Financial crisis your asset allocation strategy
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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

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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


Questions concerns

Questions? Concerns?


Basic investment principles

Basic Investment Principles

  • Diversification

  • Asset Allocation

  • Market volatility

  • Time horizon

    • Retirement v. life span


Investment goals

Investment Goals?


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?


Envision your dream

Envision your dream


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


Compare expense ratios

Compare Expense Ratios


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


Questions comments experiences

Questions? Comments? Experiences?


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

  • No December meeting

  • Topics for 2009?

  • send email to [email protected]


Questions comments experiences1

Questions? Comments? Experiences?


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