Preview. Myths, Facts, and Half-Truths. The New Retirement

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1 Mark Reynolds, CFP Mark Reynolds and Associates 123 Main Street, Suite 100 San Diego, CA Phone: Fax: The New Retirement Myths, Facts, and Half-Truths

2 This material was written and prepared by Emerald Connect. Copyright by Emerald Connect, Inc. All rights reserved. No part of this publication may be copied or distributed, transmitted, transcribed, stored in a retrieval system, transferred in any form or by any means electronic, mechanical, magnetic, manual, or otherwise or disclosed to third parties without the express written permission of Emerald Connect, Inc., Avenue of Science, Suite 200, San Diego, CA 92128, U.S.A. The information contained in this workbook is not written or intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek advice from your own tax or legal counsel. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Emerald Connect assumes no responsibility for statements made in this publication including, but not limited to, typographical errors or omissions, or statements regarding legal, tax, securities, and financial matters. Qualified legal, tax, securities, and financial advisors should always be consulted before acting on any information concerning these fields. The New Retirement: Myths, Facts, and Half-Truths NRT

3 Contents Introduction Our Commitment About Your Workbook Myths, Facts, and Half-Truths Market Timing Market Timing Matters... 5 $1 Million Portfolios Taking Time Off from the Market % Won t Cut It! Does 2% Make a Difference? The Cost of Waiting You Decide: Market Timing Matters Annuities, IRAs, and Tax Deferral Never Hold Annuities in IRAs Why Would You? Roth, Traditional, or Both? Which Should You Use?... 9 Should You Choose a Roth or a Traditional IRA? Is Tax Deferral Always Preferable? Taxable vs. Tax Deferred You Decide: Never Hold Annuities in IRAs Risk and Reward...12 The More Risk You Take, the More Reward You Get S&P 500 vs. Balanced Portfolio Annual Volatility A Tale of Two Portfolios Searching for an Efficient Portfolio The Efficient Frontier Can We Really Quantify Risk? Everyone Expects to Make Money Was There Ever an Average Year? Keeping Expectations in Check Are Your Expectations Realistic? You Decide: The More Risk You Take, the More Reward You Get Doing It Yourself You Can Do It All Yourself Millionaire Demographics Potential Net Worth Information Avalanche Why Work with a Professional? Are Your Retirement Dreams Achievable? How Much Time Do You Want to Spend? You Decide: You Can Do It All Yourself V13N2 3

4 Introduction Our Commitment Our organization is committed to helping people evaluate their financial situations and giving them the tools to help them make informed decisions. As part of that commitment, we use workshops like this one to provide individuals with sound financial information. This will help you identify your goals and make wise decisions to improve your financial situation. We follow up this session with a meeting in our offices. This is a complimentary consultation that we offer to everyone who attends our workshops. During that consultation, we can discuss any questions you have as a result of the workshop. If you prefer, we can use that time to examine your specific situation and begin the process of helping you formulate a financial strategy that will suit your needs. About Your Workbook The workbook is designed to help you apply what you learn to your specific situation. It s yours to keep. It reinforces the workshop s major points and will be a valuable resource for you. Throughout the workbook, you ll see informative graphics. They come directly from the workshop slides, making it easy for you to follow the presentation. Later, these graphics will be reminders of the workshop s important points. The workbook has wide margins so you can take notes. Feel free to underline or circle items you may have questions about. You ll find helpful exercises, worksheets, and self-analysis quizzes in the workbook. These materials will make your workshop experience interesting, informative, and most important, valuable. 4

5 Market Timing Myths, Facts, and Half-Truths There are some common assumptions we all make about investing. These assumptions are often based more on myths and half-truths than on facts. Ask yourself whether some of the conventional wisdom you ve heard about money over the years is based on myths, facts, or half-truths Market timing Annuities, IRAs, and tax deferral Risk and reward Doing it yourself Market Timing Matters Does market timing matter? When people talk about market timing, they are usually referring to the simple axiom of buy low, sell high. When you time the market, you are ideally trying scam: A common to buy at the absolute dips and sell at the absolute peaks. This type of investment approach relies on charts and graphs and lots of technical analysis. Trying to time the market is not a recommended strategy for many investors. But there is another kind of timing that also comes into play: the timing of events in your life, such as when it comes time to start taking retirement distributions and rolling your 401(k) assets to an IRA. Sometimes the timing of these life events is beyond our control, and we may find ourselves having to make financial decisions under less-than-optimal circumstances, such as retiring during a bear market. Consider the years from 2000 to 2002 when the stock market was in a prolonged slide. And investors won t easily forget 2008, when stocks lost 37 percent in one year alone! Source: Thomson Reuters, 2013, for the periods 12/31/1999 to 12/31/2002 and 12/31/2007 to 12/31/2008. Stocks are represented by the Standard & Poor s 500 Composite total return, an unmanaged index that is considered representative of U.S. stocks. The performance of an unmanaged index is not indicative of the performance of any specific investment. Individuals cannot invest directly in an index. Past performance is no guarantee of future results. Beware of Financial Scams Ponzi scheme: Named for Charles Ponzi, who defrauded thousands of New England investors in the 1920s with a postage stamp speculation scheme. A Ponzi scheme is a type of illegal pyramid scheme in which money from new investors is used to pay the returns to previous investors. Pyramid scheme: Whereas a Ponzi scheme usually centers around a person or institution that serves as the hub directing money, pyramid schemes are so named because the few early investors at the top are paid by larger groups of recruited investors. These recruits go on to recruit more investors in order to recoup their investments. Pump and dump Internet fraud in which a company s website features a glowing review of a company s financial status or new product. Messages in chat rooms and newsletters urge people to invest in the stock quickly before the price goes down. After high demand pumps up the price, scammers sell their shares at the peak. Then the stock price plummets and many investors are left holding worthless stock. Affinity fraud: An investment scam in which the fraudster targets an identifiable group, such as the elderly, and plays on the built-in trust that exists within the group. 5

6 Market Timing Source: Thomson Reuters, 2013, for the period 12/31/2002 to 12/31/2012. Each portfolio had a $1 million beginning balance at the start of the period. The second graph assumes that $50,000 annual withdrawals were taken from each account beginning on 12/31/2003. The growth and income fund is represented by the Thomson US: Growth and Income Mutual Fund Index. The S&P 500 index fund is represented by the Thomson US: S&P 500 Mutual Fund Index. The balanced fund is represented by the Thomson US: Balanced Domestic Mutual Fund Index. These indexes reflect the performance of the asset classes shown. Investors cannot invest directly in an index. The effects of income taxes, capital gains taxes, and 6 $1 Million Portfolios Here s what might have happened to $1 million portfolios invested in three different types of mutual funds over a 10-year period. The buy-and-hold graph assumes that no withdrawals were made. The second graph shows the impact of $50,000 annual withdrawals. As you can see, if returns are poor when you need to access your portfolio for income, the value can erode quickly. $900, $50,000 annual withdrawals for income, Growth and S&P 500 Balanced fund income fund index fund $1,500,000 investment fees and expenses were not considered. $1,244,447 Rates of return will vary over time, particularly for $1,100,000 $1,179,158 long-term investments. $1,132,164 Past performance is no guarantee of future results. Actual results will vary. $700,000 Mutual funds are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, is available from your financial professional. Be sure to read the prospectus carefully before investing. Buy and hold (no withdrawals), Growth and income fund $1,900,000 $1,400,000 S&P 500 index fund Taking Time Off from the Market Would could happen to your portfolio if you took time off from the market? Over this 30-year period (1983 through 2012), if bad timing caused you to miss the 12 best-performing months, your stocks would have earned a 6.67 percent average annual return. If you had remained fully invested at all times, your stocks could have earned a percent average annual return. Source: Thomson Reuters, 2013, for the period 12/31/1982 to 12/31/2012. Stocks are represented by the S&P 500 Composite total return. Past performance is no guarantee of future results. Balanced fund % average annual return Bad timing (missed 12 best months) $1,861,005 $1,804,402 $1,759, % average annual return Buy and hold (fully invested at all times)

7 Market Timing 1% Won t Cut It! Stocks are volatile, but financial vehicles that are considered safe, such as certificates of deposit (CDs), carry certain risks of their own. CDs lock up your money for a set number of months or even years and may impose a penalty for early withdrawals. After taking taxes and inflation into account, CDs can actually lose value. Does 2% Make a Difference? The Cost of Waiting $10,000 investment 1% taxable return 3% inflation 28% tax bracket Real return after taxes and inflation: 2.21% You would actually lose purchasing power! Are you putting off investing for the future? If so, procrastination can cost you a bundle. Investor B, who waited until age 45 to start, saved twice as much money as Investor A but ended up with less overall at age 65. These hypothetical examples are used for illustrative purposes only and do not represent any specific investments. Actual results will vary. The examples do not consider the effects of Every percentage point of return can make a substantial difference, especially investment expenses or over the long term, as shown by these $100,000 original investments. taxes. All figures are rounded to the nearest $700,000 $672,700 $100. $600,000 The FDIC currently $500,000 10% $466,100 insures bank CDs for $400,000 up to $250,000 per 8% $300,000 $320,700 depositor, per federally 6% insured institution. $200,000 $219,100 CDs generally provide 4% $100,000 a fixed rate of return. Year Investments seeking the potential for higher rates of return also involve a greater degree of risk. $100,000 $99,260 $98,846 $75,000 Investor A $50,000 contributes from age 40 to age 50, Investor B $25,000 then stops contributes from age 45 to age 65 $0 Age Investor A saved $2,000/year for 10 years (age 40 to 50) Amount saved: $20,000 Earnings: $79,260 Investor B saved $2,000/year for 20 years (age 45 to 65) Amount saved: $40,000 Earnings: $58,846 Both earned an 8% annual rate of return You Decide: Market Timing Matters MYTH FACT HALF-TRUTH 7

8 Annuities, IRAs, & Tax Deferral Traditional IRA withdrawals and the earnings portion of annuity withdrawals are taxed as ordinary income. Withdrawals taken prior to age 59½ may be subject to a 10% federal income tax penalty. To qualify for a tax-free withdrawal of earnings, a Roth IRA must meet the five-year holding requirement and take place after the owner reaches age 59½. Exceptions include the owner s death, disability, or a qualified first-time home purchase ($10,000 lifetime maximum). Annuities are insurancebased contracts in which one or more payments are made to an insurance company, which agrees to pay the contract holder an income or lump sum at a later date. Generally, annuities have contract limitations, mortality and expense charges, account fees, investment management fees, and administrative fees, and they carry a certain level of risk. Most annuities have surrender charges that are assessed during the early years of the contract if the owner surrenders the annuity. Typically, these surrender charges work on a sliding scale, with higher charges during the first several years of the contract and lower charges in the years before the surrender charges expire. The guarantees of fixed annuities are contingent on the claimspaying ability of the issuing insurance company. 8 Never Hold Annuities in IRAs One piece of advice you may have heard about saving for retirement is Never hold annuities in IRAs. The main reason for this is cost. Typically, IRAs have fees and expenses, and annuities have their own fees and expenses. In fact, annuities often have higher fees (as a percentage of account value) than many mutual funds. Because both IRAs and annuities offer the advantage of tax deferral, there is no additional tax advantage to holding an annuity inside an IRA. Yet there will be an additional layer of fees and expenses. That s the downside. Why Would You? Why would you consider owning an annuity inside an IRA? If you need some or all of the additional features that an annuity offers, having an IRA annuity could be an appropriate strategy for you. It all depends on your comfort level with risk, your willingness to pay additional costs to benefit from some additional protection, and your desire for a guaranteed death benefit for your spouse or other beneficiaries. Guarantees Death benefit protection Lifetime benefits Potential for tax-deductible contributions (traditional IRA) or tax-free withdrawals (Roth IRA) Variable annuities are long-term retirement savings vehicles. They are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the variable annuity contract and the underlying investment options, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest. Variable annuity subaccounts fluctuate with changes in market conditions; when the annuity is surrendered, the principal may be worth more or less than the original amount invested. For an additional cost, variable annuity contract owners may be able to purchase lifetime benefits, such as a guaranteed minimum rate of growth or a minimum income benefit. Variable annuities are not guaranteed by the FDIC or any other government agency. They are not deposits of, nor are they endorsed by, any bank or savings association.

9 Annuities, IRAs, & Tax Deferral Roth, Traditional, or Both? If you are going to utilize an IRA, you will need to decide whether to open a Roth IRA and/or a traditional IRA. Roth IRA After-tax contributions Qualified withdrawals are free of federal income tax Traditional IRA Contributions may be tax deductible If so, withdrawals are fully taxed as ordinary income If not, only earnings are taxed when withdrawn The annual IRA contribution limit ($5,500 in 2013 or $6,500 for those aged 50 and older) applies to the combined contributions to all IRAs, so having both a Roth IRA and a traditional IRA won t allow you to double your annual contributions. Which Should You Use? Which type of IRA should you use? Should you use both? Eligibility rules for deductible traditional IRAs* Roth IRA income phaseout limit kicks in at $178,000 AGI for married couples filing jointly in 2013 (limit is adjusted annually for inflation) Taxes: pay now or later? Traditional IRA withdrawals are taxed as ordinary income. Early withdrawals prior to age 59½ may be subject to a 10% federal income tax penalty. Roth IRA contributions can be withdrawn at any time without taxes or penalties. To qualify for a tax-free and penalty-free withdrawal of earnings, Roth IRA distributions must meet the five-year holding requirement and take place after the owner reaches age 59½; exceptions include the owner s death, disability, or a qualified first-time home purchase ($10,000 lifetime maximum). *Anyone under the age of 70½ with earned income can contribute to a traditional IRA. However, if you re an active participant in an employer-sponsored retirement plan, your ability to deduct IRA contributions is limited by your income. In 2013, phaseout limits begin at $95,000 AGI for married couples filing jointly and at $59,000 AGI for single filers. 9

10 This worksheet can help you determine whether you should consider contributing to a traditional or a Roth IRA. It assumes that: the taxable account (the figure from Table 2) is taxed every year, the tax rate remains constant on the taxable account, withdrawals will be taken as a lump sum, and the individual is eligible to make deductible contribu tions to a traditional IRA. 10 Annuities, IRAs, & Tax Deferral Should You Choose a Roth or a Traditional IRA? 1. How many years until you retire? 2. What return do you expect to receive from your investments (6%, 8%, or 10%)? % 8 % 8 % 3. Write in the amount from Table 1 (below) that corresponds with your answers on lines 1 and 2. $ 161,284 $ 161,284 $ 4. What do you expect your federal income tax This example further bracket to be when you reach retirement age? % 28 % 28 % assumes the maximum 5. Subtract the amount on line 4 from 100%. % 72 % 72 % allowable IRA contribution under the tax law. 6. Multiply the amount on line 3 by the percentage It considers only federal on line 5. (If, for example, you entered 72% on line 5, multiply the amount on line 3 by 0.72) $ 116,124 $ 116,124 income taxes, not state or $ local taxes (if any). 7. What is your current federal income tax bracket? % 28 % 28 % The amount on line 8 is an 8. Write in the amount from Table 2 (below) that estimate of how corresponds with your answers on lines 1, 2, and 7. $ 37,212 $ 37,212 much you $ may accumulate if you chose 9. If you were to use a traditional IRA, would you to invest the tax savings invest the tax savings?* Yes No from a traditional IRA. The amount on line 10 is 10. If you answered Yes on line 9, add lines 6 and 8 an estimate of how much and enter that sum here. If you answered No on line 9, enter the amount from line 6 here. $ 153,336 $ 116,124 you would accum ulate if $ you chose to invest in a 11. Enter the sum on line 3 here. $ 161,284 $ 161,284 $ traditional IRA. The amount on line 11 is If the figure on line 11 above is greater than line 10, you may want to consider the benefits of a Roth IRA. an estimate of how much you would accum ulate if you chose to contribute to a Roth IRA. Table 1 This hypothetical example is used for illustrative purposes only. Actual results will vary. *If, for example, you are in the 28% federal income tax bracket, each $100 contributed to a deductible IRA will save you $28 in federal taxes. If you plan to invest that savings in a taxable account, enter Yes. Years Until Annual Return on Investments Retirement 6% 8% 10% 5 $ 32,864 $ 34,848 $ 36, $ 76,844 $ 86,050 $ 96, $135,699 $ 161,284 $ 192, $ 214,460 $ 271,826 $ 346,514 Table 2 EXAMPLE 1 EXAMPLE 2 YOU 15 Current Anticipated Income Tax Investment Years Until Retirement Bracket Return % 6% $ 3,229 $ 7,429 $12,892 $19,999 8% $ 3,404 $ 8,224 $15,046 $24,705 10% $ 3,588 $ 9,108 $17,602 $30, % 6% $ 4,801 $10,957 $18,852 $28,976 8% $ 5,047 $12,059 $21,803 $35,342 10% $ 5,304 $13,279 $25,271 $43,303 25% 6% $ 7,861 $17,657 $29,864 $45,077 8% $ 8,216 $19,211 $33,925 $53,615 10% $ 8,586 $20,110 $36,108 $60,423 28% 6% $ 8,757 $19,577 $32,944 $49,459 8% $ 9,137 $21,218 $37,212 $58,374 10% $ 9,532 $23,026 $42,130 $69,175 33% 6% $10,230 $22,688 $37,860 $56,337 8% $10,643 $24,461 $42,400 $65,692 10% $11,070 $26,381 $47,555 $76,839 35% 6% $10,811 $23,902 $39,752 $58,944 8% $11,235 $25,711 $44,362 $68,395 10% $11,673 $27,665 $49,576 $79, % 6% $12,133 $26,629 $43,950 $64,645 8% $12,574 $28,494 $48,651 $74,171 10% $13,030 $30,499 $53,921 $85,324

11 Annuities, IRAs, & Tax Deferral Is Tax Deferral Always Preferable? Many people assume that tax deferral, when available, is always preferable over taxable investing. But that s not always the case. Here are two examples. Taxable vs. Tax Deferred These charts show the hypothetical After 10 Years growth of a taxable account and a tax-deferred account over 10-year and $15,264 $17,908 $12, year periods. As you can see, after 10 years, the taxable account had greater value than the tax-deferred account after taxes. But after 30 years, the tax-deferred Taxable Tax Tax account had greater value, even after deferred deferred after taxes deducting taxes. Over time, the additional compounding After 30 Years from deferring taxes on earnings allows the $57,435 tax-deferred account to outpace the taxable account in value, even after taxes are paid. $41,353 The benefits of tax deferral are largely $35,565 dependent on your time frame. The longer you expect to have the account, the more sense it may make to choose a tax-deferred option, if one is available. These examples assume that the initial investment is made with pre-tax or taxdeductible contributions. This would be another factor to consider when deciding whether to choose taxable or tax-deferred investing. Before taking action, be sure to consult with your accountant or tax advisor regarding your specific situation. Taxable Tax Tax deferred deferred after taxes Assumptions: $10,000 initial investment 6% annual rate of return 28% federal tax rate You Decide: Never Hold Annuities in IRAs MYTH FACT HALF-TRUTH These hypothetical examples are used for illustrative purposes only and do not represent any particular investment. They assume a $10,000 initial investment, a 6% annual rate of return, and a 28% federal tax rate. Actual results will vary. Investment fees and charges are not taken into account and would reduce the performance shown if they were included. Lower current maximum tax rates for capital gains and dividends, as well as the tax treatment of investment losses, could make the investment return for the taxable investment more favorable, thereby reducing the difference in performance between the accounts shown. An individual s time frame and income tax bracket, both current and anticipated, should also be considered when making financial decisions. 11

12 Risk and Reward Source: Thomson Reuters, 2013, for the period 12/31/1992 to 12/31/2012. Past performance does not guarantee future results. Stocks are represented by the S&P 500 Composite total return, which is generally considered representative of the U.S. stock market. Bonds are represented by the Citigroup Corporate Bond Composite Index, which is generally representative of the corporate bond market. Cash is represented by the Citigroup Three- Month Treasury Bill Index. The performance of an unmanaged index is not indicative of the perfor mance of any specific investment. Individuals cannot invest directly in an index. Rates of return will vary over time, particularly for long-term investments. Actual results will vary. 12 The More Risk You Take, the More Reward You Get Is this always the case? Or is it possible to have a comparable potential return with less inherent risk? S&P 500 vs. Balanced Portfolio This graph compares the $50,000 Stocks: performance of the S&P % Balanced: stock index with a more $40, % balanced portfolio consisting $30,000 Difference: of 50 percent stocks, 0.54% 40 percent investment-grade $20,000 corporate bonds, and $10, percent cash During this 20-year period, the all-stock portfolio performed slightly better than the balanced portfolio. The average annual return for the all-stock portfolio was 8.22 percent, whereas the return for the balanced portfolio was 7.68 percent a difference of 0.54 percent. Remember that there is a higher chance of loss when investing in stocks over shorter time periods. Annual Volatility Here are the same two portfolios charted differently, showing the return of each portfolio on an annual basis. The S&P 500 had annual returns that ranged from a gain of percent (an increase of more than a third in value in a single year) to a loss of 37 percent. The returns of the balanced portfolio were more steady. Annual returns ranged from a high of percent to a low of percent (about two-thirds of the greatest single-year loss in the all-stock portfolio). Stocks Balanced 40% 30% 20% 10% 0% 10% 20% 30% 40%

13 Risk and Reward A Tale of Two Portfolios ROBERT AND KAREN Both began saving for retirement in 1993 Hope to retire in 2014 Annual investments: $20,000 Retirement savings goal: $1 million Robert and Karen took different approaches to investing for retirement. Robert decided to play it safe and invested 60 percent of his portfolio in Treasury bonds and 40 percent in three-month $600,000 $400,000 $200,000 0 CDs, whereas Karen divided her portfolio into a 1993 balanced mix of 50 percent stocks and 50 percent corporate bonds; she also rebalanced her portfolio on an annual basis. Karen s Approach Even though Robert s portfolio was protected from extreme market volaility in some years, he was facing a larger shortfall than Karen. At the $1,000,000 Karen s balanced portfolio end of 2012, Karen was ahead of Robert by about $800,000 grew to more than $880,000 by the end of She $140,000, but both were short of their $1 million $600,000 benefited by having goal. Although some investors may try to play stock and bond $400,000 investments. it safe like Robert, others may need to earn the higher-potential returns that are historically associated with stocks and bonds to meet their retirement goals. But as we ve seen, investing is unpredictable, and sometimes market events can deal investors a bad hand. Robert s Approach Source: Thomson Reuters, 2013, for the period 12/31/1992 to 12/31/2012. This hypothetical example is used for illustrative purposes only and does not reflect any specific investments. The example assumes that Robert s portfolio was invested 60% in Treasury bonds and 40% in three-month CDs. Treasury bonds are represented by the Citigroup Treasury 7 10 Year Index. The example also assumes that Karen s portfolio was invested 50% in stocks and 50% in corporate bonds. Stocks are represented by the Standard & Poor s 500 Composite total return, which is generally considered representative of the U.S. stock market. Corporate bonds are represented by the Citigroup Corporate Bond Composite Index, which is generally considered representative of the U.S. corporate bond market. Treasury bonds are backed by the full faith and credit of the U.S. government as to the timely payment of principal and interest. The performance of an unmanaged index is not indicative of the performance of any specific investment. Individuals cannot invest directly in an index. Past performance does not guarantee future results. Actual results will vary. $20,000 annual investments: 60% Treasury bonds, 40% CDs $1,000,000 Robert s portfolio grew slowly but steadily. $740,810 $800,000 On the verge of retirement, he was about $260,000 short of his $1 million goal. $20,000 annual investments: 50% stocks, 50% corporate bonds $200,000 $881, The FDIC insures CDs up to $250,000 per depositor, per federally insured institution. CDs generally provide a fixed rate of return, whereas the value of stocks and bonds will fluctuate with market conditions. Rates of return will vary over time, especially for long-term investments. 13

14 Risk and Reward The Father of Portfolio Theory 14 Searching for an Efficient Portfolio Investors can benefit from a sophisticated asset allocation strategy that takes their risk tolerance into consideration but still provides a portfolio with potential growth opportunities. Investors use asset allocation in an attempt to search for an efficient portfolio. If you re receiving adequate returns from your portfolio but are not comfortable with the level of risk, the goal of asset Asset allocation attempts to achieve the highest potential return at a particular level of risk. allocation is to find the optimum mix of assets to reduce your risk without sacrificing your return. On the other hand, if you re comfortable with the risk in your portfolio but dissatisfied with the return, then you may be able to select investments with higher performance potential without raising the risk. Once a portfolio has been structured that has the potential to provide the highest potential return at a particular level of risk, it is called an efficient portfolio. Asset allocation does not eliminate or guarantee against investment loss. It is a method used to help manage investment risk. The Efficient Frontier The efficient frontier was first defined by Harry Markowitz in his landmark paper, Portfolio Selection, published in His mathematical model was designed to maximize the return from a portfolio for the amount of risk an investor could handle. The ultimate goal is to assemble a portfolio along the efficient frontier. Higher RETURN Lower Portfolio A The use of statistical analysis enables professionals to plot an efficient frontier that can be used to find the most efficient trade-off between risk and potential return. In other words, the efficient frontier demonstrates the mix of assets with the highest expected return for any particular level of risk. RISK Portfolio C Portfolio B This hypothetical example is used for illustrative purposes only. EFFICIENT FRONTIER Higher On the graph, an investor s current portfolio is represented by Portfolio B. If assets were reallocated to Portfolio A on the efficient frontier, the portfolio would have the same expected return but with substantially reduced risk. By reallocating and moving to Portfolio C, the investor may be able to maximize his or her return without increasing risk.

15 Risk and Reward Can We Really Quantify Risk? Sophisticated asset allocation models typically use a number of factors to estimate the risk associated with a particular asset mix. But how much faith can you put in those numbers, and what do they really mean? Everyone Expects to Make Money When we invest, we expect to have a positive return on our investment. If we invest in a one-year CD, we know exactly what we will get back. However, many investments, especially equity investments, experience a wide range of returns, including substantial losses and potentially extraordinary gains. If we are investing in an S&P 500 stock index fund, we are most likely estimating an annual return of percent, because that is the historical average annual return of the index over the last 30 years. But is the stock market ever likely to produce an average return in any given year? The FDIC insures bank Source: Thomson Reuters, 2013, for the period 12/31/1982 to 12/31/2012. Stocks are represented by the CDs, which generally S&P 500 Composite total return, which is generally considered representative of the U.S. stock market. provide a fixed rate of Investors cannot invest directly in an index. Past performance does not guarantee future results. return, up to $250,000 Actual results will vary. per depositor, per insured institution. The return and principal value of an investment in stocks Was There Ever an Average Year? fluctuate with changes in market conditions. This chart shows the annual returns of the S&P 500 index from 1983 to Shares, when sold, may be worth more or less than 40% the original investment 30% amount. 20% 10% 0% 10% 20% 30% 10.87% 40% During this 30-year period, the average annual return of the index was 10.8 percent. There were only two years (1993 and 2004) during this period when the annual return came close to matching the overall average annual return. 10.8% average annual return Source: Thomson Reuters, 2013, for the periods 12/31/1982 to 12/31/2012 and 12/31/2002 to 12/31/2012. The S&P 500 Composite total return is generally considered representative of the U.S. stock market. The performance of an unmanaged index is not indicative of the performance of any specific investment. Investors cannot invest directly in an index. Past performance does not guarantee future results. Actual results will vary. Generally, there s more risk when you invest in stocks over a shorter time period. The index s 7.1 percent average annual return for the 10-year period from 2003 through 2012 was significantly lower than the 10.8 percent average annual return for the 30-year period from 1983 through

16 Risk and Reward Sources: Gallup, 2003; Kiplinger s Personal Finance, January 2012; Thomson Reuters, Stocks are represented by the S&P 500 Composite total return for the periods 12/31/1999 to 12/31/2000, 12/31/2002 to 12/31/2003, and 12/31/2011 to 12/31/2012. The S&P 500 is considered representative of U.S. stocks. The performance of an unmanaged index is not indicative of the perfor mance of any specific investment. Individuals cannot invest directly in an index. The effect of taxes and fees is not considered. Past performance is no guarantee of future results. Actual results will vary. Keeping Expectations in Check When it comes to investing wisely, keeping expectations in check can help you avoid disappointments. Here are examples of investor expectations for stocks in 2000, 2003, and 2012 compared with actual performance. 18.4% Are Your Expectations Realistic? The example below shows how a 3 percent difference in return could affect the overall value of a $100,000 investment portfolio after 20 years. $600,000 $560,441 Expected return $500,000 Actual return $400,000 9% $320,714 $300,000 $200,000 $100, % 28.69% 6% Year % 8.0% 9.11% Expected stock returns Actual stock returns This hypothetical example is used for comparison purposes only and is not representative of any specific investments. It assumes a $100,000 initial portfolio. The returns shown do not reflect taxes, fees, brokerage commissions, and other expenses typically associated with investing. Actual results will vary. Because your financial strategy depends on the return you expect from your investments, it s important to be realistic about what your portfolio will yield over the long term. Inflated expectations may cause you to overspend or fall short of your goals. A more conservative outlook may prompt you to save more and, if you re fortunate, possibly even reach your goals earlier than expected. 16 You Decide: The More Risk You Take, the More Reward You Get MYTH FACT HALF-TRUTH 2013 Inc.

17 Doing It Yourself You Can Do It All Yourself There are plenty of do-it-yourselfers who truly enjoy rolling up their sleeves and poring over investment opportunities, insurance policies, and retirement savings calculations. But perhaps you don t have a passion for these subjects. And the fact is, you will probably end up having a lot more money than you think. People are living longer than ever before, giving them more time to accumulate assets. Even if you don t feel rich today, when you have greater assets in the future, you will probably need to employ more sophisticated financial strategies than you may now realize. Millionaire Demographics Although the American economy continues to produce millionaires, the affluent weren t spared from the overall decline in asset values in million million million million 6.7 million million Source: Affluent Market Insights 2013, Spectrem Group Potential Net Worth Your net worth could increase substantially over time, even at fairly conservative growth rates. $5.1 million This hypothetical example is used for illustrative purposes only. It assumes consistent annual rates of return and no withdrawals. Rates of return will vary over time, especially for longterm investments. Actual results will vary. Let s say that a hypothetical investor has a net worth of $750,000. In 25 $2 million years, if the investor s estate grew at an 8 percent average annual rate of return, $750,000 he or she could potentially have a net worth of over $5 million! Even at a 4 percent average annual growth rate, this Today In 25 years In 25 years individual would be worth $2 4% 17

18 Doing It Yourself Information Avalanche Internet Cable TV Radio Investment gurus We all know there s been an information avalanche in the past decade, particularly with the proliferation of the Internet. It s entertaining stuff. But should you really base your decision making on some cable channel s flavor of the month? Why Work with a Professional? NOT to get rich quick Financial education Help determine appropriate strategies A knowledgeable sounding board for your financial ideas Are Your Retirement Dreams Achievable? Percentage of pre-retirees who indicated that running out of money in retirement is their top concern 18 35% Do not work with a financial professional 24% Do work with a financial professional Working with a financial professional does not guarantee superior results. But a financial professional can provide education and make suggestions that you might find helpful when weighing specific financial decisions. Here s an example: In one study, 35 percent of pre-retirees who do not work a financial professional indicated that running out of money in retirement is their top concern. By contrast, only 24 percent of pre-retirees who do work with a financial professional have the same concern. Although there is no assurance that working with a financial professional will improve investment results, working with someone who focuses on your overall financial objectives can help you consider options that could have a substantial effect on your long-term financial situation. Source: BenefitsPro.com, 2012

19 Doing It Yourself How Much Time Do You Want to Spend? Finally, working with a professional can help free more of your time to spend doing the things you really want to do. You could take care of everything yourself on evenings, weekends, and during breaks at work. Financial professionals deal with financial issues all day, every day. It s what they do. Would it surprise you to know that most people spend more time each year planning their family vacations and exercising at the gym than they do planning for their retirements? 1 But let s face it. Wouldn t you rather spend more time thinking about your vacation or other things than your money? Source: 1) Business Wire, November 15, 2012 You Decide: You Can Do It All Yourself MYTH FACT HALF-TRUTH Myths, Facts, and Half-Truths This information may encourage you to question some of the conventional wisdom about money that you may have heard over the years. Sometimes the clichés are, in fact, true, and sometimes they are not. What really matters is putting a sound strategy in place. Market timing Annuities, IRAs, and tax deferral Risk and reward Doing it yourself 19 Emerald Connect, Inc.

20 What to Bring Please bring the following documents to your consultation: Your consultation is scheduled for: Date Time broker-dealer disclosure broker-dealer disclosure broker-dealer disclosure broker-dealer disclosure broker-dealer disclosure broker-dealer disclosure broker-dealer disclosure broker-dealer disclosure NRT