections generated by Morningstar regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Results may vary over time and with each simulation. This is for illustrative purposes only and not indicative of any investment. Source: Created by Raymond James using Ibbotson Presentation Materials © 2010 Morningstar. All Rights Reserved. 3/1/2010

17 High Withdrawal Rates Will Quickly Deplete Your Assets Age to which a portfolio may last based on withdrawal rate (90% confidence level) Portfolio: Stocks50% Bonds40 Cash10 10% Withdr. Rate Age An investment cannot be made directly in an index. IMPORTANT: Projections generated by Morningstar regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Results may vary over time and with each simulation. This is for illustrative purposes only and not indicative of any investment. Source: Created by Raymond James using Ibbotson Presentation Materials © 2010 Morningstar. All Rights Reserved. 3/1/2010

18 Probability of Meeting Income Needs Various withdrawal rates and portfolio allocations over a 25-year retirement 85% 34% 4% 0% 97% 72% 28% 5% 0% 96% 81% 54% 28% 12% 93% 80% 62% 44% 28% 90% 78% 64% 50% 38% 4% Withdrawal Rate 5% 6% 7% 8% 100% Bonds 75% B 25% S 50% B 50% S 25% B 75% S 100% Stocks An investment cannot be made directly in an index. IMPORTANT: Projections generated by Morningstar regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Results may vary over time and with each simulation. This is for illustrative purposes only and not indicative of any investment. Source: Created by Raymond James using Ibbotson Presentation Materials © 2010 Morningstar. All Rights Reserved. 3/1/2010

19 What is Your Risk Tolerance? And How to Manage Risk Source: Created by Raymond James using Ibbotson Presentation Materials © 2010 Morningstar, Inc. All rights reserved. Used with permission.

20 Reduction of Risk Over Time 1926 – 2009 Past performance is no guarantee of future results. An investment cannot be made directly in an index. Each bar shows the range of compound annual returns for each asset class over the period 1926–2009. This is for illustrative purposes only and not indicative of any investment. Source: Created by Raymond James using Ibbotson Presentation Materials © 2010 Morningstar. All Rights Reserved. 3/1/2010 Small StocksLarge StocksGovernment BondsTreasury Bills % 1-Year Holding Period 5-Year20-Year1-Year5-Year20-Year1-Year5-Year20-Year1-Year5-Year20-Year Compound Annual Return: 11.9% 9.8% 5.4% 3.7%

21 Potential to Reduce Risk or Increase Return 1970 – 2009 Past performance is no guarantee of future results. An investment cannot be made directly in an index. Risk and return are measured by standard deviation and compound annual return, respectively. They are based on annual data over the period 1970 – This is for illustrative purposes only and not indicative of any investment. Source: Created by Raymond James using Ibbotson Presentation Materials © 2010 Morningstar. All Rights Reserved. 3/1/2010 Lower Risk PortfolioHigher Return PortfolioFixed Income Portfolio Return:8.0% Risk:5.8% Return:8.9% Risk:7.8% Return:8.0% Risk:7.8% 15% 85% 19% 27% 37% 12% 44% 61% Stocks Bonds Cash

22 Diversified Portfolios in Various Market Conditions Performance during and after select bear markets Past performance is no guarantee of future results. An investment cannot be made directly in an index. Diversified portfolio: 35% stocks, 40% bonds, 25% Treasury bills. Hypothetical value of $1,000 invested at the beginning of January 1973 and Nov 2007, respectively. This is for illustrative purposes only and not indicative of any investment. Source: Created by Raymond James using Ibbotson Presentation Materials © 2010 Morningstar. All Rights Reserved. 3/1/2010 Mid-1970s Recession (Jan 1973 – Jun 1976)2008 Bear Market (Nov 2007 – Mar 2009) $1,150 $1,014 $844 $491 $1,250 1, Jan 1973 Jan 1974 Jan 1975 Jan 1976 Nov 2007 Mar 2008 Jul 2008 Nov 2008 Stocks Diversified Portfolio 500 Mar 2009

23 Investor Behavior – How it Affects Your Number Source: Created by Raymond James using Ibbotson Presentation Materials © 2010 Morningstar, Inc. All rights reserved. Used with permission.

24 Seeing Is Not Believing Which gray circle is bigger?Which gray bar is longer?Are the gray horizontal lines parallel? Source: Created by Raymond James using Ibbotson Presentation Materials © 2010 Morningstar. All Rights Reserved. 3/1/2010

25 Rational Minds Can Act Irrationally They are the same size. The horizontal lines are parallel.

26 Patterns of Investor Irrationality Overconfidence Hindsight bias Short-term focus Regret Mental accounting Hot-hand fallacy Source: Created by Raymond James using Ibbotson Presentation Materials © 2010 Morningstar. All Rights Reserved. 3/1/2010

27 Definition Rating oneself as above average when it comes to selecting investments Implications Miscalculating the probability of good outcomes Focusing on the potential upside of investments De-emphasizing the potential downside of investments Overconfidence Source: Created by Raymond James using Ibbotson Presentation Materials © 2010 Morningstar. All Rights Reserved. 3/1/2010

28 Overconfidence: False Perception Historical performance of emerging-market stocks 2004 – % Return % 34.5% 32.6% 39.8% -53.2% 79.0% Past performance is no guarantee of future results. An investment cannot be made directly in an index. This is for illustrative purposes only and not indicative of any investment. Source: Created by Raymond James using Ibbotson Presentation Materials © 2010 Morningstar. All Rights Reserved. 3/1/2010

29 Hindsight Bias Definition Believing that unpredictable past events, in retrospect, were obvious and predictable Implications Feelings of anger and regret Failure to avoid what appears to have been foreseeable Overconfidence Source: Created by Raymond James using Ibbotson Presentation Materials © 2010 Morningstar. All Rights Reserved. 3/1/2010

30 Hindsight Bias: Technology and Real Estate Bubbles An examination of technology stocks and home values Technology BubbleReal Estate Bubble* $367 $200 $2,000 1, $ Past performance is no guarantee of future results. An investment cannot be made directly in an index. *Data available through November This is for illustrative purposes only and not indicative of any investment. Source: Created by Raymond James using Ibbotson Presentation Materials © 2010 Morningstar. All Rights Reserved. 3/1/2010

31 Short-Term Focus Definition Inappropriately focusing on short-term risk versus long-term risk Implications Many investors talk long term but act short term. Overly sensitive to interim volatility regardless of time horizon May tend to behave as though their time horizon is far shorter than it truly is Source: Created by Raymond James using Ibbotson Presentation Materials © 2010 Morningstar. All Rights Reserved. 3/1/2010

32 When shown a distribution of one-year returns, investors allocated 40% to stocks. When shown a distribution of 30-year returns, investors allocated 90% to stocks. Stocks Short-Term Focus: Avoiding Potential Near-Term Losses Choice of asset allocation after examining different return distributions 40% 60% 10% 90% Bonds Source: Shlomo Benartzi and Richard H. Thaler, “Risk Aversion or Myopia? Choices in Repeated Gambles and Retirement Investments,” March Created by Raymond James using Ibbotson Presentation Materials © 2010 Morningstar. All Rights Reserved. 3/1/2010

33 Short-Term Focus: Coping with Near-Term Fluctuations Probability of losing money in the market 1990– % Probability 0 Daily MonthlyQuarterlyAnnually 46% 36% 31% 25% Past performance is no guarantee of future results. An investment cannot be made directly in an index. This is for illustrative purposes only and not indicative of any investment. Source: Created by Raymond James using Ibbotson Presentation Materials © 2010 Morningstar. All Rights Reserved. 3/1/2010

34 Regret Definition Having illogical feelings of guilt because of a poor outcome Implications Investors’ future investment decisions might be affected. Can cause investors to become more risk averse/risk tolerant These individuals may blame advisors for perceived mistakes. Source: Created by Raymond James using Ibbotson Presentation Materials © 2010 Morningstar. All Rights Reserved. 3/1/2010

35 Mental Accounting Definition Mentally compartmentalizing investments while ignoring the aggregate portfolio Implications Investors tend to disaggregate a diversified portfolio. Risk and return components are viewed in a vacuum. Leads to heightened concern about the riskiness of a component of a portfolio Source: Created by Raymond James using Ibbotson Presentation Materials © 2010 Morningstar. All Rights Reserved. 3/1/2010

36 Mental Accounting: Sum of the Parts Risk and return characteristics 1970 – 2009 Total Portfolio Return:10.0% Risk: 11.4% Large Stocks Return: Risk: Small Stocks Return: Risk: Bonds Return: Risk: Cash Return: Risk: International Stocks Return: Risk: 10.2% 23.1% 8.6% 11.9% 5.7% 3.0% 9.9% 18.1% 12.1% 23.6% Past performance is no guarantee of future results. An investment cannot be made directly in an index. This is for illustrative purposes only and not indicative of any investment. Source: Created by Raymond James using Ibbotson Presentation Materials © 2010 Morningstar. All Rights Reserved. 3/1/2010

37 Hot-Hand Fallacy Definition Perceiving trends where none exist and consequently taking action on this faulty observation Implications Investors desire to invest in last year’s winners. Favoring a “hot” money manager or asset class Skill is inferred from a random pattern of chance. Can lead to erroneous assumptions and predictions Source: Created by Raymond James using Ibbotson Presentation Materials © 2010 Morningstar. All Rights Reserved. 3/1/2010

38 Hot-Hand Fallacy: Asset-Class Winners and Losers Annual performance of various asset classes 1995 – % Highest Return Lowest Return Small Stocks Large Stocks International Stocks Long-Term Government Bonds Treasury Bills Diversified Portfolio Past performance is no guarantee of future results. An investment cannot be made directly in an index. This is for illustrative purposes only and not indicative of any investment. Source: Created by Raymond James using Ibbotson Presentation Materials © 2010 Morningstar. All Rights Reserved. 3/1/2010

39 Hot-Hand Fallacy: Chasing Fund Performance Wealth versus cash flows 2000 – 2009 Growth of $10,000 Cash Flows 10-Year Fund Total Return = 8.47% 10-Year Average Investor Return = % $300m $45k Past performance is no guarantee of future results. An investment cannot be made directly in an index. This is for illustrative purposes only and not indicative of any investment. Source: Created by Raymond James using Ibbotson Presentation Materials © 2010 Morningstar. All Rights Reserved. 3/1/2010

40 Find Calculators to Find Your Number at Source: Created by Raymond James using Ibbotson Presentation Materials © 2010 Morningstar, Inc. All rights reserved. Used with permission.

41 Summary Investor misconceptions can be dangerous. They need to be identified early and countered in an appropriate manner. Markets and investing must be viewed in a rational and productive manner. Source: Created by Raymond James using Ibbotson Presentation Materials © 2010 Morningstar. All Rights Reserved. 3/1/2010

42 Investors should carefully consider the investment objectives, risks, charges and expenses of mutual funds before investing. The prospectuses contain this and other information about mutual funds. The prospectuses are available from our office and should be read carefully before investing. Investing in small-cap stocks generally involves greater risks and, therefore, may not be appropriate for every investor. International investing involves special risks, including currency fluctuations, different financial accounting standards, and possible political and economic volatility. Investing in emerging markets can be riskier than investing in well-established foreign markets. Asset allocation and diversification do not ensure a profit or guarantee against a loss. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices generally rise. Holding stocks for the long-term does not insure a profitable outcome. Investing in stocks always involves risk, including the possibility of losing one's entire investment. Disclosures March 1, 2010 Source: Created by Raymond James using Ibbotson Presentation Materials © 2010 Morningstar, Inc. All rights reserved. Used with permission Raymond James & Associates, Inc., member New York Stock Exchange/SIPC 2010 Raymond James Financial Services, Inc., member FINRA/SIPC Continued on next slide

43 U.S. government bonds and Treasury bills are guaranteed by the U.S. government and, if held to maturity, offer a fixed rate of return and guaranteed principal value. U.S. government bonds are issued and guaranteed as to the timely payment of principal and interest by the federal government. Treasury bills are certificates reflecting short- term (less than one year) obligations of the U.S. government. Companies engaged in the technology sector are subject to fierce competition and their products and services may be subject to rapid obsolescence. Declines in the value of real estate, economic conditions, property taxes, tax laws and interest rates all present potential risks to real estate investments. Disclosures (continued) March 1, 2010 Source: Created by Raymond James using Ibbotson Presentation Materials © 2010 Morningstar, Inc. All rights reserved. Used with permission Raymond James & Associates, Inc., member New York Stock Exchange/SIPC 2010 Raymond James Financial Services, Inc., member FINRA/SIPC


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