2015 MDRT Annual Meeting e Handout Material

Transcription

1 2015 MDRT Annual Meeting e Handout Material Title: Speaker: Diversified to the CORE: A Better Starting Point Craig L. Israelsen, Ph.D. Presentation Date: Tuesday, June 16, :30 5:00 p.m. The Million Dollar Round Table (MDRT) does not guarantee the accuracy of tax and legal matters and is not liable for errors and omissions. You are urged to check with tax and legal professionals in your state, province or country. MDRT also suggests you consult local insurance and security regulations and your company s compliance department pertaining to the use of any new sales materials with your clients. The information contained in this handout is unedited and errors, omissions and misspellings may exist. Content may be altered during the delivery of this presentation Million Dollar Round Table Million Dollar Round Table 325 West Touhy Ave. Park Ridge, IL USA

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3 Go, Portfolio. Go! by C. L. Israelsen I Can Build it All By Myself Investment Primer

4 Go, Portfolio. Go! Big portfolios, little portfolios. Big investors, little investors. Do you like my investment portfolio? I do not. It is not diversified. Good-bye. No, don t go. I will teach you about diversification. Okay, but please make it short. Okay.

5 Diversified 7Twelve portfolio. Large US Developed Real Estate Natural Resources US Midcap US Emerging Inflation Protected Small Cap US This portfolio uses 12 different mutual funds.

6 Diversified portfolio results. 15-Year Growth of $,000 January 1, 2000 to December 31, % $13,498 0% $18,360 60% / 40% $22,044 0% $22,790 7Twelve Portfolio $29,448 More diversification is better.

7 Big portfolios, little portfolios. Big investors, little investors. Do you like my investment portfolio? I do like your 7Twelve portfolio. It is more diversified. Good-bye. Good-bye. Craig L. Israelsen, Ph.D. has taught Personal and Family Finance at the University of Missouri and Brigham Young University. He now teaches in the Woodbury School of Business at Utah Valley University. He writes monthly for Financial Planning Magazine and is the developer of the 7Twelve Portfolio ( He is the author of 7Twelve: A Diversified Investment Portfolio with a Plan published by John Wiley & Sons which is available at Amazon.com.

8 This document is a research report presenting portfolio research and analysis. This document is neither investment advice nor an investment solicitation. Implementation of the 7Twelve portfolio is no guarantee of performance. As we all know past performance is no guarantee of future performance it could be better than we expect! Overview Part One provides a historical context of the benefits of a multi-asset, low correlation portfolio. 45-year history ( ) Craig L. Israelsen, Ph.D. Diversified to the CORE: A Better Staring Point This is a copyrighted document, copying for redistribution is prohibited unless written permission is obtained from Craig L. Israelsen 7Twelve is a registered trademark belonging to Craig L. Israelsen Copyright Craig L. Israelsen All rights reserved Part Two introduces the 7Twelve Portfolio, a multi-asset, low correlation balanced portfolio. 15-year performance period ( ) 1

9 Average Annualized % Return ( ) 5/8/ Year Historical Asset Returns 45-Year Period from Annualized Return (%) Std Dev of Annual Returns Growth of $,000 Real Estate ,444,413 US Small ,175,538 US Large ,941 International , ,280 (Aggregate) , ,030 Inflation (CPI) ,409 Data Large-cap US equity represented by the S&P 500 Index. Small-cap US equity represented by the Ibbotson Small Companies Index from , and the Russell 2000 Index starting in equity represented by the MSCI EAFE Index. Real estate represented by the NAREIT Index from and the Dow Jones US Select REIT Index starting in represented by the Goldman Sachs Index (GSCI). As of February 6, 2007, the GSCI became the S&P GSCI Commodity Index. U.S. Aggregate represented by the Ibbotson Intermediate Term Bond Index from and the Barclays Capital Aggregate Bond index starting in represented by 3-month Treasury Bills Year Risk/Return Analysis: REIT Small US Equity Large US Equity Equity Worst Three-Year Cumulative % Return ( )

10 Average Annualized % Return ( ) 5/8/ Year Risk/Return Analysis: Ideal risk and return zone REIT Large US Equity Small US Equity Equity To be diversified, a portfolio must combine multiple ingredients that have low correlation with each other. 45-Year Correlations of Major Asset Classes ( ) Small US Equity Equity Large US Equity 0.78 Small US Equity Equity US US REIT REIT Worst Three-Year Cumulative % Return ( ) Aggregate (Average) Correlation in Equal-Weighted 7-Asset Portfolio =

11 Large and Small US US and Rolling 5-Year Correlations Year Rolling Correlations: Large US to Small US Year Rolling Correlations: Large US to Using S&P 500 as comparison baseline index (0.20) (0.20) (0.40) (0.40) (0.60) (0.60) (0.80) (0.80) (1.00) (1.00) 4

12 US and REITs 5-Year Rolling Correlations: Large US to REIT US and 5-Year Rolling Correlations: Large US to Meaningful portfolio diversification requires Depth and Breadth (0.20) (0.40) (0.60) (0.80) (1.00) (0.20) (0.40) (0.60) (0.80) (1.00) Mutual Funds/ETFs = Depth Wide variety of funds = Breadth 5

13 Average 3-Year Reutrn ( ) Average 3-Year Reutrn ( ) 5/8/2015 The following slides demonstrate portfolio performance as diversity (or breadth) increases Year Risk/Return Analysis: Rolling 3-Year Periods Add (50% each) Add US (33% each) Add (14.3% each) Add US Sml (25% each) Add Real Estate (16.7% each) Add (20% each) Year Risk/Return Analysis: Rolling 3-Year Periods Add (50% each) Add US (33% each) Add (14.3% each) Add US Sml (25% each) Add Real Estate (16.7% each) Add (20% each) 0% Standard Deviation of 3-Year Average Annualized Returns 0% Standard Deviation of 3-Year Average Annualized Returns 6

14 When built correctly, a multi-asset portfolio achieves equity-like returns with bond-like risk Single Assets vs. Multi-Asset Portfolio Equally Large US Small US US Real Weighted Equity Equity Equity Estate 7-Asset Portfolio 45-Year Average Annualized % Return 45-Year Standard Deviation of Annual Returns Number of Years with Negative Returns Worst Three-Year Cumulative % (37.61) (42.24) (43.32) (35.61) (39.72) (13.40) Return Single Assets vs. Multi-Asset Portfolio Equally Large US Small US US Real Weighted Equity Equity Equity Estate 7-Asset Portfolio 45-Year Average Annualized % Return 45-Year Standard Deviation of Annual Returns Number of Years with Negative Returns Worst Three-Year Cumulative % (37.61) (42.24) (43.32) (35.61) (39.72) (13.40) Return 7

15 Average Annualized % Return ( ) Average Annualized % Return ( ) 5/8/ Year Risk/Return Analysis: Multi-Asset Portfolio - 60/40-20 REIT Large US Equity Worst Three-Year Cumulative % Return ( ) Small US Equity Equity Year Risk/Return Analysis: Multi-Asset Portfolio -20 Inflation Adjusted Returns 60/40-30 REIT Large US Equity -40 Worst Three-Year Cumulative % Return ( ) Small US Equity Equity () (20) (30) (40) (50) Annual Returns for Multi-Asset Portfolio 45-year Period:

16 50 Annual Returns for Multi-Asset Portfolio vs. S&P 500 Index 45-year Period: Annual Returns for Multi-Asset Portfolio vs. S&P 500 Index 45-year Period: Annual Returns for Multi-Asset Portfolio vs. S&P 500 Index 45-year Period: () () () (20) (20) (20) (30) (40) (50) (30) (40) (50) The S&P 500 is not the correct benchmark for a multi-asset portfolio but it will used as such by many investors (30) (40) (50) S&P 500 is better 56% of the time but when it s worse it is much worse

17 Annual Returns for Multi-Asset Portfolio vs. S&P 500 Index 45-year Period: Key to Long-Term Success Single Assets vs. Multi-Asset Portfolio Large US Small US US Real Equity Equity Equity Estate Equally Weighted 7-Asset Portfolio 20 0 () (20) (30) (40) (50) Multi-Asset Portfolio Annualized Return =.12% S&P 500 Index Annualized Return =.48% Reducing the frequency and magnitude of losses 45-Year Average Annualized % Return 45-Year Standard Deviation of Annual Returns Number of Years with Negative Returns Worst Three-Year Cumulative % Return (37.61) (42.24) (43.32) (35.61) (39.72) (13.40)

18 Single Assets vs. Multi-Asset Portfolio Large US Small US US Real Equity Equity Equity Estate Equally Weighted 7-Asset Portfolio The Math of Losses and Needed Gains Needed % Gain = [1 / (1 % Loss)] 1 Percentage Loss in Portfolio Portfolios Needed Percentage Gain to Restore Portfolio Building a Diversified Portfolio 45-Year Average Annualized % Return 45-Year Standard Deviation of Annual Returns Number of Years with Negative Returns Worst Three-Year Cumulative % Return (37.61) (42.24) (43.32) (35.61) (39.72) (13.40) -5% 5.3% -% 11.1% -15% 17.6% -20% 25.0% -27% Multi-Asset Portfolio in % -30% 42.9% -35% 53.8% -37% S&P 500 Index in % -40% 66.7% -45% 81.8% -50% 0.0% -55% 141 equity funds lost 50% 122.2% -60% or more in % -65% 185.7% -70% (funds with at least 60% equity) 233.3% -75% 300.0% 7Twelve 7 Core Asset Classes utilizing 12 Underlying Funds 11

19 Minimal Diversification The S&P 500 Index Two-Asset Diversification 60/40 Portfolio Good Diversification 7-Asset Portfolio Large US Large US US Large US Developed Real Estate US Small Cap US 12

20 Superior Diversification 12-Asset Portfolio 7Twelve Portfolio 7Twelve 7 Core Asset Classes Twelve Actual Holdings Large US Developed Real Estate Natural Resources US Large US Developed Real Estate Natural Resources US US Real Estate Resources US Midcap US Emerging Inflation Protected Midcap US Emerging Inflation Protected Large US Developed Real Estate Natural Resources US Small Cap Small Cap Midcap US Emerging Inflation Protected US US Small Cap US 13

21 7Twelve Equally-weighted exposure to 12 asset classes International 8.33% US 8.33% 8.33% TIPS 8.33% Natural Resources 8.33% 8.33% Large US 8.33% Real Estate 8.33% Mid Cap US 8.33% Emerging Markets 8.33% Small US 8.33% 8.33% Performance in 2014 Real Estate, 30.37% Large US, 13.46% Small US,.55% Mid US, 9.40% 7Twelve Portfolio, 1.38% Short Term, 1.37%, 0.01% Emerging, -0.07% Short Term TIPS, -1.41%, -2.52%, -6.20% Nat Resources, -.25%, -28.% -40.0% -30.0% -20.0% -.0% 0.0%.0% 20.0% 30.0% 40.0% Nat Resources, 7.01% TIPS, 5.96% US, 5.34%, 4.21% Large US, 4.17%, 2.35%, 2.02% Real Estate, 12.51% Small US,.61% Mid US, 9.37% 7Twelve Portfolio, 7.47%, 7.35% Emerging, 7.14% 15-Year Performance 0.0% 3.0% 6.0% 9.0% 12.0% 15.0% 14

22 , 2.2% US, 3.6% TIPS, 6.6%, 8.4% 15-Year Volatility $35,000 $30, Year Growth of $, Twelve Portfolio Eight Equity and Diversifying Holdings The Engines of the Portfolio 7Twelve 7Twelve Portfolio, 12.6% Large US, 19.1% Mid US, 19.5% Small US, 19.6% $25,000 $20,000 US Large Cap 60/40 Portfolio US Real Estate Resources US Real Estate, 20.4%, 21.4% $15,000, 22.2% Nat Resources, 23.8% $,000 Emerging, 33.2% $5, % 5.0%.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% $0 15

23 7Twelve Four Fixed Income Holdings The Brakes of the Portfolio US Real Estate Resources US Brakes Have Outperformed 1/3 of the time Engines Have Outperformed 2/3 of the time Year 7Twelve Brakes (4 ETFs) 7Twelve Engines (8 ETFs) Year Return Year Return Year Return Year Return Equities and Diversifiers: 8 ENGINES 65% of Overall Portfolio Allocation 7Twelve Fixed Income: 4 BRAKES 35% of Overall Portfolio Allocation US Real Estate Resources US 16

24 Stop Chasing Performance 15-Year Period from Investment Approach 15-Year Annualized Performance Stop Chasing Performance 15-Year Period from Investment Approach 15-Year Annualized Performance Stop Chasing Performance 15-Year Period from Investment Approach 15-Year Annualized Performance HARE: Performance Chasing by Investing 0% in Last Year s BEST Asset 0.09% HARE: Performance Chasing by Investing 0% in Last Year s BEST Asset 0.09% HARE: Performance Chasing by Investing 0% in Last Year s BEST Asset 0.09% HARE II: Performance Chasing by Investing 0% in Last Year s WORST Asset HARE II: Performance Chasing by Investing 0% in Last Year s WORST Asset 3.39% HARE II: Performance Chasing by Investing 0% in Last Year s WORST Asset 3.39% TORTOISE: Invest in the equally weighted 12-asset 7Twelve model TORTOISE: Invest in the equally weighted 12-asset 7Twelve model TORTOISE: Invest in the equally weighted 12-asset 7Twelve model 7.47% 17

25 15-Year Distribution Analysis: $250,000 Initial Account Value on Jan 1, % Initial Withdrawal 3% Annual Increase in Annual Withdrawal Total Withdrawal of $232,486 Ending Account Balance on December 31, 2014 Passive 7Twelve Portfolio 7Twelve Age Based Twelve Age Based Twelve Age Based 70 Plus Vanguard Balanced Index 8% 8% 7% 7% 6% 6% 5% 7Twelve Rebalancing Comparison as of Dec 31, % 7Twelve with Annual Rebalancing 5.88% 7Twelve with No Rebalancing 7.47% 7.13% Monthly Rebalancing 7Twelve 15-Year Period from Passive 7Twelve model Quarterly Rebalancing Annual Rebalancing Vanguard 500 Index 5% 0 50,000 0, , , , , , ,000 4% -Year Annualized Return 15-Year Annualized Return 18

26 7Twelve It s the recipe that matters, not where you buy the ingredients 7Twelve Models Active 7Twelve Passive Vanguard 7Twelve 7Twelve T. Rowe Price 7Twelve Fidelity Tax Efficient DFA 7Twelve 7Twelve 7Twelve 15-Year Annualized Return ( )