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Investment Presentation

Investment Presentation. By Professor David M. Sinow University of Illinois September 11, 2007. Investing Overview. What makes a difference when you invest?. Equities vs. Fixed Income Volatility Is Your Enemy Longer Term Fixed Income Investments Are Too Risky Three Factor Model

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Investment Presentation

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  1. Investment Presentation By Professor David M. Sinow University of Illinois September 11, 2007

  2. Investing Overview • What makes a difference when you invest? • Equities vs. Fixed Income • Volatility Is Your Enemy • Longer Term Fixed Income Investments Are Too Risky • Three Factor Model • Asset Allocation: The Real Key to Investing • Dave’s Couch Potato Portfolio

  3. Asset Class Performance 1925-1996

  4. Volatility is Your Enemy!!!! Assume I invest $100.00 for one year & earn 0% at the end of year 1. Assume that the following year I invest the $100.00 and earn 0% again. My average return is 0%. Now Assume that you invest $100.00 for one year and earn 50% at the end of year 1. Assume the following year you invest $150.00 and your second year rate of return is a –50%. We each had an average rate of return of 0% over the two year period.

  5. But……….Who has more money at the end of the 2 years???? A) Me B) You MORAL OF THE STORY: VOLATILITY KILLS PORTFOLIOS IN DOWN YEARS—BECAUSE YOU LOSE A GREATER PERCENTAGE OF YOUR GAINS FROM PREVIOUS YEARS!!!!

  6. Risk/Reward: Does it Pay to Extend Maturities? 1964-1994 (%) Long maturity instruments are riskier. Returns for longer maturity instruments are not consistently greater. Alternative strategies are needed to enhance returns.

  7. Three Elements That Determine the Majority of an Equity Fund’s Expected Return 5.86% Average Annual Returns 1964-1996 5.13% 3.58% Market Factor All-Equity Universe Minus T-bills Size Factor Small Stocks Minus Large Stocks Style Factor “Out-of-Favor Companies Minus “Glamour” Companies

  8. Porfolio #1 – A Basic Portfolio Passively Invested 60% S&P 500 Index 40% Lehman Gov/Corp. Index

  9. Porfolio #2 – A Basic Portfolio Substituting Short-Term Fixed Income for Long-Term Fixed Income 60% S&P 500 Index 40% 1-yr Fixed Income

  10. Porfolio #3 – A Basic Portfolio Balancing Equities, S & P, and US Small Cap Index 40% 1-yr Fixed Income 30% S&P 500 Index 30% Small Cap

  11. Porfolio #4 – A Basic Portfolio Balancing US Small Cap Value, US Small Cap, US Large Value, and S&P 500 Index 15% Small Cap 15% S&P 500 Index 15% Small Cap Value 40% 1-yr Fixed Inc. 15% US Large Co. Value

  12. Porfolio #5 – A Basic Portfolio Adding International Diversification 7.5% S&P 500 7.5% US Large Co. Value 7.5% US Small Cap 40% 1-yr Fixed Inc 7.5% US Small Cap Value 15% Int’l Small Value 15% Int’l Large Value

  13. DAVE’S COUCH POTATO PORTFOLIO

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