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Investment Options for 2014

Investment Options for 2014. Presented by Laurence T. Hanslits, CFP 500 Liberty Street SE Suite 310 Salem, OR 97301 (503) 371-3333 larryh@thehgroup.com thehgroup-salem.com. Investment Options for 2014. CD’s Savings/Money Market/Checking Bonds Stocks Real Estate Commodities (Gold).

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Investment Options for 2014

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  1. Investment Options for 2014 Presented by Laurence T. Hanslits, CFP 500 Liberty Street SE Suite 310 Salem, OR 97301 (503) 371-3333 larryh@thehgroup.com thehgroup-salem.com

  2. Investment Options for 2014 • CD’s • Savings/Money Market/Checking • Bonds • Stocks • Real Estate • Commodities (Gold)

  3. What are the Advantages? • CD’s • Savings/Money Market/Checking • Bonds • Stocks • Real Estate • Commodities (Gold)

  4. What are the Dangers? • CD’s • Savings/Money Market/Checking • Bonds • Stocks • Real Estate • Commodities (Gold)

  5. WHAT ASSET CLASS IS BEST?

  6. Conservative Asset Class (T-Bills) Asset class returns sorted top to bottom, best to worst Disclosures. Assets are represented by the following indices: Large-Cap Stocks: Standard & Poor's 500; Mid-Cap Stocks: Russell MidCap; Small-Cap Stocks: Russell 2000; Foreign Stocks: MSCI-EAFE (in U.S. $); Foreign Bonds: Citi Non-$ World Government Bond; Corporate Bonds: Barclays Capital Credit; U.S. Gov't Bonds: Barclays Capital Government; Treasury Bills: Citi 3-Month Treasury; Real Estate: Dow Jones Wilshire REIT; Commodities: S&P GSCI; Inflation: Annual change in the Consumer Price Index for Urban Consumers (CPI-U), as calculated by the U.S. Bureau of Labor Statistics. Index performance is provided as a benchmark but is not illustrative of any particular investment. An investment cannot be made in an index. Market indexes do not include expenses, which are deducted from fund returns. Sources: Morningstar, U.S. Bureau of Labor Statistics. The performance data shown represents past performance, which is not a guarantee of future results. Investment returns and principal value will fluctuate, so that investors' shares, when sold, may be worth more or less than their original cost.

  7. Volatile Asset Class (Commodities) Asset class returns sorted top to bottom, best to worst Disclosures. Assets are represented by the following indices: Large-Cap Stocks: Standard & Poor's 500; Mid-Cap Stocks: Russell MidCap; Small-Cap Stocks: Russell 2000; Foreign Stocks: MSCI-EAFE (in U.S. $); Foreign Bonds: Citi Non-$ World Government Bond; Corporate Bonds: Barclays Capital Credit; U.S. Gov't Bonds: Barclays Capital Government; Treasury Bills: Citi 3-Month Treasury; Real Estate: Dow Jones Wilshire REIT; Commodities: S&P GSCI; Inflation: Annual change in the Consumer Price Index for Urban Consumers (CPI-U), as calculated by the U.S. Bureau of Labor Statistics. Index performance is provided as a benchmark but is not illustrative of any particular investment. An investment cannot be made in an index. Market indexes do not include expenses, which are deducted from fund returns. Sources: Morningstar, U.S. Bureau of Labor Statistics. The performance data shown represents past performance, which is not a guarantee of future results. Investment returns and principal value will fluctuate, so that investors' shares, when sold, may be worth more or less than their original cost.

  8. Moderate Allocation (Balanced) Asset class returns sorted top to bottom, best to worst Disclosures. Assets are represented by the following indices: Large-Cap Stocks: Standard & Poor's 500; Mid-Cap Stocks: Russell MidCap; Small-Cap Stocks: Russell 2000; Foreign Stocks: MSCI-EAFE (in U.S. $); Foreign Bonds: Citi Non-$ World Government Bond; Corporate Bonds: Barclays Capital Credit; U.S. Gov't Bonds: Barclays Capital Government; Treasury Bills: Citi 3-Month Treasury; Real Estate: Dow Jones Wilshire REIT; Commodities: S&P GSCI; Inflation: Annual change in the Consumer Price Index for Urban Consumers (CPI-U), as calculated by the U.S. Bureau of Labor Statistics; Balanced Portfolio: Annually rebalanced portfolio of 17.5% large-cap stocks, 7.5% mid-cap stocks, 5.0% small-cap stocks, 20.0% foreign stocks, 8.0% foreign bonds, 11.0% corporate bonds, 13.0% U.S. government bonds, 3.0% treasury bills, 10.0% real estate and 5.0% commodities. Index performance is provided as a benchmark but is not illustrative of any particular investment. An investment cannot be made in an index. Market indexes do not include expenses, which are deducted from fund returns. Sources: Morningstar, U.S. Bureau of Labor Statistics. The performance data shown represents past performance, which is not a guarantee of future results. Investment returns and principal value will fluctuate, so that investors' shares, when sold, may be worth more or less than their original cost.

  9. BONDS

  10. Bond Return Histograms The histogram illustrations on the following pages represent frequency distributions for the Ibbotson U.S. Long-Term Government Bond Index total returns based on a variety of time periods: • 1-year holding period • 5-year holding period* • 10-year holding period* • 20-year holding period* (*returns calculated on a rolling annualized basis) For each chart and each return range, the index return history is sorted from highest to lowest for each segment. For example, in the 1-year holding period chart, the years 1969, 1931, 1956, 1958, 1994, 1999 and 1967 fall into the return interval of -10% to -5%, with 1969 delivering the highest return and 1967 having the lowest return.

  11. U.S. LT Government Bonds Annual Return Histogram

  12. U.S. LT Government Bonds Annualized Rolling 5-Year Return Histogram

  13. U.S. LT Government Bonds Annualized Rolling 10-Year Return Histogram

  14. U.S. LT Government Bonds Annualized Rolling 20-Year Return Histogram

  15. Disclosures Performance represents the total return of the Ibbotson U.S. Long-Term Government Bond Index over a variety of time periods.  The Ibbotson U.S. Long-Term Government Bond Index is an unweighted index which measures the performance of twenty-year maturity U.S. Treasury Bonds. Each year a one-bond portfolio containing the bond having closest to 20 years to maturity is constructed. To measure holding period returns for the one-bond portfolio, it is prices (with accrued coupons) over the holding period and total returns are calculated, including investment of income. Index returns include dividend and/or interest income and do not reflect the removal of fees or expenses.  Index performance is provided as a benchmark but is not illustrative of any particular investment.  An investment cannot be made in an index and market indexes do not include expenses.     The performance data shown represents past performance, which is not a guarantee of future results.  Investment returns and principal value will fluctuate, so that investors' shares, when sold, may be worth more or less than their original cost.      Sources: Ibbotson, FPS calculations  

  16. Bond Real Return Histograms The histogram illustrations on the following pages represent frequency distributions for the Ibbotson U.S. Long-Term Government Bond Index total real returns based on a variety of time periods: • 1-year holding period • 5-year holding period* • 10-year holding period* • 20-year holding period* (*real returns calculated on a rolling annualized basis) “Real” returns are defined as the annual index return less each year’s respective annual change in the Consumer Price Index for Urban Consumers (CPI-U). This creates an inflation-adjusted real return history. For each chart and each return range, the index real return history is sorted from highest to lowest. For example, in the 1-year holding period chart, the years 2000, 1991, 1993 and 2002 fall into the return interval of 15% to 20%, with 2000 delivering the highest real return and 2002 having the lowest real return.

  17. U.S. LT Government Bonds Annual Real Return Histogram

  18. U.S. LT Government Bonds Annualized Rolling 5-Year Real Return Histogram

  19. U.S. LT Government Bonds Annualized Rolling 10-Year Real Return Histogram

  20. U.S. LT Government Bonds Annualized Rolling 20-Year Real Return Histogram

  21. Disclosures Performance represents the total return of the Ibbotson U.S. Long-Term Government Bond Index over a variety of time periods.  The Ibbotson U.S. Long-Term Government Bond Index is an unweighted index which measures the performance of twenty-year maturity U.S. Treasury Bonds. Each year a one-bond portfolio containing the bond having closest to 20 years to maturity is constructed. To measure holding period returns for the one-bond portfolio, it is prices (with accrued coupons) over the holding period and total returns are calculated, including investment of income. Index returns include dividend and/or interest income and do not reflect the removal of fees or expenses.  Index performance is provided as a benchmark but is not illustrative of any particular investment.  An investment cannot be made in an index and market indexes do not include expenses.     The performance data shown represents past performance, which is not a guarantee of future results.  Investment returns and principal value will fluctuate, so that investors' shares, when sold, may be worth more or less than their original cost.      The Consumer Price Indexes (CPI) measure changes in the prices paid by urban consumers for a representative basket of goods and services. Sources: Ibbotson, Bureau of Labor Statistics, FPS calculations  

  22. Bonds and Interest Rates How do changes in rates affect bond prices? If current interest rates increase, existing traditional bonds become less attractive and prices move lower. Conversely—if interest rates decrease—prices of traditional bonds become more attractive and increase. If: Then: Interest Rates Rise Bond Prices Fall Interest Rates Fall Bond Prices Rise

  23. Duration When interest rates changes, how much do bond prices change? A mathematical measure called “duration” estimates how sensitive a bond/portfolio is to rate changes. If the stated duration is 5 years, a 1% rate change will cause the bond/portfolio value to move about 5% in the opposite direction. If: Duration: 5 Years Then: Interest Rates Rise +1% Bond Prices Fall About -5% Interest Rates Fall -1% Bond Prices Rise About +5%

  24. STOCKS

  25. Disclosures Performance represents the total return of the Standard & Poor's 500 Index over a variety of time periods.  The Standard & Poor’s 500 is an unmanaged, market capitalization-weighted index of 500 widely held stocks of large-cap U.S. companies and is commonly used as a gauge of the overall U.S. equity market.  Index returns include dividend and/or interest income and do not reflect the removal of fees or expenses.  Index performance is provided as a benchmark but is not illustrative of any particular investment.  An investment cannot be made in an index and market indexes do not include expenses.     The performance data shown represents past performance, which is not a guarantee of future results.  Investment returns and principal value will fluctuate, so that investors' shares, when sold, may be worth more or less than their original cost.      The Consumer Price Indexes (CPI) measure changes in the prices paid by urban consumers for a representative basket of goods and services. Sources: Ibbotson, Bureau of Labor Statistics, FPS calculations  

  26. S&P 500 Return Histograms The histogram illustrations on the following pages represent frequency distributions for S&P 500 index total returns based on a variety of time periods: • 1-year holding period • 5-year holding period* • 10-year holding period* • 20-year holding period* (*returns calculated on a rolling annualized basis) For each chart and each return range, the index return history is sorted from highest to lowest for each segment. For example, in the 1-year holding period chart, the years 1966, 1957, 1941, 2001 and 1973 fall into the return interval of -15% to -10%, with 1966 delivering the highest return and 1973 having the lowest return.

  27. S&P 500 Annual Return Histogram

  28. S&P 500 Annualized Rolling 5-Year Return Histogram

  29. S&P 500 Annualized Rolling 10-Year Return Histogram

  30. S&P 500 Annualized Rolling 20-Year Return Histogram

  31. Disclosures Performance represents the total return of the Standard & Poor's 500 Index over a variety of time periods.  The Standard & Poor’s 500 is an unmanaged, market capitalization-weighted index of 500 widely held stocks of large-cap U.S. companies and is commonly used as a gauge of the overall U.S. equity market.  Index returns include dividend and/or interest income and do not reflect the removal of fees or expenses.  Index performance is provided as a benchmark but is not illustrative of any particular investment.  An investment cannot be made in an index and market indexes do not include expenses.     The performance data shown represents past performance, which is not a guarantee of future results.  Investment returns and principal value will fluctuate, so that investors' shares, when sold, may be worth more or less than their original cost.      Sources: Ibbotson, FPS calculations  

  32. S&P 500 Real Return Histograms The histogram illustrations on the following pages represent frequency distributions for S&P 500 index total real returns based on a variety of time periods: • 1-year holding period • 5-year holding period* • 10-year holding period* • 20-year holding period* (*real returns calculated on a rolling annualized basis) “Real” returns are defined as the annual index return less each year’s respective annual change in the Consumer Price Index for Urban Consumers (CPI-U). This creates an inflation-adjusted real return history. For each chart and each return range, the index real return history is sorted from highest to lowest. For example, in the 1-year holding period chart, the years 1940, 2000, 1966, 2001, 1957, 1981, 1977 and 1969 fall into the return interval of -15% to -10%, with 1940 delivering the highest real return and 1969 having the lowest real return.

  33. S&P 500 Annual Real Return Histogram

  34. S&P 500 Annualized Rolling 5-Year Real Return Histogram

  35. S&P 500 Annualized Rolling 10-Year Real Return Histogram

  36. S&P 500 Annualized Rolling 20-Year Real Return Histogram

  37. Principles of Asset Allocation

  38. Importance of Asset Allocation Security Selection 5% Asset Allocation 91% Market Timing 2% Other Factors 2% Based on academic research conducted by Brinson, Beebower and Singer (Financial Analysts Journal,1986 and 1991).

  39. Three Components in Determining Allocation of Assets Component #1 Asset Class Rates of Return

  40. Asset Class Relationships SpecialtyStocks SpecialtyStocks Commodities Commodities Small Cap Stock Small Cap Stock Mid Cap Stock Mid Cap Stock Volatility Foreign Stock Foreign Stock Specialty Bonds Specialty Bonds Foreign Bonds Foreign Bonds Large Cap Stock Large Cap Stock Real Estate Real Estate Corporate Bonds Corporate Bonds Government Bonds Government Bonds This is designed to show general long-term relationships, as opposed to specific results. Actual volatility achieved will likely vary.

  41. Cumulative Long-term Returns (80+ Years) Based on cumulative index total returns 1926-2013. Source: Ibbotson Associates, U.S. Bureau of Labor Statistics.

  42. Short-Term (1-Year) Returns (%) Based on single year index total returns. Source: Ibbotson Associates, Morningstar.

  43. Three Components in Determining Allocation of Assets Component #2 Asset Class Volatility (“Standard Deviation”)

  44. Distribution of Returns by Asset Class Histograms show frequency distributions of returns by range, based on index annual returns 1926-2013. Source: Ibbotson Associates, Morningstar.

  45. Reduction of Risk Over Time One Year Holding Period Five Year Holding Period Ten Year Holding Period Twenty Year Holding Period Ranges show historic highest and lowest return achieved based on index rolling return periods 1926-2013. Source: Ibbotson Associates, Morningstar.

  46. Three Components in Determining Allocation of Assets Component #3 Relative Volatility of the Asset Classes (“Correlation”)

  47. Correlations Positive Correlation Negative Correlation Correlation refers to how closely the returns of two distinct assets move relative to each other. Positive correlation implies a strong linear relationship, while negative correlation signifies weak one.

  48. Correlations of Asset Classes Long-term correlations calculated based on annual index returns (1972-2013). Source: Ibbotson Associates, Morningstar.

  49. Putting It All Together Minimize volatility by combining different classes of assets

  50. Diversifying Risk 100% Stocks 50% Stocks / 50% Bonds 75% Stocks / 25% Bonds Return 25% Stocks / 75% Bonds 100% Bonds Risk Based on long-term index total returns and standard deviations (1926-2013). Source: Ibbotson Associates, Morningstar.

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