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“What use could this company make of an electric toy? [the telephone]” William Orton, President, Western Union. “I think there is a world for maybe five computers.” Thomas Watson, Chair IBM, 1943.

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Presentation Transcript
slide1

“What use could this company make of an electric toy? [the telephone]”

William Orton, President, Western Union

“I think there is a world for maybe five computers.”

Thomas Watson, Chair IBM, 1943

“We don’t like their sound and guitar music is on the way out”

Decca Recording regarding the Beatles, 1962

slide3

Walter Updegrave

Deena Katz

Mitch Anthony

Lewis Walker

Donald G. MacGregor

Mitch Anthony

Dr. Matthew Greenwald

Jim C. Otar

Prof. Cynthia Saltzman

Robert Curtis

April K. Caudill

Prof. Moshe A. Milevsky

Anna Abaimova

Harold Evensky

Prof. Laurence Booth

William P. Bengen

Robert Kreitler

Lou Stanasolovich

Roxanne Alexander

Michael Anderson

Douglas Head

Prof. Roger G. Ibbotson

Michael C. Henkel

Peng Chen

slide8

THE SOPHISTICATES

Leaping tall buildings in a single bound is nice but can you outperform the S&P index?

slide11

NO!

Say, what’s a mountain goat doing way up here in a cloud bank?

slide17
We must take into consideration the primary risk factors that can hobble an otherwise thoughtfully crafted solution.

Once the risk factors are enunciated, practitioners have a set of criteria against which they may test proposed product and strategy solutions.

probability of a 65 year old living to various ages

78

81

86

86

85

93

88

91

91

91

96

Probability of a 65-year-old living to various ages

100%

Male

Female

At least one spouse

75%

50%

Probability

25%

0%

65

70

75

80

85

90

95

100

105

Age

squaring the curve
Squaring The Curve

Squared

Health Status

Perfect

10

8

6

4

2

Death

0

0

10

20

30

40

50

60

70

80

90

100

AGE

Traditional

slide23
Unanticipated inflation is a greater risk factor for the retired than it is for the rest of the population

The CPI-E (for the elderly), the retiree inflation index outpaced the regular CPI during the last 20 years by almost 1% per year.

slide24

MORTALITY REALITY

VOLATILITY & LUCK

slide27

90% “FOR SURE”

MONTE CARLO TO THE RESCUE

slide34

MYTH I’m Retired so I need...

Dividends and Interest The paycheck syndrome

slide37

REAL

NOMINAL

slide38

“EXCESS”ANNUAL CASH FLOW

Fidelity Intermediate Bond

“INCOME PORTFOLIO”

I’m rich!

Fidelity Intermediate & Vanguard S&P

“TOTAL RETURN”

I’m poor!

slide39

PORTFOLIO VALUE

“TOTAL RETURN”

“INCOME PORTFOLIO”

slide41
Cash flow (as from total-return portfolios) vs. Income (as in dividends and interest)

Consistent cash flow

Real cash flow

• Tax and expense efficiency

CLIENT NEEDS - FINANCIAL

slide42
CLIENT NEEDS - BEHAVIORAL

Paychecks are consistent

Paychecks are market independent

The source of paychecks is visible and considered reliable

Clients understand paychecks; they need to understand their cash flow strategy

Separate pockets.

slide46

CASH FLOW RESERVE

THE TOTAL PORTFOLIO

THE INVESTMENT PORTFOLIO

slide47

2 YEARS CASH FLOW

5 YEARS LUMP SUM

CASH FLOW RESERVE

BALANCE OF PORTFOLIO

REINVESTMENT OF ALL INTEREST & DIVIDENDS

ADJUSTED AS NECESSARY FOR OPPORTUNITY COSTS

THE INVESTMENT PORTFOLIO

slide48

CASH FLOW RESERVE

Rebalance

Refill

THE INVESTMENT PORTFOLIO

Regular Monthly Payments

the “PAY CHECK”

PERSONAL CHECKING ACCOUNT

slide50
As the reserve requirement is reviewed regularly (in our practice the review is quarterly), it’s quite easy to increase the reserves to adjust for inflation. The strategy also provides the flexibility to increase the reserve by variable amounts to reflect an inflation factor unique to each client.

Purchasing Power Risk

slide51
By providing significant control over the timing of investment liquidations, most cash flow related volatility drain can be eliminated.

Volatility

slide52
The strategy provides extraordinary flexibility in meeting the unique and changing needs of real clients.

Tendency for excess reserves

Variable needs

Unanticipated needs

Tax management opportunities

Minimize transactions & related costs

Financial Flexibility

slide53
It manages the paycheck syndrome

Cash flow is consistent

It is independent of market volatility

The source is visible and reliable

Clients understand the strategy

It frames the accounts in a manner consistent with a client’s separate-pocket mentality

Client Needs/Behavioral

slide60

1987

2000 -2001