Ten Ways to Wealth

TEN WAYS TO WEALTHLon W. Broske, CFS

TEN WAYS TO WEALTHTEN WAYS TO WEALTH

1. Have a long-term plan to reach 2 your goals

2. Do not follow the crowd

3. Do not speculate

4. Do not buy stocks on rumor

5. Do not use margin

TEN WAYS TO WEALTHTEN WAYS TO WEALTH

6. Hire a professional financial advisor

7. Do not let emotion overrule logic

8. Own a diversified portfolio

9. Do not time the market

10.Update your plan every two years

• Define Specific GoalsDefine Specific Goals

• Define Your Investment Define Your Investment

ObjectivesObjectives

• Know Your Risk Know Your Risk

ToleranceTolerance

• Build A Portfolio That Fits Build A Portfolio That Fits

Your Objectives And Your Your Objectives And Your

Risk ToleranceRisk Tolerance

#1 HAVE A LONG-TERM PLAN TO

REACH MY FINANCIAL GOALS

#2 DO NOT FOLLOW THE CROWD

• Inflows of new cash into certain sectors are almost entirely driven by the most recent performance of that sector.

• The most common mistake investors make is to pile into “hot” sectors that have become extremely overvalued.

Source: Morningstar, Inc. Past performance is no guarantee of future results.

DO NOT FOLLOW THE CROWD

• The Morgan Stanley Hi-Tech Index returned 111% in 1999.

• In the first 3 months of 2000, investors poured nearly $34 billion into this sector.

• Result? For the 5 years ending 8-31-05, the Hi-Tech Index lost 89% of its value.

Source: Commodity Systems, Inc., Lipper Inc., Past performance is no guarantee of future results.

The Morgan Stanley Technology Index is unmanaged and cannot be invested into directly. 1999 was a period of unusually high performance for the technology sector.

HAZARDS OF CHASING PAST PERFORMANCE:

Source: Commodity Systems, Inc., NAREIT

Booms and BustsExamples of large variances from year to year

Gold/ Equity Year Silver REIT Hi-Tech End Index Index Index

1993 85%1994 -17%1997 13%1998 -22%1999 111%2000 -27%

The Philadelphia Stock Exchange Gold/Silver Index, the Nareit Equity Index, and the Morgan Stanley Technology Index are all unmanaged and cannot be invested into directly. 1999 was a period of unusually high performance for the technology sector. Past performance is no guarantee of future results.

#3 DO NOT SPECULATE“Everyone knows that most people who speculate or gamble in the market lose money at it in the end. The people who persist in trying it are either unintelligent or

willing to lose money for the fun of the game…In any case, they are not really investors at all.”

-- Benjamin Graham

R W = Q + T + D

#4 DO NOT BUY STOCKS ON

RUMOR

#5 DO NOT USE MARGIN“What’s in Your Wallet?”

#5 DO NOT USE MARGIN“What’s in Your Wallet?”

• Borrowing money to buy stock dramatically Borrowing money to buy stock dramatically increases your riskincreases your risk

• You have to pay interest on the money you You have to pay interest on the money you borrow to buy the stock on marginborrow to buy the stock on margin

• A margin call could force you to sell your stock A margin call could force you to sell your stock at a depressed priceat a depressed price

Assume that shortly after Berkshire Hathaway acquired General Re in April 1998, a friend told you that “No one has ever lost money in Berkshire, and this is the biggest bet that Warren Buffett has ever made.”

A Margin Horror Story

You decide to buy 10 shares of Berkshire Class A on June 22, 1998 for $84,000 per share-- an $840,000 total investment. Feeling confident, you decide to use 50% margin….

Unfortunately Berkshire declines to $40,800 by February of 2000.

Unable to put up more margin, you are forced to sell. Your $420,000 investment is now worth ZERO.

By the end of 2002, Berkshire recovers to $72,750, but unfortunately, you were forced out of your position.

#6 Hire a #6 Hire a Professional Professional

Financial Financial AdvisorAdvisor

WHY HIRE A PROFESSIONAL FINANCIAL ADVISOR?

• Quality advice can make a difference.

• To help you work toward financial security.

• To help you clarify your goals and identify your ability to withstand market fluctuations.

WHY HIRE A PROFESSIONAL FINANCIAL ADVISOR?

• To develop and monitor a diversified portfolio designed to help you meet your goals.

• To help you remain “on course” with your long term objectives especially in those times when it is emotionally difficult to do so.

WHY HIRE A PROFESSIONAL FINANCIAL ADVISOR?

• To help you get your financial matters in order so you are prepared for the unexpected.

• To help you maximize tax savings and take advantage of money saving opportunities.

• “Our job is not to make you rich, but to save you from becoming poor.”

What do each of the following have in common?

ANSWER: THEY ALL HAVE PERSONAL COACHES

According to University of Nebraska Sports Psychologist, Dr. Jack Stark:

“Behavior management is probably the most important element in the service that a professional financial advisor can provide for his clients.”

A Professional Advisor’s Most Important Job

#7 DO NOT LET EMOTION #7 DO NOT LET EMOTION OVERRULE LOGICOVERRULE LOGIC

Do not let the news of the day distract you from your long-term plan.

The Cycle of Market EmotionsThe Cycle of Market Emotions

Optimism

Excitement

Thrill

EuphoriaAnxiety

Denial

Fear

Desperation

Capitulation

Panic

DespondencyDepression

Hope

Relief

Optimism

Point of Maximum Financial Opportunity - Investors Realize

Investment Opportunity

Point of Maximum Financial Risk - Investors Beware of Higther

Investment Risk

Bear Markets May Provide Opportunity

December 1957 43.4% 13.3% 12.8%

June 1962 31.0% 14.2% 10.4%

September 1966 30.5% 8.7% 6.9%

June 1970 41.9% 9.3% 9.0%

September 1974 38.1% 16.7% 15.6%

July 1982 59.3% 29.6% 19.2%

November 1987 23.3% 17.3% 18.7%

October 1990 33.5% 17.3% 19.4%

August 1998 39.8% 13.19 –

Average 37.9% 15.8% 14.0%

Source: Thomson Financial - Past performance is no guarantee of future results. Returns shown are for the Standard & Poor’s 500 Index. The S&P 500 index is unmanaged and cannot be invested into directly.

End date of Bear market

10 years later

5 years later

1 years later

S&P 500 vs “Panic Points”

It is not possible to invest directly in a market index. Past performance is no guarantee of future performance.Since World War II

If, at December 31, 1925, you knew what was coming

1929 - Stock Market crashes 1933 - U.S. banks closed, depression 1939 - World War II begins 1941 - Japan bombs Pearl Harbor 1950 - Korean War begins 1962 - Cuban Missile Crisis 1963 - Kennedy assassinated

1973 - OPEC oil embargo1974 -Nixon Resigns, Watergate1980 - Inflation rate rises to 14%1982 - Worst recession in 50 years1987 - Dow crashes 23 % in one day1989 - S&L crisis, $500bn bailout1990 - Persian Gulf War, recession1997 - Asian financial crisis1998 - Russian default1999 - Clinton impeachment trials 2001 - Terrorist attacks on America

What would What would you have invested in?you have invested in?

• Stocks?• T-Bills?

If you answered “stocks”, you would have been right:

Ibbotson Associates cumulative total return indices for S&P 500 and 3-Month Treasury Bills. It is not possible to invest directly in an index. Past performance is no guarantee of future results.

$0

$2,000,000

$4,000,000

$6,000,000

$8,000,000

$10,000,000

$12,000,000

1 2Stocks T-Bills

Reflects the growth of $10,000 invested on Dec. 31, 1927 to

Dec. 31, 2004

$174,400

$9,799,411

What if you wanted to seek preservation of principal?

T-BILLS MAY NOT BE THE BEST SOLUTION….”

After inflation and taxes, $10,000 continuously reinvested in 3-month T-bills was worth only $5,221. Your after-tax, inflation-adjusted purchasing power would’ve been reduced by 48% after having invested for 76 years !

Ibbotson Associates cumulative total return indices for 3-Month Treasury Bills adjusted for both inflation and taxes. Investment period from 12/31/25 - 12/31/01. It is not possible to invest directly in an index. Past performance is no guarantee of future results. Your results will vary. Taxes are based upon the top marginal personal income tax rate in the U.S. each year. Inflation is based upon the change in the Consumer Price Index.

How diversified are you really?How diversified are you really?

13.2%

12.5%

12.5%

12.4%

U.S. Stocks

Foreign Stocks

Real Estate

Commodities

Assume it is 12/31/71 and you are blessed with perfect foresight about these annual asset class returns over the next 29 years. How would you allocate your retirement plan?

Indices used to represent asset classes depicted above are the S&P 500, the Morgan Stanley EAFE Index, the NAREIT Equity REITs Index and the Goldman Sachs Commodity Total Return Index, respectively. It is not possible to invest directly in a market index. Past performance is no guarantee of future performance.

#8 OWN A DIVERSIFIED PORTFOLIO

AND THE WINNER IS...

13.2%

12.5%

12.5%

12.4%

14.0%

U.S. Stocks

Foreign Stocks

Real Estate

Commodities

25% in Each Asset

By combining four non-correlated asset classes, you were actually able to obtain a portfolio return which is higher than any of the four individual asset classes in which you invested and with less risk!

The “25% of Each” Portfolio was rebalanced on January 1 of each year, 1972-2000. Indices used to represent asset classes depicted above are the S&P 500, the Morgan Stanley EAFE Index, the NAREIT Equity REITs Index and the Goldman Sachs Commodity Total Return Index, respectively. It is not possible to invest directly in a market index. Past performance is no guarantee of future performance.

Why Diversify? Because Winners Rotate:

The indices used for Large-cap, Small-cap, Real Estate, and Foreign Stocks are the S&P 500, Russell 2000, NAREIT Equity REITs Index, and the Morgan Stanley EAFE Index, respectively. One cannot invest directly in an index. Past performance does not guarantee future results.

LARGE- SMALL- REALYEAR COMPANY COMPANY ESTATE FOREIGN

STOCKS STOCKS STOCKS STOCKS

1982 21.6 25.0 21.6 -1.91983 22.6 29.1 30.6 23.71984 6.3 -7.3 20.9 7.41985 31.7 31.1 19.1 56.21986 18.7 5.7 19.2 69.41987 5.3 -8.8 -3.6 24.61988 16.6 25.0 13.5 28.31989 31.6 16.3 8.8 10.51990 -3.1 -19.5 -15.4 -23.51991 30.4 46.0 35.7 12.11992 7.6 18.4 14.6 -12.21993 10.1 18.9 19.7 32.61994 1.3 -1.8 3.2 7.81995 37.5 28.5 15.3 11.21996 23.0 16.5 35.3 6.11997 33.4 22.4 20.3 1.81998 28.6 -2.6 -17.5 20.01999 21.0 21.3 -4.6 27.02000 -9.1 -3.0 26.4 -14.02001 -11.9 2.5 13.9 -21.42002 -22.1 -20.5 3.9 -15.9

Which $100,000 investment would have a higher return over 20 years?

• A guaranteed interest rate of 8% per year or-

• An equal-weighted portfolio of five asset classes with the following returns:

– A has a 100% loss– B returns 0% a year– C returns 5% a year

– D returns 10% a year– E returns 20% a year

• $100,000 grew to $466,096 when invested at a fixed return of 8%.

• $100,000 grew to $974,376 in the diversified portfolio despite a total loss on one asset and a zero return on another asset.

This is a hypothetical case and is not representative of any specific securities

• Diversification can enable one to offset disappointing results on individual holdings and offer the potential for rewarding long-term portfolio returns.

#9 DO NOT TIME THE MARKET

• Mark Hulbert runs the Hulbert Financial Digest, which independently monitors the investment performance of stock market newsletters

• Hulbert has tracked 137 newsletters since 1980

• There is no evidence of any market-timing ability even by those who make it a full time job: Only 4 of 137 (2.9%) outperformed the performance of simply buying and holding the Wilshire 5000 Index.

Source: Hulbert Financial Digest. It is not possible to invest directly in a market index. Past performance is no guarantee of future performance.

#9 DO NOT TIME THE MARKET

Warren Buffett offered some useful Warren Buffett offered some useful counsel on this subject: “We make counsel on this subject: “We make no attempt to predict how security no attempt to predict how security markets will behave; successfully markets will behave; successfully forecasting short-term stock price forecasting short-term stock price movements is something we think movements is something we think neither we, nor anyone else, can neither we, nor anyone else, can

do… We’ve long felt that the only do… We’ve long felt that the only value of stock market forecasters is value of stock market forecasters is to make fortune tellers look good.”to make fortune tellers look good.”

#9 DO NOT TIME THE MARKET

Market Prophecy is a Waste of Time

Predicted Actual MarginYear S&P S&P of

Gain Gain Error

1996 6.1% 26.0% 19.9%1997 3.4% 31.0% 27.6%1998 4.9% 26.7% 21.8%1999 0.1% 19.5% 19.5%2000 6.1% -10.1% 16.2%2001 18.0% -12.1% 30.0%2002 15.0% -22.1% 37.1%

Source: Business Week’s Consensus Yearend Forecast The S&P 500 index is unmanaged and cannot be invested into directly.

• Dollar-cost averaging involves spreading out your investments over several future time periods.

• This can significantly reduce the risk of being locked into a low equity return due to unusually bad timing in investing a lump sum.

• By investing at regular intervals, periods of adverse volatility may actually be working to the investor’s advantage.

REDUCE TIMING-RISK WITH DOLLAR-COST AVERAGING

Bear Market BuildingDollar-Cost Averaging is a Potential Way to Build Wealth in Both Bull and Bear Markets

Bear Market BuildingDollar-Cost Averaging is An Effective Way to Build Wealth in Both Bull and Bear Markets

Initial investment of $10,000

Annual investments of $1,000

Recent Bull Market (1980-2000) 15.7% 15.2%

Long Bear Market (1928-1948) 3.1% 6.8%

DCA improved returns by 119% in the Bear Market, while only

penalizing returns by 3% in the Bull Market period.

Annualized returns investing in the S&P 500 Index:

The above illustration is hypothetical; actual returns may vary in a different time period. Dollar cost averaging does not assure a profit or protect against a loss in a declining market. For the strategy to be effective, you must continue to purchases shares in both up and down markets. As such, an investor needs to consider his/her financial ability to continuously invest through periods of low price levels. It is not possible to invest directly in a stock market index. Past performance is no guarantee of future results.

Have your goals changed?

Were the assumptions made two years ago still valid today?

Do you need to adjust…Time, Risk Level, Amount Saved, Retirement Date, Desired Standard of Living at Retirement?

#10 - UPDATE YOUR PLAN EVERY 2-YEARS

YEAR 1YEAR 1

HAVE A LONG-TERM PLAN TO HAVE A LONG-TERM PLAN TO REACH MY FINANCIAL GOALSREACH MY FINANCIAL GOALS

STARTINGSTARTING

POINTPOINT

YEAR 1YEAR 1

YEAR 2YEAR 2

HAVE A LONG-TERM PLAN TO HAVE A LONG-TERM PLAN TO REACH MY FINANCIAL GOALSREACH MY FINANCIAL GOALS

STARTINGSTARTING

POINTPOINT

YEAR 1YEAR 1

YEAR 2YEAR 2

HAVE A LONG-TERM PLAN TO HAVE A LONG-TERM PLAN TO REACH MY FINANCIAL GOALSREACH MY FINANCIAL GOALS

STARTINGSTARTING

POINTPOINT

Stocks have offered positive performance more often than not

1954 52.6%’58 43.4’95 37.6’75 37.3’97 33.4’80 32.5’85 31.7’89 31.7’55 31.6’91 30.5 ’72 18.9%’98 28.6 ’86 18.7’61 26.8 ’79 18.5’51 24.0 ’52 18.4 ’92 7.6%’67 24.0 ’88 16.6 ’56 6.6 1953 – 1.0%’76 23.6 ’64 16.4 ’78 6.5 ’90 – 3.1’96 23.0 ’71 14.3 ’84 6.3 ’81 – 5.0’63 22.7 ’65 12.4 ’87 5.3 ’77 – 7.4 ’66 – 10.1%’83 22.6 ’59 12.0 ’70 4.0 ’69 – 8.5 ’57 – 10.8’82 21.6 ’68 11.1 ’94 1.3 ’62 – 8.8 ’01 – 11.9 ‘02 – 22.1%’99 21.1 ’93 10.1 ’60 0.5 ’00 – 9.1 ’73 – 14.8 ’74 – 26.9

Positive returns Negative returns

>20% 10% to 20% 0% to 10% –10% to 0% –20% to –10% <–20%

50-year 25-year 10-year 5-year 1-yearS&P 500 Index 11.08% 12.60% 8.99% –1.62% –20.47%

Average annual total returns through 9/30/02

Time is on your side

Source: Thomson Financial as of 12/31/02

Past performance is no guarantee of future results. The Standard & Poor’s 500 Index is an unmanaged group of large-company stocks. It is not available for direct investment. During the periods shown, a number of index stocks could have had significantly negative performance. It is possible for index performance to be positively or negatively influenced by a relatively small number of stocks.

Stocks have offered positive performancemore often than not

‘02 – 22.1%

Time is on your sideTime is on your sideTime is on your sideTime is on your side

Source: Thomson Financial as of 12/31/02

Past performance is no guarantee of future results. The Standard & Poor’s 500 Index is an unmanaged group of large-company stocks. It is not available for direct investment. During the periods shown, a number of index stocks could have had significantly negative performance. It is possible for index performance to be positively or negatively influenced by a relatively small number of stocks.

1954 52.6%’58 43.4’95 37.6’75 37.3’97 33.4’80 32.5’85 31.7’89 31.7’55 31.6’91 30.5 ’72 18.9%’98 28.6 ’86 18.7’61 26.8 ’79 18.5’51 24.0 ’52 18.4 ’92 7.6%’67 24.0 ’88 16.6 ’56 6.6 1953 – 1.0%’76 23.6 ’64 16.4 ’78 6.5 ’90 – 3.1’96 23.0 ’71 14.3 ’84 6.3 ’81 – 5.0’63 22.7 ’65 12.4 ’87 5.3 ’77 – 7.4 ’66 – 10.1%’83 22.6 ’59 12.0 ’70 4.0 ’69 – 8.5 ’57 – 10.8’82 21.6 ’68 11.1 ’94 1.3 ’62 – 8.8 ’01 – 11.9 ‘02 – 22.1%’99 21.1 ’93 10.1 ’60 0.5 ’00 – 9.1 ’73 – 14.8 ’74 – 26.9

Positive Returns Negative Returns

50-year 25-year 10-year 5-year 1-yearS&P 500 Index 11.08% 12.60% 8.99% –1.62% –20.47%

Average annual total returns through 9/30/02

>>20%20% 10% to 20%10% to 20% 0% to 10%0% to 10% -10% to 0%-10% to 0% -20% to 0%-20% to 0% <<--20%20%

• Do you know your chances of it succeeding?

• A plan is only as good as the assumptions within it

• Most plans are based on many poor assumptions

I already have a plan

learned?learned?

WHAThave we

• Bull and bear markets will occur and planning for them is important.

• Your average return has little to do with your investments.

• Aiming for higher return by taking on more risk might lower your odds.

• Having and adjusting a plan could be the single most important component in determining your success.

POSITIVES FOR 2005

Economy

Earnings

Inflation

ProductivityInterest Rates

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