How to Survive an Anaconda Attack - Wichita State...

How to Survive an Anaconda Attack: Investment Strategies in Volatile Times

Bruce E. BrinkmanCertified Financial PlannerTM, Tax Services

Allen, Gibbs & Houlik, L.C.

May 20, 2009

“We act on the facts and logic when it comes to our money.”

Fact: Our emotions drive many of the decisions we make about our finances,

particularly our investments.

Lessons from a “black swan”

“The smarter you are, the more money you’ll make.”

Fact: Intelligence is a poor indicator of financial success.

Lessons from a “black swan”

“The more closely you follow your investments, the more money you’ll

make.”Fact: The passive investor usually beats

the active trader.

Lessons from a “black swan”

“Stocks outperform bondsin the long run.”

Fact: Bonds outperformed stocks from 1968 to 2009.

Lessons from a “black swan”

“More asset classes = lower risk”

Fact: Low correlated assets = lower risk

Lessons from a “black swan”

© 2008 John Trever, Albuquerque Journal http://editorialcartoonists.com/cartoon/display.cfm/59549

How to survive an anaconda attack

Adapted with permission from Burt White.

The largest recorded anaconda was 37.4 ft long and weighed more than 500 lbs.

That’s a big snake!

How to survive an anaconda attack

How to survive an anaconda attack

If attacked by an anaconda, do not run. The anaconda is faster than you.

How to survive an anaconda attack

Lie flat on the ground. Do not panic. The anaconda will begin to climb all over your body. Be calm.

How to survive an anaconda attack

After the anaconda has examined you, it will begin to swallow you beginning with your feet. Be calm.

How to survive an anaconda attack

Permit the anaconda to swallow your feet and ankles. Do not panic.

How to survive an anaconda attack

The anaconda will suck your feet into its body. Be still. This will take a long time.

How to survive an anaconda attack

When the anaconda has almost fully swallowed your legs, calmly remove your knife and kill the snake.

How to survive an anaconda attack

Be sure you have your knife.

How to survive an anaconda attack

If attacked by an anaconda, do not run. Theanaconda is faster than you.

Lie flat on the ground. Do not panic. The anacondawill begin to climb all over your body. Be calm.

After the anaconda has examined you, it will begin toswallow you beginning with your feet. Be calm.

Permit the anaconda to swallow your feet and ankles. Do not panic.

How to survive an anaconda attack

The anaconda will suck your feet into its body. Be still. This will take a long time.

When the snake has almost fully swallowed your legs, calmly remove your knife and kill the snake.

Be sure you have your knife.

If attacked by a bear market, do not run. The bearmarket is faster than your money.

Lie flat on the ground. Do not panic. The bear marketwill begin to climb all over your money. Be calm.

After the bear market has examined your money, it will begin to swallow your money. Be calm.

How to survive a bear market

How to survive a bear market

The bear market will begin to swallow your money.Be still. This will take a long time.

When the bear market has almost swallowed your money, calmly remove your knife and kill the bear market.

Be sure you have your knife.

How to survive a bear market

What is your knife?

An investment strategy

A sharp knife

A wide knife

Microsoft Christmas card,

1978

Diversification?

Portfolio 12-mo. return

3-yearreturn

5-yearreturn

Standarddeviation

3-year

American Funds Fundamental Investors

-34.06% -8.55% 2.34% 19.24

American Funds Growth Fund of America

-33.26% -8.92% .61% 18.51

50/50 “All American” Portfolio -33.16% -8.74% 1.47% 18.87

Asset-class menu

Equities:• Large-cap growth• Large-cap value• Mid-cap• Small-cap• International• Real estate• Alternative

Asset-class menu

Fixed income:• Cash• Short-term bonds• Int./Long-term bonds

The key to diversification: correlation

Correlation to the S&P 500 Index from 1970-2004

0 +1

Growth stocks

Value stocks

Mid cap stocks

No correlation High correlation

Foreign stocks

REITsBonds

Small cap stocksAlternative

Cash

The key to diversification: correlation

Correlation to the S&P 500 Index from 2006-2009

0 +1

Growth stocks

Value stocks

Mid cap stocks

No correlation High correlation

Foreign stocks

REITsBonds

Small cap stocksAlternative

Cash

“Big Squeeze” portfolio

U.S. large-cap value (18.3%)

Cash (2.2%)Intermediate-term fixed income (0.5%)

International (13.3%)

U.S. small-cap (15.5%)

U.S. mid-cap (11.9%)

U.S. large-cap growth (38.3%)

The “Big Squeeze”

Portfolio YTD 12-month

3-year 5-yearStandard deviation

3-year

The Big Squeeze 3% -32.29% -10.08% -.69 20.28

Total returns

“Survivor” portfolioCash (10%)

Intermediate-term fixed income

(10%)

Short-term fixed income

(20%)

Real estate/alternative

(10%)

International (16%)

U.S. small-cap (12%)

U.S. large-cap value (12%)

U.S. large-cap growth (10%)

The “Survivor”

Portfolio YTD 12-month

3-year 5-yearStandard deviation

3-year

Total returns

The Big Squeeze

3% -32.29% -10.08% -0.69 20.28

The Survivor .30% -19.76% -4.38% 1.66 14.78

“Survivor II” portfolioCash (10%)

Intermediate- term fixed income

(10%)

Short-term fixed income

(20%)

Real estate/alternative

(20%)

International (12%)

U.S. small-cap (10%)

U.S. large-cap value (10%)

U.S. large-cap growth (8%)

Comparison

The Survivor II

2.19% -16.95% -3.14% 2.12% 14.09

Standard deviation

3-year5-year3-year12-

monthYTDPortfolio

Total returns

20.28-0.69%-10.08%-32.29%3%The Big Squeeze

14.781.66%-4.38%-19.76%.30%The Survivor

50/50 “All-American”

7.59% -33.16% -8.74% 1.47% 18.87

Bad news:There are more animals in the jungle

The complete toolbox:A comprehensive financial plan

© 2008, Joe Heller, Green Bay Press-Gazette http://www.hellertoon.com/main.html

Questions?

Thank you!

Bruce E. BrinkmanCertified Financial PlannerTM, Tax Services

bruce.brinkman@aghlc.com(316) 267-7231