NEED FOR PORTFOILO

WEALTH INDICES OF INVESTMENTS IN THE US CAPITAL MARKETS

(YEAR-END 1925 =$ 1.00)

INFLATION-CUMMULATIVE INDEX

INFLATION-RATES OF CHANGE

U.S. TREASURY BILLS- RETURN INDEX

U.S. TREASURY BILLS-RETURNS

TREASURY BILLS

• Stability of principal value is the great virtue of T-bills. But the price paid for this advantage is the rate of return that is only marginally ahead of inflation

• The compound annual return from T-bills over the 80-year period was 3.7% compared with compound annual inflation of 3% over the same period

• What if the returns are adjusted for tax rate• Does it mean that T-bills are not worth investing?

Beware of money illusion while investing in short –term instruments

TREASURY BILLS

Period Rate of return (average annual)

Marginal tax rate

Average Inflation rate

Effective return

1979-1981 12.1% 30% 11.5 -3.5%

1982-1984 9.7% 30% 3.9 3.0%

Which one is better? Be watchful of money illusion!Short-term instruments may erode your wealth

TREASURY BILLS

• Inflation may erode the purchasing power of your money invested in short term instruments.Example:A widow aged 54 with 30-years of life expectancy invests her money in 4% CD interest rate. The amount available for investment is Rs. 2500,000 With an average inflation of 3% during the period how much her wealth grow to at the end of the period if she consumes the entire yearly interest income?

INFLATION RISK

LONG-TERM GOVERNMENT BONDS: RETURN INDICES

LONG-TERM GOVERNMENT BONDS: RETURNS

LONG-TERM GOVERNMENT BONDS: YIELDS

COMPARATIVE BOND PERFORMANCE

INTERMEDIATE TERM GOVT. BONDS: RETURN INDICES

INTERMEDIATE TERM GOVT. BONDS: RETURNS

INTERMEDIATE TERM GOVT. BONDS: YIELDS

LONG-TERM CORPORATE BONDS: RETURN INDEX

LONG-TERM CORPORATE BONDS: RETURN INDEX

LARGE COMPANY STOCKS

LARGE COMPANY STOCKS

LARGE COMPANY STOCKS

SMALL COMPANY STOCKS

SMALL COMPANY STOCKS

CONSOLIDATED RESULTS (1926-2005)

EQUITY RISK PREMIUM

COMPARATIVE RETURNS

COMPARATIVE RETURNS

WHY PORTFOLIO

“Let every man divide his money into three parts, and invest a third in land, a third in business, and a third let him keep in reserve”

- Talmud (c. 1200 BC-500 AD)

BEAR MARKET PERFORMANCE (MARCH 24, 2000-OCTOBER 9, 2002)

ASSET CLASS CUMULATIVE TOTAL RETURN *

U.S. Bonds (taxable, high quality, Intermediate term) +29%

U.S. Stocks (large company) -47%

Real Estate Securities (REITs) +34%

ASSET ALLOCATION STRATEGY

1/3 U.S. Bonds-22% **

2/3 U.S. Stocks

TALMUD STRATEGY

1/3 U.S. Bonds

+5% **1/3 U.S. Stocks

1/3 Real Estate Securities

*With full reinvestment of income. Rounded off to nearest percent.** “Buy and hold” performance without periodic rebalancing. Rounded off to nearest percent.

PORTFOLIO

• One third allocated to fixed income mitigates the volatility risk inherent in two-thirds allocated to equity investments.

• Diversification across equity asset classes with dissimilar patterns of returns mitigate downside risk without resorting to diversification into asset classes with lower expected returns

• Multiple-asset-class investing is a smart strategy