Investing Toward Retirement

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1 ONS Congress 2013 Investing Toward Retirement Janet L Marcantonio, CFP, CRPC Thomas Robinson, CFP Marcantonio Robinson Wealth Advisory Group UBS Financial Services 1

2 Learning objectives Understand the basics of investments and its terminology Understand the importance of proper asset allocation and diversification Communicate the types of risk associated with investing 2

3 Key topics Asset allocation: Why it s important Asset subclasses: Understanding their characteristics Risk: Recognizing the different types Diversification: A factor in selecting your investments Your portfolio: Knowing how to create it and when to adjust it 3

4 Two key terms Asset allocation Diversification Percentage of Stocks Bonds Short-term Investing in different types of Stocks Bonds Short-term Neither diversification nor asset allocation ensures a profit or guarantees against loss. 4

5 Comparing the asset classes Short-term investments Bonds Stocks 5

6 In the short term Money market, T-bills, CDs Relatively stable value Potential to pay interest Lower risk, lower potential return An investment in a money market fund is not insured or guaranteed by the FDIC or any other government agency. Although money market funds seek to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in these funds. Interest rate increases can cause the price of money market securities to decrease. 6

7 Short-term investments Ways to invest By type of short-term investments By issuer Types of investments Money market funds vs. U.S. Government funds Banks Government Other financial institutions An investment in a money market fund is not insured or guaranteed by the FDIC or any other government agency. Although money market funds seek to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in these funds. Unlike mutual funds, most CDs and U.S. Treasuries offer a fixed rate of return and guarantee payment of principal if held to maturity. 7

8 What about bonds? I.O.U. Debt securities Issued by governments and corporations Potential to pay interest Moderate risk, moderate potential return In general the bond market is volatile, and fixed-income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed-income securities also carry inflation, credit, and default risks for both issuers and counterparties. (Unlike individual bonds, most bond funds do not have a maturity date, so holding them until maturity to avoid losses caused by price volatility is not possible.) Lower-quality bonds can be more volatile and have greater risk of default than higher-quality bonds. Increases in real interest rates can cause the price of inflation-protected debt securities to decrease. 8

9 Bonds Ways to invest By credit risk By maturity Types of investments High, moderate, and low quality Government Corporate Short-, intermediate-, and long-term bonds In general the bond market is volatile, and fixed-income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed-income securities also carry inflation, credit, and default risks for both issuers and counterparties. (Unlike individual bonds, most bond funds do not have a maturity date, so holding them until maturity to avoid losses caused by price volatility is not possible.) Lower-quality bonds can be more volatile and have greater risk of default than higher-quality bonds. Increases in real interest rates can cause the price of inflation-protected debt securities to decrease. 9

10 Take stock Share of a company, equity Long-term growth potential Value can go up and down Higher risk, higher potential return Stock markets, especially foreign markets, are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments. 10

11 Stocks: size of company Large Cap Mid Cap Small Cap $10 billion and above $2 to $10 billion Less than $2 billion Stock markets, especially foreign markets, are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments. The securities of smaller, less well-known companies can be more volatile than those of larger companies. Foreign securities are subject to interest rate, currency exchange rate, economic, and political risks. 11

12 Value vs. growth Value Companies undervalued or out of favor Buy it on sale Turnaround story Growth Companies whose earnings and profits are growing Relatively higher share price Pay a premium for earnings potential Value stocks can perform differently than other types of stocks and can continue to be undervalued by the market for long periods of time. Stock markets, especially foreign markets, are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments. Growth stocks can perform differently from other types of stocks and the market as a whole and can be more volatile than other types of stocks. 12

13 MARKET CAPITALIZATION Stocks: Market cap and style INVESTMENT STYLE Value Blend Growth Large Medium Small StyleMap depictions of mutual fund characteristics produced using data and calculations provided by Morningstar, Inc. StyleMaps estimate characteristics of a fund's equity holdings over two dimensions: market capitalization and valuation. 13

14 Stocks: International Ways to invest By whether they include the U.S. By where they invest By segment of the market Types of investments Global: includes U.S. International: outside U.S. Regional, e.g., Europe Country, e.g., Japan International small cap International bond Stock markets, especially foreign markets, are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments. Foreign securities are subject to interest rate, currency exchange rate, economic, and political risks, all of which are magnified in emerging markets. 14

15 International investing Tap a world of investing opportunity Non-U.S. markets account for greater than half the exposure of the aggregate world equity market capitalization. 1 International investments can add the benefits of diversification to a portfolio helping to reduce risk and potentially improve risk-adjusted returns. Stock markets, especially foreign markets, are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments. Foreign securities are subject to interest rate, currency exchange rate, economic, and political risks, all of which are magnified in emerging markets. 1. Source: Factset. MSCI All-Country World index market capitalization data as of Sept

16 International investing Broadly diversified funds International Global Targeted funds Emerging markets Regional or country specific International small cap Stock markets, especially foreign markets, are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments. Foreign securities are subject to interest rate, currency exchange rate, economic, and political risks, all of which are magnified in emerging markets. The risks are particularly significant for funds that focus on a single country or region. The securities of smaller, less well-known companies can be more volatile than those of larger companies. 16

17 Return potential of the asset classes Growth of $100 in each of three asset classes, $100,000 $10,000 $1,000 $100 $100 Stocks $10,459 Bonds $2,981 Short-term investments $1,308 Inflation $735 $10 Source: Ibbotson Associates, 2010 ( ). Past performance is no guarantee of future results. The asset class (index) returns reflect the reinvestment of dividends and other earnings. This chart is for illustrative purposes only and does not represent actual or future performance of any investment option. It is not possible to invest directly in a market index. Stocks are represented by the Standard and Poor s 500 Index (S&P 500 Index). The S&P 500 Index is a registered service mark of the McGraw-Hill Companies, Inc., and has been licensed for use by Fidelity Distributors Corporation and its affiliates. It is an unmanaged index of the common stock prices of 500 widely held U.S. stocks that includes the reinvestment of dividends. Bonds are represented by the U.S. Intermediate Government Bond Index, which is an unmanaged index that includes the reinvestment of interest income. Short-term instruments are represented by U.S. Treasury bills, which are backed by the full faith and credit of the U.S. government. Inflation is represented by the Consumer Price Index (CPI), a widely recognized measure of inflation, calculated by the U.S. government. Stock prices are more volatile than those of other securities. Government bonds and corporate bonds have more moderate short-term price fluctuations than stocks but provide lower potential long-term returns. U.S. Treasury bills maintain a stable value (if held to maturity), but returns are only slightly above the inflation rate. 17 $

18 Advantages of time Historical chance of loss ( ) 25% 20% 15% 10% 5% 0% 23% 10% 7% 5% 0% 0% 0% 0% 0% 1 YEAR 5 YEARS 10 YEARS S&P 500 Index U.S. Intermediate Government Bond Index U.S. Treasury Bills Source: Ibbotson Associates, 2010 ( ). Past performance is no guarantee of future results. The asset class (index) returns reflect the reinvestment of dividends and other earnings. This chart is for illustrative purposes only and does not represent actual or future performance of any investment option. It is not possible to invest directly in a market index. Stocks are represented by the Standard and Poor s 500 Index (S&P 500 Index). The S&P 500 Index is a registered service mark of the McGraw-Hill Companies, Inc., and has been licensed for use by Fidelity Distributors Corporation and its affiliates. It is an unmanaged index of the common stock prices of 500 widely held U.S. stocks that includes the reinvestment of dividends. Bonds are represented by the U.S. Intermediate Government Bond Index, which is an unmanaged index that includes the reinvestment of interest income. Short-term instruments are represented by U.S. Treasury bills, which are backed by the full faith and credit of the U.S. government. Stock prices are more volatile than those of other securities. Government bonds and corporate bonds have more moderate short-term price fluctuations than stocks but provide lower potential long-term returns. U.S. Treasury bills maintain a stable value (if held to maturity), but returns are only slightly above the inflation rate. 18

19 19 Importance of diversification

20 Two reasons to consider diversification To help take advantage of market conditions To help protect yourself against downturns Diversification does not ensure a profit or protect against a loss. 20

21 The case for diversification BEST- TO WORST-PERFORMING INDICES, FROM S&P 500 Index measures the performance of large-capitalization U.S. stocks. S&P MidCap 400 Index measures the performance of 400 medium-capitalization stocks. Russell Top 200 Growth Index measure the performance of the growth style of investing in large-cap U.S. stocks. Russell Top 200 Value Index measure the performance of the value style of investing in large-cap U.S. stocks. Russell 2000 Index measures the performance of small-capitalization U.S. stocks. measures the performance of the value style of investing in large-cap U.S. stocks. Russell 2000 Value Index measures the performance of the value style of investing in small-cap U.S. stocks. Russell 2000 Growth Index measures the performance of the growth style of investing in small-cap U.S. stocks. MSCI EAFE Index measures the performance of the developed stock markets of Europe, Australia, Asia, and the Far East. Barclays Capital U.S. Aggregate Bond Index measures the performance of U.S. government, corporate, and mortgage-backed securities with maturities up to 30 years. 21 Diversification does not ensure a profit or guarantee against a loss. Past performance is no guarantee of future results.

22 Creating your mix Factors to consider Characteristics of each asset class Your attitude about risk Number of years until you plan on using the money Your personal financial situation 22

23 Determining a target asset mix Domestic Equity International Equity Bonds MM/Short-Term Investments & other assets Conservative Balanced Growth Aggressive Growth 50% 6% 30% 14% 15% 40% 35% 10% 11% 49% 25% 15% 60% 25% 15% Decreasing investment risk and increasing inflation risk RISK SPECTRUM Increasing investment risk And decreasing inflation risk Generally, among asset classes, stocks may present more short-term risk and volatility than bonds or short-term instruments but may provide greater potential return over the long term. Although bonds generally present less short-term risk and volatility than stocks, bonds contain interest rate risk (as interest rates rise bond prices usually fall); the risk of issuer default; and inflation risk. Foreign investments, especially those in emerging markets, involve greater risk and may offer greater potential return than U.S. investments. These target asset mixes are hypothetical models and illustrate certain examples of many combinations of investment allocations that can help an investor pursue his or her goals; these target asset mixes do not constitute investment advice under the Employee Retirement Income Security Act of 1974 (ERISA). You should choose your own investments based on your particular objectives and situation. Remember, you may change how your account is invested. Be sure to review your decisions periodically to make sure they are still consistent with your goals. Education on investment alternatives and services do not generally constitute investment advice as defined under the Employee Retirement Income Security Act of 1974 ( the Act ). Asset allocation does not ensure a profit or guarantee against loss. For illustrative purposes only. 23

24 Consider making changes Rebalance when your mix shifts out of proportion by ± 5% to 10% Revisit your mix following major life events Review your strategy at least once a year 24

25 Lifecycle funds Managed for a specific retirement date Ongoing graduated asset allocation Automatic rebalancing Professional management Diversification may help to mitigate portfolio risk* *Diversification does not guarantee against a loss. 25

26 Next steps Determine your appropriate mix and compare it to your current mix Evaluate your investment options Select investment options that fit your target asset mix Review and adjust your asset allocation at least once a year 26

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