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Investment Advice Seminar
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& How to Avoid Them
Presented by:
Terry Elder, CFP
Cash Flow Planners
Important Disclosures
The information presented herein does not consider your particular investment objectives or financial situation and does not make
personalized recommendations. This information should not be construed as an offer to sell or a solicitation of an offer to buy any security. This material is not intended to replace the advice of a
qualified tax adviser or legal counsel. Individuals should contact their own tax professionals and attorneys to help answer questions about specific situations or needs prior to taking any action based on this
information. We believe the information provided is reliable, but do not guarantee its accuracy, timeliness, or completeness.
Securities offered through Brokers International Financial Services LLC, Member FINRA/SIPC
Absolute Capital Management is not affiliated with Brokers International Financial Services, LLC
Critical Mistake #1
Failing to establish a definitive gameplan & investment strategy
Critical Mistake #2
Not devoting sufficient timeto learning & research
Critical Mistake #3
Not taking action due to information overload
$$$
?“I don’t want to be poor.”
(FEAR)
“I want to be rich!”
(GREED)
Critical Mistake #4
Falling prey to the “Mental Accounting” tendency
Critical Mistake #5
Falling prey to the “Loss Aversion” tendency
Critical Mistake #6
Using the “Rearview Mirror” technique
Critical Mistake #7
Not diversifying assets
The Potential Effects
Source of chart data: Dalbar, Inc. Quantitative Analysis of Investor Behavior, July 2005 update. QAIB calculates investor returns as the change in assets, after excluding sales, redemptions and exchanges. Annualized return rate is calculated as the uniform rate that can be compounded annually for the period under consideration to produce the investor return dollars. Past performance does not guarantee future results.Stocks and bonds have different risks, where bonds, if held to maturity, may offer both a fixed rate of return and a fixed principal value.Past performance does not guarantee future results. Due to ongoing market volatility, current performance may be more or less than the results shown in this presentation. The performance information does not show the effects of income taxes on an individual’s investment. Taxes may reduce your actual investment returns or any gains you may realize if you sell your investment. An investor’s shares, when redeemed, may be worth more or less than the original cost.
Investments Did Well, Investors Not So Well (Average Annual Returns 1985-2004)
13.2%
3.7% 3.0%
Stocks Average Inflation Equity Fund
Investor
As measured by the S&P 500 Index
Source: Oppenheimer Funds, Pulse of the Market 2006
The Importance of Risk Management
Market Risk
Is it just the “price of admission” to be
invested in the market?
-100.0%
-50.0%
0.0%
50.0%
100.0%
150.0%
200.0%
250.0%
300.0%
% Decline
% Needed toBreak Even
The Importance of Avoiding Big Losses
-25%
-75%-50%
-33%
50%
100%
300%
33%
Investment Risk
Investment Risk: The variation of returns over time
Market Risk
Inflation
RiskCurrency Risk
Industry Risk
Geopolitical Risk
Risk and Reward: A New Perspective!
An Asset-Allocated Portfolio May Have Given You Comparable Returns with Less Risk
Indexes are unmanaged and one cannot invest directly in an index.Source of chart data: S&P Micropal. Risk is measured by annualized standard deviation of monthly total returns.Past performance does not guarantee future results.
Based on an 80% Stock; 20% Bond Allocation For the 20-Year Period Ended December 31, 2005
For illustrative purposes only. Not indicative of any investment strategy used or recommended by Absolute Capital.
Source: Franklin Templeton Investments
Do You Know Your Risk Tolerance?
What is your willingness to take risk?
What about your ability to assume risk?
How much do you worry about investments?
How often do you monitor your investments?
Do you make changes to your accounts often?
Do your concerns over investments keep you
awake at night?
What’s Your Time Horizon?
Annual Rolling Period Results for S&P 500 Index1
(1926-12/30/05)
HoldingPeriod
Number of Periods
Periods withLoss
1 Year 80 29
3 Years 78 15
5 Years 76 13
10 Years 71 1
1. Source of chart data: Ned Davis Research, 12/30/05. Based on results for all investment periods beginning and ending within January 1926
and September 30, 2005, starting after each month-end. The S&P 500 Index is a broad-based index of U.S. stocks. The index is unmanaged, includes reinvested income, but not transaction costs or taxes, and cannot be purchased directly by investors. This chart is for illustrative purposes only and does not predict or depict the performance of any investment.Past performance does not guarantee future results. Due to ongoing market volatility, current performance may be more or less than the results shown in this presentation. The performance information does not show the effects of income taxes on an individual’s investment. Taxes may reduce your actual investment returns or any gains you may realize if you sell your investment. An investor’s shares, when redeemed, may be worth more or less than the original cost.
Source: Oppenheimer Funds, Pulse of the Market 2006
Risk Perceptions
Fear
Greed
Risk Management Solutions
to current market conditions
Where to begin?
Growth?Growth? Small Cap?Small Cap?
BLEND?BLEND?
Value?Value? Mid Cap?Mid Cap?
Large Large Cap?Cap?
Stocks? Bonds?
High Yield?High Yield?
International?
Master Asset Classes
Domestic Domestic
EquityEquity
International International
EquityEquity
BondsBonds
Money MarketMoney Market
(Stable Value)(Stable Value)
Equity Styles
Value
Current stock price is lower than its
perceived value
This may be for a variety of reasons
Investor believes stock price will
rebound over time
Companies with solid earnings, often
paying high dividends
Mature industries or business models
$20
$10
$0
Perceived Value
Current Stock Price
Growth
Companies in rapidly expanding
industries
Promise of new technologies or
innovation
Earnings expected to rise quickly
Usually “plow back” earnings to reinvest
in company
Can be more speculative form of investing
EPS ($$)
Expected Earnings
Source: Federated Investors
Different Times, Different Styles
-30
-20
-10
0
10
20
30
40
50
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Growth vs. Value
(1996–2005)1
1. Source of chart data: Standard and Poor’s Micropal Inc.,12/30/05. Growth performance is represented by the S&P BARRA Growth Index. Value performance is represented by the S&P BARRA Value Index. There are special risks in both styles: with growth investments, there is the possibility of increased volatility; with value investing, there is the possibility that the market may not recognize a stock as undervalued and it might not appreciate as expected. The indices are unmanaged, includes reinvested income and cannot be purchased directly by investors. This chart is for illustrative purposes only and does not predict or depict the performance of any investment. Diversification does not assure a profit or protect against loss.Past performance does not guarantee future results. Due to ongoing market volatility, current performance may be more or less than the results shown in this presentation. The performance information does not show the effects of income taxes on an individual’s investment. Taxes may reduce your actual investment returns or any gains you may realize if you sell your investment. An investor’s shares, when redeemed, may be worth more or less than the original cost.
Growth
Value
Source: Oppenheimer Funds, Pulse of the Market 2006
Large Cap? Mid Cap? Small Cap?
Source: Federated Investors
Largest companies in the U.S.
Approximately 500 companies at present
Trade on NYSE, Nasdaq, AMEX
S&P 500 Index is a common benchmark
Approximately 1,000 companies at present
Trade on Nasdaq, NYSE, AMEX
S&P 400 Midcap Index is a common benchmark
Approximately 5,000 companies at present
Trade on Nasdaq, AMEX more commonly
Russell 2000® Index is a common benchmark
Large CapLarge Cap
Mid CapMid Cap
Small CapSmall Cap
Market Capitalization
$10 Billion
$1 Billion
$100 Million
S&P 500 Index: An unmanaged capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through change in the aggregate market value of 500 stocks representing major industries.
S&P 400 Midcap Index: An unmanaged capitalization-weighted index of common stocks representing all major industries in the mid-range of the U.S. stock market.
Russell 2000® Small Stock Index: An unmanaged index consisting of approximately 2000 small capitalization common stocks and is a trademark/service mark of the Frank Russell Company. Russell™ is a trademark of the Frank Russell Company. The Federated Mini-Cap Fund is neither affiliated with, nor promoted, sponsored, or endorsed by the Frank Russell Company. Frank Russell’s only relationship to the fund is the licensing of the use of the Index. Frank Russell Company is owner of the trademarks and copyrights relating to the Index.
Does It Matter Which Cap You Choose?
Small Cap vs. Mid Cap vs. Large Cap (1996–12/30/05)1
(Annual Returns)
200019981996 1997 1999 2001
Large cap
Mid cap
Small cap
2002
50%
0
–30
–20
–10
10
20
30
40
2003 2004 2005
1. Source of chart data: Standard & Poor’s Micropal Inc., 12/30/05. Large-cap stocks are represented by the S&P 500 Index, a broad-based index of domestic stock; mid-cap stocks are represented by the S&P MidCap 400 Index; small-cap stocks are represented by the Russell 2000 Index. Returns are based on rolling 12-month index total returns. Indices include income, but not transaction costs or taxes, are unmanaged, and cannot be purchased directly by investors. Small-cap stocks may be subject to greater volatility than stocks of larger, more established companies. This chart is for illustrative purposes only and does not predict or depict the performance of any investment.Past performance does not guarantee future results. Due to ongoing market volatility, current performance may be more or less than the results shown in this presentation. The performance information does not show the effects of income taxes on an individual’s investment. Taxes may reduce your actual investment returns or any gains you may realize if you sell your investment. An investor’s shares, when redeemed, may be worth more or less than the original cost.
Source: Oppenheimer Funds, Pulse of the Market 2006
Year S&P 500 MSCI-EAFE
1980 32.50 22.58
1981 (4.92) (2.28)
1982 21.55 (1.86)
1983 22.56 23.69
1984 6.27 7.38
1985 31.73 56.16
1986 18.66 69.44
1987 5.25 24.63
1988 16.56 28.27
1989 31.63 10.54
The International Component
Annual Total Returns (%) of S&P 500 Index vs. MSCI EAFE Index 1980 - 2005
The 1980s The 1990s
Year S&P 500 MSCI-EAFE
1990 (3.11) (23.45)
1991 30.40 12.13
1992 7.61 (12.17)
1993 10.06 32.56
1994 1.31 7.78
1995 37.53 11.21
1996 22.95 6.05
1997 33.35 1.78
1998 28.60 20.00
1999 21.03 26.96
Current Decade
Year S&P 500 MSCI-EAFE
2000 (9.10) (14.17)
2001 (11.88) (21.44)
2002 (22.09) (15.94)
2003 26.38 39.17
2004 10.87 20.25
2005 4.91 13.54
Source: Federated InvestorsPerformance data quoted represents past performance which is no guarantee of future results. Performance is based on total returns for 1-year periods ended 12/31. Total return represents the change in the value of an investment after reinvesting all income and capital gains. These indices are for illustrative purposes only and are not representative of any specific investment or the performance of any account managed by Absolute Capital. Actual investments cannot be made directly in an index.
International investing involves special risks including currency risk, increased volatility of foreign securities, political risks, and differences in auditing and other financial standards. Diversification does not assure a profit nor protect against loss.
Large Cap Stocks: The S&P 500 Index is an unmanaged capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in aggregate market value of 500 stocks representing all major industries.
International Stocks: The Morgan Stanley Capital International Europe, Australasia, and Far East Index (EAFE) is an unmanaged market capitalization-weighted equity index comprising 20 of the 48 countries in the MSCI universe and representing the developed world outside of North America. Each MSCI country index is created separately, then aggregated, without change, into regional MSCI indices. EAFE performance data is calculated in U.S. dollars and in local currency.
Asset Classes Have Rotated Over Time
Annual Returns of Key Asset Classes 1986–2005
Source of data: Standard & Poor’s Micropal.Past performance does not guarantee future results.Indexes are unmanaged and one cannot invest directly in an index.
Source: Franklin Templeton Investments
Example: Large Growth
Source: Standard & Poor’s Micropal.Past performance does not guarantee future results.Indexes are unmanaged and one cannot invest directly in an index.
Annual Returns of Key Asset Classes 1986–2005
Source: Franklin Templeton Investments
The Step by Step Formula
Assess Market Assess Market ConditionsConditions
Select Asset Classes Select Asset Classes for Investmentfor Investment
Construct Diversified Construct Diversified Portfolio (%)Portfolio (%)
Analyze Available Analyze Available Investment Options / Investment Options /
Select ManagersSelect Managers
Rebalance as Rebalance as NecessaryNecessary
Monitor & Respond to Monitor & Respond to Changing Market Changing Market
ConditionsConditions
Questions to Ask Yourself
How are my assets allocated now? How do I select my investments? How and when do I rebalance my portfolio? What risk level am I trying to achieve? What risk level is my current portfolio now? Do I have the time to regularly monitor and
analyze the market? Do I have the available tools and information to
analyze all my available investment options?
A Professional Money Manager
Provides full time market monitoring and analysis
Provides asset allocation based on your personal
tolerance for risk
Manages market risk in your portfolio
What You Get:
Full time monitoring of your investments
Reallocation of your portfolio based on current
market conditions
Risk Management
AssetAllocator
Invests in asset classes and styles that are anticipated to perform well and avoids those that are expected to lag
Generally fully invested
How it works…
• Determine your tolerance for risk
• Diversify your portfolio accordingly
• Choose the appropriate investments
• Regularly rebalance your portfolio
• Continuously review
Five Different Strategies
Income
GrowthCore
Conservative
Domestic Equity 30%
Bonds 70%
Domestic Equity 35%Bonds 55%International Equity 10%
Domestic Equity 50%Bonds 35%International Equity 15%
Domestic Equity 65%Bonds 20%International Equity 15%
Aggressive Growth
Domestic Equity 65%International Equity 35%
So Many Choices!
Growth?Growth? Small Cap?Small Cap?
BLEND?BLEND?
Value?Value? Mid Cap?Mid Cap?
Large Large Cap?Cap?
Stocks? Bonds?
High Yield?High Yield?
International?
Choosing the Correct Style Boxes
DomesticDomestic InternationalInternational
BondBond
Large Cap
Value
Large Cap
Blend
Large Cap
Growth
Mid Cap Value
Mid Cap Blend
Mid Cap Growth
Small Cap
Value
Small Cap
Blend
Small Cap
Growth
Foreign World
Europe Asia
JapanEmergin
g Markets
Investment Grade Corporate Bonds
Government Bonds
High Yield Corporate Bonds
Step 1Step 1: Determine relative : Determine relative weightings for market weightings for market capitalization (Big Cap, capitalization (Big Cap,
Mid Cap, Small Cap)Mid Cap, Small Cap)
Step 2Step 2: Determine which style: Determine which style to use (Value, Blend,to use (Value, Blend,
Growth)Growth)
Step 3Step 3: Allocate to style : Allocate to style categories based on your categories based on your investor profileinvestor profile
Style Box BreakdownStyle Box Breakdown
ValueValue BlendBlend GrowthGrowth
Smal
lSm
all
Mid
Mid
Lar
geL
arge
How It’s Done
Example: Domestic Equity
Professional Investment Selection
Number of Equity Mutual Funds
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000
105% more equity funds in 5 years!
Source: Investment Company Institute
Positioning Your Investments
Assess Market Assess Market ConditionsConditions
Select Asset Classes Select Asset Classes for Investmentfor Investment
Construct Diversified Construct Diversified Portfolio (%)Portfolio (%)
Analyze Available Analyze Available Investment Options / Investment Options /
Select ManagersSelect Managers
Rebalance as Rebalance as NecessaryNecessary
Monitor & Respond to Monitor & Respond to Changing Market Changing Market
ConditionsConditions
The Process…
A 45 minute, no obligation interview
Receive a FREE risk profile
Friendly, non sales environment
Important Disclosures
Past performance is no guarantee of future results. Historical performance is not meant to represent the performance of any specific strategy or program. Investors cannot invest directly in an index.
This update is subject to change and, although based upon information considered to be reliable, it is not guaranteed as to accuracy or completeness. This update is not meant as a general guide to investing, or as a source of any specific investment recommendations, and makes no implied or express recommendations concerning the manner in which any client's accounts should or would be handled, as appropriate investment decisions depend upon the client's investment objectives.
This update is for informational purposes only and does not constitute a complete description of our investment services or performance. Calculations that appear throughout this presentation are for demonstration purposes only. In addition, different assumptions will lead to different results. Nothing in this presentation should be interpreted to state or imply that past results are an indication of future performance.
No one involved in the preparation of this presentation shall be liable for any errors or inaccuracies, regardless of cause, or the lack of timeliness of, or for any delay or interruption in the transmission thereof to the user.