Sponsored by: Presented by: Diane M. Pearson, CFP, PPC, CDFA And James J. Holtzman, CFP, CPA

Transcription

1 Sponsored by: Presented by: Diane M. Pearson, CFP, PPC, CDFA And James J. Holtzman, CFP, CPA

2 Diane M. Pearson, CFP, PPC, CDFA Diane M. Pearson, CFP, PPC, CDFA is an Advisor and Shareholder with Legend Financial Advisors, Inc. She has over 20 years experience in the financial advisory profession. Diane has been selected three times by Worth magazine as one of The Top 250 Wealth Advisors in the country. Diane is one of the first financial advisors in the country to earn the Professional Plan Consultants (PPC ) designation, recognizing her commitment to education and service excellence in the qualified retirement planning industry. She has also been awarded the Certified Divorce Financial Analyst (CDFA ) professional designation. As a CDFA, she is qualified to serve as a financial expert on divorce cases, present data to support an argument, and educate clients on the short- and long-term financial implications of different divorce settlement proposals. Diane is a member of The National Association of Women Business Owners (NAWBO), where she is the Finance Director for the Pittsburgh Chapter. She has also been selected as the Pittsburgh Chapter of NAWBO s Woman Business Owner of the Year for 2004 as well as the "Woman Business Professional Associate of the Year" for Diane has also authored a landmark article entitled Pre-59½ Distributions Careful Analysis Is Required, regarding retirement distribution planning. She has also been a frequent guest speaker on various radio and Web site broadcasts. Diane is a frequent guest featured on Pittsburgh Business Radio (WMNY 1360 AM) and for their "Women Mean Business" show discussing headlines in the region about issues impacting women in business.

3 James J. Holtzman, CFP, CPA James J. Holtzman, CFP, CPA is an Advisor and Shareholder with Legend Financial Advisors, Inc. (Legend) Jim has been selected two consecutive times by Medical Economics as one of The 150 Best Financial Advisors for Doctors in America. Jim serves as the firm s Income Tax and Education Funding and Planning Specialist. Jim s previous professional experience includes employment with various CPA and Financial Advisory organizations where he provided tax, accounting, auditing and financial consulting services to individuals and businesses. Jim s areas of concentration include income tax planning, estate planning, stock option exercise planning, insurance, retirement planning and Section 529 Plans. Jim is a member of the Pennsylvania and American Institute of Certified Public Accountants. He is also a graduate of the Pittsburgh Leadership Development Initiative, which provides young leaders with the tools necessary to affect positive change in the Pittsburgh region, and Pittsburgh Leadership Onboard Programs. Jim also serves on the LaRoche College Board of Governors, is a member of Pittsburgh Cares, and is a former member of the Finance Committee for the Pittsburgh Downtown Partnership. Jim is a frequent guest featured on Pittsburgh Business Radio (WMNY 1360 AM). He has also been quoted in The Wall Street Journal, The Wall Street Journal Online, MSN Money, CBS Marketwatch, Pittsburgh Post-Gazette, Bloomberg Wealth Manager, Financial Planning Magazine, Financial Advisor Magazine, National Underwriter, Smart Money, Investment News, Physician s Personal Advisory, and in Bottom Line Personal. Jim has been interviewed on CNNfn s Your Money and Business Unusual, as well as WPXI-TV s Our Region s Business television programs.

4 NOT UNDERSTANDING YOUR RISK PROFILE It is important for investors to understand how comfortable you are with the risk of losing money, or understanding how much variability can be in your investment returns on an annual basis. You have to make sure your holding period matches the period you are willing to hold.

5 UNDERSTANDING HOW MUCH DOWNSIDE RISK IS IN YOUR CURRENT INVESTMENT PORTFOLIO A common complaint from investors is that they were surprised by how much money they lost during the market crash of 2008 and The S&P 500 dropped 55.25% from October 9, 2007 to March 9, The average loss in 401(k) plans in 2008 was 27.0% while the S&P 500 dropped 37.0%.

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7 Morningstar Star Ratings measure of a funds risk-adjusted return, relative to funds in its category. Risk-adjusted return is calculated by subtracting a risk penalty from each fund total return, after accounting for all loads, sales charges, and redemption fees. Top 10.0% Next 22.5% Middle 35.0% Next 22.5% Bottom 10.0%

8 LIPPER LEADER RATING Highest 20% - Rated 5 are Lipper Leaders Next 20% - Rated 4 Middle 20% - Rated 3 Next 20% - Rated 2 Lowest 20% - Rated 1 Subject to change every month and are calculated for the following periods: three-year, fiveyear, ten-year, and overall. The overall calculation is based on an equal-weighted average of percentile ranks for each measure over three-, five-, and ten-year periods (if applicable).

9 WHAT DO THE ROLLING ANNUAL RETURNS REALLY TELL US? Example: 1 YEAR 3 YEAR 5 YEAR 53% 20% 11% Year Annual Return % 3.5% 3.5% -2.5% -2.5%

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11 NOT PAYING ATTENTION TO CORRELATION IN YOUR PORTFOLIO Even investing in non-correlated assets might not matter much during times of political and financial/credit crises as correlation tends to increase during these times.

12 CORRELATIONS TO U.S. STOCKS CORRELATIONS TO U.S. STOCKS INCREASED DURING THE BEAR MARKET FROM SEPTEMBER 2008 TO FEBRUARY 2009 As of: February 28, 2009 Source: Fidelity Viewpoints

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14 BOND LIQUIDITY ISSUES 5.0% spreads Inability to diversify with individual bonds Duration Credit/default risk Interest rate risk Inflation risk Reinvestment risk

15 FIXED INCOME SECTOR RETURNS Note: Fixed income sectors shown above are provided by Barclays Capital and are represented by: Barclays Capital U.S. Aggregate Index: MBS: Fixed Rate MBS Index; Corporate: U.S. Corporates; Municipals: Muni Bond Index; Emerging Debt: Emerging Markets Index; High Yield: Corporate High Yield Index; Treasuries: Barclays Capital U.S. Treasury; TIPS: Barclays Capital TIPS. The Asset Allocation portfolio assumes the following weights: 10.0% in MBS, 20.0% in Corporate, 15.0% in Municipals, 10.0% in Emerging Debt, 10.0% in High Yield, 25% in Treasuries, 10.0% in TIPS. Asset allocation portfolio assumes annual rebalancing. As of: December 31, 2011 Source: Barclays Capital, FactSet, J.P. Morgan Asset Management REPRINTED WITH PERMISSION OF J.P. MORGAN ASSET MANAGEMENT GROUP

16 CHASING PERFORMANCE Investors frequently get caught jumping into a hot sector that has already run its course. Whether it is fixed income or commodities such as gold, it is human nature to want to be part of a successful trend. Chasing performance can be driven by poor performance in an investor s existing investments and can include making investment decisions that go against your risk tolerance.

17 SUPPLY/DEMAND FOR OPEN-END MUTUAL FUNDS AND EXCHANGE-TRADED FUNDS All Figures In Billions 2008 U.S. Focus Equity YTD As Of 2/8/2012 ($10.90) $1.20 ($2.30) $14.20 $15.50 Foreign Focus Equity ($2.80) $0.90 $1.80 $8.60 $7.80 Retail Money Funds $12.10 $48.30 ($2.80) ($8.70) ($18.60) $5.10 $8.90 $4.50 $5.70 $50.50 Bonds

18 REACHING FOR YIELD WILL REAP REWARDS While we are at all-time low interest rates for CDs, money market rates and 10-year U.S. Treasury Bonds, it is tempting to reach further out in the yield curve to obtain higher returns. However, as the chart on the following page from the Leuthold Group shows, investors need to be careful and understand the consequences of doing so. While reaching for a higher yield might work for a while, the moment that an event sparks a sell-off, your bond yielding 3.0% might take a significant loss that could wipe out the last one or two years worth of gains almost overnight. Fixed annuities can also look attractive, but investors need to make sure that they know exactly what they are buying as the introductory interest rates can look attractive, the remaining interest rate on the fixed annuity might look paltry when interest rates start to rise.

19 PRICE IMPACT OF A ONE PERCENT RISE/FALL IN INTEREST RATES Change in bond price is calculated using both duration and convexity according to the following formula: New Price = (Price + (Price * - Duration * Change in Interest Rates)) + (0.5* Price * Convexity * (Change in Interest Rates)^2). *Calculation assumes 2-year Treasury interest rate falls 0.25% to 0.00% as interest rates can only fall to 0.00%. As of: December 31, 2011 Source: U.S. Treasury, Barclays Capital, FactSet, J.P. Morgan Asset Management

20 DIVIDEND PAYING STOCKS

21 USING INAPPROPRIATE BENCHMARKS For example, the S&P 500 is a capitalization-weighted index. A capitalization weighted index is a type of market index whose individual components are weighted according to their market capitalization. As of December 31, 1999, the mean return of 6,242 U.S.-based stocks (i.e. companies) was 42.7%. The median return was -3.9%, which tells us that 50% of the 6,242 stocks had a return lower than -3.9% in 1999 which presents a very different picture than that painted by a mean return of 42.7%.

22 THE BELIEF THAT YOU CAN TIME THE MARKET The investment markets are influenced more than ever by political or global events. Another significant influence on the investment markets is based upon the decisions being made by central banks around the world. If you missed out on the 10 best days between 1980 and 2010, your average annual return would have dropped to 5.7% from 8.2%, according to an Oppenheimer report.

23 Note: The Risk Aversion Index combines ten market-based measures including various credit and swap spreads, implied volatility, currency movements, commodity prices and relative returns among various high- and low-risk assets. As of: January 5, 2012 Source: The Leuthold Group

24 INVESTORS THAT THINK THIS TIME IS DIFFERENT This time always seems different, until it turns out not to be." Behavioral finance shows that humans aren't very efficient in learning from the past. Market bubbles such as the technology and housing market bubbles are examples of this.

25 WHAT GOES DOWN MUST COME UP Investors sometimes think an investment that has taken a significant hit will come back. Buying stocks because the price has fallen usually is not a good reason to buy or continue to hold onto a stock. This especially does not apply when a stock has dropped from a significantly high valuation. "Those who try to catch a falling knife only get hurt. The stock market has proven to rise over longer periods of time. Practically speaking though, an investor needs to define the long term. The long term for some investors can mean five years, for others, it can mean ten or 15 years.

26 ANNUAL WITHDRAWAL FROM INVESTMENT PORTFOLIO Annual Withdrawal Percentage Rate YEAR 1 Portfolio Balance At The Beginning of Year Annual Cash Flow Withdrawal $1,000, ($50,000.00) Portfolio Balance Portfolio Performance $950, % Portfolio Balance At End of Year $855, % YEAR 2 Portfolio Balance At The Beginning of Year Annual Cash Flow Withdrawal $855, ($50,000.00) Portfolio Balance Portfolio Performance $805, % Portfolio Balance At End of Year $805, % YEAR 3 Portfolio Balance At The Beginning of Year Annual Cash Flow Withdrawal $805, ($50,000.00) Portfolio Balance Portfolio Performance $755, % Portfolio Balance At End of Year $755, AMOUNT TO GET BACK TO $1,000, $245, % 32.45%

27 QUESTIONS AND ANSWERS

28 LEGEND FINANCIAL ADVISORS AND EMERGINGWEALTH INVESTMENT MANAGEMENT ARE AT YOUR SERVICE

29 CONTACT INFORMATION Legend Financial Advisors, Inc Corporate Drive, Suite 350 Pittsburgh, PA Phone: (412) EmergingWealth Investment 5700 Corporate Drive, Suite 360 Pittsburgh, PA Phone: (412)