Staying Wealthy Requires Prudent Decisions. Investors have a Huge Role in Shaping Outcomes. January 4, 2016

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1 January 4, 2016 Staying Wealthy Requires Prudent Decisions No doubt you are familiar with many success stories where individuals and families escape from poverty or at least modest beginnings and amass significant wealth in a single lifetime. This is the fabled rags to riches story that permeates much of the story of America. However, you are likely also aware of how many families revert from sizeable wealth back to more modest means in a surprisingly short period of time. In other words, it is not easy to amass a fortune nor is it easy to retain wealth for multiple generations. One or more costly mistakes can make a sizeable and sometimes insurmountable difference in one's financial well being. There are myriad (and often interrelated) reasons why fortunes are lost. Today I want to share observations about the primary causes we have seen during our careers that cause families to lose significant wealth. We also share our thoughts about what might reasonably be done to avoid this unhappy outcome. Here is a list of factors that can derail wealth: Spending too much principal such that expenditures overwhelm investment assets and cause a significant erosion in wealth, Not taking sufficient risk to help ensure long-term principal growth, net of inflation, Poor investment results due to concentration of capital in the wrong place at the wrong time and/or poor timing decisions, and Prolonged poor performance of a diversified portfolio where distributions exacerbate the decline in principal. Investors have a Huge Role in Shaping Outcomes The tables below help us visualize how distribution rates and investment returns interact over time. In this particular example I show a starting value of $2,500,000 and an initial distribution of 4% (or $100,000). It is unknown what the rate of future inflation will be. In the accompanying tables, I show what happens if inflation increases 3% annually and the distribution increases at the same rate. As we will see, at that rate, the distribution would need to grow to nearly $236,000 in 30 years time in order to equate to $100,000 today. This may or may not approximate future general inflation, and there are large differences among individuals including those of the same age and wealth. In other words, some people are more exposed than others to rising costs and the need for increased distributions to cover their expenditures. Therefore, we will discuss inflation and plausible spending patterns for an array of retired people. Prior to retirement many individuals, particularly those that have already amassed wealth, make contributions to their investment portfolios. After private business interests are sold or an executive or professional retires, it is likely that the primary source of income is the returns earned on one's investment portfolios including 401(k), IRAs, and taxable portfolios. That said, some retired individuals retain ownership in closely held businesses or income producing real estate that supports some or all of their lifestyle needs. Therefore, whether or not the value of the investment portfolio grows post retirement depends on the relationship between investment returns (which add to portfolio value) compared to distributions (which can erode principal). As we will see, small differentials (positive and negative) translate into very large differences in wealth over time. This letter explores this very important topic and the role our own actions as investors play on shaping outcomes in the context of an unknowable future.

2 $ 2,500,000 Annual growth rate before distributions Annual dist Portfolio value net of distributions year 1 2,575,000 2,600,000 2,625,000 2,650,000 2,700,000 2,750, ,000 2,475,000 2,500,000 2,525,000 2,550,000 2,600,000 2,650,000 year 2 2,652,250 2,704,000 2,756,250 2,809,000 2,916,000 3,025, ,000 2,446,250 2,497,000 2,548,250 2,600,000 2,705,000 2,812,000 year 3 2,731,818 2,812,160 2,894,063 2,977,540 3,149,280 3,327, ,090 2,413,548 2,490,790 2,569,573 2,649,910 2,815,310 2,987,110 year 4 2,813,772 2,924,646 3,038,766 3,156,192 3,401,222 3,660, ,273 2,376,681 2,481,149 2,588,778 2,699,632 2,931,262 3,176,548 year 5 2,898,185 3,041,632 3,190,704 3,345,564 3,673,320 4,026, ,551 2,335,431 2,467,844 2,605,666 2,749,059 3,053,212 3,381,652 year 6 2,985,131 3,163,298 3,350,239 3,546,298 3,967,186 4,428, ,927 2,289,566 2,450,630 2,620,022 2,798,075 3,181,542 3,603,890 year 7 3,074,685 3,289,829 3,517,751 3,759,076 4,284,561 4,871, ,405 2,238,848 2,429,250 2,631,618 2,846,554 3,316,660 3,844,874 year 8 3,166,925 3,421,423 3,693,639 3,984,620 4,627,326 5,358, ,987 2,183,026 2,403,433 2,640,212 2,894,360 3,459,005 4,106,374 year 9 3,261,933 3,558,280 3,878,321 4,223,697 4,997,512 5,894, ,677 2,121,840 2,372,893 2,645,545 2,941,345 3,609,049 4,390,334 year 10 3,359,791 3,700,611 4,072,237 4,477,119 5,397,312 6,484, ,477 2,055,018 2,337,332 2,647,345 2,987,348 3,767,295 4,698,890 year 11 3,460,585 3,848,635 4,275,848 4,745,746 5,829,097 7,132, ,392 1,982,277 2,296,433 2,645,321 3,032,197 3,934,287 5,034,388 year 12 3,564,402 4,002,581 4,489,641 5,030,491 6,295,425 7,846, ,423 1,903,322 2,249,867 2,639,164 3,075,706 4,110,607 5,399,403 year 13 3,671,334 4,162,684 4,714,123 5,332,321 6,799,059 8,630, ,576 1,817,845 2,197,286 2,628,546 3,117,672 4,296,879 5,796,767 year 14 3,781,474 4,329,191 4,949,829 5,652,260 7,342,984 9,493, ,853 1,725,527 2,138,324 2,613,120 3,157,879 4,493,776 6,229,591 year 15 3,894,919 4,502,359 5,197,320 5,991,395 7,930,423 10,443, ,259 1,626,034 2,072,598 2,592,517 3,196,093 4,702,019 6,701,291 year 16 4,011,766 4,682,453 5,457,186 6,350,879 8,564,857 11,487, ,797 1,519,018 1,999,705 2,566,346 3,232,062 4,922,384 7,215,623 year 17 4,132,119 4,869,751 5,730,046 6,731,932 9,250,045 12,636, ,471 1,404,118 1,919,223 2,534,192 3,265,515 5,155,704 7,776,715 year 18 4,256,083 5,064,541 6,016,548 7,135,848 9,990,049 13,899, ,285 1,280,957 1,830,707 2,495,617 3,296,161 5,402,876 8,389,101 year 19 4,383,765 5,267,123 6,317,375 7,563,999 10,789,253 15,289, ,243 1,149,142 1,733,692 2,450,155 3,323,687 5,664,863 9,057,768 year 20 4,515,278 5,477,808 6,633,244 8,017,839 11,652,393 16,818, ,351 1,008,266 1,627,689 2,397,312 3,347,758 5,942,701 9,788,195 year 21 4,650,736 5,696,920 6,964,906 8,498,909 12,584,584 18,500, , ,903 1,512,185 2,336,566 3,368,012 6,237,506 10,586,403 year 22 4,790,259 5,924,797 7,313,152 9,008,844 13,591,351 20,350, , ,610 1,386,643 2,267,365 3,384,064 6,550,477 11,459,014 year 23 4,933,966 6,161,789 7,678,809 9,549,374 14,678,659 22,385, , ,928 1,250,499 2,189,123 3,395,497 6,882,905 12,413,305 year 24 5,081,985 6,408,260 8,062,750 10,122,337 15,852,952 24,624, , ,378 1,103,160 2,101,221 3,401,868 7,236,179 13,457,277 year 25 5,234,445 6,664,591 8,465,887 10,729,677 17,121,188 27,086, , , ,007 2,003,002 3,402,701 7,611,793 14,599,725 year 26 5,391,478 6,931,174 8,889,182 11,373,457 18,490,883 29,795, ,378 (52,344) 772,389 1,893,775 3,397,485 8,011,359 15,850,320 year 27 5,553,223 7,208,421 9,333,641 12,055,865 19,970,154 32,774, ,659 (269,574) 587,626 1,772,804 3,385,675 8,436,609 17,219,692 year 28 5,719,819 7,496,758 9,800,323 12,779,217 21,567,766 36,052, ,129 (499,790) 389,002 1,639,316 3,366,687 8,889,409 18,719,533 year 29 5,891,414 7,796,629 10,290,339 13,545,970 23,293,187 39,657, ,793 (743,576) 175,769 1,492,489 3,339,895 9,371,768 20,362,693 year 30 6,068,156 8,108,494 10,804,856 14,358,728 25,156,642 43,623, ,657 (1,001,540) (52,857) 1,331,456 3,304,632 9,885,853 22,163,306 4% initial distribution that then grows 3% annually Total distributions 4,757,542 The left hand side shows what happens to the value of $2.5 million over time at various rates of growth. As you can see, modest differences in growth rates translate into very large differences in portfolio value over time. This table makes it very clear that investors have significant incentive to try to earn higher rates of return. For example at 3%, 5% and 8% growth rates, $2.5 million grows to a nominal value of $6.1 million, $10.8 million and $25.2 million respectively in 30 years time. Please note that these rates of return are assumed to be net of fees and income & capital gains taxes, but before the effects of inflation are taken into account. In other words, these are nominal values not net of inflation (e.g. real ) values. Indeed if inflation averages 3% annually, the nominal value in 30 years time would need to be about $6.1 million to have the same purchasing power of $2.5 million today. Please also note that if investment fees are 1% annually and taxes also equal another 1% of portfolio value, then the pre-fee, pre-tax return required to earn 3% on a net basis would be 5%. Clearly fees and taxes matter and this is why we focus on low cost, tax-efficient solutions to help our clients capital to compound at favorable rates. The other side of the table shows what happens to portfolio values when we take distributions into account. In this illustration, I show an initial distribution of $100,000 (e.g. 4% of the starting value) that then grows by 3% annually thereafter. As the table shows, if the account generates a predistribution annual return on principal of 3%, the account will run out of money after about 26 years due to the annual increase in the distribution amount. On the other hand, if the annual distribution held steady at $100,000 per year, the value would still be $2.5 million (nominal) because the aggregate distribution would be $3.0 million (e.g. 30 years x $100,000) versus the $4.7 million shown above. The obvious question we investors face is what will our distribution needs be over time? Will they increase, decrease or largely stay the same? Some retirees spend more in early years due to increased travel, ownership of a second (or third) home (and the attendant increases in property taxes, insurance, maintenance, etc.), weddings, education for children and/or grandchildren, gifts to charities and other institutions that are important, etc. Sometimes these individuals take much more modest distributions later in life. Other people spend more in later years due to out of pocket health care related expenses for themselves or loved ones including assisted living or other long-term care needs. Whether the distributions are for personal needs, required to pay taxes or support a loved one or charity, all withdrawals reduce principal value. 2

3 In the absence of substantial withdrawals of principal, many wealthy families can sustain wealth through generations. However, if distribution amounts increase faster than investment capital grows, then principal value can decrease rather dramatically. Indeed the same results (favorable or otherwise) that are shown in the table at the top of page 2, would pertain to a portfolio of $10 million where the initial distribution is $400,000 (e.g. 4%) in year 1. If the withdrawal amount increases by the same 3% per year and the average annual rate of return on your principal averages only 3.0% per year, the portfolio would be completely depleted in approximately 26 years. Hope for the Best and Plan for the Unexpected I think it is likely that most of us will experience a need for rising distributions during our retirement years. While costs related to ever improving technology devices may continue to come down, it is likely that things like food, clothing, insurance, property taxes, higher education, travel, cars and other forms of transportation will continue to increase over time. Also many investors will want to make distributions to family members and institutions that we want to support. Throw in the costs for one or more weddings and there are lots of claims on resources. One thing that investors can do, is own portfolios that are positioned for long-term growth. When the rate of return exceeds the rate of distributions, wealth can be maintained or even enhanced. Historically, broadly diversified equity portfolios including high quality dividend paying stocks have provided favorable return profiles over most long-term periods (e.g. 10+ years). Another option for many individuals is to delay retirement by a few years. By working longer, we can often increase savings and reduce total lifetime distributions from our portfolios. In other words, by delaying retirement we can potentially shorten the time our investments need to support our lifestyles and other spending needs. Take a look at the table below. The only change is distributions begin five years from now at $100,000 and then grow at 3.0% annually thereafter. $ 2,500,000 Annual growth rate before distributions Annual dist Portfolio value net of distributions No distributions in first 5 years year 1 2,575,000 2,600,000 2,625,000 2,650,000 2,700,000 2,750,000-2,575,000 2,600,000 2,625,000 2,650,000 2,700,000 2,750,000 year 2 2,652,250 2,704,000 2,756,250 2,809,000 2,916,000 3,025,000-2,652,250 2,704,000 2,756,250 2,809,000 2,916,000 3,025,000 year 3 2,731,818 2,812,160 2,894,063 2,977,540 3,149,280 3,327,500-2,731,818 2,812,160 2,894,063 2,977,540 3,149,280 3,327,500 year 4 2,813,772 2,924,646 3,038,766 3,156,192 3,401,222 3,660,250-2,813,772 2,924,646 3,038,766 3,156,192 3,401,222 3,660,250 year 5 2,898,185 3,041,632 3,190,704 3,345,564 3,673,320 4,026,275-2,898,185 3,041,632 3,190,704 3,345,564 3,673,320 4,026,275 year 6 2,985,131 3,163,298 3,350,239 3,546,298 3,967,186 4,428, ,000 2,885,131 3,063,298 3,250,239 3,446,298 3,867,186 4,328,903 year 7 3,074,685 3,289,829 3,517,751 3,759,076 4,284,561 4,871, ,000 2,868,685 3,082,829 3,309,751 3,550,076 4,073,561 4,658,793 year 8 3,166,925 3,421,423 3,693,639 3,984,620 4,627,326 5,358, ,090 2,848,655 3,100,053 3,369,149 3,656,990 4,293,356 5,018,582 year 9 3,261,933 3,558,280 3,878,321 4,223,697 4,997,512 5,894, ,273 2,824,842 3,114,782 3,428,333 3,767,137 4,527,551 5,411,168 year 10 3,359,791 3,700,611 4,072,237 4,477,119 5,397,312 6,484, ,551 2,797,037 3,126,822 3,487,199 3,880,614 4,777,204 5,839,733 year 11 3,460,585 3,848,635 4,275,848 4,745,746 5,829,097 7,132, ,927 2,765,020 3,135,968 3,545,632 3,997,524 5,043,453 6,307,779 year 12 3,564,402 4,002,581 4,489,641 5,030,491 6,295,425 7,846, ,405 2,728,566 3,142,001 3,603,508 4,117,970 5,327,524 6,819,152 year 13 3,671,334 4,162,684 4,714,123 5,332,321 6,799,059 8,630, ,987 2,687,435 3,144,694 3,660,696 4,242,061 5,630,739 7,378,080 year 14 3,781,474 4,329,191 4,949,829 5,652,260 7,342,984 9,493, ,677 2,641,381 3,143,805 3,717,054 4,369,907 5,954,521 7,989,211 year 15 3,894,919 4,502,359 5,197,320 5,991,395 7,930,423 10,443, ,477 2,590,145 3,139,080 3,772,429 4,501,624 6,300,406 8,657,655 year 16 4,011,766 4,682,453 5,457,186 6,350,879 8,564,857 11,487, ,392 2,533,458 3,130,251 3,826,659 4,637,330 6,670,046 9,389,028 year 17 4,132,119 4,869,751 5,730,046 6,731,932 9,250,045 12,636, ,423 2,471,038 3,117,038 3,879,569 4,777,147 7,065,227 10,189,508 year 18 4,256,083 5,064,541 6,016,548 7,135,848 9,990,049 13,899, ,576 2,402,594 3,099,143 3,930,971 4,921,199 7,487,869 11,065,883 year 19 4,383,765 5,267,123 6,317,375 7,563,999 10,789,253 15,289, ,853 2,327,818 3,076,256 3,980,666 5,069,618 7,940,045 12,025,617 year 20 4,515,278 5,477,808 6,633,244 8,017,839 11,652,393 16,818, ,259 2,246,393 3,048,047 4,028,440 5,222,536 8,423,989 13,076,920 year 21 4,650,736 5,696,920 6,964,906 8,498,909 12,584,584 18,500, ,797 2,157,989 3,014,172 4,074,066 5,380,092 8,942,112 14,228,816 year 22 4,790,259 5,924,797 7,313,152 9,008,844 13,591,351 20,350, ,471 2,062,258 2,974,268 4,117,298 5,542,426 9,497,010 15,491,226 year 23 4,933,966 6,161,789 7,678,809 9,549,374 14,678,659 22,385, ,285 1,958,841 2,927,954 4,157,879 5,709,687 10,091,486 16,875,064 year 24 5,081,985 6,408,260 8,062,750 10,122,337 15,852,952 24,624, ,243 1,847,362 2,874,829 4,195,529 5,882,025 10,728,562 18,392,327 year 25 5,234,445 6,664,591 8,465,887 10,729,677 17,121,188 27,086, ,351 1,727,433 2,814,472 4,229,955 6,059,596 11,411,496 20,056,210 year 26 5,391,478 6,931,174 8,889,182 11,373,457 18,490,883 29,795, ,611 1,598,645 2,746,439 4,260,842 6,242,561 12,143,805 21,881,219 year 27 5,553,223 7,208,421 9,333,641 12,055,865 19,970,154 32,774, ,029 1,460,574 2,670,268 4,287,854 6,431,085 12,929,280 23,883,312 year 28 5,719,819 7,496,758 9,800,323 12,779,217 21,567,766 36,052, ,610 1,312,781 2,585,468 4,310,637 6,625,340 13,772,012 26,080,033 year 29 5,891,414 7,796,629 10,290,339 13,545,970 23,293,187 39,657, ,359 1,154,806 2,491,528 4,328,810 6,825,501 14,676,414 28,490,677 year 30 6,068,156 8,108,494 10,804,856 14,358,728 25,156,642 43,623, , ,171 2,387,910 4,341,971 7,031,752 15,647,248 31,136,466 No distribution in first 5 years Total distributions 3,645,926 We all face important decisions and indeed we need to take appropriate steps to help ensure the outcomes that we desire. Life is about choices and making informed decisions. If assets are invested too conservatively, there may be little ability to increase principal and income sufficiently to make the higher distributions. If an investor takes on too much risk, she can also fail to achieve her goals. 3

4 Avoiding Common Risks and Mistakes is also Key Of course, principal erosion is exacerbated by declines in the market (particularly those that are sustained) but it can happen even when markets are reasonably favorable. Here too, we investors can influence outcomes. Specifically it is incumbent upon us to adopt and then adhere to sensible plans. Actions like dramatic timing calls (in and out of equities) and/or performance chasing can lead to catastrophic results. Let s say a family has an investment portfolio of $10 million and then the value of their holdings gets cut in half either due to a general market sell-off or a dramatic decline in one of more concentrated holdings. Due to very real stress and a continuation of dismal news stories, the account holder decides to liquidate the holding(s) in favor of holding cash. Now the principal value is $5 million. Then real estate (or tech or energy or fill in the blanks) performs quite well and the investor commits all or most of her/his capital into the new investments near the top only to experience another 50% decline. If the capital is once again moved back into the safety of cash, U.S. Treasuries etc., then the person s or family s wealth has now be reduced more or less permanently from $10 million to $2.5 million. Distributions for living expenses that were prudent and reasonable when the level of wealth was $10 million are dangerously high when the principal value is just $2.5 million. Unfortunately this hypothetical example pertains to lots of good folks who make mistakes. Sadly, the impact can be rather devastating particularly for those investors who are already in retirement and not in a position to replace lost value. The risks associated with holding highly concentrated positions (due to loyalty, aversion to incurring capital gains, etc.) are impossible to quantify for any particular stock. Indeed it is likely safe to say that the business risks for a global consumer staples company like Procter & Gamble are likely much lower than that of a high tech start-up. That said, there are some sobering statistics about publicly traded stocks that are worthy of consideration. Indeed colleagues at our old firm did some rather extensive analysis on the potential adverse consequences of holding concentrated positions. Here are some excerpts from the report entitled The Agony and the Ecstasy which was published in September i Over the long run, some companies substantially outperform the broad market and maintain their value. However, the odds have been stacked against the average concentrated holder. Risk of permanent impairment. Using a universe of Russell 3000 companies since 1980, roughly 40% of all stocks have suffered a permanent 70%+ decline from their peak value. Negative lifetime returns vs. the broad market. The return on the median stock since inception vs. an investment in the Russell 3000 index was -54%. In light of the fact that significant declines can wreak havoc on a family s wealth, measures to reduce risk seem prudent for most investors, most of the time. After all, single stocks often entail one or more risks due to 1) changing consumer preferences, 2) product obsolescence and/or 3) new entrants that surpass industry leaders. Of course there are also more mundane things like significant and protracted declines in valuation. The good news is there are various techniques that can be utilized to reduce risks associated with having capital concentrated at the wrong place at the wrong time. More generally, while we think most investors should invest a substantial portion of their liquid wealth in stocks, we believe diversification across sectors, market segments and economies is a key means to reduce long-term risk.* Moreover, investors who are not adding to their investment portfolio, need a strategy to help to minimize the downside and help ensure that the individual or family can withstand the inevitable (but unpredictable) downturns that lie ahead. 4

5 Having a Buffer can Really Help While it is impossible to predict the timing and magnitude of either market declines or advances, we can nevertheless prepare for declines by holding rainy day reserves outside the long-term investment portfolio. Then when declines occur, that portion of the client s wealth is walled off from the downturn. Moreover, the reserves can be utilized during the period the stock market is falling to meet distribution needs. The benefits are both real in terms of portfolio value, but also they can be powerful psychologically. It can be painful and costly to sell capital at depressed prices. Also the capital that is distributed does not participate when markets recover. With the reserve, investors can invest most of their liquid wealth for long-term growth while knowing that there are provisions set aside to make distributions as needs occur regardless of what is occurring in the equity markets. The tables below show the same market action as we have seen before with a couple of important adjustments. Specifically significant declines occur in years 11 & 12 and then the rate of return in the ensuing 3 years is 5% higher per year. In the first table below, distributions continue throughout the decline and first year of the recovery and this means principal declines rather precipitously. In the second table, only 90% is invested in the long-term growth assets. Therefore the balances before the declines are lower. However, the sum of money that is set aside can now be tapped to meet the investor s distribution needs outside the main portfolio. This alleviates the need to sell stocks at depressed prices and allows the capital to recover partially before distributions from the main account resume. Of course another alternative is to utilize a securities based line of credit to make distributions when declines in the portfolio occur. This means all of the capital can be put to work, but understandably some investors are averse to borrowing when markets are behaving poorly. $ 2,500,000 Annual growth rate before distributions Annual dist Portfolio value net of distributions year 1 2,575,000 2,600,000 2,625,000 2,650,000 2,700,000 2,750, ,000 2,475,000 2,500,000 2,525,000 2,550,000 2,600,000 2,650,000 year 2 2,652,250 2,704,000 2,756,250 2,809,000 2,916,000 3,025, ,000 2,446,250 2,497,000 2,548,250 2,600,000 2,705,000 2,812,000 year 3 2,731,818 2,812,160 2,894,063 2,977,540 3,149,280 3,327, ,090 2,413,548 2,490,790 2,569,573 2,649,910 2,815,310 2,987,110 year 4 2,813,772 2,924,646 3,038,766 3,156,192 3,401,222 3,660, ,273 2,376,681 2,481,149 2,588,778 2,699,632 2,931,262 3,176,548 year 5 2,898,185 3,041,632 3,190,704 3,345,564 3,673,320 4,026, ,551 2,335,431 2,467,844 2,605,666 2,749,059 3,053,212 3,381,652 year 6 2,985,131 3,163,298 3,350,239 3,546,298 3,967,186 4,428, ,927 2,289,566 2,450,630 2,620,022 2,798,075 3,181,542 3,603,890 year 7 3,074,685 3,289,829 3,517,751 3,759,076 4,284,561 4,871, ,405 2,238,848 2,429,250 2,631,618 2,846,554 3,316,660 3,844,874 year 8 3,166,925 3,421,423 3,693,639 3,984,620 4,627,326 5,358, ,987 2,183,026 2,403,433 2,640,212 2,894,360 3,459,005 4,106,374 year 9 3,261,933 3,558,280 3,878,321 4,223,697 4,997,512 5,894, ,677 2,121,840 2,372,893 2,645,545 2,941,345 3,609,049 4,390,334 year 10 3,359,791 3,700,611 4,072,237 4,477,119 5,397,312 6,484, ,477 2,055,018 2,337,332 2,647,345 2,987,348 3,767,295 4,698,890 year 11-15% 2,855,822 3,145,519 3,461,401 3,805,551 4,587,716 5,511, ,392 1,612,373 1,852,340 2,115,852 2,404,854 3,067,809 3,859,665 year 12-15% 2,427,449 2,673,691 2,942,191 3,234,719 3,899,558 4,684, ,423 1,232,094 1,436,066 1,660,051 1,905,703 2,469,215 3,142,292 year % 2,621,645 2,914,323 3,236,410 3,590,538 4,406,501 5,387, ,576 1,188,085 1,422,736 1,683,480 1,972,754 2,647,636 3,471,060 year % 2,831,376 3,176,613 3,560,051 3,985,497 4,979,346 6,195, ,853 1,136,279 1,403,929 1,704,974 2,042,904 2,844,976 3,844,865 year % 3,057,887 3,462,508 3,916,056 4,423,902 5,626,661 7,125, ,259 1,075,922 1,379,023 1,724,213 2,116,364 3,063,564 4,270,336 year 16 3,149,623 3,601,008 4,111,859 4,689,336 6,076,794 7,837, , ,403 1,278,387 1,654,627 2,087,549 3,152,852 4,541,573 year 17 3,244,112 3,745,048 4,317,452 4,970,696 6,562,937 8,621, , ,505 1,169,052 1,576,887 2,052,331 3,244,609 4,835,260 year 18 3,341,435 3,894,850 4,533,324 5,268,937 7,087,972 9,483, , ,835 1,050,529 1,490,447 2,010,187 3,338,893 5,153,501 year 19 3,441,678 4,050,644 4,759,991 5,585,074 7,655,010 10,432, , , ,307 1,394,726 1,960,554 3,435,762 5,498,608 year 20 3,544,929 4,212,670 4,997,990 5,920,178 8,267,411 11,475, , , ,849 1,289,112 1,902,837 3,535,272 5,873,118 year 21 3,651,276 4,381,177 5,247,890 6,275,389 8,928,804 12,622, , , ,592 1,172,956 1,836,396 3,637,483 6,279,818 year 22 3,760,815 4,556,424 5,510,284 6,651,912 9,643,108 13,885, ,029 21, ,946 1,045,574 1,760,550 3,742,452 6,721,771 year 23 3,873,639 4,738,681 5,785,798 7,051,027 10,414,557 15,273, ,610 (169,937) 301, ,243 1,674,573 3,850,237 7,202,337 year 24 3,989,848 4,928,228 6,075,088 7,474,089 11,247,721 16,800, ,359 (372,393) 115, ,196 1,577,689 3,960,898 7,725,213 year 25 4,109,544 5,125,357 6,378,843 7,922,534 12,147,539 18,480, ,279 (586,844) (82,653) 588,627 1,469,071 4,074,490 8,294,454 year 26 4,232,830 5,330,372 6,697,785 8,397,886 13,119,342 20,329, ,378 (813,828) (295,337) 408,680 1,347,837 4,191,072 8,914,522 year 27 4,359,815 5,543,586 7,032,674 8,901,759 14,168,889 22,361, ,659 (1,053,902) (522,810) 213,455 1,213,048 4,310,698 9,590,315 year 28 4,490,610 5,765,330 7,384,308 9,435,865 15,302,401 24,598, ,129 (1,307,648) (765,851) 1,999 1,063,702 4,433,425 10,327,218 year 29 4,625,328 5,995,943 7,753,523 10,002,016 16,526,593 27,058, ,793 (1,575,670) (1,025,278) (226,694) 898,732 4,559,306 11,131,147 year 30 4,764,088 6,235,781 8,141,199 10,602,137 17,848,720 29,763, ,657 (1,858,596) (1,301,946) (473,685) 716,999 4,688,394 12,008,605 Total distributions 4,757,542 Back to back annual declines of 15% with distributions coming out of the portfolio during the decline. Notice how much principal erodes during the period of market declines when distributions come out of the main account. That is because the size of each distribution is large compared to the reduced principal value. Also note that in both cases, the back to back declines mean that average compounding rate is actually lower that the rates shown at the top of each column. 5

6 $ 2,250,000 Annual growth rate before distributions Annual dist Portfolio value net of distributions year 1 2,317,500 2,340,000 2,362,500 2,385,000 2,430,000 2,475, ,000 2,217,500 2,240,000 2,262,500 2,285,000 2,330,000 2,375,000 year 2 2,387,025 2,433,600 2,480,625 2,528,100 2,624,400 2,722, ,000 2,181,025 2,226,600 2,272,625 2,319,100 2,413,400 2,509,500 year 3 2,458,636 2,530,944 2,604,656 2,679,786 2,834,352 2,994, ,090 2,140,366 2,209,574 2,280,166 2,352,156 2,500,382 2,654,360 year 4 2,532,395 2,632,182 2,734,889 2,840,573 3,061,100 3,294, ,273 2,095,304 2,188,684 2,284,902 2,384,013 2,591,140 2,810,523 year 5 2,608,367 2,737,469 2,871,634 3,011,008 3,305,988 3,623, ,551 2,045,612 2,163,681 2,286,596 2,414,503 2,685,880 2,979,025 year 6 2,686,618 2,846,968 3,015,215 3,191,668 3,570,467 3,986, ,927 1,991,053 2,134,301 2,284,998 2,443,445 2,784,823 3,161,000 year 7 2,767,216 2,960,847 3,165,976 3,383,168 3,856,105 4,384, ,405 1,931,380 2,100,267 2,279,843 2,470,647 2,888,204 3,357,695 year 8 2,850,233 3,079,280 3,324,275 3,586,158 4,164,593 4,823, ,987 1,866,334 2,061,291 2,270,848 2,495,898 2,996,273 3,570,477 year 9 2,935,740 3,202,452 3,490,488 3,801,328 4,497,760 5,305, ,677 1,795,647 2,017,065 2,257,713 2,518,975 3,109,298 3,800,847 year 10 3,023,812 3,330,550 3,665,013 4,029,407 4,857,581 5,835, ,477 1,719,039 1,967,271 2,240,122 2,539,636 3,227,564 4,050,455 year 11-15% 2,570,240 2,830,967 3,115,261 3,424,996 4,128,944 4,960,532-1,461,183 1,672,180 1,904,103 2,158,691 2,743,429 3,442,886 year 12-15% 2,184,704 2,406,322 2,647,972 2,911,247 3,509,602 4,216,453-1,242,005 1,421,353 1,618,488 1,834,887 2,331,915 2,926,454 year % 2,359,480 2,622,891 2,912,769 3,231,484 3,965,851 4,848,920-1,341,366 1,549,275 1,780,337 2,036,725 2,635,064 3,365,422 year % 2,548,239 2,858,951 3,204,046 3,586,947 4,481,411 5,576, ,854 1,301,821 1,541,855 1,811,516 2,113,911 2,830,768 3,723,381 year % 2,752,098 3,116,257 3,524,451 3,981,511 5,063,995 6,412, ,260 1,254,707 1,529,363 1,841,408 2,195,181 3,047,509 4,130,628 year 16 2,834,661 3,240,907 3,700,673 4,220,402 5,469,114 7,053, ,797 1,136,551 1,434,740 1,777,681 2,171,095 3,135,512 4,387,894 year 17 2,919,701 3,370,543 3,885,707 4,473,626 5,906,644 7,759, ,471 1,010,176 1,331,658 1,706,094 2,140,889 3,225,881 4,666,212 year 18 3,007,292 3,505,365 4,079,992 4,742,044 6,379,175 8,535, , ,196 1,219,639 1,626,113 2,104,057 3,318,666 4,967,547 year 19 3,097,510 3,645,580 4,283,992 5,026,566 6,889,509 9,388, , ,208 1,098,181 1,537,175 2,060,056 3,413,916 5,294,058 year 20 3,190,436 3,791,403 4,498,191 5,328,160 7,440,670 10,327, , , ,757 1,438,682 2,008,308 3,511,678 5,648,113 year 21 3,286,149 3,943,059 4,723,101 5,647,850 8,035,923 11,360, , , ,815 1,330,005 1,948,195 3,612,000 6,032,312 year 22 3,384,733 4,100,782 4,959,256 5,986,721 8,678,797 12,496, , , ,777 1,210,475 1,879,056 3,714,930 6,449,513 year 23 3,486,275 4,264,813 5,207,219 6,345,924 9,373,101 13,746, ,611 56, ,037 1,079,387 1,800,188 3,820,513 6,902,853 year 24 3,590,864 4,435,405 5,467,580 6,726,680 10,122,949 15,120, ,359 (139,127) 329, ,997 1,710,840 3,928,794 7,395,779 year 25 3,698,589 4,612,822 5,740,958 7,130,280 10,932,785 16,632, ,280 (346,581) 139, ,517 1,610,210 4,039,818 7,932,076 year 26 3,809,547 4,797,334 6,028,006 7,558,097 11,807,408 18,296, ,379 (566,357) (63,906) 609,114 1,497,444 4,153,624 8,515,905 year 27 3,923,834 4,989,228 6,329,407 8,011,583 12,752,000 20,125, ,660 (799,008) (282,123) 423,909 1,371,631 4,270,254 9,151,836 year 28 4,041,549 5,188,797 6,645,877 8,492,278 13,772,161 22,138, ,130 (1,045,108) (515,537) 222,975 1,231,799 4,389,745 9,844,890 year 29 4,162,795 5,396,349 6,978,171 9,001,815 14,873,933 24,352, ,794 (1,305,255) (764,953) 5,330 1,076,913 4,512,131 10,600,585 year 30 4,287,679 5,612,203 7,327,079 9,541,924 16,063,848 26,787, ,658 (1,580,070) (1,031,208) (230,061) 905,870 4,637,444 11,424,986 Total distributions 4,342,164 Starting value is 10% lower + consecutive declines of 15% for two years + no withdrawal from this portfolio for three years Offense sells tickets; Defense wins championships. Paul Bear Bryant, Jr. Offense does sell tickets. Indeed many investors flock to buy shares of stocks that have performed really well. However, if investment success was that simple, earning high returns would be easy. It is not. On the other hand, if you either 1) delay taking distributions (by working longer) and/or 2) take more modest distributions as a percentage of your portfolio value you can safeguard against the risk of principal declines. We recognize that neither of these measures may be easy for many. However, if you distribute 2% less than the 4% in the illustration, it is the same as earning 2% more on the right hand side of all of the tables. That is a great way to relieve pressure on principal balances. So which is it? Is the best strategy to have great offense (earn high returns) or to have great defense (risk management)? Over the course of my career, I have learned that my primary role is not that of the offensive coordinator, but rather that of risk management/defense. My job is to control the elements of risk in client portfolios (e.g. design an appropriate asset allocation) and also to temper emotions of fear and greed that stem from market movements over time. This transition in my thinking has been illuminating and perhaps somewhat surprisingly; I am comforted by the acceptance of the fact that I cannot predict the future. Rather I believe I can help clients prepare for the unknown future with confidence, but also a sense of humility. In other words, my focus is not outperformance each and every day, week, month etc. (or guessing which active managers will exhibit the hot hand). Rather my energy is focused upon avoiding the risks that I believe derail many investors like, market timing, performance chasing, excessive concentration of capital, etc. We are confident that our diversified approach coupled with our vigilance with respect to avoiding high fees and the granddaddy of them all taxes is a sound long-term approach. Furthermore, we believe there are prudent means to position one s portfolio for long-term growth in principal and income but also rainy day funds for when markets perform poorly. Perhaps Michael Jordan said it best. He said, Talent wins games, but teamwork and intelligence wins championships. 6

7 Good News It is not too Late If you have not yet engaged us to advise you on some or all of your financial, planning, investment management and trust needs, but you like our common sense approach, we welcome the opportunity to visit with you. If you believe you are taking too much risk or you are prone to performance chasing, we can help. If you are sitting on excess cash, we can help. We believe successful approaches need not be complicated in order to be effective. Indeed we are confident that our focus on reducing risk through diversification, coupled with avoidance of high investment fees and low tax efficiency will work well for most people over the long term. Therefore if you are a client but you know of family members, neighbors, friends, colleagues etc. that might benefit from our advice, please send them our way. Wayne Gretsky, (aka the Great One ) said, Procrastination is one of the most common and deadliest diseases and its toll on success and happiness is heavy. For those of you who want our help, please know we are pleased, ready, willing and able to serve. Warmest regards and our very best to you and all those who are dear to you in this New Year! W. Richard Jones, CFA Senior Vice President, Investments i JP Morgan, The Agony and the Ecstasy: The Risks and Rewards of a Concentrated Stock Position, page 1 of df *Diversification and strategic asset allocation do not ensure a profit or protect against a loss. Past performance is not indicative of future results. Investing always involves risk and you may incur a profit or loss. No investment strategy can guarantee success. Raymond James makes a market in PG, and is followed by Raymond James Equity Research. Scenarios described above are hypothetical examples for illustrative purposes only, and are provided to illustrate the potential benefits of financial planning. They are not intended to reflect the actual performance of any security. The information contained in this letter do not purport to be a complete description of the securities, markets, or developments referred to in this material. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of W. Richard Jones and not necessarily those of Raymond James. Investments mentioned may not be suitable for all investors. Please note that investment decisions should only be made after a discussion with the appropriate professional about your individual situation. Dividends are not guaranteed and must be authorized by the company's board of directors. 7