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Introduction to Wealth Engineering and how to maximize portfolio returns in the context of the clien\'ts personal cicumstance, goals and risk tolerancy.
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Summit Portfolio Management. © 2009
“Wealth Engineering”Timothy F. Bock
President
Summit Portfolio Management. © 2009
Summit Portfolio Management
• Founded in 1984 by Timothy F. Bock
• S.E.C. Registered Investment Advisor
• State-of-the-Art Strategies- “Wealth Engineering”
• Fee-only Financial Consulting Firm
• Comprehensive Personal Financial Services
• Offices in Los Angeles, Newport Beach, Walnut Creek, and Las Vegas
Summit Portfolio Management. © 2009
Wealth Engineering
• Invest Using Scientific Evidence
• Take Only Appropriate Risks
• Measure Risk and Return
• Coordinate Investing with Financial Planning
• Limit and Control Costs
• Limit Emotional Influence
• Control Security and Fraud Risk
Summit Portfolio Management. © 2009
Fraud Protection
• Ponzi Schemes
• Certain Life Products / Annuities
• Partnerships / Hedge Funds
• Packaged Financial Products
• Commission Based Financial Advisors / Misleading Sales Tactics
• Identity Theft
Summit Portfolio Management. © 2009
Who to TrustWho to Trust
FearFear
GreedGreed
When is Enough, Enough?When is Enough, Enough?
Loss Versus DeclineLoss Versus Decline
Emotional and Psychological Distractions
Claiming LossesClaiming Losses
Sunk CostSunk Cost
Hindsight BiasHindsight Bias
OverconfidenceOverconfidence
Probability vs. PossibilityProbability vs. Possibility
Summit Portfolio Management. © 2009
Risk is Not Bad
• Taking Risk is What Produces Returns
• Understand Risks
• Control Risks
• Measure Risks
• Market Declines are Different Than Losses
• Avoid Uncompensated Risk
Summit Portfolio Management. © 2009
Why Flip a Coin?
Academic Research Provides Many Answers
Summit Portfolio Management. © 2009
Active vs. Passive
• Active Management
The belief that stock prices are often incorrect and can be exploited via market timing or stock picking
• Passive Management
Market mechanisms price securities effectively...Efficient Markets Hypothesis
Summit Portfolio Management. © 2009
Efficient Markets Hypothesis Eugene F. Fama, University of Chicago
• Prices incorporate all available information and expectations
• Current prices are the best estimate of intrinsic value
• Price changes are due to events/news
• Mispricings do occur, but not predictably
Summit Portfolio Management. © 2009
Why Passive Management is Superior
• Competition Makes Capital Markets Efficient
• Concentrated Portfolios Have Higher Risks and Costs, But Not Higher Returns
• Superior Returns are Due to Lower Costs and Less Taxation
• Less Than 1% of Active Managers add Value
• Analyzing Track Records Doesn’t Help
• Forecasting the Future Doesn’t Work
Summit Portfolio Management. © 2009
Predictability of Mutual Funds Returns
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
2002 2003 2004 2005 2006 2007 2008
Percentage of Funds Predictedby Flipping a Coin
Actual Percentage of Funds
Source: Morningstar (May 2009)
Summit Portfolio Management. © 2009
Summit Portfolio Management. © 2009
Structure Determines Returns
96% Structured Exposure to Factors• Market (Beta)• Size – Market Cap• Value/Growth
4% Stock Picking and Market Timing
Summit Portfolio Management. © 2009
Small and Value “Tilts”
Increased Expected Returns
Total Stock
Market
Small
GrowthHigh P/B
ValueLow P/B
Large
Summit Portfolio Management. © 2009
T i m e
I n d e x V a l u e s ( U S D )G r o w t h o f $ 1 . 0 0
0 . 8
4 0 0
1 2 4
1 02 04 0
1 0 02 0 0 1 8 9 . 1 4 4
3 2 . 3 2 7
D e c1 9 6 9
M a y2 0 0 9
D e c1 9 7 5
D e c1 9 8 0
D e c1 9 8 5
D e c1 9 9 0
D e c1 9 9 5
D e c2 0 0 0
S & P 5 0 0G l o b a l V a l u e S t o c k s B l e n d
Summit Portfolio Management. © 2009
I n t e r v a l : 6 0
R e t u r n V a l u e s6 0 M o n t h R o l l i n g R e t u r n s
- 1 0 . 0 0 %
4 0 . 0 0 %
0 . 0 0 %
1 0 . 0 0 %
2 0 . 0 0 %
3 0 . 0 0 %
1 . 9 1 %- 1 . 9 9 %
D e c1 9 7 4
M a y2 0 0 9
D e c1 9 8 5
D e c1 9 9 5
S & P 5 0 0P o r t f o l i o 1 0 0 C
Summit Portfolio Management. © 2009
Fixed Income Strategies
• Bonds Should Provide Income and Safety
• Limit Term Risk: Optimal 1-3 Years
• Limit Credit Risk: Govt. and Inv. Grade Only
• Currency Risk? High Volatility, Uncertain Benefit
• Index Funds Better Solution than Active Funds or Individual Bonds
Summit Portfolio Management. © 2009
R i s k ( S T D )
R e t u r n ( G M )S e p t e m b e r 1 9 7 1 - M a y 2 0 0 9
R i s k v s . R e t u r n
2 . 0 0 % 1 2 . 0 0 %4 . 0 0 % 6 . 0 0 % 8 . 0 0 % 1 0 . 0 0 %7 . 2 0 %
8 . 7 0 %
7 . 4 0 %
7 . 6 0 %
7 . 8 0 %
8 . 0 0 %
8 . 2 0 %
8 . 4 0 %
H i g h Y i e l d B o n d s
I n t e r . G o v t . B o n d s
L o n g T e r m G o v t . B o n d s
S h o r t T e r m G o v t . B o n d s
S h o r t T e r m B o n d s - S P M B l e n d
Summit Portfolio Management. © 2009
Rebalancing
• Maintains Desired Risk Level
• Buy Low, Sell High
• Avoids Timing Uncertainty
• Time Based or % Based
• Avoids Emotional Distraction
Summit Portfolio Management. © 2009
Dimensional Fund Advisors
• Academically Based Research
• Created Many Firsts in “Index” Funds
• Passive Management, Added Returns from Small and Value Companies
• Fierce Attention to Keeping Costs Low
• #1 Fund Family for Lending Revenue
• Advisor-Only Network
Summit Portfolio Management. © 2009
• High Quality Short-Term Bonds
• Fixed Annuities
• CDs
• Global Value Stocks
• Real Estate
• Private Equity and Hedge Funds
Where is Your Portfolio?
Summit Portfolio Management. © 2009
Timely Opportunities
• Is Your Equity Exposure Appropriate?
• Value Stocks Tend to Lead Growth Out of Recessions: From March 9th Low:
S&P 500: 40.74%, USV:58.50%, DC: 61.34%, EM: 79.14%
• Limit Term Risk on Bonds
• Portfolio Analysis: $500-$5,000
• Harvest Tax Losses
Summit Portfolio Management. © 2009
7 Steps to a Better Investment Experience
• Manage Your Investment Risks, Don’t Speculate
• Passive Management Means: Lower Costs, Less Taxation, Less Risk, Less Uncertainty and Better Returns
• Focus on Return Sources: Market Cap, Relative Value
• Control Risks: Diversification of Securities, Countries
• Control Emotional and Psychological Influences
• Get Expert Guidance if You’re Not an Expert
Summit Portfolio Management. © 2009
“Wealth Engineering”Timothy F. Bock
PresidentToll Free: 800.683.5800 [email protected]
www.SummitPortfolio.com
Summit Portfolio Management. © 2009
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
Investor Average Equity Treasury Note One-Year S&P 500 Index
The Average Investor’s Mutual Fund Return Compared to Indexes
20 Years – 1989 to 2008
Sources: Dalbar QAIB Study 2009, Ibbotson
Summit Portfolio Management. © 2009