© 2008 Morningstar, Inc. All rights reserved. 3/1/2008 LCN200803-2013997 Principles of Investing.
-
date post
21-Dec-2015 -
Category
Documents
-
view
218 -
download
1
Transcript of © 2008 Morningstar, Inc. All rights reserved. 3/1/2008 LCN200803-2013997 Principles of Investing.
© 2008 Morningstar, Inc. All rights reserved. 3/1/2008LCN200803-2013997
Principles of Investing
Power of Reinvesting1988–2007
Past performance is no guarantee of future results. Hypothetical value of $1,000 invested at the beginning of 1988. Data does not account for taxes or transaction costs. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
$20k
1
1988 1991 1994 1997 2000 2003 2006
$9,330
$5,943$5,892
$1,638
10
11.8%9.39.32.5
Compound annual return
• Stocks with reinvestment• Stocks without reinvestment• Bonds with reinvestment• Bonds without reinvestment
Power of CompoundingHypothetical investment in stocks
Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
Years contributing: 10Annual amount contributed: $2,000
Years contributing: 10Annual amount contributed: $4,000
Investor BInvestor A
$40,000
$55,138
$20,000
$104,555
• Total amount invested• Compounded value at year-end 2007
0
20
40
60
80
100
120
$140k
1988–2007 1998–2007
Importance of Rebalancing1987–2007
Past performance is no guarantee of future results. Stocks: 50% large and 50% small stocks. Data is represented as of year-end 1987.Bonds: intermediate-term government bonds. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
50% 50%
55%
45%
69%
31%
62%
38%
73%
27%
0
10
20
30
40
50
60
70
80%
2002 2007199719921987
• Stock allocation• Bond allocation
Controlling Risk With Portfolio RebalancingThe risk and return of rebalanced versus non-rebalanced portfolios
Past performance is no guarantee of future results. Risk and return are measured by annualized standard deviation and compound annual return, respectively. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
Return
0
2
4
6
8
10
12
14%
Jan 1970–Dec 2007
Jan 1980–Dec 2007
Jan 1990–Dec 2007
Jan 1970–Dec 2007
Jan 1980–Dec 2007
Jan 1990–Dec 2007
Risk
12.6%12.4%
10.7%10.2%
9.8%
9.0%
11.0%
11.7%
9.1%
10.7%
11.3%
8.8%
• Non-rebalanced portfolio• Rebalanced portfolio
2,500
Dangers of Market TimingHypothetical value of $1 invested from 1926–2007
Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
$3,246
$19.23 $20.19
0
500
1,000
1,500
2,000
3,000
$3,500
Stocks Stocks minus best 40 months Treasury bills
Dangers of Market TimingHypothetical value of $1 invested from 1988–2007
Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
$9.33
$2.36 $2.41
0
2
4
6
8
$10
Stocks Stocks minus best 18 months Treasury bills
Market-Timing RiskThe effects of missing the best month of annual returns
Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
–40
–30
–20
–10
0
10
20
30
40% Return
1988 1994 2000 2006198219761970
• Annual return• Annual return minus best month
Reduction of Risk Over Time1926–2007
Past performance is no guarantee of future results. Each bar shows the range of compound annual returns for each asset class over the period 1926–2007. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
Small stocks Large stocks Government bonds Treasury bills
–60
–30
0
30
60
90
120
150%
1-year
Holding period
5-year 20-year 1-year 5-year 20-year 1-year 5-year 20-year 1-year 5-year 20-year
Compound annual return:12.5% 10.4%
5.5% 3.7%
Tax-Loss HarvestingSelling losing investments for a tax advantage
Past performance is no guarantee of future results. *Assumes capital gains tax rate of 15%.This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
• Taxable gain (loss)
• Taxes paid (credit)*$5,000
$750
($450)
($3,000)
$2,000
$300
(3,500)
(2,500)
(1,500)
(500)
500
1,500
2,500
3,500
4,500
$5,500
Investmentwith gain
Investment with loss
Results ofharvesting loss
Returns Before and After Inflation1926–2007
Past performance is no guarantee of future results. Assumes reinvestment of income and no transaction costs or taxes. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
10.4%
7.1%
5.5%
2.4%
3.7%
0.7%
Stocks Bonds Cash
0
2
4
6
8
10
12%
Before inflation After inflationBefore inflation After inflation Before inflation After inflation
Reduction of Portfolio Risk
Past performance is no guarantee of future results. Risk is measured by standard deviation. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
0
2
4
6
8
10
12
14% Risk
1 2 3 4 5 6 7 8
Number of randomly selected assets in portfolio
12.1%
10.0%
8.9%
8.4%8.0% 7.9% 7.7%
7.5%
Can You Stay on Track?
Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2008 Morningstar, Inc. All rights reserved. 3/1/2008
$18,439
$1,091
$37,344
$912
$60,895
$747
600
800
1,000
$1,200
100
1k
10k
$100k
1975 1985 1995 20051972 1973 1974
• Stocks• 50/50 portfolio• Bonds