financial crisis your asset allocation strategy
Download
Skip this Video
Download Presentation
Financial Crisis & Your Asset Allocation Strategy

Loading in 2 Seconds...

play fullscreen
1 / 57

Financial Crisis Your Asset Allocation Strategy - PowerPoint PPT Presentation


  • 136 Views
  • Uploaded on

Financial Crisis & Your Asset Allocation Strategy. Developed by Barbara O’Neill, Ph.D., CFP, Rutgers Cooperative Extension Adapted by Jean Lown, Ph.D. Family, Consumer & Human Development, USU. November 12, 2008. Overview . Financial Crisis Asset Allocation Principles

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about 'Financial Crisis Your Asset Allocation Strategy' - arleen


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
financial crisis your asset allocation strategy

Financial Crisis & Your Asset Allocation Strategy

Developed by Barbara O’Neill, Ph.D., CFP, Rutgers Cooperative Extension

Adapted by Jean Lown, Ph.D.

Family, Consumer & Human Development, USU

November 12, 2008

overview
Overview
  • Financial Crisis
  • Asset Allocation Principles
  • Risk-Return Relationship
  • Application to TIAA-CREF Retirement Investment Options
    • 9 new investment choices (as of 2003)
  • TIAA-CREF vs. Fidelity
  • Taking Action
worldwide market meltdown
Worldwide Market Meltdown
  • Worst $ crisis since Depression
  • Nowhere to hide
    • Stocks & Bonds
    • Domestic & foreign
    • Real estate, too
  • Should you sell?
    • Buy low & sell high
    • Market timing doesn’t work
basic investment principles
Basic Investment Principles
  • Diversification
  • Asset Allocation
  • Market volatility
  • Time horizon
    • Retirement v. life span
asset allocation
Asset Allocation
  • Diversifying portfolio multiple investment categories to reduce investment risk
  • Ex: 50% stock, 30% bonds, 20% cash assets (e.g., Treasury bills)
  • Lower risk by reducing volatility
  • Loss in one investment offset by gains in another
determinants of portfolio performance
Determinants of Portfolio Performance

Source: “Determinants of Portfolio Performance II, An Update” by Gary Brinston, Brian D. Singer and Gilbert L. Beebower, Financial Analysts Journal May-June 1991

For illustrative purposes only. Not indicative of any specific investment.

callan periodic table of investment returns
Callan Periodic Table of Investment Returns
  • http://www.callan.com/research/institute/periodic/
  • Benefits of asset allocation
  • 20 years asset class performance
  • Best performing asset class changes
  • This year’s “winner” = next year’s “loser”
  • Invest in them all
market timing is futile
Market Timing is Futile
  • $100 invested in large company stocks (S&P 500 index): June 1980 - June 2000
    • $2,456 IF invested entire time
    • $613 if you missed the best 15 months
  • Biggest market gains concentrated in short periods
more market timing futility
More Market Timing Futility
  • S&P 500 stock market index 1998-2000
  • If investor stayed fully invested: 41.4% return
  • If investor missed top 10 trading days of 1998, 1999, & 2000: - 41.7% return
  • Stay invested in both bull & bear markets
importance of asset allocation
Importance of Asset Allocation
  • Asset allocation is the MOST important decision an investor makes (i.e., buying some stock, NOT Coke versus Pepsi)
  • Asset allocation determines about 90% of the return variation between portfolios
  • Study repeated numerous times by different researchers with similar results
why use asset allocation to increase long term investment results
Why Use Asset Allocation? To Increase Long Term Investment Results
  • Scenario #1: $100,000 invested at 8% over 25 years grows to $684,848
  • Scenario #2: $100,000 divided equally among 5 investments:
    • One loses principal; other 4 earn 0%, 5%, 10%, and 15% average annual returns
    • Diversified portfolio = $962,800 over 25 years
factors to consider
Factors to Consider
  • Investment objective (e.g., retirement)
  • Time horizon (e.g., life expectancy for retirement)
  • Amount of money you have to invest
  • Your risk tolerance and experience
    • Caution about risk tests!
downside of asset allocation
Downside of Asset Allocation
  • In short run… diversified portfolio MAY generate lower return compared to a “hot” asset class (e.g., growth stocks from 1995-99) BUT
  • No one knows the next “hot” asset class (i.e., Callan table)
  • Asset allocation reduces volatility to provide a competitive rate of return
major asset classes
Stocks

Large company growth & value

Mid cap growth & value

Small growth & value

International

Real estate (e.g., REITs)

Bonds

Domestic

International

Corporate

Municipal

Cash (CDs, I-bonds, MMMFs, Treasury bills)

Major Asset Classes
stock capitalization
Stock Capitalization
  • Large Cap companies: valued at >$5 billion
    • ExxonMobil, General Electric, Microsoft
  • Mid-Cap: $1-5 billion
    • Bath & Beyond, Monsanto, Hilton Hotels
  • Small-Cap: <$1 billion
    • Earthlink, FirstFed Financial, Vintage Petroleum
historical average annual rates of return
Historical Average Annual Rates of Return
  • Small Co. U.S. stocks = 12.6%
  • Large Co. U.S. stocks = 10.4%
  • Government Bonds = 5.1%
  • Treasury Bills = 3.8%
  • Inflation = 3.1%
why invest internationally
Why Invest Internationally?
  • Low correlation among world markets
    • (e.g., U.S. & foreign stocks)
  • World markets (especially small companies) are driven by local dynamics
  • Investing in U.S. multinationals does not deliver the same level of diversification
  • Benefits of diversification outweigh currency, market, & political risks
  • U.S.: <1/3 of the world’s stock markets
    • Big 4: BRIC
asset allocation process
Asset Allocation Process
  • Define goals and time horizon
  • Assess your risk tolerance
  • Identify asset mix of current portfolio
  • Create target portfolio (asset model)
  • Select specific investments
  • Review and rebalance portfolio yearly
other things to know about asset allocation
Other Things to Know About Asset Allocation
  • Portfolio risk decreases as the # of asset classes increases
  • Best results are achieved over time
  • Diversify holdings within each asset category
    • Stock: different industry sectors
    • Bonds: different types and maturities
more asset allocation tips
More Asset Allocation Tips
  • Stick to your asset allocation model unless personal circumstances change
  • Rebalance when asset percentages change by a certain amount (e.g., 2%) or yearly (automatic rebalancing)
  • No one sector > 10%- 30%
risk return relationship
Risk-Return Relationship
  • Low risk = low return
  • High risk = possibility of high return
  • Risk: chance of loss of principal in the short run
    • 2000-2003 U.S. stocks lost 49% (after incredible run-up in prices in 1990s)
    • October 2007 to Oct 2008 lost 40%+
stocks are risky in short run
Stocks are Risky in Short Run
  • Very volatile in sort run (1-5 years)
    • annual returns -50% to +50%!!
    • 2003 was a great year to buy stocks when all news was gloom & doom
    • Today is buying opportunity
  • Large Co. U.S. stocks = 10.7% (avg. returns since 1926)
safe investments are risky in the long run
“Safe” Investments are Risky in the Long Run
  • Inflation = 3.1%
  • Government Bonds = 5.1% -3.1% = 2%
  • Treasury Bills = 3.8% - 3.1% = 0.7%
  • Subtract the impact of taxes
    • ‘safe’ investments = negative returns
  • You will not reach long term goals
relationship between risk and return
Relationship Between Risk and Return

High

Int’l Stocks

U.S. Stocks

Real Estate

Expected

Return

Int’l Bonds

U.S. Bonds

Cash

Equivalents

Low

Low

Risk

High

For illustrative purposes only. Not indicative of any specific investment.

diversification from combining investments
Diversification From Combining Investments

No Diversification

Complete Diversification

Portfolio 1

Portfolio 2

Investment A

Investment C

Investment D

Investment B

Some Diversification

Portfolio 3

Investment E

Investment F

For illustrative purposes only. Not indicative of any specific investment

2000 2003 was a gut check
2000-2003 was a gut check
  • Thank goodness some of my portfolio was in bonds & real estate!
    • Stocks tanked
    • Bonds held steady
    • Real estate saved the day
  • Here we go again!
invest for growth
Invest for Growth
  • There is no such thing as a risk-free investment!
  • Retirement $ must grow faster than inflation to provide financial security
  • Risk is relative
    • Short term volatility=long term growth
    • Diversified portfolio needs stocks for growth
understand risk tolerance
Understand Risk Tolerance
  • Beware of taking risk tests and settling for a conservative portfolio
  • Conservative investors risk outliving their assets
  • Life expectancy calculators
    • http://www.ces.purdue.edu/retirement/Module1/module1b.html
time horizon for retirement
Time Horizon for Retirement?
  • Until the day you retire?
  • Until the day you die?
retirement growth portfolio
Retirement Growth Portfolio
  • 10-15% International stocks
  • 10-15% Small-cap stocks
  • 10-15% Mid-Cap stocks
  • 10-15% Real Estate
  • 10-15% Bonds
tips for funding a tax deferred employer plan
Tips For Funding a Tax-Deferred Employer Plan
  • Diversify across asset classes
  • Avoid market timing
  • Choose investments with solid historical performance
    • Past returns are NO guarantee for the future!!
    • <10 year track record is too short!
  • Choose funds with low fees
your action list
Your “Action” List
  • Review your current asset allocation
  • Consider your other retirement accounts
  • Use the TIAA-CREF web site
    • Risk tolerance quiz
    • Asset allocation calculators
  • Talk with a representative
  • Reallocate, Rebalance, Re-visit
before you decide
Before You Decide
  • Read the website
  • Understand the risks
  • Make careful choices
  • Don’t be afraid to change asset allocation
    • You can always change your mind
the big picture
The Big Picture
  • Same principles can be applied to
    • 401(k) plans
    • Individual retirement accounts (IRAs)
    • Other retirement plans
key considerations for successful investing
Key Considerations For Successful Investing
  • Establish policies and objectives
  • Stick to your plan and stay focused
  • Educate yourself to make informed decisions
  • Monitor investment performance
  • If you need help, seek a professional advisor
before you decide1
Before You Decide
  • Read the TIAA-CREF website
  • Understand risk
  • Make choices based on solid investment principles
  • Don’t be afraid of making mistakes; you can always change your asset allocation
5 tiaa cref asset classes
5 TIAA-CREF Asset Classes
  • Guaranteed (low risk; low return)
  • Fixed-Income (bonds)
  • Equities (stocks)
    • High return; volatile in the short run
  • Real Estate
    • Inflation protection; reduce volatility
  • Money Market (safe; low return)
tiaa cref options pre 2003
TIAA Traditional

TIAA Real Estate

CREF Money Market

CREF Social Choice

CREF Stock

Global Equities

Growth

Equity Index

TIAA-CREF Options (pre-2003)
9 new fund choices 2003
Real Estate Securities

Growth & Income

S&P 500 Index

Large Cap Value

Social Choice Equity

Mid-Cap Value

Mid-Cap Growth

Small-Cap Equity

International Equity

9 New Fund Choices (2003)
global vs international
Global vs. International
  • Global: U.S. and foreign investments
  • International: “all” foreign
murky mixture
Murky Mixture
  • Few of the funds are “pure”
  • CREF Stock
    • 80% Large-, 15% Mid-, 5% Small-Cap
    • Some foreign stocks
  • Mid-Cap Growth
    • 59% Large-! 39% Mid-, 2% Small-Cap
  • Read Prospectus (or at least the summary)
growth portfolio
Growth Portfolio
  • STOCKS
    • Large-cap Domestic
    • 10-15% Mid-Cap
    • 10-15% Small-cap
    • 10-15% International
  • 10-15% Real Estate
  • 10-15% Bonds (to dampen volatility)
adjusting your allocation
Adjusting Your Allocation
  • You can change future allocations
  • You can transfer current balances among funds
  • Use TIAA-CREF.org web site
  • Sign up for automatic rebalancing
tips for allocating your retirement contributions
Tips for Allocating Your Retirement Contributions
  • Diversify across asset classes
    • Stocks, bonds, real estate
  • Avoid market timing
  • Choose investments with strong historical performance (stocks)
    • >10 year track record
the big picture1
The Big Picture
  • Same principles can be applied to
    • 401(k) plans
    • Individual retirement accounts (IRAs)
    • Other retirement plans
  • Past returns are NO guarantee for the future!!
  • 5-10 year track record for a specific investment is too short.
key considerations for successful investing1
Key Considerations For Successful Investing
  • Establish policies and objectives
  • Stick to your plan and stay focused
  • Educate yourself to make informed decisions
  • Monitor investment performance
  • If you need help, seek a professional advisor
your action list1
Your “Action” List
  • Review your current asset allocation
  • Consider your other retirement accounts
  • Use the TIAA-CREF web site
    • Risk tolerance quiz
    • Asset allocation calculators
  • Talk with a representative
  • Reallocate, Rebalance, Re-visit
before you decide2
Before You Decide
  • Read the website
  • Understand the risks
  • Make careful choices
  • You can always change your mind so don’t be afraid to change your asset allocation.
financial planning for women
Financial Planning for Women
ad