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2014Second Quarter-in-Review
© 2014 LWI Financial Inc. All rights reserved. Unauthorized copying, reproducing, duplicating, or transmitting of this material is prohibited. LWI Financial Inc. (“Loring Ward”) is an investment adviser registered with the Securities and Exchange Commission. Securities transactions are offered through its affiliate, Loring Ward Securities Inc., member FINRA/SIPC. B 14-059 (Exp. 07/16)
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This Quarter brought to you by the numberNumber of S&P 500 moves greater than 1% since April 16thChange on the Dow Jones Index on April 24thThree of them following the one and seven in the DowThere were nine 0s behind the two which the
LA Clippers NBA team was bid forNumber of World Cup Championships the
US Men’s National Team hasNumber of the nine asset classes we track
which had negative returns in Q2
Source: Yahoo! Finance, NBA.com, FIFA.com
Volatility at lowest level since 2007VIX indexJan 1, 2000 – Jun 30, 2014
Source: Yahoo! Finance, VIX Index. Indexes are unmanaged baskets of securities that are not available for direct investment by investors. Index performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. All investments involve risk, including loss of principal.
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U.S. and International Market IndexesApril 1, 2014 through June 30, 2014
Market Returns
Global 1-5 Year Bonds
+0.6%
BONDSU.S. STOCKS
Emerging MarketsStocks
+6.6%
Int’l Small Stocks
+3.2%
Int’l Value Stocks
+5.2%
U.S. REIT Stocks
+7.2%
U.S. Small Cap
Stocks
+2.1%
U.S. Value Stocks
+5.1%
U.S. Large Cap
Stocks
+5.2%
INTERNATIONAL STOCKS
U.S. Gov/ Credit 1-3
Year Bonds
+0.4%
Source: Morningstar Direct 2014. Market segment (Index representation) as follows: U.S. Large Cap (S&P 500 Index), U.S. Value Stocks (Russell 1000 Value Index), U.S. Small Company Stocks (Russell 2000 Index), U.S. Real Estate Market (Dow Jones U.S. Select REIT Index), International Developed Value (MSCI World Ex USA Value Index (net div.)), International Small (MSCI World Ex USA Small (net div.)), Emerging Markets (MSCI Emerging Markets Index (net div)), Global Bonds (Citi WGBI 1-5 Yr Hdg USD), US Bonds (BofA ML Corp & Govt 1-3 Yr TR). Indexes are unmanaged baskets of securities that are not available for direct investment by investors. Index performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. All investments involve risk, including loss of principal. Foreign securities involve additional risks, including foreign currency changes, political risks, foreign taxes, and different methods of accounting and financial reporting. Fixed income investments are subject to interest rate and credit risk.
Annualized for 5 and 10 Year Periods
ONEYear 24.6 23.8 23.6 13.3 26.9 29.5 14.3 1.8 1.2
FIVEYears 18.8 19.2 20.2 23.8 11.5 15.3 9.2 1.9 1.8
TEN Years 7.8 8.0 8.7 9.4 7.1 8.7 11.9 3.2 3.0
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Source: Morningstar Direct 2014. 5 and 10 year periods are annualized. Asset allocations and index portfolio returns are for illustrative purposes only and do not represent actual performance. Stocks represented by MSCI World IMI Index (net div.) and Bonds represented by 50% Citi World Government Bond Index 1-5 Yr Hedged and 50% Bank of America Merrill Lynch US Treasury/Agency 1-3 Yr. Globally diversified portfolios rebalanced annually. Hypothetical value of $1 and kept invested through June 30, 2014 from the respective dates. Assumes reinvestment of income and no transaction costs or taxes. This is for illustrative purposes only and not indicative of any investment. Indexes are unmanaged baskets of securities that are not available for direct investment by investors. Index performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Stock investing involves risks, including volatility (up and down movement in the value of your assets) and loss of principal.
Diversified Portfolios Review
Asset Class
Qtr1
Year5
Year10
Year10 Year Volatility
100% Stocks
4.7 24.5 15.5 7.6 16.3
75-25 3.6 18.8 12.2 7.0 11.9
50-50 2.6 13.0 8.7 6.0 7.7
25-75 1.5 7.2 5.2 4.6 3.7
100% Bonds
0.4 1.3 1.6 3.0 1.2
Growth of WealthJul 2004 – Jun 2014
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Historical US Bull and Bear MarketsS&P 500 Index, Jan 1926 – Jun 2014Defined as trend of +/- 20%
Source: Morningstar Direct 2014. Market segment (Index representation) as follows: U.S. Large Cap (S&P 500 Index). Indexes are unmanaged baskets of securities that are not available for direct investment by investors. Index performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. All investments involve risk, including loss of principal. Foreign securities involve additional risks, including foreign currency changes, political risks, foreign taxes, and different methods of accounting and financial reporting. Fixed income investments are subject to interest rate and credit risk.
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Investment Perspectives
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99
10
Do you know the difference between a Temporary Decline
and a Permanent Loss?
DEVASTATION
DEFLATION
CONFISCATION
CAPITULATION
INFLATION
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• A loss due to erosion of purchasing power
• High probability
Inflation
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Reduction in Purchasing Power
Source: Consumer Price Index, Morningstar Direct 2014. Hypothetical reduction in purchasing power when starting with $1,000,000 on January 1, 1967 and 1984 over following 30 years. This is for illustrative purposes only and not indicative of any investment. Past performance is not a guarantee of future results.
Starting with $1,000,000, actual inflation
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Pur
chas
ing
Pow
er
Time
1
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Inflation Risk: Will Returns Keep Pace with Inflation?Annualized Returns 1926 to 2013
Source: Morningstar Direct. Annualized returns before and after inflation. Past performance is no guarantee of future results. Assumes reinvestment of income and no transaction costs or taxes. This is for illustrative purposes only and not indicative of any investment. Stocks are represented by the CRSP 1-10 Index; Bonds are represented by the Ibbotson/SBBI Long-Term Government Bonds Index; Inflation is represented by CPI. Gold represented by London Fix Gold PM PR index. Indexes are unmanaged baskets of securities that are not available for direct investment by investors. Index performance does not reflect the expenses associated with the management of an actual portfolio. Stock investing involves risks, including volatility (up and down movement in the value of your assets) and loss of principal. Investors with time horizons of less than five years should consider minimizing or avoiding investing in common stocks. Bonds are subject to market and interest rate risk. Bond values will decline as interest rates rise, issuer's creditworthiness declines, and are subject to availability and changes in price. The price of gold may be affected by global gold supply and demand, currency exchange rates and interest rates. Investors should be aware that there is no assurance that gold will maintain its long-term value in terms of purchasing power in the future.
0%
2%
4%
6%
8%
10%
12%
0.5%
AfterInflation
3.5%
BeforeInflation
Cash
5.5%
BondsBefore
Inflation
2.5%
AfterInflation
4.7%
GoldBefore
Inflation
1.7%
AfterInflation
9.9%
StocksBefore
Inflation
6.7%
AfterInflation
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Understanding the TradeoffsPurchasing Power of $1
Source: Morningstar Direct 2014. Market segment (Index representation) as follows: Bonds (SBBI US Long Term Government Bond), Stocks (CRSP 1-10 Index), Gold (London Fix Gold PM PR). Indexes are unmanaged baskets of securities that are not available for direct investment by investors. Index performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Stock investing involves risks, including increased volatility (up and down movement in the value of your assets) and loss of principal. Fixed income investments are subject to interest rate and credit risk. The price of gold may be affected by global gold supply and demand, currency exchange rates and interest rates. Investors should be aware that there is no assurance that gold will maintain its long-term value in terms of purchasing power in the future.
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Inflation
• High probability
• Avg 10 year change has been 33%
• Help protect through diversification and stock exposure
Source: Morningstar Direct 2014. Inflation defined as Consumer Price Index.
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Capitulation
• A loss due to investor behavior
• High probability
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Past performance is no guarantee of future results. This is for illustrative purposes only. © 2014 Morningstar. All Rights Reserved.
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Hot-Hand Fallacy: Chasing Fund PerformanceWealth versus Cash Flows 2004 - 2013
Growth of $10,000
Cash Flows
–$3
$0
$1
$2
$3
$4
$5
$6
–$1
$0
$10
$20
$25
$40
$45
$35
$30
$15
$5 –$2
20082004 2005 2006 2007 2009 2010 2011 2012 2013
BIL
LIO
NST
HO
US
AN
DS
18 For illustrative purposes only
The Cycle of Market EmotionsEmotion often leads to trying to time the markets.
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Source: Morningstar Direct 2014. Past performance is no guarantee of future results. Assumes reinvestment of income and no transaction costs or taxes. This is for illustrative purposes only and not indicative of any investment. Stocks are represented by the CRSP 1-10 Index; Bonds are represented by the Ibbotson/SBBI Long-Term Government Bonds Index; Inflation is represented by CPI. Indexes are unmanaged baskets of securities that are not available for direct investment by investors. Index performance does not reflect the expenses associated with the management of an actual portfolio. © 2013 Morningstar. All Rights Reserved.
When shown a distribution of one-year returns, investors allocated 40% to stocks.
Stocks40% Bonds
60%
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–20%
0%
20%
40%
60%
80%
100%
120%
160%
140%
–60%
-40%
1 Year Rolling Period Returns1926 - 2013
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Source: Morningstar Direct 2014. Past performance is no guarantee of future results. Assumes reinvestment of income and no transaction costs or taxes. This is for illustrative purposes only and not indicative of any investment. Stocks are represented by the CRSP 1-10 Index; Bonds are represented by the Ibbotson/SBBI Long-Term Government Bonds Index; Inflation is represented by CPI. Indexes are unmanaged baskets of securities that are not available for direct investment by investors. Index performance does not reflect the expenses associated with the management of an actual portfolio. © 2013 Morningstar. All Rights Reserved.
Stocks90%
Bonds10%
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30 Year Rolling Period Returns1926 - 2013
–20%
0%
20%
40%
60%
80%
100%
120%
160%
140%
–60%
-40%
When shown a distribution of 30-year returns, investors allocated 90% to stocks.
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Capitulation
• A loss due to investor behavior
• High probability
• Help protect through diversification and working with a financial advisor
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Confiscation
• Loss due to seizure(also includes taxes)
• Low to medium probability
• Help protect through diversification and tax management
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• Loss due to decline in prices
• During Great Depression prices fell by 26%
• Since 1926 only 6% of 10 year rolling periods have been deflationary
• Help protect through cash, bonds and diversification
Deflation
Source: Morningstar Direct 2014. Fixed income securities are subject to interest rate risk because the prices of fixed income securities tend to move in the opposite direction of interest rates. In general, fixed income securities with longer maturities are more sensitive to these price changes and may experience greater fluctuation in returns.
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Devastation
• Loss due to disaster
• Low probability
• Help protect through diversification and insurance
Diversification neither assures a profit nor guarantees against loss in a declining market.
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The Risks
Event Likelihood Protection Potential
DevastationInsurance, geographical diversification
Deflation Cash, bonds, diversification
ConfiscationTax management, geographical diversification
CapitulationWork with a financial advisor, diversification
InflationStocks, short term bonds, diversification
1
4
5
1
2
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“How do we know when irrational exuberance has unduly escalated asset values?”Fed Chairman Alan Greenspan, 1996
Source: Morningstar Direct 2014. Market segment (Index representation) as follows: U.S. Large Cap (S&P 500 Index). Indexes are unmanaged baskets of securities that are not available for direct investment by investors. Index performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. All investments involve risk, including loss of principal. Foreign securities involve additional risks, including foreign currency changes, political risks, foreign taxes, and different methods of accounting and financial reporting. Fixed income investments are subject to interest rate and credit risk.
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Standardized Performance Data and Disclosures
Average Annual Total Returns (%) 3 Mo 1 Yr 5 Yr 10 Yr Since Inception
S&P 500 TR 5.23 24.61 18.84 7.78 10.67 Jan-70
Russell 1000 Value TR USD 5.10 23.81 19.23 8.03 12.56 Dec-78
Russell 2000 TR USD 2.05 23.64 20.21 8.70 12.00 Dec-78
DJ US Select REIT TR USD 7.15 13.27 23.76 9.41 9.36 Dec-86
MSCI World Ex USA Value NR USD 5.24 26.91 11.54 7.09 12.01 Dec-74
MSCI World Ex USA Small Cap NR USD 3.23 29.55 15.32 8.74 9.63 Dec-00
MSCI EM NR USD 6.60 14.31 9.24 11.94 10.97 Dec-98
Citi WGBI 1-5 Yr Hdg USD 0.58 1.84 1.89 3.25 5.87 Jan-85
BofAML US Corp&Govt 1-3 Yr TR USD 0.37 1.25 1.80 2.97 5.31 Jun-86
Data as of 6/30/14
Source: Morningstar Direct 2014. Indexes are unmanaged baskets of securities that are not available for direct investment by investors. Index performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. All investments involve risk, including loss of principal. Foreign securities involve additional risks, including foreign currency changes, political risks, foreign taxes, and different methods of accounting and financial reporting. Fixed Income investments are subject to interest and credit risk.
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