Positioning Your Portfolio for Today

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Positioning Your Portfolio for Todays Volatile
Markets and the Coming Recovery

• By Matthew Lekushoff
• Financial Advisor
• Matthew.lekushoff_at_raymondjames.ca
• www.matthewlekushoff.com

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Topics

• How Did We Get Here?
• The Importance of Multiple-Class Investing
• Human Nature
• Financial/Life Planning
• Were Do We Go From Here?

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How Did We Get Here
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How Did We Get Here?
Success is simple..but not easy! Lance
Armstrong

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How Did We Get Here?

• Roots in the aftermath of 9/11
• Lowering interest rates to prevent recession
• Housing Bubble
• Lending Bubble
• Social Proof
• Ignoring History

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How Did We Get Here?

• Irrational Exuberance
• Tulipmania
• The South Sea Bubble
• Dot Com Bubble

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Asset Allocation
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Asset Allocation

• Let every man divide his money into three parts,
  and invest a third in land, a third in business,
  and a third let him keep in reserve
• Talmud
• Circa 1200 B.C. 500 A.D.

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Historical ReturnsSP Index from 1825 to 2008
Percentage Total Return
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Diversification (random returns)
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Objective of an Investor

• Rational investor wants to maximize returns with
  a given amount of risk
• Basis of
• Modern Portfolio Theory

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Modern Portfolio Theory

• Efficient Frontier Key principle behind
  portfolio management
• Optimal Allocation

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Investment Risks

• Event Risk (cant control)
• economic, social and political events
• Market Risk (can control)
• Security Selection
• Concentration
• Asset Allocation
• Cash, Bonds, Stocks (sector, geography), Real
  Assets
• Inflation (rising prices cant control)
• Taxes (dependant on source of income)
• Human Nature (can control)

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Variability of Performance
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Factors Affecting Risk Tolerance

• Time horizon
• Ability to handle market volatility
• Aggressiveness of goals
• Different type of goals
• Compartmentalizing

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Types of Assets

• Cash
• T-Bills/GIC
• Fixed Income
• Bonds
• Equities/Real Assets
• Canadian Equities
• US Equities
• International Equities
• Commodities
• Real Estate

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Long Term Diversification

• Annual Returns for Decade Ending February 2009
• US Stocks (-1)
• International Stocks (1)
• Real Estate (7)
• Natural Resources (7)
• Rebalance on a regular basis

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Did Diversification Work During the Crisis?

• What Worked?
• Cash/T-bills
• Bonds
• What Kind of Worked?
• Gold/Precious Metals
• Real Estate
• What Didnt Work?
• International Diversification

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Why didnt it work as well as hoped?

• In times of crisis only two things matter
• Risk and Safety
• Investors were fleeing risk into safety

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Asset Allocation

• Conclusion
• In times of crisis allocation between cash,
  bonds and equities is most important
• Over the long term (5 years) allocation between
  and rebalancing of multiple asset classes is very
  important

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Human Nature
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Human Nature
We have seen the enemy..and he is us! The Pogo
Papers
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Human Nature

• Morningstar Survey
• Looked at all 17 categories of securities they
  follow
• In all 17 the time weighted returns are higher
  than the dollar weighted returns
• Top 10 Internet Funds 1997-2002
• Time Weighted average 1.5/year
• Dollar weighted -72
• Tax Bill was 24 due to turnover

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Human Nature

• Over Confidence
• 82 of students consider themselves better than
  average drivers
• Men are more overconfident than women in areas
  like finance
• Overconfidence leads to too much trading and
  higher fees as well as taking too much risk

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Human Nature

• Pride and Regret (Get-Evenitis)
• Selling winners too early and losers too late
• - Investors are 50 more likely to sell a
• winner than a loser
• Would I buy this stock if I didn't own it?

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Human Nature

• Considering the Past
• People tend to use a past outcome as a factor in
  evaluating a current risky situation
• People take a larger risk after large gains and
  less risk after loses
• However sometimes after losing money some
  investors will "double down" to get even

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Human Nature

• Mental Accounting
• Viewing investments on an individual basis as
  opposed to part of the whole.

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Human Nature

• Representativeness and Familiarity
• Canadians owning mostly Canadian stocks
• Residents of Atlanta owning lots of Coke
• Employees owning a high percentage of their
  company's stock.
• Over 50 of the time an investor becomes
  interested in a stock because another person
  mentions it

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Human Nature

• Social Interaction and Investing
• Herding or social proof
• Buying Nortel because everyone else owns it.
• Emotion and Investing
• Compared the daily return in 26 stock exchanges
  around the world to the weather in the 26
  exchanges.
• When they annualized the difference between the
  sunniest and worst days the difference was 24.6

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Human Nature

• Conclusion
• Investors need to work hard to be rational!!

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Financial/Life Planning
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Financial/Life Planning

• I have always thought that one man of tolerable
  abilities may work great changes, and accomplish
  great affairs among mankind, if he first forms a
  good plan!
• 
  
  Benjamin Franklin

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Why do we invest

• To reach a goal or objective
• Buy a house
• Retirement
• Achieve financial independence
• Protect family
• Create a legacy

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Goal of an Investor

• Increase the probability of reaching your goals
• or
• Reduce the probability of not reaching your goals
  

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Financial/Life Planning

• Two biggest risks to achieve your financial goals
• Volatility Short Term
• Inflation Long Term

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Inflation
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Order of Returns
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Reduce Risk of Large Losses

• Making mistakes early can hurt you in the long
  run
• Invest 100,000
• Investment drops 20 to 80,000
• You need to earn 25 to break even again
• 80,000 X 1.25 100,000

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Probability of Reaching Goals
Uncertain lt75 A confidence level below 75 means
that there is too high of a chance you may not
achieve your goals. Adjustments need to be made
to your goals, your allocation or your
investments
Sacrifice gt90 A confidence level above 90
indicates that you are needlessly sacrificing
your financial goals. You could take less
investment risk, achieve larger or more goals and
still maintain confidence in your financial
future.
Confidence Comfort (in balance) A confidence
level between 75 and 90 should give you
confidence that your goals can be met. This
reading indicates a set of goals that is
manageable and avoids unnecessary investment
risk. You may find at some future date minor
changes may be suggested, but they are likely to
be small, easily manageable and exposed well in
advance through ongoing monitoring. This analysis
simultaneously evaluates your goals, your
investment allocation and your assets to
determine how confident you can be that your
goals will be met. The Wealthcare process
subjects your goals and investment strategy to
this sophisticated stress testing process which
simulates 1000 market environments, both good and
bad. Your Confidence or Comfort is the
percentage of the 1000 simulations that achieve
your goals. For example, if you achieved all of
your goals or more in 830 of 1000 tests your
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Achieving Your Goals
3,000,0001,800,000200,000
54 55 56 57
58 59 60 61 Age
Monitoring Your ProgressAs financial markets,
financial goals and priorities change, we monitor
your progress on an ongoing basis. The Wealthcare
process identifies in advance the future
portfolio values needed to maintain balance
between confidence and undue sacrifice. This
monitoring process enables us to track where your
current portfolio falls so we can alert you of
potential problems, or help you achieve
additional goals you may have. Additionally, this
dynamic process recognizes that throughout your
life, goals and priorities change. In such cases
we will design new recommendations for you.
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Financial/Life Planning

• Estate Planning
• Risk Planning
• Tax Planning
• Business Planning
• Retirement Planning
• Life Planning

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Financial/Life Planning

• Conclusion
• Having a well thought out plan is essential in
• order to reach your goals and get the most out
  of your life
• Even the best plans need to be updated on a
  regular basis

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Where Do We Go From Here?
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Questions?

• By Matthew Lekushoff
• Financial Advisor
• Matthew.lekushoff_at_raymondjames.ca
• www.matthewlekushoff.com

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• Recommended Readings
• Extraordinary Popular Delusions and the Madness
  of Crowds
• Charles Mackay
• Influence and the Psychology of Persuasion
• Robert Cialdini
• Seeking Wisdom From Darwin to Munger
• Peter Bevelin
• The Importance of Muliti-Class Investing (White
  Paper)
• Roger Gibson