Managing the Human Element in Investing

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Managing the Human Element in Investing

• Behavioral Risk in The Retirement Red Zone

Monika Fontanez Financial Services
Representative February 5, 2009
IFS-A134962 Ed. 1/2009
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Emotions in The Retirement Red Zone

• How do you feel about
• your money?
• I care
• I worry

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Feelings, whoa - whoa - whoa, feelings

• Are perfectly normal
• Are perfectly human
• Are manageable to some degree

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The Red Flags of The Retirement Red Zone

• Longevity risk

• Sequence risk

• Behavioral risk

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What makes investors tick?

• Traditional finance assumes
• people are rational. It tells us how
• people should behave in order to
• maximize their wealth. Behavioral
• finance studies how people
• actually behavehow psychology
• affects financial decisions.
• John R. Nofsinger, Professor of Finance,
• Washington State University

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Does a computer . . .

• Fall in love with investments?
• Worry about investments?
• Wait too long to invest?
• Become overconfident?

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Who Hasnt Felt Like Burying Money in a Downturn?


You steered the proper course, Capn, when you
had us bury this instead of investing it in
the market!

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Do hares or tortoises win the investment race?

• Hare Emotional, frequent moves, chasing winners
• Tortoise Rational, steady, focused on long term

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Investor decisions may compromise long-term
results
Equity investors performance Returns for 20
years, 19862005
13
12
SP 500Buy and Hold
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11.9
10
9
8
7
6
5
4
AverageInvestor Return
3
3.9
2
1
0
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Behavioral Risk in The Retirement Red ZoneSM A
Groundbreaking Prudential Financial Study

• To what extent do they affect investors?
• Which emotions are dominant?
• What can investors do to minimize the impact of
  emotions?

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About the Prudential Study

• Conducted by Prudential and the University of
  Connecticut
• 1,000 Retirement Red Zone investors surveyed
• Investors are influenced by their emotions to
  varying degrees
• Five emotions dominate

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Retirement EQ A Measure of Emotion in Investing
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Score Range Least Score Possible 14 Maximum
Score Possible 70
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Source Prudential Global Market Research,
Behavioral Risk in The Retirement Red Zone, April
2007
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Which Emotions Are Most Evident?
The Retirement Red Zone Investor Distribution by
Five Dominant Emotions

• Fear 29
  23 48
• Regret 20 35
  45
• Inertia 43
  34 23
• Aggressiveness 63
  18 19
• Susceptibility 42
  48 10

Distribution based on research survey responses.
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Many Investors Dont Recognize Their Emotions
Source Prudential Global Market Research,
Behavioral Risk in the Retirement Red Zone, April
2007
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Meet BobWhos Bullish on the Market
Make Up for Past Regrets?
100
92

• Bob

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13
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FEAR
AGGRESSIVENESS
INERTIA
SUSCEPTIBILITY
REGRET
This survey participant expresses regret for the
past. To make-up for lower returns in the past,
this person may plan to be quite aggressive in
his/her retirement planning.
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NancyWhos a Bit Nervous About the Market
Fear of Failure and Inaction?
94

• Nancy

50
17
0
0
FEAR
AGGRESSIVENESS
INERTIA
SUSCEPTIBILITY
REGRET
Fear is a dominant driver for this investor. This
fear may make it difficult to take the savings
and investment steps necessary to plan for
retirement.
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FredWhos a Little Lost About Investing
Cannot Find the Path Ahead?

• Fred

67
56
33
25
0
FEAR
AGGRESSIVENESS
INERTIA
SUSCEPTIBILITY
REGRET
This individual may not be able to steer through
a combination of fear, past regrets, inertia and
advice from well-meaning friends and family.
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The best-laid plans can collide with a down market
Case study 1 What Would You Do?
Will poor performance in The Retirement Red Zone
change your plans?
350,000
308,000 (15,400/yr)
10
-19
300,000
12
-15
250,000
Value
200,000
212,058 (10,602/yr)
150,000
5
4
3
2
1
Intendedretirement
Retirement countdown (Years)
For illustrative purposes only. This chart is
hypothetical and one example of the returns an
investor theoretically could experience during a
given period, and is not intended to depict past
or future performance of a variable annuity or
subaccount within a variable annuity. If this
were an actual example, various costs would be
factored into the gross return, including annual
insurance and administrative charges of the
annuity, annual contract charges, investment
management fees of the variable subaccounts, the
cost for any optional features, and any other
applicable fees.
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Case study 1 What Would You Do?

• Effect of Negative Portfolio Returns

Emotional Reactions of Pre-Retirees ( Agree)
I wish I had planned better as I got closer to
retirement 85 I wish I had better
downside protection 89
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Case study 2 What Would You Do?
The Effect of Portfolio Losses on Retirement
Account Balances at Retirement Hypothetical
Example250,000 Retirement savings impacted by
two consecutive annual losses.
Hypothetical Annual Rate of Return
Hypothetical Withdrawal Taken
Hypothetical 250,000 Portfolio Value
Start Withdrawals Year 1 Year 2
250,000 193,500 155,857
-17.6 -12.8
12,500 12,875
?
?
?
30 Years
What will future returns be?
How will it affect future withdrawals?
How long will my nest egg last?
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Case study 2 What Would You Do?
The Effect of Portfolio Losses on Retirement
Account Balances at Retirement
Emotional Reactions of New Retirees ( Agree) I
wish I had planned better as I got closer to
retirement 63 I wish I had better downside
protection 80 Concerned about
running out of money too quickly 72
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The Perfect Investment Fairy Tale

• The little pig with the
• portfolio of straw and
• the little pig with the
• portfolio of sticks
• were swallowed up,
• but the little pig with
• the portfolio of bricks
• withstood the dip in
• the market.

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Help Capture the Upside, Provide Some Protection
Against the Downside
Guaranteed Income for Life
Hypothetical Market Performance
could have captured this?
could have avoided this?
Source For illustrative purposes only. Not
indicative of any investment. Past performance
does not guarantee future results.
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Retirement Red Zone Opportunities

• Discover your Retirement EQ

• Consider guarantees

Behavioral Risk

• Talk to your financial professional

• Consider variable annuities

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Thank You!
Questions

Answers
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Disclosure
This material was prepared to support the
promotion and marketing of variable annuities
available through Prudential. Prudential, its
affiliates, its distributors, and their
respective representatives do not provide tax,
accounting, or legal advice. Any tax statements
contained herein were not intended or written to
be used, and cannot be used for the purpose of
avoiding U.S. federal, state, or local tax
penalties. Please consult your own independent
adviser as to any tax, accounting, or legal
statements made herein. Investors should consider
the contract and the underlying portfolios
investment objectives, risks, charges, and
expenses carefully before investing. This and
other important information is contained in the
prospectuses, which can be obtained by contacting
your financial professional. Please read the
prospectuses carefully before investing. Your
needs and the suitability of an annuity product
should be carefully considered before investing.
When evaluating your needs, please consider other
variable annuities available from Prudential
Financial companies.
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Disclosure
Variable annuities are appropriate for long-term
investing and designed for retirement purposes.
Investment return and principle value of an
investment will fluctuate so that an investor's
unit values, when redeemed, may be worth more or
less than their original cost. Withdrawals or
surrenders may be subject to contingent deferred
sales charge (CDSC). Withdrawals and
distributions of taxable amounts are subject to
ordinary income tax and, if made prior to age 59
1/2, may be subject to an additional 10 federal
income tax penalty. Withdrawals, for tax
purposes, are deemed to be gains out first.
Withdrawals can reduce the living benefit, death
benefit, and account value. Annuity contracts
contain exclusions, limitations, reductions of
benefits, and terms for keeping them in force.
Your licensed financial professional can provide
you with costs and complete details. Optional
living and death benefits may not be available in
every state and may not be elected in conjunction
with certain optional benefits. The fees are in
addition to fees and charges associated with the
basic annuity. See the prospectus for more
detailed information.
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Disclosure
All guarantees are backed by the claims-paying
ability of the issuing company and do not apply
to the underlying investment options. Variable
annuities are issued by Pruco Life Insurance
Company (in New York, by Pruco Life Insurance
Company of New Jersey), Newark, NJ, or by
Prudential Annuities Life Assurance Corporation,
Shelton, CT. All are distributed by Prudential
Annuities Distributors, Inc., Shelton, CT. All
are Prudential Financial companies and each is
solely responsible for its own financial
condition and contractual obligations. Wachovia
Corporation is the majority owner and Prudential
Financial, indirectly through subsidiaries, is a
minority owner of Wachovia Securities, LLC.
Prudential Annuities is a business unit of
Prudential Financial. Prudential, Prudential
Financial, the Rock logo, and the Rock Prudential
logo are registered service marks and The
Retirement Red Zone is a registered service mark
of The Prudential Insurance Company of America
and its affiliates. Issued on formsRID-HD7-DB(7/
08), P-RID-HD7-DB(7/08), RID-HD7-LIA(7/08),
P-RID-HD7-LIA(7/08), RID-HDGRO(1/08),
P-RID-HDGRO(1/08), RID-GRO(1/08), et al or state
variation thereof.
WO69613 IFS-A134962 ORD200217 Ed. 1/2009
FIRM APPROVAL CODES