November 6, 2008 Dr. David Porter. Where Does This Year Fit in a Historical Perspective? Photo by Arne Naevra Dr. David PorterTSA Presentation 11/06/2008

November 6, 2008Dr. David Porter

Where Does This Year Fit Where Does This Year Fit in a Historical in a Historical Perspective?Perspective?

Photo by Arne NaevraDr. David Porter

TSA Presentation 11/06/2008

One of the most volatile in historyOne of the biggest down years in history

2

DJIA Early-Mid October DJIA Early-Mid October 2008 2008

Dr. David PorterTSA Presentation 11/06/2008 3

Annual Returns S&P 500Annual Returns S&P 5001926-2007

2006

Up Years 59

2004

Down Years

23

2000

2007

1988

2003

1997

1990

2005

1986

1999

1995

2008 down 39.4% as of 10/24

1981

1994

1979

1998

1991

1977

1993

1972

1996

1989

1969

1992

1971

1983

1985

1962

1987

1968

1982

1980

1953

1984

1965

1976

1975

1946

1978

1964

1967

1955

2001

1940

1970

1959

1963

1950

1973

1939

1960

1952

1961

1945

2002

1966

1934

1956

1949

1951

1938

1958

1974

1957

1932

1948

1944

1943

1936

1935

1954

1931 1937

1930

1941

1929

1947

1926

1942

1927

1928

1933

-60 -50 -40 -30 -20 -10 0 10 20 30 40 50 60 70 80


Source: Ibbotson SBBI 2008 Yearbook

Distribution of Returns Distribution of Returns S&P 500S&P 500

1926-2006

As of 10/24 the S&P 500 is down 39.4%. Based on history, there is only about a 0.5% chance of seeing a down year like the one we are seeing in 2008


Source: Investments: Bodie, Kane & Marcus 2008

What Does it Mean for What Does it Mean for Investors?Investors?

Maintain a long-term focusMarket timing is very difficult

Stay DiversifiedHistory suggests there is light at the

end of the tunnelRecheck your risk preferencesFollow a disciplined investment

approachDr. David Porter

TSA Presentation 11/06/2008 6

“Trading is Hazardous to Your Wealth” (Barber and Odean: JF 2000, pp.773-806, data 1991-1996 & 66,465 trading accounts)

20% of accounts with highest portfolio turnover had average returns 7% less than 20% with lowest turnover

Market timers must be incredibly nimble

TSA Presentation 11/06/2008 Dr. David Porter 7

Market Timing is Very Market Timing is Very DifficultDifficult

Source: University of Michigan, data from August 12, 1982 to August 25, 1987.


Stock Picking is Very Stock Picking is Very DifficultDifficult

Source: Investments: Bodie, Kane & Marcus 2008

21 of 37 years the index beat the professionally managed equity funds

Stay Diversified Stay Diversified (Indexes)(Indexes)


Source: Callan Associates 2007

Stay Diversified Stay Diversified (Sectors)(Sectors)


Source: Wells Fargo & Company 2006

TSA Presentation 11/06/2008 Dr. David Porter

Stay Diversified Stay Diversified (International)(International)

World Stock Market

Capitalization (Developed Economies)

2007: 39.1 trillion

(US$)


11

Correlation between S&P Correlation between S&P 500 and International 500 and International

StocksStocks



The lower the correlation, the better the diversification possibilities. The importance of international diversification has been declining since the late 1990’s but you still need to diversify internationally.

through October 10, 2008

If History Repeats Itself: If History Repeats Itself: There is Light at the End There is Light at the End of of the Tunnel the Tunnel


Source: Wall Street Journal Oct 11-12

Red indicates persistent bear

markets

Recheck Your Risk Recheck Your Risk PreferencesPreferences

• http://moneycentral.msn.com/investor/calcs/n_riskq/main.asp


TSA Presentation 11/06/2008 Dr. David Porter

Annual Returns Annual Returns ComparisonComparison

15

Different Asset Different Asset AllocationsAllocations

1My source: www.troweprice.com. Their source: Ibbotson Associates. All rights reserved. Used with permission. Based on actual performance for the 50 years ending December 31, 2006. This information is shown for illustrative purposes only and is not intended to represent an investment in any T. Rowe Price fund or banking product. Past performance cannot guarantee future results. Figures include changes in principal value and reinvested dividends and assume the same asset mix is maintained each year. The historical performance data uses the following indices to represent the 50-year categories from 1957 to 2006: Stocks - S&P 500 Index; Bonds - U.S. Gov't Intermediate Bond Index; Cash Reserves - 30 Day U.S. Treasury Bills



1Source: www.troweprice.com.











The Difference Between The Difference Between Average and Geometric Average and Geometric

Average ReturnsAverage ReturnsYou invest $1,000You lose 10% in year 1, then gain 10% in year

2Your average annual return is:

If your average return is zero you should still have $1,000 but you don’t – you only have $990

Your geometric average is:The larger the returns variance, the more the

average return overstates your actual return

%0

2

%10%10

%5013.011.19.0 21


Total Returns 1926-2007Total Returns 1926-2007

SeriesGeometric Mean

Arithmetic Mean

Standard Deviation

Small Company Stocks

12.45% 17.1% 32.6%

S&P 500 10.36% 12.3% 20.0%

Long-Term Gov’t Bonds

5.47% 5.8% 9.2%

Intermediate-Term Gov’t Bonds

5.3% 5.5% 5.7%

T-Bills 3.73% 3.8% 3.1%



S&P 500 to Small Companies: S&P 500 to Small Companies: for each 1% gain in return you need 6.02% additional riskLT Gov’t Bonds to S&P 500:LT Gov’t Bonds to S&P 500: for each 1% gain in return you need 2.2% additional risk

Inflation Adjusted T-Bill Inflation Adjusted T-Bill ReturnsReturns



$1.00

Real Total Return Index

Nominal Total Return Index

Follow a Disciplined Follow a Disciplined Investment ApproachInvestment Approach

Invest a Little at a TimeMost common investment technique since most

people are paid on a regular basis (weekly, bi-weekly, monthly)

DCA is inferior to lump sum investing overall but It removes the “when to invest” decision It makes us save It makes us save so we don’t consume our

retirement money before we retire

RebalanceExamine your portfolio at least annually and

rebalance if necessaryDr. David Porter

TSA Presentation 11/06/2008 24

Picking Funds from TSA Picking Funds from TSA OfferingsOfferings

Lots of information and links available at the TSA’s web site

Almost 400 fund choices of most risk levelsThe “Selected Investment Returns” file lists the top

returns (based on five years) in many of the most commonly chosen categories. For example:


Risk is just as important as return

Matching funds by category helps match risk but it is insufficient

Use the internet to further research the offeringsMorningstar.com has a free website that has

excellent informationMorningstar uses geometric returns after expensesMorningstar uses several different risk measuresMorningstar has lots of definitions for stuff you

might not be familiar with (e.g. moderate allocation)

Picking Funds from TSA Picking Funds from TSA OfferingsOfferings


What Looks the Same What Looks the Same Can be Very DifferentCan be Very Different

Wells Fargo 2010 fund (-17.62 YTD 10/24)

Oppenheimer 2010 fund (-38.45 YTD 10/24)

STNRX

OTTAX


1Source: www.morningstar.com.

Why Start Now?Why Start Now?Warren Buffett wrote in the New York Times 10/17 that

he is now deploying his cash hoard into US stocks."In the near term, unemployment will rise, business

activity will falter and headlines will continue to be scary,"

"A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful," said Buffett. "And most certainly, fear is now widespread, gripping even seasoned investors."

"Fears regarding the long-term prosperity of the nation's many sound companies make no sense," wrote Buffett. "Most major companies will be setting new profit records 5, 10 and 20 years from now.”

"Bad news is an investor's best friend," Buffett said. "It lets you buy a slice of America's future at a marked-down price."


Documents

November 6, 2008 Dr. David Porter. Where Does This Year Fit in a Historical Perspective? Photo by Arne Naevra Dr. David PorterTSA Presentation 11/06/2008