Building Portfolios with Stocks, Bonds, and Mutual Funds Financial

1
Building Portfolioswith Stocks, Bonds, and
Mutual Funds Financial Retirement Planning

• Jay Taparia, CFA
• Managing Director, Sanskar Investments, Inc.
• Lecturer of Finance, University of Illinois _at_
  Chicago

2
The Client Is A Human Being Is Capable Of
Having

• Emotion attached to wealth
• Goals (if) that are ST, MT or LT
• A limited life span
• Uncertainty about the future
• Irrationality associated with decision-making
• A gambling attitude toward the markets
  over-confidence
• Dreams that could be impossible to reach
• Dreams that are very possible to reach
• An aversion toward risk whatever that may be
• Annoying you at times
• And dont forget that Life Happens

3
Because Of This

• Building portfolios is not only a science, but it
  is an art
• Having a nice irrelevant conversation with the
  client is necessary to build a relationship, but
  also to discover new needs and objectives
• Client needs objectives change over time (years
  even days)
• Portfolios are managed with continuously changing
  objectives

4
Individual Investor Life Cycle
Spending Phase Gifting Phase Long-term Estate
Planning Short-term Lifestyle Needs, Gifts
Accumulation Long-term Retirement, Childrens
college Short-term House, Car
Consolidation Long-term Retirement Short-term V
acations, Childrens College
Phases are Shifting
Age
5
Portfolio Management Process

• State the Objective Mission statement of the
  portfolio, who and what it serves and why
  income, and/or capital appreciation.
• Identify the Constraints there are always going
  to be constraints taxes, legal, emotions, etc.
• Formulate the Investment Policy develop the
  business plan of the portfolio listing out
  return, risk and all the other issues associated
  with the portfolio
• Study Market and Economic Conditions to forecast
  future trends This is everything that you
  learned in Economic, Industry, Financial
  Statements, etc.
• Monitor Performance keep in touch with what is
  going on in the portfolio, and
• Reevaluate Modify the Portfolio rebalance
  and/or reconfigure according to the policy and
  markets

6
Role of the Portfolio Manager

• Bottom Line? You need someone to manage the
  whole process of investing
• Minimizing individual security risk (company,
  industry, or unsystematic risk)
• Making sure that the portfolio is
  well-diversified among industry, country and
  company
• Managing the tax consequences of the portfolio
  esp. for expensive people
• Most importantly, making sure the portfolio
  caters to the client needs via an Investment
  Policy Statement
• Return capital gain vs.income
• Risk Tolerance varies typically according to
  age
• Tax Issues maximizing after-tax returns
• Time retirement, college payments
• Liquidity usually driven by time needs
• Legal Issues trust and pensions have special
  legal issues
• Other Unique Needs of the client

7
Realistic Investor Goals

• Current income
• generate spendable funds
• Capital preservation
• minimize risk of real loss
• strongly risk-averse or cash needs are soon
• Capital appreciation
• capital gains for real growth for future needs
• growth strategy with accepted risk
• Total Return
• Capital Gains Income
• Desire to have medium risk exposure

8
What Is Asset Allocation?
Asset allocation is the process of combining
asset classes such as stocks, bonds, and cash in
a portfolio in order to meet your goals.
Bonds
Stocks
Cash
9
The Need For Asset Allocation

• An investment strategy is based on four decisions
• What asset classes to consider for investment
• What normal or policy weights to assign to each
  eligible class
• The allowable allocation ranges based on policy
  weights
• What specific securities to purchase for the
  portfolio to satisfy the strategy
• 90 of the overall investment return is due to
  the first two decisions, not the selection of
  individual investments (BHB 1991)
• 70 of the overall investment return is due to
  style (Sharpe 1992)

10
Is Asset Allocation Important?
Contributing Factors of Portfolio Performance
91.5
93.3
97.9
100
80
60
40
20
100
0
Percent
11
Returns Risk Of Different Asset Classes

• Higher returns should compensate for risk
• Policy statements must provide risk guidelines
• Measuring risk by standard deviation of returns
  over time indicates stocks are more risky than
  T-bills
• Measuring risk by probability of not meeting your
  investment return objective indicates risk of
  equities is small and risk of T-bills is large
  because of different expected returns
• Focusing only on return variability ignores
  reinvestment risk and many other types of risk

12
HistoricalAsset Performances A Guide
13
Asset Class Returns
Highs and Lows 1926 - 1999
Highest Annual Return
142.9
150
Lowest Annual Return
100
54.0
40.4
50
29.1
14.7
0
0.0
-5.1
-9.2
-50
-43.3
-58.0
-100
Small
Large
Long-Term
Int.-Term
Treasury Bills
Company
Company
Government
Government
Stocks
Stocks
Bonds
Bonds
Each bar shows the range of annual total returns
for each asset class over the period 1926-1999.
14
DiversifyTo Reduce Risk Or Increase Return
Fixed Income Portfolio
Cash 10
1970 - 1999
Higher Return Portfolio
Lower Risk Portfolio
Bonds 90
Stocks 12
Cash 20
Stocks 39
Cash 35
Bonds 41
Bonds 53
Return Risk
9.0 6.1
Risk is measured by standard deviation. Risk and
return are based on annual data over the period
1970-1999. Portfolios presented are based on
Modern Portfolio Theory.
15
Return Before After Inflation
15
1926 - 1999
11.3
10
Compound Annual Return
5.1
5
3.8
0
Stocks
Bonds
Cash
Assumes reinvestment of income and no transaction
costs or taxes.
16
Monitor Performance

• Revise IPS as needed
• Modify investment strategy accordingly
• Evaluate portfolio performance not only with
  market return or benchmark portfolio
• Consider that relative performance will mean
  little when relative progress is on track

17
Reevaluate Modify Portfolio

• Asset Allocation has fixed income/equity
  balance changed from the design
• Style Under/Over-weights is the portfolio
  tilted in style?
• Industry Selection based on the economic
  environment what might the best sectors be, or is
  the portfolio weighted too much in any 1 sector
  (i.e. 25)?
• Security Concentrations usually anything
  greater than 10 of the portfolio must be reduced
  in size
• Security Selection sell stocks that have poor
  fundamental issues in the future and buy those
  that have positive changes ahead.
• Key point LT focus not ST turnarounds. Why?
  Tax constraints.  

18
Understanding How Stocks Work
19
What is a Stock?

• Legal ownership in a company through shares
  purchase of stock implies you own a slice or
  share of the company
• Stockholders have 1st right to purchase new
  shares issued by the company gives them right
  to maintain share of ownership

20
4 Characteristics of Stocks

• Voting Power - Ownership implies control having
  the right to appoint Board of Directors, who in
  turn, elect management
• Residual Claim you are last on the food chain
  to collect your investment if the company goes
  bankrupt
• Limited Liability can only lose the investment
  you make into the company not more than that
• Stock Market Listing stocks are traded between
  buyers and sellers in stock exchange

21
Return Risk of Stocks

• Two Ways to Earn a Return on a Stock
• Appreciation in Stock Price if the investors
  perceive strong growth in the companys sales
  earnings, then investors will demand to buy more
  of the stock. As demand increases, the price of
  the stock increases.
• Dividend Payment if the company pays dividends

22
Caveats of Stock Ownership

• No Guarantee of Return you can lose your
  investment
• Ownership Can Be Small you are just 1 of many
  owners you have some, but not a whole lot of
  influence
• Mergers Acquisitions other companies can
  offer to buy your share out and replace your
  shares with theirs
• Voting Proxy Statements - investors should take
  an active role in voting for directors and
  management they are owners

23
Conceptualizing Financial Statements

• Financial statements are guided by a set of
  accounting rules, called GAAP (Generally Accepted
  Accounting Principles).
• Because of flexibility, financial statements can
  be manipulated to give a better-than-expected
  view of earnings.
• Ratio Analysis Footnotes is one of the key
  tools to understanding a company.

24
Conceptualizing Companies

• Companies are dynamic, financial statements are
  static
• One date of release summary of 3, 6, 9 or
  12-month activity
• Lagged released approximately one month after
  quarter- or year-end
• Past-tense information possibly already
  incorporated into the stock price (barring any
  major surprises)
• Dynamic forces on companies are qualitative
• The economic cycle
• Industry analysis
• Management strategy

25
Conceptualizing the 3 Financial Statements

• Think of analyzing your own finances
• Financial analysis of companies is similar to
  personal financial planning
• Your balance sheet a loan application
• Income statement your tax return
• Cash cash flow statement Your checking
  account and salary
• Footnotes to financial statements how you would
  explain what the numbers really mean to an IRS
  auditor or loan agent

26
Statement of Cash Flows
Income Statement
(or ... what do you tell the Government you made?)
(or ... what REALLY happened this year)
Cash flows from operations
Sales
Income from operations
-
Cost of sales (including depreciation expense)
Net income (Profits)
Depreciation

Restructuring charge not spent


Gross profit on sales
Gains or losses
or
-

or
-
Deferred income taxes

-
Selling and administrative expenses
Cash provided by (used for) working capital
-
Restructuring expense
Accounts receivable
or
-

/-
Gains or losses
Inventory
or
-

Accounts Payable
or
-

Net Operating Income


Net cash provided by operating activities (Cash
Flows From Operations)(CFFO or CFO)
Other revenues

-
Other expenses
Earnings before tax

Cash from investing activities
Income tax expense
-
Sale of assets

Net income (Profits)

Purchase of assets
-
Net cash provided by investing

activities
Dividends on preferred stock
-

Net income available to common stock
Cash from financing activities
Issue of debt

Dividends on common stock
-
Retirement of debt
-
Sale of common stock
Net income transferred to surplus or retained
earnings


Dividends paid
-
Net cash provided by financing

activities
The sum of the last line in each box
above the change in cash balances
27
Public Filings You Need to Know

• Form 10-K (due 90 days after fiscal year close)
• Income statement (aka Statement of Operations)
• Balance Sheet
• Cash Flow Statement
• Footnotes to the Financial Statements
• Management Discussion and Analysis
• Auditors Report
• Liquidity Position and Capital Expenditures

28
Stock Market Indices (i.e., Indexes)

• Price-Weighted Index - each company represented
  by 1 share in index. Gives higher-priced shares
  more weight in determining performance of the
  index (e.g., Dow Jones Industrial Average)
• Market Value-Weighted Index - weight of companies
  in index based on its market capitalization
  (stock price x shares outstanding) the higher
  the market value, the higher the weight in the
  index (e.g., SP 500, NASDAQ)
• Comparing your portfolios performance to the
  market depends on which index you are using and
  whether you are really comparing apples to
  apples or apples to oranges

29
Costs of Investing

• Commissions Costs from the broker to implement
  trades one-way must remember that you incur the
  cost when selling also
• Bid-Ask Spread brokers who make a market in
  the stock make the spread as their profit (or
  your cost)
• Market Impact Costs - if you are institutional
  (mutual or pension fund), your purchases/sales
  are large enough to move the stock price against
  you while buying or selling

30
Buying Stock on Margin

• Definition - Borrowing Funds to Buy Stock -
  initially up to 50 of the equity purchase
  called the Initial Margin Requirement
• After the Purchase - must maintain at least 30
  equity of the total account value called the
  Maintenance Margin Requirement to guard against
  default
• Primary Objective - Usually done to make higher
  returns on your equity via using someone elses
  funds but can also lose more than if you did
  not borrow the funds
• High Risk Strategy only meant in cases where
  client has high amounts of liquidity (cash
  reserves) or has the risk tolerance (i.e., loves
  risk and has nerves of steel)

31
Buying Stock on Margin

• Example of Margin Trading
• 10,000 of GE desired to be purchased with 5,000
  personal funds and a 5,000 Margin Loan from
  broker
• GEs stock price is 50 per share of shares
  200
• Interest Rate on Loan is 10

Bottom Line? Margin increases gain and loss
returns substantially!
32
Short Selling

• Definition Instead of Buying Low 1st, And
  Selling High 2nd, you are doing this in reverse
  (Selling High, Buying Low) - You do this, when
  you think the stock price is overvalued and you
  decided to short or sell first, in expectation
  that the stock is going to fall
• High Risk Strategy only meant in cases where
  client has high amounts of liquidity (cash
  reserves) or has the risk tolerance (i.e., loves
  risk and has nerves of steel)

33
Procedure to Short Selling

• Borrow the Stock from Broker as if you were
  taking a loan
• Sell the Stock in the Market collecting the
  proceeds
• When Stock Price Declines buy the stock back at
  lower price
• Return the Stock to the Broker keep leftover
  funds as profit
• Similar Margin Requirements as in Margin
  Trading

34
Basics on Portfolio Management

• Always make sure that your portfolio is
  diversified not just 8-10 securities, but 20-30
  minimum across industries and countries
• Caveat emptor there are 7,000 stocks and 10,000
  mutual funds at a minimum to choose from in the
  USA should you be picky about what you buy?
  YES!!
• Be street smart make sure that what you are
  buying makes sense and you know the reasons why
  you are buying it not just a hot stock tip
  in other words, squeeze the tomatoes

35
Basics on Portfolio Management

• Make sure your portfolio does not become too
  concentrated in 1 name or 1 sector. Be receptive
  to sell if any 1 stock becomes greater than 10
  of the portfolio it may drive future
  performance, including downward
• Just because you made good money on 1 stock or
  sector, please be aware that you might get
  emotionally attached to it but keep in mind,
  stocks and money never were born with a heart

36
Understanding How Bonds Work
37
Definition of a Bond

• Contractual loan that pays interest over a fixed
  term
• Upon its maturity, the principal or the
  investment amount is returned to the lender of
  the bond
• Interest rate (called Coupon Rate) is typically
  fixed hence, the alternative name for bonds as
  fixed income securities
• An Income-Based Investment focus on generating
  income and less so on capital appreciation ltgt
  stocks
• Bond Contract is called an Indenture Agreement
  which has all of the structure details about the
  bond and disclosures about the company issuing
  the bonds
• Usually denominated in 1,000 units 50,000 in
  Bonds 50 Bonds

38
Bond Classifications

• Registered vs. Bearer Forms
• Security
• Collateral secured by financial securities
• Mortgage secured by real property, normally
  land or buildings
• Debentures unsecured
• Notes unsecured debt with original maturity
  less than 10 years
• Seniority

39
Major Classes of Bonds

• U.S. Treasury Bonds issued by the U.S.
  Government and considered the safest type of bond
• Corporate Bonds issued by corporations to fund
  their projects and assets carry higher risk
  than the U.S. Treasury bonds due to high risk of
  default (or non-payment of interest and/or
  principal)
• Municipal Bonds issued by cities, counties,
  quasi-government agencies (like the Illinois
  State Tollway) and states to fund projects and
  general municipal funding.

40
Major Classes of Bonds

• Foreign Bonds issued by foreign governments as
  well as foreign corporations can be denominated
  either in US Dollars or in foreign currency
  considered to have multiple layers of risk, both
  in terms of the foreign entities willingness to
  pay as well as in currency risk terms
• Securitized Certificates issued by taking a
  group of assets such as mortgages, auto loans or
  credit cards and packaging them for issuance as a
  security. Considered to have higher quality than
  a single asset due to diversification. Cash flow
  is usually less predictable and dependent on
  changing levels of interest rates

41
Key Characteristics of Bonds

• Par Value stated value of a bond usually
  1000 par value per bond. 50,000 par is to 50
  bonds to buy.
• Coupon Interest Rate the amount that is paid
  each period to a bondholder by the issuer. Rate
  is usually quoted as an annual rate, but payments
  are made usually semi-annually.
• Coupon Payment Coupon Interest Rate x Par Value
• Maturity Date when the bond matures principal
  and last coupon payment paid on this day.
• Price (Market Value) what the value of the bond
  is worth. Better yet, what the market is valuing
  this Annuity Stream.

42
Bond Value ()
kd 7.
1,372
1,211
kd 10.
M
1,000
837
kd 13.
775
30 25 20 15 10 5 0
Years remaining to Maturity
43
Bond Risks

• Default Risk Risk that you are not going to get
  your original principal back due to the company
  going bankrupt.
• Interest Rate Risk as interest rates rise, the
  price (and value) of the bond falls. Capital
  Loss!!
• Reinvestment Rate Risk has to do with the
  reinvestment of interest and principal payments.
  
• Interest Payments what do you do with the
  interest payments (beside spend it) if rates
  decline, your return is lower as you reinvest
  these at a lower rate.
• Principal Payments what do you do when you get
  your money (principal) back if rates decline,
  your principal gets reinvested at a lower rate.
• Keep in mind that Callable Bonds also have
  reinvestment rate risk. The company will only
  call the bonds when rates decline. You have both
  interest and principal payment reinvestment rate
  risk.

44
What is Interest Rate Risk? Also, called Price
Risk
Interest rate risk Rising kd causes bonds
price to fall. Which bond has more risk? 1-year
or 10-year?
1-year
10-year
kd
Change
Change
5
1,048
1,386
4.8 -4.4
38.6 -25.1
1,000
1,000
10
956
749
15
45
Prices and Yield / Interest Rates
Price
Yield
46
Default Risk Premium (Credit Risk)
Investment Grade Junk Bonds Moodys Aaa Aa A B
aa Ba B Caa C SP AAA AA A BBB BB B CCC D
47
Corporate Bond Spreads AA BB
48
Benefits of Bonds in Portfolios

• Historically Lower Risk
• Diversification Benefits
• Income Generation
• Expand Efficient Opportunities
• Potential Growth

49
Fixed Income Maturity (Interest Rate) Risk
1970 - 1999
Long-TermGovt Bond
15
Intermediate-TermGovt Bond
9.8
10
5.9
Short-TermGovt Bond
5
1.5
0
-1.3
-5
-4.5
-10
-8.7
50
Using Bonds to Diversify
1970 - 1999
Original Portfolio
Lower Risk Portfolio
Cash 19
Stocks 50
Stocks 38
Cash 50
Bonds 43
Risk is measured by standard deviation. Risk and
return are based on annual data over the period
1970-1999. Portfolios presented are based on
Modern Portfolio Theory.
51
Bonds Produce Greater Income
1970 - 1999
2
6
9
25
73
85
Stocks
Bonds
Based on annual data over the period 1970-1999.
52
Bond Prices Yields Over Time
When Yields Increase, Bond Prices Decrease
1.60
16
Bond Prices ()
Bond Yields ()
1.40
14
1.20
12
1.00
10
.80
8
.60
6
4
.40
2
.20
0
0
1925
1935
1945
1955
1965
1975
1985
1999
53
UnderstandingHow Mutual Funds Work
54
Definition of an Investment Company

• Financial intermediaries (i.e., middlemen) that
  collect funds from individual investors and
  invest those funds in a diversified pool of
  stocks, bonds, or other assets based on the
  companys focus or specialty. (i.e., a bond
  fund, an international fund)
• Benefits to the Individual Investor
• Recordkeeping Administration for all holdings
  in the fund
• Diversification Divisibility if the investor
  has a small amount of money they can have instant
  ownership of many stocks, not just one. They can
  also easily buy more (in increments of , not
  100 share blocks)
• Professional Management this is of course
  relative you must do you homework on management
  but it does beat doing the research yourself
• Lower Transaction Costs due to pooling of
  funds, commissions, fees, and market impact costs
  are lower

55
Types of Investment Companies

• Managed Investment Companies (mutual funds)
• Open-End issues shares every time a buyer adds
  money to the mutual fund investor buys shares
  at NAV.
• Closed-End trade like stocks on the exchange.
  Investor buys at the current stock prices (which
  could be higher or lower than the NAV).
• Unit Investment Trust pool of money invested in
  a portfolio whose investments are fixed for the
  life of the fund. Usually Bonds given that they
  have a maturity, but also seen used with stocks
  for a 1 year term.
• Commingled Funds (i.e., limited partnerships)
  similar to Open-Ended Funds, but instead of
  buying shares, you are buying units at NAV.
  Usually offered by banks insurance companies.
• Real Estate Investment Trusts (REITs) a
  closed-ended fund that invests in real estate

56
Net Asset Value and Price

• Used as a basis for valuation of investment
  company shares.
• Selling new shares
• Redeeming existing shares
• Market Value of Assets - Liabilities
• Shares Outstanding
• Open Ended Funds NAV is Price
• Closed Ended Funds - NAV is compared to Stock
  Price of Fund

57
Open-End and Closed-End Funds Key Differences

• Shares Outstanding
• Closed-end no change unless new stock is
  offered.
• Open-end changes when new shares are sold or old
  shares are redeemed.
• Pricing
• Open-end Net Asset Value (NAV)
• Closed-end Premium or discount to NAV

58
Investment Policies

• Money Market
• Fixed Income
• Equity
• Balance Income
• Asset Allocation
• Indexed
• Specialized Sector

59
Costs of Investing in Mutual Funds

• Fee Structure
• Front-end load
• Back-end load
• Operating expenses
• 12 b-1 charges
• distribution costs paid by the fund
• Alternative to a load
• Fees and performance

60
Exchange Traded Funds

• Allow investors to trade funds based on indexes
  like stock.
• Examples
• SPDRS
• WEBS
• HOLDERS
• Allow sector specialization

61
A First Look at Fund Performance

• Benchmark Wilshire 5000
• Results
• Most funds underperform
• Not fair comparison because of costs
• Adjusted Benchmark Wilshire 5000 with passive
  management costs considered.
• The majority of funds still under-perform.

62
Consistency of Fund Performance

• Do some mutual funds consistently outperform?
• Evidence suggests that some funds show consistent
  stronger performance.
• Depends on measurement interval
• Depends on time period
• Evidence shows consistent poor performance.

63
Rate of Return Calculations for Funds

• Performance History has shown that 80 of
  mutual fund managers do not beat the market
  so why bother? Main difference is that they are
  comparing apples and oranges.
• Mutual fund managers charge fees and hence their
  performance will be lower. In other words, you
  cannot get around the fees period even if you
  bought the index yourself you would still have
  commission charges.
• Past Performance does not completely indicate
  future performance, but do remember you are
  investing in the mutual fund manager. If his/her
  performance is poor, then it is likely that it
  might remain poor (if he is not fired, that is)
  Money Magazine flaws as an example of this.

64
Information Sources on Mutual Funds

• Wiesenbergers Investment Companies
• Morningstar
• Investment Company Institute
• Popular press
• Investment services

65
Measuring Fund Performance Category Ranks and
Ratings

• You can view all mutual funds as 1 peer group
  but everyone is investing with a different
  style
• Category ratings are used to see who did better
  within a category of style.
• Certain investment styles perform better than
  others at any point in time if that is the
  case, then managers must be compared to their
  peers
• Category Style Investment Objective of the Fund
• Helps to determine what funds do well even when
  style is out of favor
• Points out funds that are just riding on the coat
  tails of their group

66
Categories Identify the Real Competition

• For example International Equity
• Foreign
• World
• Diversified Emerging Markets
• Regional
• International Hybrid
• This reaffirms that returns do not tell the whole
  story
• 10 YR Trailing Return (1/2001)
• Janus Twenty 21.63
• Weitz Partners Value 21.57

67
Morningstar Equity Style Box
Value Blend Growth

Large
Medium
Small

• Classifies a fund based on
• Style Value, Blend, Growth
• Size Small, Medium, Large

68
Style Box Breakpoints

• Market Capitalization
• Large gt 10 billion
• Medium lt 10.0 billion, gt 1.6 billion
• Small lt 1.6 billion
• Style Types Relative Valuation Ratios vs.
  Market
• Value rel. P/E rel. P/B lt1.75
• Blend rel. P/E rel. P/B 1.75-2.25
• Growth rel. P/E rel. P/B gt2.25

69
Styles ltgt Objectives

• Fund Objective Actual Style
• Oakmark Select Growth Mid Value
• Pioneer Cap Growth Small Co. Mid Value
• Prudential Equity Inc Equity Inc. Mid Value

70
Styles ltgt Objectives

• Fund Objective Actual Style
• Vanguard Growth Index Growth Large Growth
• Sequoia Growth Large Value
• Delafield Growth Small Value

71
Current Equity Style Box
Twenty
Weitz
Value Blend Growth
Value Blend Growth
Large
Medium
Small
Large Cap Growth
Mid Cap Value
72
Janus Twenty Top Holdings
73
Weitz Top Holdings
74
Janus Twenty Portfolio Breakdown
75
Weitz Partners Value Portfolio Breakdown
76
Janus Twenty Sector Exposure
77
Weitz Partners Value Sector Exposure
78
Risk Measures

• Twenty Weitz
• Morningstar Risk (10 YR) 1.32 0.59
• Standard Deviation 24.72 14.18
• Morningstar Risk Ratio Fund SD / Market SD
• It is a Relative Measure of Risk

79
Five Key Points in Picking Funds

• How has the fund performed?
• Compare with appropriate index
• Compare with peer group
• Examine after-tax returns, if relevant
• How risky has the fund been?
• Big returns spell risk
• Are you comfortable with the level of volatility?
• Morningstar risk standard deviation
• What does the fund own?
• Value vs. Growth
• Sectors
• U.S. and Foreign
• Who runs the fund?
• Who earned the funds record?
• Where does this manager come from?
• Whats the fund family like?
• What does the fund cost?
• Low expenses are best
• Load funds arent bad if performance is
  justified, but rare

80
Understanding Global Investing
81
Why Invest Globally?

• Investment Opportunities roughly 50 of the
  global stock market currently Foreign
• Market History
• Growth Potential faster growing economies
• Diversification Benefits Expand Efficient Range

82
Global Stock Market Returns
Highest and Lowest Historical Annual Returns for
Each Region 1970 - 1999
Pacific
120
107.5
Europe
100
International
79.8
80
69.9
United States
60
37.4
40
20
13.2
13.8
13.4
13.7
0
-20
-23.2
-22.8
-26.5
-40
-34.3
Average Return
Each bar shows the range of annual total returns
for each region over the period 1970-1999.
83
Domestic Versus Global
1970 - 1999
Domestic Portfolio
Global Portfolio
Risk is measured by standard deviation. Risk
and return are based on annual data over the
period 1970-1999.
84
Risks Of Foreign Investing

• Currency Risk
• Economic/Political Risk
• Market Liquidity Risk
• Differences in Accounting Standards
• Costs of Investing Internationally

85
The End!

• Thank You!