Investment & Portfolio Strategy

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1 Ivestmet & Portfolio Strategy Five Threats to Your Retiremet September 213 Thikig about retiremet is o loger a future evet for may Americas; most recogize the eed for careful plaig throughout their workig years. While it is a positive that Americas are expected to live loger, this ca add to the already dautig challeges of fudig a comfortable retiremet. With the help of a PNC Wealth Maagemet advisor, ivestors ca map out a course for meetig their fiacial goals. This process ofte etails a ivestmet objective of savig ad of ivestig a portfolio desiged to help meet idividual cash flow eeds i retiremet while preservig capital ad maagig risk. We have writte several times about differet (yet ot mutually exclusive) methods of ivestig for retiremet (see PNC Wealth Maagemet s May 213 white papers, Retiremet: Total Retur ad Retiremet: Icome Floor), which provide isights o how ivestors may seek to achieve their stated objectives. With the goal of ivestig for retiremet i mid, we wat to address five threats to retiremet of which a ivestor should be cogizat. iappropriate asset allocatio; higher iterest rates; loss of purchasig power (fiacial repressio); risig health-care costs (private ad public); ad chages i et worth. What follows is a discussio of these risks ad how we believe ivestors ca seek to mitigate them. E. William Stoe, CFA, CMT Maagig Director, Ivestmet & Portfolio Strategy Chief Ivestmet Strategist Marsella Martio Seior Ivestmet Strategist Michael Zoller Ivestmet Strategist Iappropriate Asset Allocatio Selectig a appropriate log-term strategic asset allocatio that matches a ivestor s goals, risk tolerace, ad ivestmet holdig period is vital to maagig fuds set aside for retiremet. I practice, this process takes a sigificat amout of time for cliets ad fiacial advisors to develop a uderstadig ad to pla. This is time well spet beig too coservative or too aggressive could likely prevet a ivestor from meetig goals withi the appropriate time period. It was ot that log ago that a fairly low-risk portfolio could have a expected real retur high eough to support a relatively safe 3-4%-per-year drawdow. However, the recet exteded low-iterest-rate eviromet, aided by Federal Reserve (Fed) policy actios, has made it much more difficult for ivestors to pc.com PNWI9113

2 Five Threats to Your Retiremet eve keep pace with iflatio while maitaiig a low-risk profile. Thus, positioig a portfolio too coservatively ca pose a threat to the ivestor s goals, sice the goal for essetially all retirees is to maitai or better yet grow purchasig power, ad a toocoservative positio ca erode purchasig power. Who does ot wat to keep or eve improve their stadard of livig i retiremet? Oe lesso leared from the fiacial crisis ad subsequet Great Recessio is the importace of a well-balaced portfolio that icludes a diversified mix of asset classes. Durig this period, ivestors flocked to fixed-icome, drive by a variety of reasos, icludig preservatio of capital ad assurig future cash eeds could be met. Lookig at the flow of assets ito differet asset classes, the so-called flight to safety is clear (Chart 1). However, it is also importat to recogize the cosequeces of beig too coservative i retiremet plaig. Usig a exteded time series of historical returs for the PNC Wealth Maagemet asset allocatio profile (Chart 2), it has bee demostrated that over ay rollig 1-year period, takig less market risk has kept real returs tempered, ad we believe it could eve result i drawig dow more pricipal tha origially aticipated durig retiremet. This is highlighted further by lookig at the 1-year Treasury yield compared with the U.S. Cosumer Price Idex (Chart 3, page 3). With a 1-year Treasury yield aroud 2.8% it's ulikely a Treasury portfolio will yield a positive real retur i the curret eviromet with log-term iflatio i the Uited States averagig a little less tha 3%. Thus, the cost of safety is extraordiarily high. Chart 1 Net Mutual Fud Flows by Type Billios of Dollars YTD 213 Total: 28-6/13 1,2 1, $93 -$576 -$496 Emergig Domestic Equity Total Equity Markets Equity Source: Strategas, PNC Wealth Maagemet $1,16 Fixed Icome Chart 2 Historical Returs ad Rage of Returs by Asset Allocatio Profile (Percetage Aual Returs, ) -43.3% -35.6% -29.6% Highest 1-Yr. Rollig -23.4% Highest 1-Yr. Geometric Mea -17.1% Lowest 1-Yr. Rollig Lowest 1-Yr. Aggressive -1.4% Growth Balaced Moderate Coservative Preservatio -6.9%.4% 1.6% 2.8% 9.8% 9.3% 8.7% 8.1% 17.2% 16.3% 15.7% 15.% 2.1% 7.4% 3.8% 11.3% 17.7% 5.3% 1.9% 26.7% 29.2% 37.% 44.5% 54.% -6% -4% -2% % 2% 4% 6% Source: Ibbotso Associates, PNC Wealth Maagemet 2

3 Five Threats to Your Retiremet Chart 3 1-Year Treasury Yield versus Iflatio 14 1-Year Less Year-over-Year Chage i CPI 12 1-Year Less Log-Ru 1 Average CPI Source: Bureau of Labor Statistics, Bloomberg L.P., PNC Wealth Maagemet Percet Forecastig returs for differet asset allocatios over a ivestor s ivestmet holdig period likely provides a picture that helps frame expectatios ad thus allows for decisio makig. Beig too coservative with a asset allocatio exposes the ivestor to the risk of a egative real retur over the medium to log term (the cost of beig too coservative). Coversely, there also is a risk of beig too aggressive, puttig at risk capital that may eed to be draw upo i the earer term. Sice accurately determiig the short-term movemet of stocks is ulikely, we argue that ivestors should focus o what is kowable ad cotrollable. Whe determiig their asset allocatio, ivestors should focus o their: goals; risk tolerace; expected liabilities; expected cash iflows; ivestmet holdig period; ad persoal situatio. Each of PNC Wealth Maagemet s six asset allocatio profiles (Table 1) differs from the ext i the stock/bod/cash weightig by about 15-2%. These icremets are just eough to result i materially differet risk ad retur characteristics for each asset allocatio profile. They are desiged to miimize gaps or redudacies i the risk/retur spectrum. The impact of these icremets is for a variace of a little more tha.5% i historical retur. The risk spectrum has larger gaps i terms of worst oe-year returs due to the large variability of oe-year stock returs, but the worst 1-year umbers are much more cotrolled. Historically, eve the most coservative of the asset allocatios has outpaced iflatio, o average (Chart 2, page 2). Table 1 PNC Wealth Maagemet Asset Allocatio Profiles Preservatio Coservative Moderate Balaced Growth Aggressive Stocks 15.% 35.% 5.% 65.% 8.% 1.% Bods Cash Total 1.% 1.% 1.% 1.% 1.% 1.% Source: PNC Wealth Maagemet Importatly, with the high share of cash i the preservatio portfolio ad limited market risk, it is ulikely that this strategy will have a positive real retur over the medium term, give the low omial yields o safer assets. Accordig to our calculatios, over the 12 moths eded Jue 3, 213, cash retured a hair over %; bods (Barclays U.S. Aggregate Idex) had a capital loss of.69% due to risig yields; while stocks (S&P 5 ) retured a sharply higher 2.6%. All told, a portfolio of 55% cash, 3% Barclays U.S. Aggregate, ad 15% S&P 5 would have retured about 2.7% over the 12 moths. Although outpacig iflatio over that 12-moth period, it is ot too difficult to imagie a sceario i which the capital appreciatio of stocks fails to make up 3

4 Five Threats to Your Retiremet Table 2 Log-Term Govermet Bod* Total Returs Capital Icome Total Decade Appreciatio Retur Retur 193s 1.9% 3.% 4.9% 194s s s s s s s to 7/31/ *Ibbotso Associates Log-Term Govermet Bod Idex Source: Ibbotso Associates, PNC Wealth Maagemet for the poor price appreciatio of bods ad the scat yields of cash. This expectatio for more restraied returs from bods is i the cotext of history; capital appreciatio of log-term govermet bods has rarely if ever bee this strog (Table 2). Higher Iterest Rates Followig the fiacial crisis ad subsequet Great Recessio, the Uited States has bee i a exteded period of low short-term iterest rates. The Fed-led recovery has bee a importat variable i recet years, cotributig to the ivestmet ladscape. Assistace by the Fed i terms of moetary policy was always iteded as temporary; however, ad as the ecoomy cotiues to slowly stregthe, realistic expectatios cotiue to mout that the low-iterest-rate party could be drawig to a ed. The Fed is ot plaig for rates to rise meaigfully aytime soo. Noetheless, the rise i iterest rates cotiues to be a evetuality, eve though we do ot expect a steep rise i the ear term. The log-term view of iterest rates is a importat part of the retiremet ivestig equatio. Facig the evetual rise i log-term iterest rates, ivestors should evaluate their portfolios for this ad other factors. Commodity Idex U.S. Credit U.S. Treasury: U.S. TIPS U.S. Corporate High Yield EM USD Aggregate U.S. Treasury 1-17 Year Muicipal Bod U.S. Aggregate It is importat to look at all asset classes potetial reactio durig times of higher rates. I particular, we take a momet to discuss fixed icome. Flow-of-fuds data suggest that ivestors have swarmed to fixed icome i recet years i respose to the fiacial ucertaity stemmig from the fiacial crisis. This demostrates the importace of assessig asset risk as bod portfolios have grow. We believe fixed-icome ivestors ca, with prudece, better maage risks through a logterm approach to ivestig ad strategic diversificatio (Chart 4). Agai we remid ivestors of the importace of fixed icome to portfolios for preservatio of capital, for icome, ad for low correlatios of returs to stock returs, to ame just a few cosideratios. Chart 4 Correlatios of Barclays Aggregates to S&P 5 Barclays Idexes S&P Correlatio Source: J.P. Morga, Barclays Capital, Bloomberg L.P., PNC Wealth Maagemet 4

5 Five Threats to Your Retiremet Fiacial repressio occurs whe a govermet implemets policies that fuel moey to itself that would have otherwise flowed elsewhere. As a result of these policies, omial iterest rates are lower tha they would be i a more competitive market. These low omial rates combied with iflatio eve if iflatio is aroud the curret Fed target of 2% is eough to erode the real value of ivestmets. There are several ways govermets are able to keep rates low. The two most relevat i the Uited States are: de-facto caps o iterest rates; ad the creatio of a captive domestic audiece. The Fed s purchases of mortgage-backed securities, agecy debt, ad log-term Treasuries have bee a effective tool for keepig borrowig cost low i may markets. O the shorter ed of the yield curve, the Fed is keepig its policy rates (federal fuds rate, discout rate, ad iterest paid o excess reserves) low. The best example of creatig a captive domestic audiece is the regulatory stadards created by the Basel Committee o Bakig Supervisio, which give a lower risk score for govermet debt tha most other securities. It is importat to poit out here that we are ot judgig the appropriateess of these policies ad regulatios. Regardless of our opiio, the fact remais that rates o Treasuries ad other high-quality (low-risk) fixed-icome securities are likely to remai low. At the same time, there is little reaso to expect that iflatio will deviate too far from the Fed s soft target of 2%. Uder these circumstaces, real iterest rates will likely be extremely low or egative, which is a key feature of fiacial repressio. Over the past several decades, the Uited States has see the effects of fiacial repressio ad egative real iterest rates. Accordig to research doe by Reihart ad Sbracia, betwee 1945 ad 198, real iterest rates have bee egative 25% of the time i the Uited States. 1 This created iterest-cost savigs of 3-4% per year, which helped the U.S. govermet reduce its debt load. This reduced debt burde came at a direct cost to savers i the Uited States because the purchasig power of their ivestmets was reduced. Earig real positive returs o fixedicome ivestmets i this eviromet was challegig. Loss of Purchasig Power Despite iflatio remaiig below the log-ru average, ivestors preparig for retiremet should be aware of the threat of decliig purchasig power. This has particular importace for ivestors thikig about retiremet because iflatio chips away at purchasig power over time the reductio i purchasig power is ofte difficult to see whe it is happeig, but it is very real. Short-term iterest rates are likely to remai low ito 215, creatig a difficult eviromet for earig a positive real (iflatio-adjusted) retur from short-term bods ad cash at tolerable levels of risk. I the past we have ofte discussed ivestig i a low-iterest-rate eviromet, ad this theme will cotiue to be importat through the ear term. We will frame this discussio as ivestig durig a time of fiacial repressio. For some ivestors, the relative safety of ivestig i Treasuries or other highquality fixed-icome securities may still make sese. If uable or uwillig to tolerate the higher volatility associated with equity ivestig, they may still fid it appropriate to have a large share of a portfolio i high-quality bods or cash. However, it is importat to be aware that after adjustig for iflatio, the retur o such ivestmets is likely egative; thus, a dollar ivested today will purchase less i the future. Takig a log-term view of aualized returs, we show the effects of iflatio o returs o several asset classes i Table 3. Table 3 Historical Average Aualized Returs Jauary 1926-July 213 Real Nomial S&P % 1.% Log-Term Gov t Bod Day T-Bill Iflatio NA 2.97 Source: Ibbotso Associates, MorigStar, PNC Wealth Maagemet Furthermore, cosiderig several times i history, icludig durig the early 194s whe the govermet implemeted fixed iterest rates o Treasury securities, we believe that ivestors seekig positive real returs should avoid Treasuries whe omial rates are below average log-term iflatio. If you assume iflatio is about average through the ear term, the iflatio-adjusted retur o a 1-year Treasury is curretly egative. I fact, takig the roughly 3% aual iflatio rate as a costat, we see that real rates have ever bee lower tha they are ow. The aalysis chages whe the actual year-over-year CPI is used, but it is difficult to imagie ayoe accurately predictig iflatio durig the volatile 197s ad early 198s (Chart 2, page 2). It is importat ot to lose sight of where the bod market is i the cotext of history. Lookig at the history of the 1-year Treasury ote yield gives a idea of what a bull market i bods it has bee over the past three decades (Chart 5, page 6). Give the steady march dowward, there does ot appear to be room for yields to move much lower. 1 Carme M. Reihart ad M. Bele Sbracia, The Liquidatio of Govermet Debt, Natioal Bureau of Ecoomic Research Workig Paper Series, Workig Paper (March 211). 5

6 Five Threats to Your Retiremet To aalyze returs durig a bear bod market you eed to go back decades. Lookig back at other bear bod markets, it ca be see that purchasig or holdig log-term govermet bods at very low yields bodes ill for portfolio returs. For example, if a 2.5% costat maturig 3-year bod was available i 1946, it would have falle from $11 to $17 by 1981 or a declie of 83%. This was a sigificatly worse performace tha the average retur o U.S. equities over that time period. 2 As the ecoomy cotiues to stregthe, iterest rates are likely to move higher as rates ormalize. History shows that the 1-year Treasury yield should typically be aroud the omial rate of U.S. GDP growth (Chart 5). With PNC Wealth Maagemet s omial GDP growth estimates of approximately 3% i 213 ad 4% i 214, the pressure is likely higher o iterest rates. This could pose a problem for bodholders, particularly ivestors with outsized bod positios ad log maturities. Chart 5 1-Year Yield versus Nomial GDP (3/31/62-6/3/13) Nomial GDP (percetage chage year earlier) 1-Year Treasury Yield (percet) Source: Bureau of Ecoomic Aalysis, Bloomberg L.P., PNC Wealth Maagemet Curretly, with few iflatioary pressures i the ecoomy, the Fed has maitaied its policy o short-term rates, statig that the federal fuds target rate will remai close to zero at least util either the uemploymet rate falls below 6.5% or iflatio oe to two years out appears set to move above 2.5%. Give that there is o sig that the iflatio threshold will be hit aytime soo, the uemploymet rate is more relevat. Eve there, we do ot believe the uemploymet rate is likely to move below 6.5% util early i 215, so we expect that short-term rates will remai close to zero for aother couple of years. To be clear, oe should ot extrapolate this ito the view that ivestors should ow o bods. A core belief of the PNC Wealth Maagemet Itegrated Ivestmet Approach has always bee to ow securities for a specific purpose. Bods cotiue to fulfill such a purpose cosistet icome geeratio which is difficult to obtai elsewhere. Oe could also view high-quality bods as a form of isurace, i that risky assets such as stocks are likely to do better over the log term but are much more susceptible to large losses. As opposed to a wholesale elimiatio of bods from a portfolio, what are the implicatios if iterest rates remai low? I our view, ivestors should focus o their icome eeds ad tolerace for price volatility whe settig their bod allocatios, but it would be wise ot to cout o ay price appreciatio i bods whe projectig future returs. Withi bods, a allocatio to o-treasury fixed icome, such as muicipal bods, corporate bods, or absolute-retur-orieted fixed-icome strategies, could be appropriate. A beefit of such a allocatio is that it provides extra yield over ad above Treasury bods. Also we have log discussed the merits of addig alterative assets to portfolios, icludig Treasury Iflatio-Protected Securities, as a method to retai purchasig power. For more iformatio 2 Sidey Homer ad Richard Sylla, A History of Iterest Rates, Third Editio, Revised (Hoboke, NJ: Joh Wiley & Sos, Ic., 1996). 6

7 Five Threats to Your Retiremet regardig TIPS please see our white paper Neither Fish or Fowl: A TIPS Primer. All told, we believe ivestors will likely cotiue to face low rates over the ear term. This has may beefits to a ecoomy that is i the midst of a teuous recovery. However, this eviromet is ot without costs to ivestors, who must be cogizat of the potetial erosio of purchasig power whe buildig a retiremet portfolio. I 21, PNC Wealth Maagemet bega advisig cliets to cosider a tactical allocatio to leveraged loas withi the recommeded profiles i order to provide some defese agaist a possible risig-iterest-rate eviromet. I additio, we added a allocatio to global bods to further diversify away from low developed-coutry yields. Recetly, PNC Wealth Maagemet added a absolute-retur-orieted fixed-icome strategy tactical allocatio (see July 213 Ivestmet Outlook, Breakig the Bods). Risig Health-Care Costs The cosequeces of a reductio i purchasig power are magified whe applied specifically to health-care spedig. Although it is ot the most pleasat of topics to thik about durig the plaig-for-retiremet phase of life, it must be cosidered that health care will make up a larger share of cosumptio tha i the youger years curretly health care is 15% of the average aual spedig per perso (Chart 6). This spedig is just a average ad, as oe would expect, health-care spedig rises with age, accordig to a report by the Bureau of Labor Statistics. Chart 6 Health-Care Expeditures Share of Persoal Cosumptio (3/31/59-6/3/13) Percet Chart 7 Cosumer Prices: Headlie ad Medical Care (1/3/48-7/31/13) Year-over-Year Percetage Ch hage Source: Bureau of Ecoomic Aalysis, Bloomberg L.P., PNC Wealth Maagemet Source: Bureau of Labor Statistics, PNC Wealth Maagemet The price of health care has bee icreasig rapidly over the past 7 years, which has likely already caught some retirees by surprise ad is a reaso govermet spedig o health care (Medicaid ad Medicare) has soared. The headlie CPI has averaged a 3.7% year-over-year icrease sice 1948, while the medical care compoet of CPI has averaged a 5.5% year-over-year icrease (Chart 7). 7

8 Five Threats to Your Retiremet The fast-paced rise i health-care costs is problematic, leavig retirees o a ucertai path with govermet spedig o health care usustaiable. To further this poit, we look at the Cogressioal Budget Office s estimate of growth i key etitlemet programs as a percetage of GDP over the ext 39 years. At the curret projected rate of growth, these etitlemet programs will take up the etire tax reveue by 25 if the ratio of tax receipts relative to GDP stays ear the log-term average (Chart 8). These forecasts suggest that reformig etitlemet outlays will eed to be a key part of ay meaigful fiscal reform. Comig up with a pla to address log-term fiscal issues is a dautig task. Although much ucertaity remais, it is ot too hard to imagie a sceario i which govermet spedig o health care declies (Medicare), while the cost of health care cotiues to rise faster tha headlie iflatio. These potetial headwids from health-care costs could result i more (iflatio-adjusted) dollars beig allocated to medical care. This type of sceario is difficult to prepare for, but should be cosidered whe developig a pla for retiremet. Chages i Net Worth The threat of a sharp declie i et worth feels ever more pertiet i the cotext of the Great Recessio (Chart 9). Oce a perso is earig or has etered retiremet, the ability to recover from a egative wealth shock (a declie i house or equity prices) is greatly dimiished. For the most part, there is o additioal paycheck that ca be ivested to make up for the loss of pricipal. It is also more likely that risk appetite is too low to accept eough market risk to recover from the shock. This is largely a timig problem. Ad as the fiacial crisis illumiated, a sharp drop i asset prices at the wrog time ca be particularly troublesome to those approachig retiremet age. We believe a sharp declie i home prices is the bigger of the threats, give the historical recovery period. This poit is furthered by the Jue 212 Federal Reserve Bulleti, Although declies i the values of fiacial assets or busiess were importat factors for some families, the decreases i media et worth appear to have bee drive most strogly by a broad collapse i house prices. 3 Home Values The declie i home prices has weighed heavily o et worth, ad remais a formidable threat for retiremet. Accordig to recet Fed data, a primary residece makes up almost 3% of family assets, the largest sigle asset Chart 8 Major Etitlemet Outlays ad Tax Reveues Percetage of GDP Tax Reveue Historical Tax Level=18.4% Medicaree Medicaidd Social Security Source: Cogressioal Budget Office, PNC Wealth Maagemet Chart 9 Chages i Net Worth Percetage Chage 3 Media 2 Mea Chages are based o iflatio-adjusted dollars Source: Federal Reserve, PNC Wealth Maagemet 3 Jesse Bricker, Arthur B. Keickell, Kevi B. Moore, ad Joh Sabelhaus, Chages i U.S. Family Fiaces from 27 to 21: Evidece from the Survey of Cosumer Fiaces, Federal Reserve Bulleti 98 (Jue 212): 1. 8

9 Five Threats to Your Retiremet Chart 1 U.S. Households Real Estate Assets as a Percetage of Total Assets (3/31/59-3/29/13) (Chart 1). Such a high cocetratio of a largely illiquid asset ca quickly chage the path of a retiremet pla. There are a couple of reasos this could be a threat. Percet Chart 11 Housig Prices (3/31/-6/3/13) Source: Federal Reserve, Bloomberg L.P., PNC Wealth Maagemet ,7 4 1,6 1,5 38 1,4 36 1,3 34 1,2 32 1,1 3 1, Source: Federal Housig Fiace Agecy, Bloomberg L.P., PNC Wealth Maagemet 29 For people attemptig to retire ad move to a more retiremet-friedly state for weather or cost of livig reasos the declie i home prices ad the exteded lack of liquidity i may real estate markets are actig as costraits, impedig the plaed retiremet move. May soo-to-be retirees are ow copig with the fact that their largest asset is worth a lot less tha previously aticipated. This is potetially causig a postpoemet of retiremet or forcig chages to goals. The housig market is ow recoverig, which is havig a importat effect o cosumer cofidece ad ecoomic outlook. Because real estate teds to be a cosumer s biggest asset, risig home prices have a marked impact o cosumer balace sheets. Home prices, while still off a low base, appear fially to be addig much eeded value back to homeowers balace sheets (Chart 11). While the big picture certaily looks much improved from the deep recessioary days, real estate teds to be local, ad home values have improved i some areas more tha others, affectig ivestors differetly, sometimes dramatically so. Give our curret expectatios for a modest housig recovery, it will take util aroud 22 for house prices to reach their pre-housig-bubble peak. This meas the declie i wealth is essetially permaet for may people earig retiremet. For idividuals still far away from retiremet, we believe these cocers should be remembered ad factored ito retiremet plaig. Oe way we recommed protectig your retiremet from a uexpected declie i wealth is by settig proper expectatios. Sceario testig a retiremet pla for a drop ad prologed suppressio of house prices is oe optio. Of course that does ot prevet the hardship, but it will help with settig proper expectatios surroudig a idividual s retiremet plaig. Market Timig Cosideratios ad Net Worth Oe does ot have to look back i history very far to see the cosequeces of decliig equity prices o household et worth. The S&P 5 declied more tha 5% peak to trough betwee October 27 ad March 29. The S&P 5 hit 1,565 o October 9, 27, ad bottomed at o March 9, 29. This traslated ito a massive declie i equity. However, historically, equity markets have bouced back fairly quickly. With better ecoomic ews ad accommodative easig, markets have recovered, ad the trajectory of recovery has picked up steam. For example, if you ivested 9

10 Five Threats to Your Retiremet i the Balaced total retur portfolio i October 27 i hidsight the worst time i the past 7 years to purchase equities, the portfolio would have retured more tha 16% as of Jue 3, 213 (this is a simple example usig a hypothetical asset allocatio). O August 2, 213, the S&P 5 hit a ew all-time high of 1,79, before pullig back o cocers regardig a evetual Fed taperig of quatitative easig. The poit we make here is that well-balaced portfolios ted to bouce back over reasoable time frames. Thus, although severe market moves may be paiful ad scary, they are less likely to be detrimetal to a retiree s et wealth i the log ru. To be clear, the ride has bee bumpy, ad while from a techical perspective the recet rally makes sese, it is our view that ivestors cotiue to feel some apprehesio. The discoect ceters aroud the tagibility of ecoomic recovery. While clear i some areas, it is sluggish i others. There are cotiued cocers about quatitative easig ad future Fed policy i the Uited States ad globally about a slowdow i Chia, amog other issues. Chart 12 Net Mutual Fud Flows ito Bods ad Stocks Billios of Dollars Stocks Bods Source: ICI, Morigstar, PNC Wealth Maagemet Chart 13 Net Worth of U.S. Households ad Noprofits I the wake of the 27 fiacial crisis, there has bee a persistet outflow of ivestmet from stocks ito bods (Chart 12). While 213 has see some iflows ito stocks, the Great Rotatio the asset allocatio shift back to stocks from bods by ivestors is just startig to be see. As we oted earlier, the flockig to fixed-icome by ivestors i recet years had merit, give the strog returs experieced util recetly. Fially overall we ote that despite the challeges households 35 have faced i terms of decliig et worth, whether i ivestmet portfolios, home prices, or other asset dislocatios, et worth has ow fully recovered ad exceeded its prerecessio highs (Chart 13). Our discussios here ote the importace of asset allocatio i totality to positio a ivestor s portfolio for various scearios. For example durig the fiacial crisis, whe stock market valuatios eroded portfolios, at least o paper fixed icome provided a salve to ivestors with cash eeds. A log-term approach works best, i our view, i positioig portfolios for ear-term ad log-term market ad ecoomic scearios. Trillios of Nomial Dollars Source: Federal Reserve, PNC Wealth Maagemet The PNC Fiacial Services Group, Ic. ( PNC ) provides ivestmet ad wealth maagemet, fiduciary services, FDIC-isured bakig products ad services ad ledig of fuds through its subsidiary, PNC Bak, Natioal Associatio, which is a Member FDIC, ad provides certai fiduciary ad agecy services through PNC Delaware Trust Compay. This report is furished for the use of PNC ad its cliets ad does ot costitute the provisio of ivestmet advice to ay perso. It is ot prepared with respect to the specific ivestmet objectives, fiacial situatio or particular eeds of ay specific perso. Use of this report is depedet upo the judgmet ad aalysis applied by duly authorized ivestmet persoel who cosider a cliet s idividual accout circumstaces. Persos readig this report should cosult with their PNC accout represetative regardig the appropriateess of ivestig i ay securities or adoptig ay ivestmet strategies discussed or recommeded i this report ad should uderstad that statemets regardig future prospects may ot be realized. The iformatio cotaied i this report was obtaied from sources deemed reliable. Such iformatio is ot guarateed as to its accuracy, timeliess or completeess by PNC. The iformatio cotaied i this report ad the opiios expressed herei are subject to chage without otice. Past performace is o guaratee of future results. Neither the iformatio i this report or ay opiio expressed herei costitutes a offer to buy or sell, or a recommedatio to buy or sell, ay security or fiacial istrumet. Accouts maaged by PNC ad its affiliates may take positios from time to time i securities recommeded ad followed by PNC affiliates. PNC does ot provide legal, tax or accoutig advice. Securities are ot bak deposits, or are they backed or guarateed by PNC or ay of its affiliates, ad are ot issued by, isured by, guarateed by, or obligatios of the FDIC, or the Federal Reserve Board. Securities ivolve ivestmet risks, icludig possible loss of pricipal. 213 The PNC Fiacial Services Group, Ic. All rights reserved.