Investment SIG Thursday, January 14, 2010 Agenda Market Update Presentation and Discussion on Investment Diversification Download Demonstration - Ben Anthony.

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Investment SIG Thursday, January 14, 2010 Agenda Market Update Presentation and Discussion on Investment Diversification Download Demonstration - Ben Anthony Open Discussion on Investment Opportunities and Cautions Inputs from Attendees: Investment Information Exchanges Preferences for Future Subjects

Investment SIG Thursday, January 14, 2010 Agenda Market Update

Yahoo Finance DJIA stock trends Vanguard Total Bond Index (VBTLX)

Investment SIG Thursday, January 14, 2010 Agenda Market Update Presentation and Discussion on Investment Diversification

Investment Diversification Reduce Risk And Increase Return

Diversification (The Theory) Modern Portfolio Theory (MPT) Invented circa 1950 by Harry Markowitz (He received the Nobel Prize in Economics in 1990) Told how to combine stocks in a portfolio to give the least risk for the return sought He found that a portfolio of risky stocks could be purchased in such a way so that the whole portfolio was less risky than the individual stocks in it.

Diversification (More onThe Theory) The key is to select securities that have correlation coefficients that are less than one. How can you tell the correlation? MPT uses R Squared, Beta, and Alpha to measure this for mutual funds R Squared of 100 correlates exactly with a referenced index. A 25 means it is only moves about 25% in the same direction as the index

Diversification (More onThe Theory) How can you tell the correlation? MPT uses R Squared, Beta, and Alpha to measure this for mutual funds R Squared of 100 correlates exactly with a referenced index. A 25 means it is only moves about 25% in the same direction as the index Beta measures the volatility or degree of movement with the index. A 1.5 Beta means that if the index moves up 10 points, the mutual fund moves up 15 points Alpha measures the performance or contribution of a mutual fund manager relative to the indes

Diversification (More onThe theory) Most important is the allocation of investments according to asset classes such as: Stocks, Bonds, Cash, Commodities, Real Estate, Gold Also, next allocate with in the asset classes to: Geography (Developed and / or Emerging Markets) Sectors of the economy

Diversification (The Practice) Does it work? There are many successful examples of the application of the MPT since it was developed Studies show that the volatility of a portfolio of a single stock portfolio can be reduced 40% by increasing the portfolio to 20 stocks. However, the best effect is to mix the most risky with safest investments—especially if they don’t have correlations approaching one.

Diversification (The Practice) Does it work? One must balance risk and returns. A totally risk free portfolio will be eroded by inflation over the years Look for middle ground between asset preservation and potential gain

Diversification (The Practice) NOTE: Although a rising tide floats all boats A Tsunami will upset nearly all boats and sink many. However, even though diversification becomes temporarily thwarted by a financial panic, when markets recover to “normal times” diversification becomes ever more importance to recover your losses in a rational way

Diversification (The Practice) Does it Work? All 12 Morningstar stock sectors suffered double digit losses for 2008 but: The average Financial stock lost 40% The average Health care stock lost 20%

Diversification (The Practice) Does it work? In the 2008 a Vanguard 500 index mutual fund lost 37% With a mix of 80 %Vanguard 500 and of 20% the Vanguard Total Bond, a portfolio would have lost 29% A mix of 60% / 40% would have lost 20%

Diversification (The Practice) How do you diversify? Assess your own risk tolerance Decide what asset classes are OK for you and what percent to put in them There are web sites that offer calculators for asset allocation and comparisons for age standards

Diversification (The Practice) How do you diversify? (Keep the theory in mind ): Decide how much to put into bonds Decide the amount for equities and which of the 12 Equity Sectors you wish to invest in and in what proportion Decide geographically where you want to invest

Diversification (The Practice) How do you diversify? Some Tools: You can construct model portfolios in several web sites to watch the performance hypothetically if you choose. The calculators will show your allocation percentages for your portfolio and compare them with standards for your age

Diversification (The Practice) How do you diversify? Some Tools: Morningstar has a portfolio X-Ray tool that will analyze you entire portfolio, including mutual funds and ETFs. It will show how many dollars you have in various categories and in every stock in your mutual fund portfolio as well.

Diversification (The Practice) How do you diversify for a balanced return? Common mistakes: Dividing investments among many stocks or funds that are in the same sector If you use advisors or multiple advisors, failing to telling them your total picture may yield a sub optimized diversification

Diversification – 2 nd Opinions Does everyone agree with MPT and Diversification: NO Warren Buffet: Diversification is protection from ignorance. Put your eggs in one basket and watch it Peter Lynch: Deworsification Charlie Munger: Wider investment = mediocre My Observation about insiders and internal knowledge: Facts do not always predict stock prices.

Investment Diversification The End

Investment SIG Thursday, January 14, 2010 Agenda Market Update Presentation and Discussion on Investment Diversification Download Demonstration - Ben Anthony

Download of MLP Data Demo By Ben Anthony - MSN Money.com

Investment SIG Thursday, January 14, 2010 Agenda Market Update Presentation and Discussion on Investment Diversification Download Demonstration - Ben Anthony Open Discussion on Investment Opportunities and Cautions

Open Discussion Any one impressed with any specific stocks, bonds, ETFs? How about Economic Sectors or Geographic areas? Energy? Utilities? New Technology?

Investment SIG Thursday, January 14, 2010 Agenda Market Update Presentation and Discussion on Investment Diversification Download Demonstration - Ben Anthony Open Discussion on Investment Opportunities and Cautions Inputs from Attendees: Investment Information Exchanges Preferences for Future Subjects

Inputs from Attendees s I send as SIG Information Exchanges: Feed Back? Useful? What percent of them do you read? Suggestions for improvements?

Any Preferences for special subjects for February 11 th ? Candidates: Utilities Sector Investments On line sources of investment information Investing in breakthrough technologies How to find and evaluate investment candidates Exchange Traded Funds vs. Mutual Funds Index Mutual Funds vs. Managed Mutual Funds

SEE YOU NEXT MONTH FEBRUARY 11TH.