Financial Wellness & Education Investing. Why investors need discipline

Transcription

1 Financial Wellness & Education Investing Why investors need discipline

2 Striving for success... Many Americans have selected mutual funds as their investment of choice. According to the Investment Company Institute, as of December 2014, over $15 trillion was held in mutual funds. For perspective, the gross domestic product of the United States in 2014 was about $17.7 trillion, according to the Bureau of Economic Analysis. The popularity of mutual funds makes a great deal of sense, since they provide individuals with a host of important benefits, including diversification, liquidity, low minimum investment requirements and access to professional asset managers. However, despite the advantages that mutual funds offer, many fund investors have experienced disappointing results. This brochure will take a look at some of the costly traps that investors sometimes fall into and what you can do to avoid them. but often stumbling A recent study by Dalbar, a respected research firm, found that between 1994 and 2013, the S&P 500 posted an average annual return of 9.22 percent. Many view the S&P 500 Index as a proxy for the performance of the U.S. stock market. However, over that same period of time, the average U.S. stock fund investor achieved a return of only 5.02 percent, exceeding inflation which averaged 2.37 percent a year. For the purposes of the study, the average investor is calculated by treating industry flows as being representative of average investors and applying those flows to an appropriate performance index. How investors performed: % S&P 500 Index 5.02% Average Equity Fund Investor 2.37% Inflation Source: 2014 Dalbar QAIB, page 3 (Free Advisor Compliance Edition).

3 Why have investors fared so poorly? Part of the answer relates to investors behavior. During times when the market is booming, people tend to get caught up in the frenzy and throw money into high-flying funds. Conversely, during market slumps, investors become wary of bigger losses and abandon out-of-favor funds or asset classes. Dalbar noted that Investors are motivated by fear and greed, not by sound investment practices. In addition, the nature of the market itself presents serious challenges for fund investors. As the graph below indicates, since 1926, the stock market has averaged an annual return of 10.1 percent. If the market returned its average every year, investing would be pretty easy. The reality is far different. While 10.1 percent is the average, the individual returns most years tend to be significantly higher or lower. For example, in only 16 of the 88 years since 1926 has the market produced a return that was within five percentage points of its average. In addition, the market has produced an annual loss about 28 percent of the time. Finally, some of the market s best periods have come closely on the heels of its biggest slumps, and some of the sharpest downturns have marked the end of great bull markets. It s important to note that the past performance of the indexes does not indicate future results, and does not reflect the past or future performance of any Foresters Financial product. The cyclical nature of the stock market, and its tendency to shift abruptly from strong performance to weak, creates plenty of temptation for investors to make ill-advised decisions. Deviating from a sound long-term strategy because of short-term market movements can have a disastrous effect on results. Compound annual returns: * 10.1% Large Company Stocks 6.1% Long-Term Corporate Bonds 5.7% Long-Term Government Bonds Source: Ibbotson SBBI 2015 Yearbook, Morningstar Direct * 2014 data is preliminary and may be restated. 2.9% Inflation

4 Fund rankings In recent years, more and more investors have been using the Internet to research mutual funds and other investments. Given the exhaustive amount of information available online, it s no wonder that do-it-yourself investors are eager to find a way to simplify the process. This quest to find the best or easiest way to invest has led to the current popularity of fund rankings. There are several companies and services that attempt to rank funds on a numerical scale; generally, these rankings are based in large part on a fund s past returns. While a strong track record of success may be one of several factors an investor considers before making an investment decision, rankings should not be the sole reason to invest in a particular fund or funds. This is because past performance is no guarantee of future results. Getting burned by hot funds In taking this rearview mirror approach to investing, investors gravitate to those funds that have achieved the greatest recent returns. Given the cyclical nature of the market, it is all too common for investors who embrace this practice to get into the hot fund after much of its growth has already been achieved, and just before the inevitable correction is about to occur. In the chart below, Fund A and Fund B represent two real-life funds that were heavily weighted in technology stocks just as the tech bubble burst in The figures for returns and assets under management are real. Fund returns versus investor returns These numbers tell an interesting story. Someone who was invested in one of these funds since the beginning of 1999 would have enjoyed heady returns, even after the severe drop in 2000 (see the Aggregate Return column). But take a look at the Assets columns in the case of Fund B, assets more than doubled by the end of 2000, as investors flocked to it in the hopes of sky-high returns. However, many of them got in as the tech bubble was bursting, dragging the fund to a double-digit loss for the year. Therefore, although the fund s average return for was very high, many investors, who got in after much of the gains were achieved, fared far worse. A tale of two funds Assets as of Assets as of Aggregate Return Fund 1999 Return 12/31/ /31/ Return Fund A 109.5% $342M $726M -10.3% 88.0% Fund B 237.5% $298M $763M -30.3% 135.0%

5 Chasing performance The following chart shows how past performance can influence investor behavior on a large scale. The left-hand columns list stock and bond returns for a given year; the right-hand columns indicate how much net new cash flowed into equity and bond funds in the following year. As you can see in the chart below, were boom years for stocks. It s no coincidence that during that same period, investors became increasingly interested in stock funds particularly those that specialized in technology. In the year 2000, $315.7 billion was invested in stock funds, nearly double the amount invested in As noted in the chart, some of this money likely came from the redemptions of bond funds, which saw outflows of over $50 billion in Unfortunately, as you probably recall, 2000 was the year that the tech bubble burst, beginning a bear market that would last through This trend works the other way as well. As the stock market did poorly in 2001 and 2002, fund investors soured on equity funds, despite the fact that they had gotten much cheaper during the slump. By 2002, the pattern of 2000 was reversed, as fund investors were taking money ($29.0 billion) out of their equity funds and pouring money ($141.6 billion) into bond funds. Many of these investors were caught off guard by the sharp rally in the stock market that occurred in early 2003 and lifted the S&P 500 to a 28.7 percent gain for the year. As you can see, cash inflows into equity funds increased dramatically in 2003; but by that time, investors had already missed out on most of the gains. Despite the lessons of history, many investors continue to chase performance and flee underperformance. Notice the staggering outflow from stock funds in 2008, when the financial crisis hit, and how investors continued to shy away from stocks and instead poured money into bond funds in Even in 2010, with stocks up 26.5 percent in 2009 and bond returns low, interest in bond funds was strong as investors remained jittery about stock market performance. In 2013, when a low interest rate environment hurt the bond market, investors fled to stocks which had a banner year. 1 Stocks are represented by the S&P Bonds are represented by Citigroup Long-Term High Grade Corporate Bond Index. 3 Net new cash flow is the dollar value of new sales minus redemptions, combined with net exchanges. Investors chase yesterday s winners Market returns and net new cash flow, Net New Cash 3 Net New Cash 3 Stocks 1 Bonds 2 Following into Stock Funds into Bond Funds Year Total Return Total Return Year (Billions) (Billions) % 1.4% % 13.0% % 10.8% % -7.5% % 12.9% % 10.7% % 16.3% % 5.3% % 8.7% % 5.9% % 3.2% % 2.6% % 8.8% % 3.0% % 12.4% % 18.0% % 10.7% % -7.1% 2014 NA NA Source: The Investment Company Institute 2014 Factbook (page 179, 181), Morningstar Direct.

6 How you can do better Unfortunately, there s no magic investment product or strategy that can guarantee success. Given that fact of life, Foresters Financial has long advocated a disciplined, patient approach to investing. Most people are best served by maintaining a long-term investment perspective, practicing asset allocation and seeking professional advice. Invest for the long-term As was noted earlier, stocks have produced an annual loss about 28 percent of the time since However, positive returns have been achieved in 86 percent of the five-year rolling periods since 1926, and 95 percent of 10-year periods. Stocks have produced positive results in each of the overlapping 20-year periods that occurred in that time. Dalbar concluded that mutual fund investors who hold their investments are more successful than those who time the market. Large company stocks: Rolling Number of Positive Percentage Period Such Periods Periods Positive 1-Year % 5-Year % 10-Year % 20-Year % Practice asset allocation The ups and downs of the marketplace can shake the confidence of individuals and panicky investors often make poor investment decisions. Fortunately, there is an investment strategy that helps control the volatility inherent in investing and can keep you focused on the long term. It s called asset allocation, and it involves dividing investment dollars among asset classes stocks, bonds and cash equivalents in order to assemble a suitable mix. An appropriate portfolio of investments would be determined by your specific financial goals, investment time horizon and tolerance for risk. Because some investments may rise in value at the same time that others fall, asset allocation helps control volatility and may enable you to stick with your strategy over the long term. The chart on the next page demonstrates that the bond market posted positive results in each of the last five years that the stock market posted negative results. Investors who owned bond and stock funds would have weathered these downturns more easily than those who owned stock funds alone. Source: Ibbotson SBBF 2014 Yearbook, Morningstar Direct *2013 data is preliminary and may be restated.

7 Asset allocation at work Let s look at asset allocation put into practice. In this example, the S&P 500 is used as a proxy for stock market performance and the Citigroup Long-Term High Grade Corporate Bond Index represents bond market performance. Consider two individuals who each invested $10,000 at the beginning of One investor, eager to cash in on the bull market, aggressively placed 100 percent of his money in equity funds. The other investor allocated her assets more conservatively, placing $7,500 in equity funds and $2,500 in bond funds. As the years passed, their results were quite different. The performance chaser would have seen his balance shrink to about $6,200 by the end of 2002, a loss of nearly 40 percent. Many actual investors panicked at this time, and sold at low points. Conversely, the asset allocator s balance would have been $8,309 at the end of This investor would have found it much easier to stay the course, and would have been much more likely to reap the benefits of the market s turnaround in Source: Stocks are represented by the S&P 500. Investment grade bonds are represented by Citigroup Long-Term High Grade Corporate Bond Index Bond performance during bear markets for stocks Bonds -3.1% 6.8% -9.1% 12.9% -11.9% 10.6% -22.1% 16.3% Stocks -37.0% Source: Stocks are represented by the S&P 500 Index. Investment grade bonds are represented by Citigroup Long-Term High Grade Corporate Bond Index. 8.8% Seek professional advice For most people, a prudent investment strategy begins with professional guidance. The painful lessons learned by do-it-yourself investors in recent years have made plain the benefits of professional advice. The Dalbar study found that Investor returns increase in the face of disciplined investor behavior. Dalbar noted that most people need professional guidance to achieve this discipline. A Financial Services Representative is a trained, licensed professional who will assess your situation and recommend products that can help you meet your financial goals.

8 Make the right moves This brochure uses various indexes as proxies for asset classes. It is not possible to invest directly in any index. In addition, the results do not take into consideration fees and expenses that an investor would incur in purchasing securities in an index. The past performance of the indexes does not indicate future results, and does not reflect the past or future performance of any Foresters Financial product. Neither Foresters Financial nor its Representatives offer tax, legal or estate planning services. Clients should contact their personal tax and legal advisers for any advice about estate planning or gifting. An investment in mutual funds will fluctuate with market conditions and may lose value. When you sell your shares, they may be worth more or less than their original cost. For more information about any mutual fund from Foresters Financial Services, Inc., you may obtain a free prospectus and summary prospectus by contacting your Representative, writing to the address below, calling or visiting our website at forestersfinancial.com. You should consider the investment objectives, risks, charges and expenses carefully before investing. The prospectus and summary prospectus contain this and other information and should be read carefully before you invest or send money. An investment in a mutual fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other government agency. All investments involve risk, including possible loss of principal. You can lose money by investing in the Fund. Past performance is no guarantee of future results. Foresters Financial Services, Inc. provides everyday families and individuals with financial solutions, guidance and tools, to meet their needs across all life stages. Our financial representatives offer personalized service combined with a solid, long-term approach and fresh thinking, to help you: Save and invest for retirement, education and other life events Create retirement income strategies Protect the ones you love Plan your legacy You can also take pride in knowing that you are part of Foresters, an international financial services provider that gives back to the community and cares deeply about family wellbeing. Each year Foresters organizes thousands of community activities, providing financial contributions and hands-on volunteerism in support of charitable partners that make a meaningful and lasting impact in local communities. Together, we can help you achieve financial and family well-being now and tomorrow, this generation and the next. Foresters Financial TM and Foresters TM are trade names and trademarks of The Independent Order of Foresters (a fraternal benefit society, 789 Don Mills Road, Toronto, Canada M3C 1T9) and its subsidiaries, including Foresters Financial Services, Inc. Foresters Financial Services, Inc. is a subsidiary of Foresters Financial Holding Company, Inc. All securities products are offered through Foresters Financial Services, Inc. Foresters Financial Services, Inc. 40 Wall Street New York, New York forestersfinancial.com Find Foresters Financial on Social Media R DISCIPLINE (LG 30M 8/15)