Asset allocation for volatile markets

Transcription

1 Asset allocation for volatile markets Guest Presenters: Harold Evensky, President of Evensky & Katz Wealth Roger Gibson, Chief Investment Officer of Gibson Capital COPYRIGHT 2011 fi360 ALL RIGHTS RESERVED ASSET ALLOCATION FOR VOLATILE MARKETS Harold Evensky, CFP 1

2 THE NEW INVESTMENT REALITY 2

3 EXPENSE & TAX DRAG CURRENT RETURN* FUTURE RETURN GROSS 14.0% 78% 7.8% Less Expenses (1%) Less Taxes (20%) NET GROSS RETURN After Inflation What Do You Have to Spend? * 40% Fixed / 60% Equity 20 Years Past Future 7.2% 2.4% Retail Efficient Frontier is 3-Dimensional RISK RETURN EXPENSES &TAXES Viable efficient frontier analysis does not exist on an after tax basis 3

4 WHAT TO DO NOW? MARKET TIME! 4

5 S&P 500 8/17/1997 8/17/ % of the best days occurred within 2 weeks of a worst day 100% of the best days that occurred within 6 months of a worst day Source: Quantitative Analysis of Investor Behavior by Dalbar, Inc. (July 2008) and Lipper. 5

6 I could have gotten out in 1996 and been in cash hfor 15 years. I would ldhave missed three different 50%+ ralllies in equities. And because I would also have missed the crashes, I D HAVE MORE MONEY MISSING EVERY SINGLE MAJOR RALLY FOR THE PAST 15 YEARS. FIFTEEN YEARS 9/1/1996 8/31/2011 Total Annualized Return Return Vanguard Balanced Index 170% 6.9% S&P 144% 6.1% 6 Month T Bill 64% 3.4% 6

7 CERTAINTY vs. SAFETY 7

8 MPT RIP? Harold Evensky, CFP Th fi t t t t it The first stage starts wit observations and experience and ends with beliefs about the future performances of available securities. 8

9 The E-V Rule Expected Returns Variance of Returns To use the E-V rule in the selection of securities we must have procedures for finding reasonable µ i [expected return] and i j [covariance]. BUY AND & HOLD MANAGE IT S NOT BUY & FORGET YOURSELF IT S BUY AND MANAGE 9

10 CORE & SATELLITE CORE β β + BREAKING THE PAYCHECK SYNDROME 10

11 CASH FLOW RESERVE THE TOTAL PORTFOLIO THE INVESTMENT PORTFOLIO CASH FLOW RESERVE 2 YEARS CASH FLOW 5 YEARS LUMP SUM THE INVESTMENT PORTFOLIO BALANCE OF PORTFOLIO REINVESTMENT OF ALL INTEREST & DIVIDENDS ADJUSTED AS NECESSARY FOR OPPORTUNITY COSTS 11

12 CASH FLOW RESERVE Regular Monthly Payments the PAY CHECK PERSONAL CHECKING ACCOUNT Rebalance Refill THE INVESTMENT PORTFOLIO REMEMBER PASCAL S WAGER 12

13 Asset Allocation for Volatile Markets Roger C. Gibson, CFA, CFP This is an educational presentation. This presentation does not constitute an offer or solicitation of any security or product and does not constitute a recommendation of the suitability of any investment strategy for a particular investor. Past performance is not indicative of future results. Suite 2200, 6600 Brooktree Court, Wexford, PA Real Estate Common Stocks Bonds Let every man divide his money into three parts, and invest a third in land, a third in business, and a third let him keep in reserve. Talmud circa 1200 B.C. 500 A.D. 13

14 Investment Portfolio Design Format Total Investment Assets $ ( %) Interest- Generating Investments $ ( %) Equity Investments $ ( %) Short-Term Debt $ ( %) U.S. Bonds $ ( %) Non-U.S. Bonds $ ( %) U.S. Stocks $ ( %) Non-U.S. Stocks $ ( %) Real Estate Investments $ ( %) Commodity- Linked Securities $ ( %) Money-market funds CDs Fixed annuities Guaranteed interest contracts Short-term bonds Type Conventional Inflation Protected (TIPS) Issuer Government Corporate Municipal Maturity Intermediate Long-term Quality High Low Market Developed Emerging Type Conventional Inflation Protected (TIPS) Issuer Government Corporate Maturity Intermediate Long-term Quality High Low Capitalization Large Small Style Growth Value Market Developed Emerging Capitalization Large Small Style Growth Value Real estate investment trusts (REITs) Real estate pooled accounts Real estate partnerships Real estate direct ownership Energy Agriculture Industrial metals Livestock Precious metals Source: Roger C. Gibson Asset Allocation: Balancing Financial Risk Fourth Edition, McGraw-Hill Publishing, New York, NY Updated by author, Roger C. Gibson. Financial Crisis of A Perfect Storm: Securitization Financial engineering Excessive leverage Misalignment of interests Greed Source: 2009 Roger C. Gibson 14

15 The Carnage and the Recovery Total Returns in Percent Treasury Bills Long-Term Government Bonds Long-Term Corporate Bonds U.S. Stocks Non-U.S. Stocks Real Estate Securities Commodity-Linked Securities Source: 2011 Roger C. Gibson Return Compound Annual ACD Fifteen Equity Portfolios BCD CD C (Real Estate Securities) 1 Asset Class Portfolio 2 Asset Class Portfolio ABCD ABD AC BC 3 Asset Class Portfolio 4 Asset Class Portfolio ABC BD AD AB B (Non-U.S. Stocks) A (U.S. Stocks) D (Commodities) Standard Deviation Single-Asset-Class Portfolios Three-Asset-Class Portfolios: Equally Allocated, Annually Rebalanced A ---- U.S. Stocks (S&P 500 Index) ABC ---- U.S. Stocks, Non-U.S. Stocks, Real Estate Securities B ---- Non-U.S. Stocks (MSCI EAFE Index) ABD ---- U.S. Stocks, Non-U.S. Stocks, Commodity-Linked Securities C ---- Real Estate Securities (FTSE NAREIT Equity REITs Index) ACD ---- U.S. Stocks, Real Estate Securities, Commodity-Linked Securities D ---- Commodity-Linked Securities (S&P GSCI Index) BCD ---- Non-U.S. Stocks, Real Estate Securities, Commodity-Linked Securities Two-Asset-Class Portfolios: Equally Allocated, Annually Rebalanced Four-Asset-Class Portfolio: Equally Allocated, Annually Rebalanced AB --- U.S. Stocks, Non-U.S. Stocks ABCD --- U.S. Stocks, Non-U.S. Stocks, Real Estate Securities, Commodity-Linked Securities AC --- U.S. Stocks, Real Estate Securities AD --- U.S. Stocks, Commodity-Linked Securities BC --- Non-U.S. Stocks, Real Estate Securities BD --- Non-U.S. Stocks, Commodity-Linked Securities CD --- Real Estate Securities, Commodity-Linked Securities Source: Roger C. Gibson, Asset Allocation and the Rewards of Multiple-Asset-Class Investing, Updated by author. 15

16 Correlations vs. U.S. Stocks Non-U.S. Stocks Real Estate Securities Commodity-Linked Securities Dec-76 Dec-77 Dec-78 Dec-79 Dec-80 Dec-81 Dec-82 Dec-83 Dec-84 Dec-85 Dec-86 Dec-87 Dec-88 Dec-89 Dec-90 Dec-91 Dec-92 Dec-93 Dec-94 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec Quarter (5-year) Periods Ending Source: Roger C. Gibson, Annual Equity Returns During Gut-Wrenching Bear Markets Post WWII (A) (B) (C) (D) (E) Year U.S. Stocks Non-U.S. Stocks Real Estate Securities Commodity- Linked Securities Equal Allocation Source: Roger C. Gibson,

17 U.S. Large Company Stock Total Annual Returns Histogram Calendar Years 1937 & % -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% 60% Source: 2011 Gibson Capital, LLC Has Multiple-Asset Asset-Class Investing Failed? Multiple-asset-class investing Promises to deliver long-term portfolio returns that are higher than the weighted-average return of the asset classes comprising the portfolio less volatile than the weighted-average volatility of the asset classes comprising the portfolio Has delivered on that promise in the past Will deliver on that promise in the future Mitigates risk but does not eliminate it You cannot hedge the world. Paul Volcker Source: 2011 Gibson Capital, LLC 17

18 Additional announcements Join us at the 2012 fi360 Conference April in Chicago and gain valuable insights from leading fiduciary experts, discuss the industry s hottest topics, and share your professional experiences with colleagues as you earn as many as 11.5 CE credits for your professional credentials. Register today and save $100! ( The 2012 AIF and AIFA Designation Training dates and locations are now available. Visit our calendar to find an upcoming program near you. ( px) or contact us directly at carl@fi360.com or ext COPYRIGHT 2011 fi360 ALL RIGHTS RESERVED Thank you Continuing education for the AIF and AIFA designations and CFP certification will be reported by fi360 Visit the fi360 Blog for a follow-up post to answer your questions: A recording of this webinar will be available soon in the archive ( and in the Designee Portal resources@fi360.com with any additional questions or comments. 36 COPYRIGHT 2011 fi360 ALL RIGHTS RESERVED 18