Warning: Past performance is not a reliable guide to future performance.

DON’T TRY THIS AT HOMEA DIY APPROACH TO INVESTING MAY BE BAD FOR YOUR WEALTH

Gary Connolly, iCubed

D o n ’ t Tr y T h i s a t H o m e ! G a r y C o n n o l l y

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D o n ’ t Tr y T h i s a t H o m e ! G a r y C o n n o l l y

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Investing without professional financial adviser

Would you make an investment without taking advice from a professional financial advisor?

If yes, who would you take advice from – business associates, solicitor, family etc.?

Source: iCubed Survey

Chart1

Yes

No

YES []

NO []

51

49

Chart1

Family

Business associates

Internet

Solicitor

Media

Other (Please specify):

[]%

[]%

[]%

[]%

[]%

[]%

60.2

41.7

41.7

23.3

19.4

8.7

D o n ’ t Tr y T h i s a t H o m e ! G a r y C o n n o l l y

Theme4

Advice is an imperative.

Equally client buy-in to the process.

However, we are dealing with clients that believe in some fundamental untruths.

AGENDA

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Fundamental Untruth #1

Fundamental Untruth #2

Fundamental Untruth #3

A Remedy

D o n ’ t Tr y T h i s a t H o m e ! G a r y C o n n o l l y

Financial Literacy6

1. You put €100 in a savings account earning 2 per cent annually. How much would there be at the end of the year – €100, €102, or €120?

2. High inflation means that the cost of living is increasing rapidly, True or False?

3. True or False: It is usually possible to reduce investing risks by buying a wide range of stocks and shares?

58%

78%

64%

Source: OECD/INFE International Survey of CORE COMPETENCIES FRAMEWORK ON FINANCIAL LITERACY FOR ADULT S

D o n ’ t Tr y T h i s a t H o m e ! G a r y C o n n o l l y

Financial Literacy7

Concerned on one level as low levels of financial literacy are associated with • Usage of high-cost products and failure to plan for retirement,

lack of participation in the stock market.

Less concerned as it relates to investing.• The great menace “is not ignorance, but illusion of

knowledge”.

Self-perceived expertise causes people to think they know more than they really do.

D o n ’ t Tr y T h i s a t H o m e ! G a r y C o n n o l l y

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Fundamental Untruths#1

Risk & Return

DO WE REALLY UNDERSTAND RISK?9

How many roads must a man walk down, before you can

call him a man.

Dad, do you even know what rhetorical

means?

No dad, it’s a rhetorical question.

7.

Ok, 8.

Do I know what rhetorical means?

WHAT IS RISK?10

Because there is a common word ‘risk’ doesn’t mean there is a common concept.

If you asked any of your friends (not employed in financial services) what is investment risk, what is the most likely answer?

Chance that I will lose money?

WHAT IS RISK?11

How many will say the fluctuations in the capital value of my investment?

You might think this is the same as “Chance that I might lose money”, but it is not.

And this is the fundamental untruth #1.

The financial services industry is built around this untruth. That risk is the fluctuations in the capital value of a portfolio and that it is the same as losing money.

D o n ’ t Tr y T h i s a t H o m e ! G a r y C o n n o l l y

The Chance of Losing Money12

Negative Periods: 37/403 = 9%

*Source: J&E Davy. Based on data from 1976-2016 (Q2). Returns are gross of any charges or tax.

Warning: Past performance is not a reliable guide to future performance. The value of your investment may go down as well as up. This product may be affected by changes in currency exchange rates.

D o n ’ t Tr y T h i s a t H o m e ! G a r y C o n n o l l y

Is not the same as the fluctuations along the way…13

*Source: J&E Davy. Based on data from 1976-2016 (Q2). Returns are gross of any charges or tax.

Negative Periods: 153/480 = 32%

Warning: Past performance is not a reliable guide to future performance. The value of your investment may go down as well as up. This product may be affected by changes in currency exchange rates.

D o n ’ t Tr y T h i s a t H o m e ! G a r y C o n n o l l y

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Worrying About The Wrong Risks

The annual number of Americans killed, on average, by lawnmowers - compared to two Americans killed annually, on average, by immigrant Jihadist terrorists.

Source: Royal Statistical society of Britain.

69

D o n ’ t Tr y T h i s a t H o m e ! G a r y C o n n o l l y

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Worrying About The Wrong Risks Contd.

Source: Irishtimes.com

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D o n ’ t Tr y T h i s a t H o m e ! G a r y C o n n o l l y

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The Concept of Money (or Currency)?

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Risk that Capital Does Not Keep Pace With Inflation

11p60p

LIFE EXPECTANCY & INVESTING TIME HORIZON18

At age 65, a couple has a

50% chance of living until 90.

A 25 year time horizon

translates into arguably much

greater tolerance for

risk if the measure of risk is inflation as

opposed to the measure of risk

being fluctuations in capital value.

Warning: Past performance is not a reliable guide to future performance.

D o n ’ t Tr y T h i s a t H o m e ! G a r y C o n n o l l y

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Fundamental Untruth#2

Return

D o n ’ t Tr y T h i s a t H o m e ! G a r y C o n n o l l y

Often have invoked this chart to remind advisers that losses can be painful because of the fact that they require much larger percentage gains to make them back:

Downside Risk Management20

Source: Crestmont research

Warning: Past performance is not a reliable guide to future performance.

D o n ’ t Tr y T h i s a t H o m e ! G a r y C o n n o l l y

But what about the opposite? The opportunity cost of missing out on significant gains in the markets can be just as (or more) important than avoiding large losses.

Upside Risk Management21

Source: http://awealthofcommonsense.com/2017/12/upside-risk-management/

D o n ’ t Tr y T h i s a t H o m e ! G a r y C o n n o l l y

Gains typically last much longer than the losses if we use history as our guide.

Upside Risk Management22

Source AWealthofCommonsense.com/

Warning: Past performance is not a reliable guide to future performance.

D o n ’ t Tr y T h i s a t H o m e ! G a r y C o n n o l l y

• On the day I was born the S&P500 closed at 112.

• Today it is c. 2,800• A multiple of 24x its 19xx level.

• Most indices are quoted in price terms –not including dividends.

• Dividends included my lifetime return is actually 106x.

Birthday Calculator

PHOTO CAPTION

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Source: https://us.spindices.com/indexology/djia-and-sp-500/birthday-calculator

D o n ’ t Tr y T h i s a t H o m e ! G a r y C o n n o l l y

• During this time period, the market has experienced short term declines averaging just over 15% every year.

• In six of those years, there were declines in excess of 25% (roughly every 7 years).

• Greatest risk was not whether they were in the market during these tough declines.

• Their greatest risk was whether they were out of the market for the much more frequent advances.

Birthday Calculator

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D o n ’ t Tr y T h i s a t H o m e ! G a r y C o n n o l l y

• Monday 15th September 2008 files for bankruptcy.• S&P 500 falls 45% over the next six months.• $10,000 on the eve of the collapse, today is worth?

25

Timing?

$5,500

$10,000

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Timing?

• 11.2% compound for the decade.

$28,700

D o n ’ t Tr y T h i s a t H o m e ! G a r y C o n n o l l y

US Stock Market Drawdowns: Manage Expectations27

Warning: Past performance is not a reliable guide to future performance.*Source: J&E Davy. Based on data from Jan 1, 1927– 31 December 2017. Returns are gross of any charges or tax.

D o n ’ t Tr y T h i s a t H o m e ! G a r y C o n n o l l y

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Where Adviser is Key

Calibrating expectations properly.

How to manage both downside and upside risk. Defining risk for a client.

Not overly focusing on the negatives.

Distinguishing between safety and security.

D o n ’ t Tr y T h i s a t H o m e ! G a r y C o n n o l l y

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The Buffett Bet

D o n ’ t Tr y T h i s a t H o m e ! G a r y C o n n o l l y

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How’d it Pan Out?

+125%+36%

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Their Stake

Each placed $318,250 in to US Treasuries @ 4.56% coupon.

• Compounds to $500,000 over 10 years.

In December 2012 – bonds were yielding 0.88%.

Recycled the funds into Berkshire ‘B’ shares.

December 2017: Donated $2.2m to charity ($1.2m more).

D o n ’ t Tr y T h i s a t H o m e ! G a r y C o n n o l l y

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Lessons From The Buffett Bet

Academic view of risk is nonsense.

A portfolio with no activity for 10 years beat the likely hyper-active approach of 200 hedge fund managers.

D o n ’ t Tr y T h i s a t H o m e ! G a r y C o n n o l l y

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Fundamental Untruth#3

Activity

D o n ’ t Tr y T h i s a t H o m e ! G a r y C o n n o l l y

Call to Action in Life is Strong34

D o n ’ t Tr y T h i s a t H o m e ! G a r y C o n n o l l y

Bias to Action35

Average investor turned over 75 percent of his/her portfolio each year.

• Reduced net performance by 3.7 percent compared with the market as a whole.

Also investors had a tendency to sell shares that had risen in value while holding on to losing investments, reducing returns further.

Dormant investors not only save on trading costs but also avoid ill-timed trades. tendency for retail investors to pile in when everything is rosy and positive and to sell when it’s gloomy and bad.

Poor timing

Hanging on to losers and

Trading too much,

Source: Barber & Odean

D o n ’ t Tr y T h i s a t H o m e ! G a r y C o n n o l l y

Don’t Do Something, Just Stand There36

2014 internal performance review of Fidelity accounts from 2003 and 2013.

The customer account audit revealed that the best investors were? • Either dead or forgot they had accounts!

Laziness is a virtue in financial markets.

Source: Business Insider Report.

D o n ’ t Tr y T h i s a t H o m e ! G a r y C o n n o l l y

Hindsight Investment Management37

Warning: Past performance is not a reliable guide to future performance. *Source: Financial Express. IDP Pension Categories for all funds in each of the industry categories; 2007-2017.

Calendar Year Best Performing Fund Performance Cumulative Investment

Start 2007 Initial Investment €10,000

2007 Irish Life Fidelity India China +42.7 € 14,270.00

2008 Stan Life Inv Eurozone Government Bond +12.6 € 16,068.02

2009 Standard Life Synergy Indian Equity +94.4 € 31,323.00

2010 Standard Life Synergy UK Smaller Cos +54.2 € 48,287.53

2011 Stan Life Inv Extended Duration +34.2 € 65,448.92

2012 Zurich Life Australasian Property +35.5 € 88,048.44

2013 Stan Life Inv European Sm Cos +44.5 €127,247.60

2014 Irish Life Biotech QLD +51.2 €192,411.10

2015 Zurich Life Irish Equity +38.5 €266,450.89

2016 Irish Life First State Global Resources +45.2 €386,886.69

D o n ’ t Tr y T h i s a t H o m e ! G a r y C o n n o l l y

Reality Investment Management38

Warning: Past performance is not a reliable guide to future performance. *Source: Financial Express. IDP Pension Categories for all funds in each of the industry categories; 2007-2017.

CalendarYear Best Performing Fund

Previous Year’s Performance

This Year’s performance

CumulativeInvestment

Start 2008 Initial Investment €10,000

2008 Irish Life Fidelity India China +42.7 -54.2 € 4,580

2009 Stan Life Inv Eurozone Government Bond +12.6 +4.5 € 4,784

2010 Standard Life Synergy Indian Equity +94.4 +21.2 € 5,797

2011 Standard Life Synergy UK Smaller Cos +54.2 -7.3 € 5,370

2012 Stan Life Inv Extended Duration +34.2 +9.2 € 5,864

2013 Zurich Life Australasian Property +35.5 -10.3 € 5,262

2014 Stan Life Inv European Sm Cos +44.5 +4.1 € 5,477

2015 Irish Life Biotech QLD +51.2 +23.3 € 6,756

2016 Zurich Life Irish Equity +38.5 -1.4 € 6,665

2017 Irish Life First State Global Resources +45.2 +4.2 € 6,945

D o n ’ t Tr y T h i s a t H o m e ! G a r y C o n n o l l y

Flying Cats39

D o n ’ t Tr y T h i s a t H o m e ! G a r y C o n n o l l y

A Great Track Record40

Derren Brown predicted he could flip a coin 10 times

and get heads every time.

D o n ’ t Tr y T h i s a t H o m e ! G a r y C o n n o l l y

The Need for Advice41

Natural proclivity to chase performance.

Focus on the process.• Need some firm anchor for inevitable turbulence.

Adviser firm itself must have a firm anchor in terms of a process to credibly intervene.

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The Remedy

D o n ’ t Tr y T h i s a t H o m e ! G a r y C o n n o l l y

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Organ Donation: German & Austria

Source: Danariely.com

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Default Options

Austria requires individuals to opt out, while Germany requires donors to opt in.

Default options and inertia are incredibly powerful.

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Self Discipline

Self control issues have no place in rationalist theory of finance

“In theory there is no difference between theory and practice; in practice there is.” Yogi Berra

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This is what we say to clients…Diversification, rebalancing, long term view, long term equity returns have been 8%, but the future returns are likely more modest. Be aware of volatility, importance of ongoing oversight and advice.

Blah blah blah blah blah blah blah blahblah blah blah blah blah blah blah blah blah blah blah blah 8% blah blah blah blah blah blah blah blah blah blah blah blah blah, blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah

This is what they hear…

D o n ’ t Tr y T h i s a t H o m e ! G a r y C o n n o l l y

Where Adviser is Key47

A type of nudge, recognising the intellect very often isn’t in the driving seat when it comes to investment decision making.

Only change for structural reasons.• Not due to cyclical changes in markets.

Greater sense of confidence & control.

D o n ’ t Tr y T h i s a t H o m e ! G a r y C o n n o l l y

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The MSCI sourced information is the exclusive property of MSCI Inc. (MSCI). Without prior written permission of MSCI, this information and any other MSCI intellectual property may not be reproduced, disseminated or used to create any financial products, including any indices. This information is provided on an “as is” basis. The user assumes the entire risk of any use made of this information. MSCI, its affiliates and any third party involved in, or related to, computing or compiling the information hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of this information. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in, or related to, computing or compiling the information have any liability for any damages of any kind. MSCI and the MSCI indexes are services marks of MSCI and its affiliates.

IMPORTANT INFORMATION

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Slide Number 1Slide Number 2Slide Number 3Slide Number 4AgendaSlide Number 6Slide Number 7Slide Number 8Do we really understand risk?What is risk?What is risk?Slide Number 12Slide Number 13Slide Number 14Slide Number 15Slide Number 16Slide Number 17Life expectancy & investing time horizonSlide Number 19Slide Number 20Slide Number 21Slide Number 22Slide Number 23Slide Number 24Slide Number 25Slide Number 26Slide Number 27Slide Number 28Slide Number 29Slide Number 30Slide Number 31Slide Number 32Slide Number 33Slide Number 34Slide Number 35Slide Number 36Slide Number 37Slide Number 38Slide Number 39Slide Number 40Slide Number 41Slide Number 42Slide Number 43Slide Number 44Slide Number 45Slide Number 46Slide Number 47Slide Number 48