Investment Presentation

1
Investment Presentation

• By
• Professor David M. Sinow
• University of Illinois
• September 11, 2007

2
Investing Overview

• What makes a difference when you invest?

• Equities vs. Fixed Income
• Volatility Is Your Enemy
• Longer Term Fixed Income Investments Are Too
  Risky
• Three Factor Model
• Asset Allocation The Real Key to Investing
• Daves Couch Potato Portfolio

3
Asset Class Performance 1925-1996
4
Volatility is Your Enemy!!!!
Assume I invest 100.00 for one year earn 0 at
the end of year 1. Assume that the following
year I invest the 100.00 and earn 0 again. My
average return is 0. Now Assume that you invest
100.00 for one year and earn 50 at the end of
year 1. Assume the following year you invest
150.00 and your second year rate of return is a
50. We each had an average rate of return of
0 over the two year period.
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But.Who has more money at the end of the 2
years???? A) Me B) You
MORAL OF THE STORY VOLATILITY KILLS PORTFOLIOS
IN DOWN YEARSBECAUSE YOU LOSE A GREATER
PERCENTAGE OF YOUR GAINS FROM PREVIOUS YEARS!!!!
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Risk/Reward Does it Pay to Extend Maturities?
1964-1994
()
Long maturity instruments are riskier. Returns
for longer maturity instruments are not
consistently greater. Alternative strategies are
needed to enhance returns.
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Three Elements That Determine the Majority of an
Equity Funds Expected Return
5.86
Average Annual Returns 1964-1996
5.13
3.58
Size Factor Small Stocks Minus Large Stocks
Market Factor All-Equity Universe Minus T-bills
Style Factor Out-of-Favor Companies Minus
Glamour Companies
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Porfolio 1 A Basic Portfolio Passively Invested
60 SP 500 Index
40 Lehman Gov/Corp. Index
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Porfolio 2 A Basic Portfolio Substituting
Short-Term Fixed Income for Long-Term Fixed Income
60 SP 500 Index
40 1-yr Fixed Income
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Porfolio 3 A Basic Portfolio Balancing
Equities, S P, and US Small Cap Index
30 SP 500 Index
40 1-yr Fixed Income
30 Small Cap
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Porfolio 4 A Basic Portfolio Balancing US
Small Cap Value, US Small Cap, US Large Value,
and SP 500 Index
15 Small Cap
15 SP 500 Index
15 Small Cap Value
40 1-yr Fixed Inc.
15 US Large Co. Value
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Porfolio 5 A Basic Portfolio Adding
International Diversification
7.5 SP 500
7.5 US Large Co. Value
7.5 US Small Cap
40 1-yr Fixed Inc
7.5 US Small Cap Value
15 Intl Small Value
15 Intl Large Value
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DAVES COUCH POTATO PORTFOLIO