An Historical Perspective On the Market 1

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What about the Decade Of 2000 to 2010? Many news sources have reported that the “’00s” were the lost decade for returns, but it depends on which numbers you choose. S&P % DJIA+ 2.5% Small Cap+ 6.2% World Index+ 1.3% Brazil+21.0% U.S. T-Bonds+ 8.3% 5

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*Matt Moran, CBOE seminar, Oct. 29,

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So, What Does This Data Tell Us? First, remember when people say “this time is different” - it is never different. Markets over and under correct, but they revert to the mean of their long term values. Periods of over performance will be followed by periods of underperformance, etc. Diversification is a key strategy for investing. 9

Did the Markets Really Change in 2008? Probably not, but technology is driving changes in the way the market operates. The globalization of markets should change investment strategies for U.S. investors. Investors must diversify beyond the U.S. to capture find returns. Growth rates in developed markets (e.g. U.S. and Europe) projected under 2% Growth rates in BRIC countries projected at 5% to 7%. To earn the returns historically provided by equities it will be necessary to invest globally. 10

The main investing principles you should learn from this class We can’t predict the market accurately so, create a diversified portfolio of various assets. The risk of the portfolio should be one that is appropriate to you. Minimize trading, trading costs and taxes. Rebalance at least annually to fit your investment objectives. 11

Investing for the Next Decade The WSJ Calls it the Age of “Macro” Investing 12

What are “Macro” Events To understand these, we must distinguish between the terms “risk” and “uncertainty”. Risk = a statistically measurable result for a random variable eg. the outcome of the roll of a die (each side has a 1/6 chance.) Uncertainty = outcomes for which there is no way to estimate their outcomes. 13

Macro Uncertainty Examples: Natural Disasters: Katrina, The Japanese earthquake Political Turmoil The Arab Spring Terrorist Attacks European Debt Crisis Economic Events The 2008 Recession Bankruptcy of Lehman Bros. 14

A Little Perspective over the past 60 years U.S. stocks enjoyed a great boom in the 1980’s and ’90’s – returns averaged 18% yearly. 2000’s decade returns: S&P returned 1% Bonds 6% annually. A survey in 1951 about investing showed: 49% favored bonds, then real estate then bank deposits Only 6% favored stocks. 28% said they would not hold stocks because of “lack of safety”. Remember what the world was like in 1951? 15

World Events the Past two Generations A world war that cost 50 million lives Korean Conflict A cold war and Iron Curtain that threatened world destruction. The Vietnam Conflict, the Oil Embargo in 1974, severe inflation, wage and price controls, another oil shock, the dissolution of the Soviet Union. Two wars in the Middle East, and 9/11/2001. The 2000’s that gave us a real estate bubble, toxic mortgage securities, and near collapse of the world banking system. 16

What this Means for Investors Put your fears into perspective: Warren Buffett: We have usually made our bet purchases when apprehensions about some macro event were at a peak”. Is fear warping your perception of risk. Take selective risks: If you endured the past decade, hang in there. Exposure to factors like illiquidity, credit concerns, natural disasters and insurable events wil be better rewarded than in the past century. Invest with a global perspective 17

Why Demographics will Drive the Future Economic Growth Demand for housing, autos, and consumer goods is driven by the 25 to 45 year age groups. 18

Italy 19

Germany 20

United States 21

Brazil 22

India 23

China 24

So what will the next decade bring? Here’s some data to help you decide 25

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