1. Kootenay Valley Financial Services

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

3. 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

4. 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

5. 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

6. 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%

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

8. 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

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

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

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

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

13. 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% 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 1984 1983 1982 1981 1980 13.0% 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% 1979 1978 1977 1976 1975 1974 1973 1972 1771 1970 1969 1968 1967 1966 1965 1964 1963 1962 1961 1960 1959 1958 1957 1956 1955 1954 1953 1952 1951 1950 1949 1948 1947 1946 1945 1944 1943 1942 1941 1940 1939 1938 Now let’s look at INFLATION AVERAGE 3.6%4.8% 3.4%

14. 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 $ 85.00 $235,000 $ 25,000 $ 2.39 $ 2.15 $ 18,500 5.85% 8.43% 7.76% 6.68% 8.12% 4.98% 4.66% COMMODITY1970TODAYINFLATION Does History Really Repeat Itself? What is the TRUE Inflation rate?

15. 24% ? 1940196019802000 7% 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”

16. 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)

17. Real Return on $1000 Invested 1981-2001 Source: DataStream, Dec 2001 ($ 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 $6726.13 $3604.68 $2333.26 $1166.97

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

19. Brinson Study 60 80 100 0 20 40 Timing 2% Stock Selection 4% Asset Allocation 94% What IMPROVES Portfolio Performance

20. 1. 2. 3. Where should I invest my MONEY? Name THREE basic Asset Classes? Cash Stocks Bonds

21. Stocks DomesticInternational LargeSmall GrowthBlendValue Medium

22. 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%

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

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

25. U.S. vs. International Rolling 12-Month 40% 30% 20% 10% 0% 10% 20% 30% 40% 50% 60% 70% Returns 72 76 80 84 86 90 94 98 International outperforms U.S. U.S. outperforms International

26. ASIA 30.7 ASIA 199419931992199519961997199819992000 ASIA 108.3 ASIA -9.3 ASIA -8.3 ASIA 3.4ASIA -45.9 ASIA -4.5 ASIA 60.1 ASIA -39.8

27. Small Cap 30.2 Small Cap Small Cap 23.8 199419931992199519961997199819992000 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

28. Nasdaq 27.0 Nasdaq 199419931992199519961997199819992000 Nasdaq 19.3 Nasdaq 2.7 Nasdaq 36.2 Nasdaq 23.3 Nasdaq 26.9 Nasdaq 47.4 Nasdaq 77.4 Nasdaq -36.9

29. S&P 500 18.4 S&P 500 199419931992199519961997199819992000 S&P 500 14.5 S&P 500 7.5 S&P 500 33.9 S&P 500 23.5 S&P 500 39.2 S&P 500 37.8 S&P 500 14.0 S&P 500 -5.6

30. Canadian Bond 11.6 Canadian Bond 199419931992199519961997199819992000 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

31. Global Bond 9.8 Global Bond 199419931992199519961997199819992000 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

32. 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 5.5 199419931992199519961997199819992000

33. Europe 5.2 Europe 199419931992199519961997199819992000 Europe -4.9 Europe 9.8 Europe 38.4 Europe 29.6 Europe 22.2 Europe 18.8 Europe 8.8 Europe 35.3

34. 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 2.1 199419931992199519961997199819992000

35. TSE 300 -1.4 TSE 300 199419931992199519961997199819992000 TSE 300 7.4 TSE 300 31.7 TSE 300 -1.6 TSE 300 15 TSE 300 28.3 TSE 300 14.5 TSE 300 -0.2 TSE 300 32.5

36. International Int’l -3.1 199419931992199519961997199819992000 Int’l -11.0 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

37. 199419931995199619971998199920001994199319951996199719981999200019941993199519961997199819992000199419931995199619971998199920001994199319951996199719981999200019941993199519961997199819992000199419931995199619971998199920001994199319951996199719981999200019941993199519961997199819992000199419931995199619971998199920001994199319951996199719981999200019941993199519961997199819992000 ASIA 108.3 ASIA -9.3 ASIA -8.3 ASIA 3.4ASIA -45.9 ASIA -4.5 ASIA 60.1 ASIA -39.8 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 -36.9 S&P 500 14.5 S&P 500 7.5 S&P 500 33.9 S&P 500 23.5 S&P 500 39.2 S&P 500 37.8 S&P 500 14.0 S&P 500 -5.6 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 300 32.5 TSE 300 -0.2 TSE 300 14.5 TSE 300 28.3 TSE 300 15 TSE 300 -1.6 TSE 300 31.7 TSE 300 7.4 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 -11.0 2000 2001 ASIA -23.8 Small Cap - 11.5 Nasdaq -28.5 S&P 500 -11.9 Canadian Bond 8.1 Global Bond 5.2 T-Bills 4.7 Europe -15.0 Dow Jones -7.1 TSE 300 -12.6 Int’l -16.5 2002 Global Bond 18.5 Canadian Bond 10.5 T-Bills 2.5 ASIA -8.2 TSE 300 -12.4 Int’l -14.9 Dow Jones -16.8 Europe -17.5 Small Cap - 20.5 S&P 500 -22.1 Nasdaq -37.6

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

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

40. Determine the REAL rate of return YEAR12345 25% 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%

41. Determine the REAL rate of return of $100,000 IRRIRR 11.3% 12.2% YEAR 12345 25% - $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

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

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

44. 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 30 25 20 15 10 5 1 35 40 45 50 55 60 65 70 AGE Discover your optimal risk allocation

45. 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

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

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

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

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

50. 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

51. History and Crisis Events – DJI % Reaction

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

53. 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

54. 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

55. What do you HAVE? What do you NEED? 1.How many years do you have until you retire? 35+ 30 2520 1510 5 2. What is your investment time horizon? 35+ 30 2520 15 10 5

56. 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% $29,000 1.90 $55,100$55,100 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 1.03 1.07 1.10 1.14 1.17 1.21 1.25 1.29 1.33 1.38 1.42 1.47 1.52 1.56 1.62 1.67 1.72 1.78 1.84 1.90 1.96 2.02 2.09 2.15 2.22 2.30 2.37 2.45 2.53 2.61 2.70 2.78 2.87 2.97 3.06 3.16 3.27 3.37 3.48 3.59 3.71 3.83 3.96 4.08 4.22 Years to Retire Inflation Factor 20 1.90

57. Now we will estimate your Social Security Income Step 1. Enter your current monthly income. Annual income 12 = $42,000 12 = $3,500 Step 2. Enter your Year of Birth. 1965 Step 3. Age of Expected Retirement. 65

58. To Calculate Your Factor – Follow These Steps Step 4. Find the Social Security Factor. Year of Birth 1940 or Before 1941 to 1957 1958 or After 0.27 0.29 0.32 0.34 0.36 0.37 0.26 0.27 0.30 0.32 0.34 0.37 0.24 0.26 0.28 0.30 0.32 0.35 Age at Retirement 62 or Prior 63 64 65 66 67 $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 $3,500 65 0.34 0.32 0.3065 1965 1958 or After 0.30

59. 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

60. 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

61. Life Expectancy Factor Age at Retirement 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 18.75 18.41 18.00 17.66 17.25 16.83 16.42 16.00 15.50 15.08 14.58 14.08 13.50 13.00 12.42 11.83 11.25 10.58 9.92 9.25 8.58 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 $42,500 65 14.58 14.58 14.58 $619,650

62. 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 ?

63. 6%10%8% Yrs to Retire Growth Factor Growth Factor 1.06 1.12 1.19 1.26 1.34 1.42 1.50 1.59 1.69 1.79 1.90 2.01 2.13 2.26 2.40 2.54 2.69 2.85 3.03 3.21 3.40 3.60 3.82 4.05 4.29 4.55 4.82 5.11 5.42 5.74 6.09 6.45 6.84 7.25 7.69 8.15 8.64 9.15 9.70 10.29 10.90 11.56 12.25 12.99 13.75 1.08 1.17 1.25 1.36 1.47 1.59 1.71 1.85 2.00 2.16 2.33 2.52 2.72 2.94 3.17 3.43 3.70 4.00 4.32 4.66 5.03 5.44 5.87 6.34 6.85 7.40 7.99 8.63 9.32 10.06 10.87 11.74 12.68 13.69 14.79 15.97 17.25 18.63 20.12 21.72 23.46 25.34 27.37 29.56 31.92 1.10 1.21 1.33 1.46 1.61 1.77 1.95 2.14 2.36 2.59 2.85 3.14 3.45 3.80 4.18 4.59 5.05 5.56 6.12 6.73 7.40 8.14 8.95 9.85 10.83 11.92 13.11 14.42 15.86 17.45 19.19 21.11 23.23 25.55 28.10 30.91 34.00 37.40 41.14 45.26 49.79 54.76 60.24 66.26 72.89 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 305.74 10.0617.45 Figuring the Growth Factor Step 1. Determine the number of Years to retirement. AGE at Retirement Current AGE Years until Retirement65 35 30 Step 2. Look up Growth Factor at 8%. 10.06 X Step 3. Accumulated assets. $45,000 $45,000 = Step 4. Capital Available at 65. $452,700

64. 6%10%8% Yrs to Retire 12 25 40 57 75 95 117 141 168 198 230 265 304 347 393 444 500 560 626 699 777 863 956 1058 1168 1288 1419 1561 1715 1883 2065 2262 2476 2709 2961 3235 3532 3854 4202 4580 4990 5434 5914 6435 6999 12 25 39 55 72 90 110 132 155 181 208 238 269 304 341 381 423 470 519 572 629 691 756 827 902 983 1069 1162 1261 1367 1481 1602 1731 1870 2017 2175 2344 2523 2715 2920 3138 3371 3619 3884 4166 12 26 41 58 78 100 124 151 182 216 254 297 344 397 455 520 592 672 761 859 968 1088 1221 1368 1531 1710 1909 2128 2371 2638 2933 3259 3618 4014 4451 4933 5465 6050 6696 7407 8191 9055 10006 11054 12209 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 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 65. - = Step 3. Additional CAPITAL you need to create before retirement.$619,650 $166,950.... Step 4. Determine the Saving Factor Years until Retirement30 Look up Saving Factor at 8%. 1883 301367 1883 2638 Step 5. The Additional amount you need to SAVE = $89 per month

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