Kootenay Valley Financial Services

Two Great Questions in Life A$$ETS What do You Have? What do You Have? GOAL What do You Need? What do You Need?

Principles for Long Term Investment Success Asset class performance is ________________ over long time frames. Investment expense are ________ important than returns. Diversification is not always ____________. Mutual Funds are ____________ within asset classes. ______________ asset classes based on volatility enhances return. PREDICTABLE MORE EFFICIENT RANDOM COMBINING

What are Your CORE BELIEFS? Taxes WILL always go up, not down. ______ ______ To be financially SECURE income must keep pace with inflation. ______ ______ Life expectancies ARE greater than ever. ______ ______ Managed Equities ARE safer than CD’s and Bonds. ______ ______ Risk is a necessary evil. ______ ______ Yes No X X X X X

Speculative Foundation Investors typically have THREE types of Capital To achieve a consistent investment return – You must avoid the BIG MISTAKE! 3. _______________ 2. _______ 1. Core

The S&P Average Market Return over the last 10 Years? 12.7% Ibbotson, Morningstar and Fidelity studies show Average Investor Returns over the last 10 Years. 2.3%

The THREE Barriers to financial success 1._____________________ 2._____________________ 3._____________________ Taxes Inflation Inefficient Diversification INVESTMENT FRICTION

Let’s look at TAXES!!! If $1 doubles every year for 20 years $1,048,576 $ 1 00 = In a 40% Tax Bracket $12,089 In a 28% Tax Bracket $51,353 Notice the huge impact TAXES can have on your wealth

What is RISK? Name the TWO kinds of risk: 1. _____________________________ 2. _____________________________ Loss of Capital Loss of Purchasing Power

What Causes LOSS of CAPITAL? It’s all about Volatility

Whose Numbers are those? They are not Yours - UNLESS You are Buying or Selling

How do you measure Volatility? Average ROR Index Average ROR +/- 12% % -17% 12% High29% Low- 5% +29% - 5% Risk is ALL ABOUT Volatility

3.0% 2.7% 1.6% 1.7% 3.3% 2.7% 2.8% 3.0% 3.1% 6.1% 4.6% 4.4% 1.1% 3.8% 4.0% 3.8% 3.9% 8.9% 12.4% % 9.0% 6.8% 4.8% 7.0% 12.2% 8.8% 3.4% 5.5% 6.1% 4.7% 3.0% 3.3% 1.9% 1.2% 1.7% 1.2% 0.7% 1.5% 1.8% 3.0% 2.0% 0.4% - 0.5% 0.6% 0.9% 5.9% 5.8% - 1.8% 2.7% 9.0% 18.2% 2.2% 2.1% 3.2% 9.3% 9,7% 1.0% - 0.5% - 2.8% Now let’s look at INFLATION AVERAGE 3.6%4.8% 3.4%

Stamp Woman’s Skirt House Car Loaf of Bread ½ Gal Milk Median Income $.09 $ 7.50 $25,000 $ 3,400 $.23 $.50 $ 4,594 $.50 $ $235,000 $ 25,000 $ 2.39 $ 2.15 $ 18, % 8.43% 7.76% 6.68% 8.12% 4.98% 4.66% COMMODITY1970TODAYINFLATION Does History Really Repeat Itself? What is the TRUE Inflation rate?

24% ? % 14% % Over age 65 Living to age 90 Why is Inflation such a PROBLEM? The longer people live the higher the risk they will “Run Out of Money” The longer people live the higher the risk they will “Run Out of Money”

The ‘Real’ Return of a GIC GIC yearly return GIC after marginal tax rate (40%) GIC Real Return (after inflation) Source: DataStream, Dec 2001 ($ Cdn)

Real Return on $1000 Invested Source: DataStream, Dec 2001 ($ Cdn) GIC Real Return 20 yr avg 0.84% MSCI Real Return 20 yr avg 6.6% TSE 300 Real Return 20 yr avg 4.3% S&P 500 Real Return 20 yr avg 10% $1000 invested in 1981 $ $ $ $

Retirement But Remember – Risk is also Inflation So, which Risk is Guaranteed to Happen?

Brinson Study Timing 2% Stock Selection 4% Asset Allocation 94% What IMPROVES Portfolio Performance

Where should I invest my MONEY? Name THREE basic Asset Classes? Cash Stocks Bonds

Stocks DomesticInternational LargeSmall GrowthBlendValue Medium

Historical Return on Investment Volatility Index Small Cap Large Cap Corporate Bonds Gov’t Bonds Inflation Is asset class performance PREDICTABLE? 12.4% 11.3% 5.6% 5.1% 3.3% 39.62% 20.17% 8.78% 9.43% 16.61% 8.51% 4.57% 4.69% 1 Year 5 Year 4.42%3.29%

The Lipper Study Mutual Funds in the same asset class eventually Earn the same average rate of return. REGRESSION TO THE MEAN

Some asset classes move in OPPOSITE directions Zero+1 Negative – Moves in opposite directions Totally Random – no relationship Positive – Moves in the SAME direction

U.S. vs. International Rolling 12-Month 40% 30% 20% 10% 0% 10% 20% 30% 40% 50% 60% 70% Returns International outperforms U.S. U.S. outperforms International

ASIA 30.7 ASIA ASIA ASIA -9.3 ASIA -8.3 ASIA 3.4ASIA ASIA -4.5 ASIA 60.1 ASIA -39.8

Small Cap 30.2 Small Cap Small Cap Small Cap 14.3 Small Cap 4.4 Small Cap 27.7 Small Cap 16.9 Small Cap 25 Small Cap 4.0 Small Cap 0.8

Nasdaq 27.0 Nasdaq Nasdaq 19.3 Nasdaq 2.7 Nasdaq 36.2 Nasdaq 23.3 Nasdaq 26.9 Nasdaq 47.4 Nasdaq 77.4 Nasdaq -36.9

S&P S&P S&P S&P S&P S&P S&P S&P S&P S&P

Canadian Bond 11.6 Canadian Bond Canadian Bond 26.3 Canadian Bond 14.2 Canadian Bond 18.5 Canadian Bond 12.8 Canadian Bond -6.0 Canadian Bond 13.0 Canadian Bond 22.1 Canadian Bond -7.4

Global Bond 9.8 Global Bond Global Bond 18.1 Global Bond -4.3 Global Bond 20.7 Global Bond 12.3 Global Bond 9.6 Global Bond 9.2 Global Bond -1.1 Global Bond 10.2

T-Bills 7.1 T-Bills T-Bills 5.5 T-Bills 4.7 T-Bills 3.2 T-Bills 4.8 T-Bills 7.6 T-Bills 5.4 T-Bills

Europe 5.2 Europe Europe -4.9 Europe 9.8 Europe 38.4 Europe 29.6 Europe 22.2 Europe 18.8 Europe 8.8 Europe 35.3

Dow Jones 4.2 Dow Jones Dow Jones -6.2 Dow Jones 25.2 Dow Jones 13.7 Dow Jones 16.1 Dow Jones 22.6 Dow Jones 26.0 Dow Jones 33.5 Dow Jones

TSE TSE TSE TSE TSE TSE TSE TSE TSE TSE

International Int’l Int’l Int’l 20.3 Int’l 29.2 Int’l 6.6 Int’l 6.9 Int’l 8.5 Int’l 14.5 Int’l 38.6

ASIA ASIA -9.3 ASIA -8.3 ASIA 3.4ASIA ASIA -4.5 ASIA 60.1 ASIA Small Cap 23.8 Small Cap 4.0 Small Cap 25 Small Cap 16.9 Small Cap 27.7 Small Cap 4.4 Small Cap 14.3 Small Cap 0.8 Nasdaq 19.3 Nasdaq 2.7 Nasdaq 36.2 Nasdaq 23.3 Nasdaq 26.9 Nasdaq 47.4 Nasdaq 77.4 Nasdaq S&P S&P S&P S&P S&P S&P S&P S&P Canadian Bond 22.1 Canadian Bond -7.4 Canadian Bond 26.3 Canadian Bond 14.2 Canadian Bond 18.5 Canadian Bond 12.8 Canadian Bond -6.0 Canadian Bond 13.0 Global Bond 18.1 Global Bond -4.3 Global Bond 20.7 Global Bond 12.3 Global Bond 9.6 Global Bond 9.2 Global Bond -1.1 Global Bond 10.2 T-Bills 5.5 T-Bills 5.4 T-Bills 7.6 T-Bills 4.8 T-Bills 3.2 T-Bills 4.7 T-Bills 5.5 Europe 35.3 Europe 8.8 Europe 18.8 Europe 22.2 Europe 29.6 Europe 38.4 Europe 9.8 Europe -4.9 Dow Jones 13.7 Dow Jones 2.1 Dow Jones 33.5 Dow Jones 26.0 Dow Jones 22.6 Dow Jones 16.1 Dow Jones 25.2 Dow Jones -6.2 TSE TSE TSE TSE TSE TSE TSE TSE Int’l 38.6 Int’l 14.5 Int’l 8.5 Int’l 6.9 Int’l 6.6 Int’l 29.2 Int’l 20.3 Int’l ASIA Small Cap Nasdaq S&P Canadian Bond 8.1 Global Bond 5.2 T-Bills 4.7 Europe Dow Jones -7.1 TSE Int’l Global Bond 18.5 Canadian Bond 10.5 T-Bills 2.5 ASIA -8.2 TSE Int’l Dow Jones Europe Small Cap S&P Nasdaq -37.6

Why are Correlation Coefficients important? VALUE TIME This is Called INEFFICIENT Diversification

We need to create DISSIMILAR Price Movements This is Called EFFICIENT Diversification VALUE TIME A A & BA & BA & BA & B B

Determine the REAL rate of return YEAR % 25% -30%RETURN 14% 14% 15% 15% 13% 13% 16% 16% 4% 4%RETURN Average ROI 14.00%12.40% IRRIRR 11.3% 12.2%

Determine the REAL rate of return of $100,000 IRRIRR 11.3% 12.2% YEAR % - $125,000 25% - $125,000 25% - $156,250 25% - $156,250 25% - $195,312 25% - $195,312 25% - $244,140 25% - $244,140 14% - $114,000 14% - $114,000 15% - $131,100 15% - $131,100 13% - $148,143 13% - $148,143 16% - $171,846 16% - $171,846 RETURNRETURN Average ROI 14.00% 12.40% 12.40% -30% - $170,898 4% - $178,719 4% - $178,719

AVERAGE RATE OF RETURN FOR 9 YRS. OF 11.9% INTERNAL RATE OF RETURN ????????

Why is this IMPORTANT? This effect can ONLY be consistently achieved with EFFICIENT Diversification VALUE TIME 

100% Stocks 80% Stocks/20% Bonds 60% Stocks/40% Bonds 100% Bonds 20% Stocks/80% Bonds 40% Stocks/60% Bonds 50% Stocks/50% Bonds YEARS AGE Discover your optimal risk allocation

Three Professors from the Chicago School of Economics (Miller, Sharpe and Markowitz) received the NOBEL PRIZE in 1990 for these research conclusions: 1. Reduce Investment Risk 2. Increase Return 3. Create Dissimilar Price Movements 4. Use Asset Allocation

What is the EFFICIENT FRONTIER? 100% 100% International International 100% 100% Large Cap Large Cap Return Risk Optimum Mix

Recession #1 – 1974/75 Source: Datastream US GDP and S&P 500 Recession Ends

Recession #2 : 1981/1982 US GDP and S&P 500 Source: Datastream Recession Ends

Recession #3: 1990/1991 US GDP and S&P 500 Source: Datastream Recession Ends

A Tale of Three Recessions 1H ’91+ 34%Sept 1990 Q1 ’83+ 67%Aug 1982 Q2 ’75+ 47%Dec 1974 Recession EndS&P +1 yearMarket bottom

History and Crisis Events – DJI % Reaction

1. What do you have? 2. What do you need? 3. How do you fill the gap?

What do you HAVE? What do you NEED? 1.Invest in pure assets Institutional instead of retail Avoid style drift 2. Combine dissimilar asset classes Stay on the efficient frontier Utilize multiple asset classes

What do you HAVE? What do you NEED? 3. Minimize the tax effect Reduce turnover Use tax-free investments when appropriate Achieve deferred TAX growth, if possible 4. Minimize expenses No wrap fees No loads No surrender charges No trading costs

What do you HAVE? What do you NEED? 1.How many years do you have until you retire? What is your investment time horizon?

How much retirement income Will you NEED each month? $ _____________ Current Annual Income $ _____________ Your retirement goal = X INFLATION $ _____________ Your INFLATION Factor = INFLATION $ _____________ Your INFLATION Adjusted Income at retirement. $42,000 $ _____________ % required at retirement X70% $29, $55,100$55, Years to Retire Inflation Factor

Now we will estimate your Social Security Income Step 1. Enter your current monthly income. Annual income 12 = $42, = $3,500 Step 2. Enter your Year of Birth Step 3. Age of Expected Retirement. 65

To Calculate Your Factor – Follow These Steps Step 4. Find the Social Security Factor. Year of Birth 1940 or Before 1941 to or After Age at Retirement 62 or Prior $3500 per month 3.And your AGE at retirement. ________ 2.Then use your Birth YEAR. ________ 4. FIND the correct monthly factor. ________ 1. Using your income, find the correct BOX. _________ $3,500 $3, or After 0.30

Now we will estimate your Social Security Income Step 5. Figure your Social Security Income. Smaller First – Determine The Smaller Of Your Annual Income or $68,400. Second – Input your Social Security Factor. X Third – Calculate your projected Social Security Benefit. =0.30 $42,000 $12,600

Let’s calculate how much NET INCOME you’ll need at retirement. you’ll need at retirement. $55,100$55,100 First – Enter your Adjusted Annual Income at retirement.$12,600 Second – Now enter your projected annual Social Security benefit. - Third – Your NET Inflation Adjusted Retirement (NIA) Income. =$42,500

Life Expectancy Factor Age at Retirement Pension Factor Pension Factor Let’s calculate how much CAPITAL will be needed to provide this income. Step 1. Your projected NIA income. Step 2. Your projected pension benefit, if any. - Step 3. Your NIA income less any pension benefit. = Step 4. Now select your life expectancy factor. X Step 5. Total CAPITAL required to meet your goal. =$42,500 $0 $0 $42, $619,650

How much will my current SAVINGS help me reach my goal. List your Assets – 401(k), IRA, 403(b), Mutual Funds 1. __________________ 2. __________________ 3. __________________ ________________ $15,000 $25,000 $ 5,000 Type FMV Total IRA 401(k) Mutual Funds $45,000 Step 1. Your Accumulated assets. Step 2. Growth Factor. X$45,000 ?

6%10%8% Yrs to Retire Growth Factor Growth Factor Figuring the Growth Factor Step 1. Determine the number of Years to retirement. AGE at Retirement Current AGE Years until Retirement Step 2. Look up Growth Factor at 8% X Step 3. Accumulated assets. $45,000 $45,000 = Step 4. Capital Available at 65. $452,700

6%10%8% Yrs to Retire Saving Factor Saving Factor How much MORE will you have to SAVE to reach your goal? Step 1. Total CAPITAL required to meet your goal.$452,700 Step 2. Capital Available at = Step 3. Additional CAPITAL you need to create before retirement.$619,650 $166, Step 4. Determine the Saving Factor Years until Retirement30 Look up Saving Factor at 8% Step 5. The Additional amount you need to SAVE = $89 per month

1. What do you have? 2. What do you need? 3. How do you fill the gap?