Zurich International Life Managing market volatility Investing with composure for the long term For financial professional use only
Managing market volatility explained Overview Investments can offer both risk and reward, and generally, the bigger the risk, the greater the potential reward. It s down to each investor to find the perfect balance for them, and this will vary depending on how much they have to invest, what stage of life they have reached and what they are trying to achieve. For new investors, the first steps can seem to be complicated. There are thousands of different investment products available and often the language is unfamiliar. On top of this, periods of market volatility discourage your client from making investments and they may even sell any existing holdings they have. That s why we have created this guide, to give you a clear introduction to the most important investment principles when it comes to providing reassurance and guidance to your clients. The Zurich Managing market volatility guide focuses on: Market timing it s enough just to be in the market Diversification how to manage a well diversified portfolio Dollar-cost averaging how to take advantage of volatility using dollar-cost averaging With an ever-increasing amount of investment information available, it is not unusual to feel overwhelmed by all the data. This guide is designed to provide financial professionals and their clients with concepts and knowledge to make informed investment decisions with confidence. 2
Managing investment risk what to invest in 3
What can you invest in? There are four main types of assets to choose from and each one works in different ways and carries its own particular risks. Cash Bonds Property Equities Income options Minimal Yes Yes Dividend only Capital growth potential Very low Low Medium High Risk level Low Medium Low-medium Medium-high A savings account is low risk, as your money will only grow in line with interest, so there is little chance of growing your capital. At the end of the term your investment should be repaid, but there is a risk of default on payments. This varies greatly depending on the issuer. Income can fluctuate in line with the housing market. Property is considered more stable than equities, but your initial investment is still not secure. Equities depend on the fortunes of the companies you invest in. There is no limit to growth of an equity, but there is also no limit to how much they can fall. All investments involve some level of risk, which is the possibility of losing some or all of your investment. The more risk you take, the more your investment could grow, on the other hand, the more it could fall. 4
Getting into the details Bonds How they work Property How it works Equities How they work 1 You make a loan to a government or company 2 They pay you interest 3 Then they pay you back, OR 4 You sell the bond on the stock market 1 You invest in a building 2 The tenants pay you rent 3 Then you sell the building (potentially for more than you bought it for) 1 A company splits its ownership into shares (equities) 2 You buy some of these shares becoming part-owner of the company 3 Then you sell the shares, potentially for more than you bought them for (without dividends), OR 4 The company decides how much profit it will pay to shareholders (dividends) and how much they will reinvest. Then you sell the shares potentially for more than you bought them for (with dividends) The type of investment you will need depends on whether they require capital growth for the future, income from the investment for now, or a combination of both. 5
4,000 3,000 YEARS Equities over the long term The volatility of the financial markets underlines the case for a long-term approach to investing in the stock markets. 0 4,000 3,000 EU grows 2002 to 25 members $ 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2004 Docking of Mir and Atlantis 1995 $ Establishment of the European Asian Stock Market Crisis Central Docking of Bank 1997 1998 Mir and Atlantis 1995 Establishment of the European Central Bank 1998 Asian Stock Market Crisis 1997 Internet Drives Nasdaq to 5,000 2000 Internet Drives Nasdaq to 5,000 Introduction of the Euro 20022000 Enron Scandal 2001 9/11 29% fall the "Tech wreck" Argentinian Crisis 2002 War in Iraq 2003 EU grows to 25 members 2004 Enron Scandal 2001 Subprime rattles markets 2007 Introduction of the Euro 2002 9/11 Collapse of some of Wall Street s largest names 2008 Barack Obama inauguration Argentinian Crisis 45% fall "Global financial crisis" European Sovereign debt crisis War in Iraq 2003 USA loses it s AAA overall rating Long period of recovery USD365.0672 Subprime rattles markets 2007 Collapse of some of Wall Street s largest names 2008 Barack Obama inauguration European Sovereign debt crisis USA loses it s AAA overall rating YEARS Long period of recovery USD365.0672 0 29% fall the "Tech wreck" 45% fall "Global financial crisis" 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Sources: FE. All data from 1 January 1990 to 1 November 2015. Equities are represented by the FE International Equity sector. It is not possible to invest directly in an index. The information provided is for illustrative purposes only and is not meant to represent the performance of any particular investment. Past performance in not a guide to future performance. Volatility is part of investing. It is the reason to maintain a long-term perspective rather than a reason to sell. Investors who stay in the market benefit from the rebounds after the market falls. 6
Diversification This chart illustrates how the worst performing asset class can quickly become the next year s best performing asset class. Stock market volatility can be managed in a portfolio by following a disciplined diversification and rebalancing investment approach. Take a look below. 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 YTD 2003-2014 Cumulative 99.96% 72.46% 89.83% 35.57% 63.03% 6.92% 83.17% 21.64% 6.20% 23.06% 32.74% 33.77% 3.43% 545.32% 54.30% 25.52% 34.79% 33.15% 45.49% -1.19% 71.22% 18.75% 1.81% 22.37% 26.07% 11.49% 2.94% 542.02% 46.33% 21.44% 31.39% 31.83% 37.42% -23.12% 40.01% 18.61% -0.59% 17.39% 22.95% 9.79% 1.73% 277.74% 40.32% 21.23% 20.97% 31.21% 28.23% -40.27% 39.63% 18.55% -2.15% 15.74% 16.46% 8.09% 0.31% 150.04% 34.48% 19.51% 7.20% 24.89% 10.30% -42.96% 32.74% 14.82% -5.80% 14.62% 2.16% 7.43% 0.23% 145.82% 28.37% 12.48% 7.03% 11.98% 6.16% -46.58% 31.64% 14.02% -9.17% 11.52% 0.40% 2.85% -0.05% 129.82% 25.55% 9.44% 6.74% 10.83% 5.54% -49.15% 21.94% 11.65% -17.19% 8.39% 0.16% 0.14% -0.37% 104.51% 17.77% 9.02% 5.62% 4.35% 3.75% -49.38% 19.68% 7.98% -20.53% 1.91% -2.13% -3.64% -10.57% 94.91% 1.10% 2.67% 1.85% 3.95% 3.61% -53.11% 1.42% 4.52% -21.04% 1.62% -5.00% -5.16% -11.88% 41.61% 0.85% 0.88% 1.63% 2.40% -8.28% -61.23% 1.11% 1.07% -35.31% -2.18% -6.13% -12.52% -15.88% 14.43% India Equities Emerging Markets Equities MENA Equities Commodity and Energy Equities UK Equities US Equities International Property Equities Zurich IL US Dollar Blue Chip US Government Bonds US Cash Over the last five years, Zurich s US Dollar Blue Chip fund, a balanced fund investing in equities and bonds, has generated annualised returns of 7.6% comparing quite nicely to other major asset classes. More importantly, by diversifying and rebalancing properly, an asset allocation portfolio like Zurich s US Dollar Blue Chip has achieved these returns with lower volatility than other equity asset classes. 7
International shares By investing in international shares, you have more opportunity to invest in different sectors, which can protect your portfolio from large and sudden falls. Start off the day Wash hair with Pantene (Procter & Gamble US) Take Panadol (GlaxoSmithKline UK) for headache Refuel your car on the way to work Pull into Shell (Netherlands) service station to fill car with petrol Day at the office Work on laptop using Microsoft (US) software Go online during lunch break and book in your car Mercedes (Germany) for a service Unwind at the coffee shop Call friends on iphone made by Apple (US) Have a coffee at Costa (Whitbread PLC UK) End of day at home Watch the late night news on Samsung (Korea) television Brush teeth with Oral-B toothbrush (Procter & Gamble US) We believe that talented, experienced and well-resourced fund managers are able to improve investment returns over the long term. Through the Zurich Collection Select fund list, our aim is to bring together the very best international fund providers in our view, in one place. 8
How to invest 9
The behaviour gap The behaviour gap is the gap between investors, returns and investment returns. We don t know what comes next for financial markets. In the end, our behaviour is all that we can control and ultimately our behaviour will make the difference in our financial success. In other words, it s up to us as investors to close the behaviour gap. 9.0% 8.0% The behaviour gap 7.0% Rate of return % 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% US Market return What investors got back Source: FE Analytics. Annualised return from 31 October 1995 to 31 October 2015. Past performance is not a guide to future performance. For illustrative purposes only. 10
When to buy Many investors do the opposite of what makes sense buying high and selling low, don t fall into this trap. 1 5 Investors often buy here and sell here. and miss the rally 2 4 3 and only buy again when prices start to get higher. Therefore locking in their losses. Source: Zurich International Life. For illustrative purposes only. They often miss the opportunity of cheap prices Cash may not be the solution in a crisis There are times investors are tempted to move their fund holdings into cash until things clear up, but then there is a new problem, when to buy back in? The equity market may have a lot of short-term instability. As an investor, we should stay focused and ride out those highs and lows to take advantage of the long-term trend. 11
Dollar cost averaging Let s assume an investment of USD500 at each period in a savings plan. When the unit price falls, USD500 buys more units, which enables investors to buy cheaply during a falling market. 12 Unit price USD 10 8 6 4 2 0 (50 units) (50 units) (62.5 units) (62.5 units) (83.3 units) (83.3 units) (125 units) (125 units) (125 units) (125 units) 1 2 3 4 5 6 7 8 9 10 Investment period (months) Comparison of results Amount invested No. of units purchased Value at end* Dollar cost average USD5,000 891.6 USD8,916 Invest all at beginning of period USD5,000 500 USD5,000 Invest all at end of period USD5,000 500 USD5,000 * This example has been prepared to illustrate the effects of dollar cost averaging. It is not intended to be a guide as to the future performance of any product or fund, and should not be relied upon for those purposes. Source: Zurich International Life. Past performance is not a guide to future performance. For illustrative purposes only. Planning is the result of taking what might otherwise be only a wish and making it a specific set of goals. While these goals are definitely exciting, the way of achieving them is relatively dull investing on a regular basis and benefiting from Dollar cost averaging. 12
About risk 13
Risk simplified What is risk? Risk is the possibility of losing some or all of your original investment. All investments have some level of risk. Capital risk You might not get back your original investment amount Credit risk A company or government could fail to make payments on a bond Inflation risk The value of your investments could be eroded over time Market risk The market could collapse, perhaps due to a major economic shock In general, higher risk investments have a higher potential return, and lower risk investments have a lower rate of return. Currency risk Your overseas investments might suffer when you convert them to a different currency Interest rate risk Changes may affect your % investment 14
Risk simplified (continued) How much risk to take? To find the amount of risk that s right for you, you need to think about your plans. How much time do you have to let your investment grow? And how much money will you need at the end of this time? Strike a balance A high-risk investment could involve losing money in the short term, but your investment could grow in the long term as there is time to recover from short-term dips. Taking too little risk in the long term could lead to you not having enough money at the end of your term, if the interest rate is less than inflation. But your savings would be safer in the short term. It is important to understand the level of investment risk customers are prepared to take before they make an investment. There is a wide range of investments to choose from and each one can have a different level of risk and potential returns. We are dedicated to helping customers to better understand and manage the level of investment risk they assume when following the advice of their financial adviser. For any further information or if you have any questions, please contact your local Zurich representative. 15
Zurich International Life is a business name of Zurich International Life Limited. Zurich International Life Limited is fully authorised under the Isle of Man Insurance Act 2008 and is regulated by the Isle of Man Financial Services Authority which ensures that the company has sound and professional management and provision has been made to protect policy owners. For life assurance companies authorised in the Isle of Man, the Isle of Man s Life Assurance (Compensation of Policyholders) Regulations 1991, ensure that in the event of a life assurance company being unable to meet its liabilities to its policy owners, up to 90% of the liability to the protected policy owners will be met. The protection only applies to the solvency of Zurich International Life Limited and does not extend to protecting the value of the assets held within any unit-linked funds linked to your policy. Not for sale to residents or nationals of the United States including any United States federally controlled territory. Zurich International Life Limited is registered in Bahrain under Commercial Registration No. 17444 and is licensed as an Overseas Insurance Firm Life Insurance by the Central Bank of Bahrain. Zurich International Life Limited is authorised by the Qatar Financial Centre Regulatory Authority. Zurich International Life Limited is registered (Registration No. 63) under UAE Federal Law Number 6 of 2007, and its activities in the UAE are governed by such law. Calls may be recorded or monitored in order to offer additional security, resolve complaints and for training, administrative and quality purposes. Zurich International Life Limited provides life assurance, investment and protection products and is authorised by the Isle of Man Financial Services Authority. Registered in the Isle of Man number 20126C. Registered office: 43-51 Athol Street, Douglas, Isle of Man, IM99 1EF, British Isles. Telephone +44 1624 662266 Telefax +44 1624 662038 www.zurichinternational.com MSP13401 (717121002) (01/16) RRD