2011 Andex Chart Speaker Notes

Transcription

1 2011 Andex Chart Speaker Notes Contents Investment Growth Risk and Return Prime Rate Inflation Canadian Dollar versus U.S. Dollar Gross Domestic Product Life Expectancy Wages and Unemployment RRSP (Registered Retired Savings Plan) Tax Rates 2011 Morningstar, Inc., 1 Toronto Street, Suite 500, Toronto, Ontario M5C 2W4.

2 Investment Growth The 2011 Canadian ANDEX Chart illustrates the growth of $100 invested in seven major asset classes, three hypothetical portfolios (aggressive, moderate and conservative) and inflation from January 1950 through June The allocations to each of the three diversified portfolios are listed in the Hypothetical Portfolios box. The chart also illustrates the ending wealth values and the compound annual returns over this time period. These values are illustrated in the table below. The chart provides a historical insight into the performance characteristics of various asset classes. U.S. small stocks provided the highest return (13.6%) and largest increase in wealth ($248,768) since As illustrated in the image, fixed-income investments provided only a fraction of the growth provided by stocks. However, the higher returns achieved by stocks are associated with much greater risk, which can be identified by the volatility or fluctuation of the graph lines. The aggressive portfolio (10.8%) provided returns similar to the world markets ex-u.s. (10.9%) and U.S. large stocks (11.0%) since represent U.S. recessions as per the National Bureau of Economic Research. There have been 6 recessions (U.S. and Canada) since The S&P/TSX lost 50% of its value during the recent global financial crisis. However, history reveals that recoveries usually follow contractions. This is evident from the rebound in asset class returns during 1967, 1982, 1991, and A disciplined investment approach is still the best strategy for handling market downturns. Staying focused on a long-term investment plan may enable investors to participate in recoveries. It is also interesting to look at commodity prices, such as gold and oil, under different market conditions. Gold, for example, is considered somewhat of a safe investment during poor market conditions. This is evident from the rise in prices during the recessionary periods defined by NBER. Gold prices reached a high of $1,553 in June Investors have the option of owning stocks belonging to a firm that derives its revenue from the sale of such physical commodities. The chart also highlights Canadian and U.S. recessions. The dark gray shaded areas represent Canadian recessions, and the light blue bars adjacent to the oil and gold chart Growth of $100 Ending Compound January 1950 June 2011 Wealth Value ($) Annual Return (%) U.S. Small Stocks (CAD) 248, U.S. Large Stocks (CAD) 60, World Markets ex U.S. (CAD) 56, Aggressive Portfolio 55, S&P/TSX Composite 40, Moderate Portfolio 30, Conservative Portfolio 11, DEX Long Bond 8, Year Guaranteed Investment Certificates 5, day Canada Treasury Bills 2, Consumer Price Index

3 Risk and Return The bar chart on top illustrates the calendar year returns of stocks, bonds, cash and the moderate portfolio since The most successful decade for U.S. large stocks was the 1990s (20.8%), while the worst-performing one happened during the 2000s ( 4.0%). Canadian stocks, on the other hand, experienced the most successful decade in the 1950s (12.7%) and the worst performing one in the 2000s (5.6%). The best 10-year period for bonds was in the 1980s, with a compound annual return of 13.7%. During the 2000s, bonds provided the highest return of 7.8%. It is interesting to note that Treasury bills had the best decade in the 1980s with a return of 11.9%. The Percentage Returns table displays the return characteristics of the seven major asset classes, three hypothetical portfolios and inflation over varying time periods. As expected in an efficient market, asset classes exhibiting higher returns are associated with higher risk. Small stocks have had the highest return but have also exhibited the highest risk (24.8%) of the asset classes shown since Though stocks are often considered to be risky investments, long-term gains have been demonstrated to offset short-term losses for the long-term investor. As illustrated by the Percentage Returns table, all asset classes have seen positive returns over 20- and 30-year time frames. Short-term losses can even be expected for fixed-income investments, though they are generally considered less risky than stocks. With a long investment horizon, however, losses could potentially be recouped. The table also helps compare the performance of the three diversified portfolios relative to the individual asset classes listed. Although investing in a diversified portfolio may prevent an investor from capturing top-performer returns in any given year, this strategy can also protect an investor from experiencing extreme losses. This is illustrated from the long-term risk and return characteristics of the three diversified portfolios since Prime Rate Economic ups and downs affect the ability of banks, companies and consumers to spend money as well as provide goods and services. For example, when inflation is high, the Bank of Canada may act by increasing the prime rate, making it more expensive to borrow money. During the mid to late 1970s and early 1980s, inflation increased significantly and unemployment was high. This is evident during the early 1980s when the prime rate reached an all-time high of 22.75%. Likewise, when inflation is low, the Bank of Canada may decrease the prime rate. Changes in the prime rate help boost the economy or slow it down. Inflation Inflation is commonly defined as the rise in prices for goods and services over time. Inflation, the rise in prices, erodes each dollar you earn on your investments. By not considering the negative impact inflation has on investment returns, you could run the risk of overestimating your future purchasing power. Take for example the case of the stamp. In the 1950s, a first-class stamp cost about 4 cents; today, the same stamp costs 59 cents. In Canada, high inflationary periods were experienced during the 1970s-80s, owing to the oil crises. Oil rose to $38.34 per barrel in 1981.

4 Inflation during this period was over 10%. More recently, inflation has been relatively low in the 2% to 3% range. Over long time horizons, such as a 30-year retirement, however, an annual increase in prices of 3% can have a tremendous impact on investors financial situations. Investors planning for retirement would be wise to plan for an inflation rate higher than 3%. Canadian Dollar vs U.S. Dollar Currency translation can affect the returns of a foreign security because foreign exchange rates are constantly fluctuating with changes in the supply and demand of each country s currency. The graph labeled Canadian Dollar in U.S. dollars illustrates the relationship between the two currencies. As illustrated, the Canadian dollar fell against its American counterpart for most of the 1990s, which may be attributed to the technological boom in the United States during this period. In January 2002, the Canadian dollar hit a low relative to the U.S. dollar at $ The Canadian dollar s value rose sharply in 2007 due to the continued strength of the Canadian economy (as opposed to the U.S. economy, which began to weaken around that time). During this time the Canadian dollar appreciated to $ relative to the U.S. dollar. For investors, it is important to understand that currency fluctuations also affect investments. Foreign currency changes affect returns achieved by local investors and are often different from the returns that Canadian investors achieve even though they are both investing in the same security. Gross Domestic Product GDP measures the value of all final goods and services produced within a nation in a given year. Foreign direct investments and exports are often considered the two major drivers of economic growth. Because GDP measures a nation s total output, it can provide a snapshot of a country s economic condition. A rising GDP number indicates economic expansion. The bar chart illustrates quarterly GDP numbers since As illustrated, in the early 1980s Canada experienced 6 consecutive quarters of negative GDP. Following the recession in the early 1990s, Canada has experienced several quarters of positive GDP. Recently, however, this growth has slowed down, as many countries have been hit by the global recession, Canada included. Latest data reveals positive GDP numbers for the first two quarters in Life Expectancy Longevity risk is the possibility that a person will outlive his or her retirement savings. Accounting for longevity risk in retirement planning is more important than ever because people today are living significantly longer than prior generations, due to advances in medicine, diet, and technology. The chart lists the life expectancy for both males and females since As illustrated in the image, the average life expectancy in the 1950s was 66.5 years for males and 71 years for females. Current average life expectancy rates are much higher than they were in the 1950s. As of 2006, the average life expectancy was 78.3 years for males and 83 years for females. As people live longer, they should plan for their investments to last longer as well.

5 Wages and Unemployment Canada experienced economic recessions in the early 1980s and 1990s. This led to high unemployment rates of 12.7% in 1984 and 11.6% in Unemployment is currently at 7.4% as of June In the 1960s, minimum wage rates were $1.00/hr. More recently, the minimum wage rate in Canada has ranged from $6.85/hr to $10.25/hr. RRSP (Registered Retired Savings Plan) An RRSP is an investment account designed primarily for saving towards retirement. As retirement savings vehicles, regulated by the Canadian government, RRSPs have special tax benefits. The annual RRSP contribution can reduce the amount of income tax paid in a given year and the money put away can have several years of tax-deferred growth potential. In the late 1950s, the annual RRSP started with a limit of $2,500. This number has grown over the years. Most recently, the RRSP limit was set at $22,450. Tax Rates It is important to take tax consequences into account when making an investment, especially for investors in higher tax brackets. Income taxes can create a significant difference between your before-tax and after-tax return, so it is important to be aware of their potential impact. In the early 1970s, Ontario s top marginal tax rate dropped from 82.4% to 59.5%. More recently, the top marginal tax rate was set at 46.4%.

6 1-year periods (715) 3-year periods (691) 5-year periods (667) 10-year periods (607) 20-year periods (487) 30-year periods (367) Positive Returns * 74.1% 77.5% 82.1% 79.9% 100% 89.3% 84.7% 94.4% 90.0% 100% 98.7% 87.9% 100% 97.5% 100% 100% 95.9% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% * This number represents the percentage of positive returns. Jun 83 90% 86.9% 90% $187 85% An analysis of rolling 1, 3, 5, 10, 20 and 30-year periods Graph Legend 85% January 1, 1950 June 30, % 80% The above bar charts below show how rates of return 74.1% of the time that s 530 of the 715 rolling 1-year Canadian stocks turn an intial $100 investment into An initial $100 invested in Canadian stocks S&P/TSX Composite Total Return Index 75% 75% from various asset categories have varied over many periods since Of all of those 1-year periods, $187 a gain of 86.9%. on October 31, 1977 grew to $3,599 by October 31, S&P 500 Total Return Index in CAD different holding periods. In the past, longer holding the worst for Canadian stocks ended on June 30, By contrast, buying and holding Canadian stocks for a 2007 a compound return of 12.7% per year. 70% Hypothetical Moderate Portfolio 70% periods have generally resulted in a lower likelihood That year saw Canadian stocks turn an initial $100 full 30 years starting at anytime since 1950 would The worst 30-year period extended from July 1, % of loss. investment into $61 a loss of 39.2%. Interestingly, have produced positive returns (i.e. no losses) in each through June 30, 1982 during which a $100 initial DEX Long Bond Index 65% Jul 83 For example, an investor holding Canadian stocks the best year for Canadian stocks began immediately of the 367 rolling 30-year periods. October 31, 2007 investment grew at a rate of 8.6% per year for an 5 Year Guaranteed Investment Certificates 56.8% Jun 83 60% for just one year has historically made money thereafter ending on June 30, That year saw marked the end of the best 30-year period since ending value of $1, % $ % Jun 83 $156 55% 55% 50.8% $151 50% 50% 45% Nov 80 45% 39.3% 40% $270 40% Apr % $243 Jul 87 Jul 87 35% 30.4% Jun % 35% Jul 87 Jul 87 $ % $388 Sep % 27.8% 30% $ % 30% $340 $340 $325 Oct % 25% Aug 87 Mar 00 25% $771 Aug % Sep 91 Jun % 18.6% $ % $3,470 Jun 00 20% 17.5% Jan 83 Oct 84 $552 Feb 98 $538 Oct 97 Sep % 20% $ % 13.9% Jun % 14.6% Oct 07 Jun % $8,410 $1,656 $ % $1,408 $1,534 Jun % 13.4% Sep 05 $152 15% $4,357 $ % $3, % Jul 96 15% $815 $2, % $1,673 10% 10% $1,806 $1,204 $1, % 5% $334 $387 $ % 6.2% 7.0% 6.3% $264 Jul % $659 5% Jun 82 Sep % $108 $138 $269 $115 $125 $137 May 77 Dec 74 Dec 74 $ % Dec 79 0% 0% $ % $ % 3.3% 2.3% $ % 2.2% Jun % 1.9% Jun 10 $91 0.4% $95 Jun 10 Jun 10 Jun % Jun 10 Dec 69 Sep 81 Mar % Feb % (5%) Dec 59 (5%) Sep 59 $60 $82 Mar 03 $79 $68 5.1% (10%) 7.5% Feb 09 (10%) $70 Mar 03 Sep 81 (15%) 11.1% (15%) Aug 03 $84 $ % 15.7% (20%) (20%) Sep 81 Mar 03 (25%) Hypothetical Moderate Portfolio $76 Understanding the Graph Rolling Periods (25%) 24.2% Jul 83 Rolling periods are periods of consecutive months (12 months) Median Return Sep % with new periods beginning on the first day of each month. (30%) $157 If each monthly return is ranked from highest (30%) to lowest, the median figure is that which 20% Canadian Stocks The Moderate Portfolio was created for illustrative Best 5% Beginning of Period Order of Period falls in the middle of the entire series. 20% U.S. Stocks purposes only. It is neither a recommendation, (35%) Jan 1, 50 1st Rolling period (35%) Other 90% nor an actual porfolio. Trading costs, expenses and 30% Bonds Most Recent Return taxes were ignored. All income was reinvested and Feb 1, 50 2nd Worst 5% (40%) 20% World ex-u.s. Stocks (40%) $61 This shows the return for each asset class the portfolio was rebalanced every 12 months. $60 $102 Mar 1, 50 3rd 0.4% 10% Cash 39.2% over the most recent holding period (ending 40.2% Feb 09 Jun 82 June 30, 2011). Jan F M A M J J A S O N D J F 715th Sep 74 Assumes reinvestment of all income and no transaction costs or taxes. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. Past performance is no guarantee of future results. Government bonds and Treasury bills are guaranteed by the full faith and credit of the Canadian government as to the timely payment of principal and interest, while stocks are not guaranteed and have been more volatile than the other asset classes. International investments involve special risks such as fluctuations in currency, foreign taxation, economic and political risks, liquidity risks, and differences in accounting and financial standards. Source: S&P 500 Standard and Poor s 500, which is an unmanaged group of securities and considered to be representative of the U.S. stock market in general; S&P/TSX Composite Canadian Financial Markets Research Center for and Standard and Poor s/tsx Composite Index total return series thereafter, which replaced the TSE300 Total Return Index on May 1, 2002; World Markets ex-u.s. Global Financial Data for and Morgan Stanley Capital International (MSCI) World ex-u.s. Index thereafter; DEX Long Bond Index PC-Bond, a business unit of TSX, Inc.; 5 Year Guaranteed Investment Certificates Bank of Canada; Cash 90 Day Canada Treasury Bills, Bank of Canada Morningstar. All Rights Reserved Jan-June ' Ss = U.S. Small Stocks Ws = World Ex-U.S. Stocks Ls = U.S. Large Stocks Cs = Canadian Stocks Mp = Moderate Portfolio Cb = Canadian Bonds Gc = 5-YR GICs Tb = Treasury Bills It is impossible to predict which asset class will be the best or and Canadian stocks from 2003 through 2007, it is easy to ignore the the next few years. Moreover, investors hoping for a continuance of of a portfolio in a number of different asset classes, portfolio Moderate Portfolio worst performing in any given year. The performance of any fact that historical data shows it is impossible to predict the winners impressive Canadian-stock performance in 2008 experienced a volatility may be reduced. Notice how the moderate portfolio never given asset class can have drastic periodic changes. The image for any given year. dismal year as Canadian stocks sank to the worst-performing position occupied the lowest position over the 30 years analyzed. illustrates the annual performance of various asset classes, after 5 excellent years. While it was also never the best performer, it consistently ranked Investors betting on another stellar performance for world ex-u.s. 10% Treasury Bills and a hypothetical moderate portfolio, in relation to one another. somewhere in the middle. 30% Canadian Bonds stocks in 1989 were certainly disappointed as this asset class A well-diversified portfolio may allow investors to mitigate In times when one asset class dominates most others, as 20% Canadian Stocks performed rather poorly, in relation to the other asset classes, over some of the risks associated with investing. By investing a portion 20% U.S. Large Stocks was the case for world ex-u.s. stocks from 1985 through % World ex-u.s. Stocks Assumes reinvestment of all income and no transaction costs or taxes. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. Past performance is no guarantee of future results. Government bonds and Treasury bills are guaranteed by the full faith and credit of the Canadian government as to the timely payment of principal and interest, while stocks are not guaranteed and have been more volatile than the other asset classes. International investments involve special risks such as fluctuations in currency, foreign taxation, economic and political risks, liquidity risks, and differences in accounting and financial standards. Diversification does not eliminate the risk of experiencing investment losses. All values presented herein are in Canadian dollars. Source: Canadian Stocks S&P/TSX Composite Index total return series, which replaced the TSE300 Total Return Index on May 1, 2002; U.S. Large Stocks Standard & Poor s 500, which is an unmanaged group of securities and considered to be representative of the stock market in general; U.S. Small Stocks represented by the fifth capitalization quintile of stocks on the NYSE for 1981 and the performance of the Dimensional Fund Advisors, Inc. U.S. Micro Cap Portfolio thereafter; World ex-u.s. Stocks Morgan Stanley Capital International (MSCI) World ex-u.s. Index; Canadian Bonds DEX Long Bond Index, data from PC-Bond, a business unit of TSX, Inc.; 5 Year Guaranteed Investment Certificates data from the Bank of Canada; Treasury Bills 90-day Canada Treasury Bills, data from the Bank of Canada Morningstar. All Rights Reserved. Morningstar Communications Materials Complementing your Andex TM Charts purchase, Morningstar offers additional communication resources to help communicate an effective and concise message, and maximize the impact of the time spent with current and prospective clients. Designed to help clearly communicate various investment concepts, these printed charts and presentation materials are powerful resources that support oneon-one client meetings, seminars, outreach initiatives, and training sessions. Risk and Return Chart 2011 Risk and Return It s About Time 6.5% 7.7% Feb CHARTS Demonstrating the value of long-term investing, this handout charts the performance of Canadian and U.S. stocks, bonds, and fixed-term investments over several holding periods since Key Features + Illustrates the range of compound annual returns for four asset classes over one-, three-, five-, ten-, 20-, and 30-year holding periods + Asset classes include the S&P 500, S&P/ TSX, DEX Long Bond Index, and 5-Year GICs Asset-Class Winners & Losers Chart Highest Returns % Lowest Returns % 2010 Asset-Class Winners and Losers CHARTS Tb Cb Ss Cb Ws Ws Ws Ws Ls Tb Ss Ss Ws Ws Ls Cs Ls Ls Cs Cb Ss Cb Ss Cs Cs Ws Cs Gc Cs Cb Gc Ss Cs Ls Ls Mp Gc Ss Cs Gc Ls Ls Cs Ss Ss Ls Ss Ws Ss Cs Cb Gc Cs Ws Cb Cs Tb Cb Ws Ss Ss Ls Ws Gc Mp Cb Tb Mp Mp Cb Cb Cb Ss Gc Cb Ss Cb Mp Ws Tb Gc Tb Ws Cb Mp Ss Cb Tb Mp Gc Cb Mp Ls Tb Ss Ls Cs Cb Cb Ls Mp Gc Mp Ls Mp Mp Mp Cb Ls Gc Tb Mp Mp Ss Ws Ls Gc Mp Ss Tb Mp Gc Mp Mp Cb Gc Mp Cs Tb Mp Cs Mp Cb Tb Cs Cb Cs Tb Mp Mp Mp Cs Cb Mp Tb Mp Mp Ss Ls Mp Ws Tb Gc Ws Cs Tb Cb Gc Gc Cs Ws Tb Ls Mp Ws Ws Ws Gc Gc Ss Ls Ss Ls Gc Gc Tb Ws Ls Cb Cs Ls Cs Tb Ss Gc Cs Ls Tb Ws Ss Gc Cs Gc Cs Gc Gc Gc Ss Tb Ls Cs Ws Gc Ls Ss Cb Ls Ws Gc Ls Cs Ws Cb Cs Tb Ss Ss Ls Ss Ws Tb Ws Tb Cb Tb Tb Tb Cs Cb Ws Ws Ls Tb Tb Ls Gc Ss Cs Tb Ws Highlighting the benefits of diversification, this chart depicts the 30-year performance history of a hypothetical moderate portfolio against seven asset classes. Key Features + Asset classes include Canadian stocks, Canadian bonds, U.S. small-cap stocks, U.S. large-cap stocks, 5-Year GICs, Canadian Treasury bills, and global ex-u.s. stocks + Bonus graph Domestic and Foreign Strength: Analysis of the three best performing developed stock markets compared to the Canadian market over the past ten years Principles of Investing Image Library Featuring 20 professionally designed Microsoft PowerPoint slides, this all-in-one communication tool is the simplest way for advisors to discuss today s most pressing financial topics, set appropriate investment expectations, and keep their brand top of mind with current and prospective clients. Key Features + A comprehensive library of 20 slides that cover various investment concepts, including downturns and recoveries, retirement, longterm investing, risk and volatility, and global investing + Speaker Notes available for each slide, helping advisors translate complex investment topics and foster client conversations For additional product information Product Sales (Mon Thurs. 7am 6pm, and Fri 7am 5pm CST). Visit here