Market Volatility and the Long-Term Investor

1
Market Volatility and theLong-Term Investor

• Eileen Gannon, CIMA
• Vice President Wealth Management
• Senior Investment Management Specialist

2
The Recent Correction
Dow Jones Industrial Average 10/9/07 to 6/30/08
-19.9
Source Smith Barney
3
The Correction in Medium-Term Focus
Dow Jones Industrial Average 10/9/02 to 6/30/08
15,000
14,000
13,000
56
-19.9
12,000
11,000
10,000
9,000
8,000
7,000
Source Smith Barney
4
The Correction in Long-Term Focus
Dow Jones Industrial Average 12/31/77 to 6/30/08
1265
-19.9
Source Smith Barney
5
Get the Point?
300 point swings in the Dow in percentage terms
over time
Feb. 5, 2008 2.45
Source Smith Barney
6
A Clearer Perspective
Dow Jones Industrial Average on a Log Scale
2000 to 2002 Bear Market
1987 Crash
1973-74 Bear Market
Source Smith Barney
7
Is the Market Getting Riskier?
Postponing an attractive purchase because of
fear of what the general market might do will,
over the years, prove very costly.
Philip A. Fisher
8
Volatility Cycles
Daily Moves in the SP 500 Index of More Than 1
30-Year Average 57
Source Smith Barney
9
What About the Down Side?
Monthly Returns on the SP 500 December 1977
Through December 2007
Number of Monthly Returns
Source Smith Barney
10
A Look at Some Other Popular Asset Classes

• Treasury Bonds
• Corporate Bonds
• Treasury Bills
• Other Cash Instruments

11
And the Winner Is . . .
Cumulative Return on an Invested Dollar 1926
Through 2007
15,092
3,255
77
20
12
Small Cap
Large Cap
LT Gov Bonds
T-Bills
Inflation
Source Smith Barney
12
Rates of Return
Annualized Returns 1926 Through 2007
LT Gov Bonds
Small Stocks
Large Stocks
Inflation
T-Bills
Source Smith Barney
13
Leader of the Pack
Top Performing Asset Class 12/31/45 Through
12/31/07
Number of Periods
Stocks
LT Gov Bonds
T Bills
Source Smith Barney
14
Where Do We Go From Here?
An investor who has all the answers doesn't
even understand the questions.
Sir John Templeton
15
The Bear Facts
Declines of 20 or More in the SP 500 1950
Through 2007
Decline (in months)
Recovery (in months)
Date
Peak-to-Trough
86 4 20 3 70 21 7 14 11
2000-02 1990 1987 1980-82 1973-74 1968-70 1966 196
2 1956-57
-49 -20 -34 -27 -48 -36 -22 -28 -22
30.5 3 3 19 21 18 8
6 15
Average
-31.8
13.7
26.2
Source Smith Barney
16
The Real Story
17
The Bear Facts II
Declines of 20 or More in SP 500 Total Return
After Inflation
? 20 123 29 10 32
2000-02 1987 1973-74 1968-70 1962 1946-48
-47 -30 -52 -35 -23 -20
23 3 21 18 6 15
Average
-34.5
14.3
42.8
Source Smith Barney
18
The Case for Waiting Out the Storm
Cumulative Growth of Three Portfolios Dec. 31,
1972 Through September 1984
351,758
Investor 2 stays in stocks
Investor 3 adds 25,000
244,301
100,000
93,451
Investor 1 sells stocks, earns 5 return
Source Smith Barney Note The above represents
a hypothetical investment and does not reflect
the deduction for investment-management fees or
transaction costs. Actual results would be
reduced by these costs.
19
Buying at the Top
Cumulative Growth December 1961 Through December
2007
2.74 million
10,000
10,000
10,000
10,000
10,000
10,000
10,000
502,716
Source Smith BarneyNote The above represents a
hypothetical investment and does not reflect the
deduction for investment management fees or
transaction costs. Actual results would be
reduced by these costs.
20
Buying at the Bottom
Cumulative Growth December 1961 Through December
2007
10,000
3.68 million
10,000
10,000
10,000
10,000
10,000
10,000
10,000
469,367
Source Smith BarneyNote The above represents a
hypothetical investment and does not reflect the
deduction for investment management fees or
transaction costs. Actual results would be
reduced by these costs.
21
What the Experts Say About Market Timing
I have never met a person who could forecast the
market. Warren
Buffett
Dont try to buy at the bottom and sell at the
top. This cant be doneexcept by liars.
Bernard Baruch
There is no basis for assuming the average
investor can anticipate market movements more
successfully than the general public, of which he
is a part.
Benjamin Graham
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And the Losers . . .
Its no trick at all to be right on the
market.
Jesse Livermore
23
Easy Boat to Miss
Annualized Increase in the SP 500 1980 Through
2007 Net of Dividends
Source Smith Barney
24
On the Rebound
10 Worst Days for the SP 500 1950 Through 2007
Following Day
Following Year
Following Week
Date
Decline
Average
-8.0
3.0
15.5
3.6
Source Smith Barney
25
The Costs of Short-Term Investing
Returns on a Buy-and-Hold Approach Versus a
Market-Timing Strategy December 1977 Through
December 2007
3.87 million
1.71 million
Buy and Hold
Market Timing
Source Smith BarneyNote The above represents a
hypothetical investment and does not reflect the
deduction for investment management fees or
transaction costs. Actual results would be
reduced by these costs.
26
A Bad Time for Bad Timing

• Bear markets can be points of maximum
  vulnerability to poor market-timing decisions.
• Historically, net cash outflows by investors have
  marked major market bottoms.

27
A Winning Hand
28
The Odds Favor the Long-Term Investor
Distribution of Returns on the SP 500 1926
Through 2007
2006
2004
Up Years 59 (72) Down Years 23 (28)
1993
1997
1988
2003
1995
1986
1999
2007
1979
1991
1998
2005
1994
1989
1972
1996
1985
1983
1992
1971
1987
1980
1968
1982
1984
1975
1965
1976
1978
1955
1964
1967
1970
1950
1959
1963
1960
1945
1952
1961
1956
1938
1949
1958
1951
2002
1974
1935
1948
1936
1944
1954
1943
1937
1930
1928
1947
1927
1926
1933
1942
1931
Source Smith Barney
29
More Hits Than Misses
Probabilities of Various Annual Returns 1926
Through 2007

• Up 10 or more about 3 in 5
• Up 20 or more about 2 in 5
• Up 30 or more about 1 in 5
• Down 10 or more 1 in 8
• Down 20 or more 1 in 16
• Down 30 or more 1 in 40

Source Smith Barney
30
Time Pieces
Positive and Negative Returns on the SP 500
1945 Through 2007
One-Year Periods
Five-Year Periods
Ten-Year Periods
48
53
5
53
14
Negative Returns
Positive Returns
Source Smith Barney
31
In a Nutshell

• Volatility is a fact of life in the stock market.
• Over the long run, stocks have offered
  significantly higher returns than bonds or
  T-bills.
• Market timing can be an expensive undertaking.
• Historically, the odds have favored the bulls.

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Important Smith Barney Disclosures
Although the statements of fact and data in this
presentation have been obtained from, and are
based upon, sources that the firm believes to be
reliable, we do not guarantee their accuracy, and
any such information may be incomplete or
condensed. All opinions included in this
presentation constitute the firms judgment as of
the date of this presentation and are subject to
change without notice. This report is for
informational purposes only and is not intended
as an offer or solicitation with respect to the
purchase or sale of any security. Past
performance is not a guarantee of future results.
The charts depicted within this presentation
are for illustrative purposes only and are not
indicative of future performance. The data do not
reflect the material differences between stocks,
bonds, bills and inflation, such as fees
(including sales and management fees), expenses
or tax consequences. Common stocks generally
provide an opportunity for more capital
appreciation than fixed income investments but
are also subject to greater market fluctuations.
Corporate bonds, US Treasury bills and US
government bonds fluctuate in value but, if held
to maturity, offer a fixed rate of return and a
fixed principal value. Government securities are
guaranteed as to the timely payment of interest
and provide a guaranteed return of principal. The
principal value and interest on treasury
securities are guaranteed by the US government if
held to maturity. The Standard Poors 500 Index
is a market capitalization-weighted index of 500
widely held common stocks. Investors cannot
directly invest in an index. Actual results may
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