Introduction to Investing Preston D. McSwain Senior Vice President Neuberger Berman Private Asset Management (617) 619-4630 [email protected]smartwomansecuritie s 2006 Smart Woman Securities. All materials are for SWS members’ use only October 3, 2006 We would like to thank Neuberger Berman and Lehman Brothers for their generous offer to use of many of the firm’s slides and research in this presentation.
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Introduction to Investing Preston D. McSwain Senior Vice President Neuberger Berman Private Asset Management (617) 619-4630 [email protected] smartwomansecurities.
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Introduction to Investing
Preston D. McSwainSenior Vice PresidentNeuberger Berman
2006 Smart Woman Securities. All materials are for SWS
members’ use only
October 3, 2006
We would like to thank Neuberger Berman and Lehman Brothers for their generous offer to use of many of the firm’s slides and research in this presentation.
Why Do You Invest?
• Winning is reaching your goals…….. not beating the neighbors
• Investing is a means to your ends…….. Not a contest
Your Investing Enemies:
• Gut Instincts
• Intuition
• Friends & Family
Three Main Asset Classes
One way to minimize the risks of investing in stocks is to educate
• Taxable fixed income – Bank CDs - safety and insurance– U.S. Treasuries - safety– Corporate - high/medium quality– High yield - lower quality (“junk
bonds”)
• Tax-exempt – Municipal - federal, state, local
Bonds (Primary Source for Income)
• Checking Accounts with Interest
• Bank Money Market Funds
• Mutual Fund Money Market Funds – Taxable– Tax-exempt
• Short-Term Bonds (less than one year) – Treasury Bills
Cash (Primary Source for Stability)
• Allocate / Invest Funds to Match Your Specific Goals
• Diversify Among Various Investment Options / Asset Classes to Reduce Risk
• Be Disciplined – Stick to Your Plan
Investment Plan Basics
1. Take a Long Term View
2. Stay Emotionally Balanced
3. Remain Diversified
4. Remember Taxes
Four Step Plan
$10
$100
$1,000
$10,000
Dec-4
9
Sep-5
3
Jun-5
7
Mar-
61
Dec-6
4
Aug-6
8
May-7
2
Feb-7
6
Nov-7
9
Aug-8
3
May-8
7
Jan-9
1
Oct-
94
Jul-98
Apr-
02
Dec-0
5
Source: Neuberger Berman and Standard & Poor’s. Please see Additional Disclosures page for complete index description. The data presented herein represents securities industry market data as of the dates specified. It does not represent Neuberger Berman performance nor does it reflect the fees and expenses associated with managing a portfolio. Indices are unmanaged, and the figures for the index shown do not reflect any fees or expenses. Investors cannot invest directly in an index. We strongly recommend that these factors be considered before an investment decision is made. Past performance is no guarantee of future results. Please note: This chart is presented in a logarithmic scale, which shows the index’s gains or losses on a percentage basis, for ease of comparison.
(Log. Scale)
S&P 500 Index – Month-End Values (January 1950 – December 2005)
The information presented herein was compiled from sources believed to be reliable. It is intended for illustrative purposes only, and is furnished without responsibility for completeness or accuracy. Past performance does not guarantee future results.
405313
75%100%25%
20.94%13.19%-10.65%
PositiveAll YearsNegative
Number of Years
Percentage of Years
Average Return
0
Stocks Can Be Negative But …
Source: Standard & Poor’s, Neuberger Berman. Please see Additional Disclosures page for complete index description.
The data presented herein represents securities industry market data as of the dates specified. It does not represent Neuberger Berman performance nor does it reflect the fees and expenses associated with managing a portfolio. Indices are unmanaged, and the figures for the index shown do not reflect any fees or expenses. Investors cannot invest directly in an index. We strongly recommend that these factors be considered before an investment decision is made. Past performance is no guarantee of future results.
S&P 500: 10-Year Rolling ReturnsAnnualized, 1935-2005
… Make Money Over Time And ...
$0
$1
$10
$100
$1,000
$10,000
$100,000
Dec
-26
Dec
-28
Dec
-30
Dec
-32
Dec
-34
Dec
-36
Dec
-38
Dec
-40
Dec
-42
Dec
-44
Dec
-46
Dec
-48
Dec
-50
Dec
-52
Dec
-54
Dec
-56
Dec
-58
Dec
-60
Dec
-62
Dec
-64
Dec
-66
Dec
-68
Dec
-70
Dec
-72
Dec
-74
Dec
-76
Dec
-78
Dec
-80
Dec
-82
Dec
-84
Dec
-86
Dec
-88
Dec
-90
Dec
-92
Dec
-94
Dec
-96
Dec
-98
Dec
-00
Dec
-02
Dec
-04
Large Company Stocks Inflation
Small Company Stocks Government Bonds
Cash$13,706 12.7%
$63 5.3%
EndingValue
AverageReturn
$2,657 10.4%
$18 3.7%
$11 3.0%
Hypothetical value of $1 invested in 1926.Source: Ibbotson Associates, Neuberger Berman. Past performance is not indicative of future results. Small Company stocks represented by the fifth capitalization quintile of stocks on the NYSE for 1926-1981 and performance of the Dimensional Fund Advisors (DFA) Small Company Fund thereafter, Large Company Stocks represented by the S&P 500 Index which is an unmanaged group of securities and considered to be representative of the stock market in general; Government Bonds represented by 5-year US Government Bonds; Cash is represented by the 30-day U.S. Treasury Bill. Please note that indices are unmanaged and do not take into account any fees or expenses of investing in the individual securities that they track, and that individuals cannot invest directly in an index. Data about the performance of these indices is prepared or obtained by Neuberger Berman and includes reinvestment of all dividends and capital gain distributions. See Appendix for complete description of each index.
1926-2005
Over the Long Term Outperform
1. Avoid making rash investment decisions based on breaking news
2. Recipe for losing money: rushing into the bull market and pulling out of a bear market
2. Stay Emotionally Balanced
“How could I havebeen so wrong?”
“Temporary set back - I’m a long-term investor.”
“Wow, am I smart.”
Point of MaximumFinancial Opportunity -
Investors Realize Investment Opportunity
Point of MaximumFinancial Risk -
Investors Beware of Higher Investment Risk
The Cycle Can Be Difficult
________________Source: Strategic Insight.Indices are unmanaged, and the figures for the index shown include reinvestment of all dividends and capital gain distributions and do not reflect any fees or expenses.Investors cannot invest directly in an index. We strongly recommend that these factors be considered before an investment decision is made. The data presented herein represents securities industry market data as of the date specified. It does not represent Neuberger Berman performance nor does it reflect the fees and expenses associated with managing a portfolio. Past performance is not indicative of future results.
Mutual Fund Flows – Tech / Telecom
– At the height of the technology market bubble, investors flocked to tech funds at precisely the wrong moment
-20
0
20
40
60
Jun-99 Dec-99 Jun-00 Dec-00
($ billions)
March 13, 2000: NASDAQ peaks at 5049
Don’t Follow the Herd
9.1%
4.0%
0.2%
-3.0%-4%
-2%
0%
2%
4%
6%
8%
10%
Fully Invested Minus 10 Best Days Minus 20 Best Days Minus 30 Best Days
Source: Standard & Poor’s, Neuberger BermanPlease see Additional Disclosures page for complete index description. The data presented herein represents securities industry market data as of the dates specified. It does not represent Neuberger Berman performance nor does it reflect the fees and expenses associated with managing a portfolio. Indices are unmanaged, and the figures for the index shown do not reflect any fees or expenses. Investors cannot invest directly in an index. We strongly recommend that these factors be considered before an investment decision is made. Past performance is no guarantee of future results.
S&P 500 Index Average Annualized Returns
An
nu
aliz
ed R
etu
rn
10 Years Ending December 31, 2005
Avoid Market Timing
Start with $1,000, earning 10% each year and add $1,000 every year
$2,104 $3,325 $7,807 $19,009 $67,760
$199,732
$556,987
$1,128,011
$0
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
After 1Year
After 2Years
After 5Years
After 10Years
After 20Years
After 30Years
After 40Years
After 47Years
Time is On Your Side
*Invested from 1986-1995. From 1995-2004 investment grew. This is for illustrative purposes only and not indicative of any investment. Past performance is no guarantee of future results. Source: Ibbotson Associates. The hypothetical results presented herein are based on historical index returns of the S&P 500. The results do not represent the performance of any Neuberger Berman managed account or product and do not reflect the fees and expenses associated with managing a portfolio. These returns are used for discussion purposes only. They are not intended to represent, and should not be construed to represent a prediction of future rates of return. See Appendix for complete description of each index. Results are on a pre-tax basis. Investment is made at the beginning of each year.The data presented herein represents securities industry market data as of the dates specified. It does not represent Neuberger Berman performance nor does it reflect the fees and expenses associated with managing a portfolio. The material is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. Indices are unmanaged, and the figures for the index shown include reinvestment of all dividends and capital gain distributions and do not reflect any fees or expenses. Investors cannot invest directly in an index. We strongly recommend that these factors be considered before an investment decision is made.
Investor A Investor B Investor CYears Contributing: 20 10 10*Annual Amount Contributed: $2,000 $4,000 $2,000
$20,000
$40,000$40,000
$97,787
$49,436
$122,505
$0
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
$140,000
Total Amount Invested
Compounded Value atYear-End 2005
1996-2005
1986-2005 1986-2005
Power of Compounding
• Invest Based Upon Your Risk Profile
• No One Allocation of Any Type of Investments is Correct for Everyone
• Diversify Among Stocks, Bonds and Cash
• Have a Mix of Various Types of Stocks(Growth, Value, Large, Mid, Small, Across Sectors)
If you continue with SWS into the spring semester, please note that we are currently investing only in stocks. However, we recognize that a successful investment portfolio is one that is diversified. We hope that by learning about how to pick stocks in which to invest, students will gain knowledge about evaluating other asset classes as well. In the spring, we anticipate having
additional classes on bonds, derivatives, and other more complicated investment tools as well.
3. Remain Diversified
Annual Percentage Returns (1986-2005)
Source: Standard & Poor’s, Frank Russell Co., Morgan Stanley, Merrill Lynch & Co., Lehman Brothers Holdings Inc. and Callan Associates. This is for illustrative purposes only and not indicative of any investment. The data presented herein represents securities industry market data as of the dates specified. It does not represent Neuberger Berman performance nor does it reflect the fees and expenses associated with managing a portfolio. The material is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. This material is not intended to be a formal research report and should not be construed as an offer to sell or the solicitation of an offer to buy any security. Indices are unmanaged and the figures for the indices presented herein include reinvestment of all dividends and capital gain distributions and do not reflect any fees or expenses. Investors cannot invest directly in a index. Past performance is not indicative of future results. See Market Index Descriptions in the disclosures at the end of this presentation.
• Risks of No Diversification- Large Cap Growth Stocks -22.42%- Small Cap Growth -22.43%
• Rewards of Prudent Diversification- Small Cap Value Stocks 22.43%- Bonds - Fixed Income 11.85%- Large Cap Value 7.01%
1 Year Returns – Period Ending 12/31/00
Source: Frank Russell Co., and Lehman Brothers Holdings Inc. Large Cap Growth - Russell 1000 Growth, Large Cap Value - Russell 1000 Value, Small Cap Value Russell 2000 Value, Fixed Income - Lehman Govt. Corp This is for illustrative purposes only and not indicative of any investment. The data presented herein represents securities industry market data as of the dates specified. It does not represent Neuberger Berman performance nor does it reflect the fees and expenses associated with managing a portfolio. The material is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. This material is not intended to be a formal research report and should not be construed as an offer to sell or the solicitation of an offer to buy any security. Indices are unmanaged and the figures for the indices presented herein include reinvestment of all dividends and capital gain distributions and do not reflect any fees or expenses. Investors cannot invest directly in a index. Past performance is not indicative of future results. See Market Index Descriptions in the disclosures at the end of this presentation.
Risks & Rewards of Diversification
Source: Ibbotson Associates. Selected years shown represent all calendar years from 1929 to 2005 in which the S&P 500 Index had a negative total return.U.S. Long-Term Government Bonds are represented by the 20-year U.S. Government Bond and U.S. Long-Term Corporate Bonds are represented by the Citigroup U.S. Broad Investment Grade Index.Past performance is not indicative of future results. Please note that indices are unmanaged and do not take into account any fees or expenses of investing in the individual securities that they track, and that individuals cannot invest directly in an index. Data about the performance of these indices are prepared or obtained by Neuberger Berman and include reinvestment of all dividends and capital gain distributions. See Appendix for complete description of each index. The data presented herein represents securities industry market data as of the dates specified. It does not represent Neuberger Berman performance nor does it reflect the fees and expenses associated with managing a portfolio. The material is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. This material is not intended to be a formal research report and should not be construed as an offer to sell or the solicitation of an offer to buy any security. A bond’s value may fluctuate based on interest rates, market conditions, credit quality and other factors. You may have a gain or loss if you sell your bonds prior to maturity. Of course, bonds are subject to the credit risk of the issuer. Government bonds and Treasury Bills are backed by the full faith and credit of the United States Government as to the timely payment of principal and interest.
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
19
29
19
30
19
31
19
32
19
34
19
37
19
39
19
40
19
41
19
46
19
53
19
57
19
62
19
66
19
69
19
73
19
74
19
77
19
81
19
90
20
00
20
01
20
02
S&P 500 Index
U.S. Long-Term Government Bonds
U.S. Long-Term Corporate Bonds
When Stocks Are NegativeBonds Tend to Be Positive
BondBondPricesPrices
InterestInterestRatesRates
Bonds Don’t Always Appreciate
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
5.00
5.50
6.00
1yr 3yr 5yr 7yr 15yr 25yr
Treasury GO-AAA
MATURITYMATURITY
As of June 30, 2004
Source: Bloomberg. The data presented herein represents securities industry market data as of the date specified. It does not represent the performance of any Neuberger Berman account or product nor does it reflect the fees and expenses associated with managing a portfolio. See Additional Disclosure page.
PO
TE
NT
IAL
P
OT
EN
TIA
L
YIE
LD
(%
)Y
I EL
D (
%)
Longer Term Bonds Tend to Pay Higher Interest Rates to Investors
-7.4%
-12.5%
-4.1%
-15%
-10%
-5%
0%
4.3%
8.1%
15.4%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
But Long Term Bonds Have Greater Risk
% PRINCIPAL GAIN
% PRINCIPAL LOSS
Rates Down 1%Rates Down 1% Rates Up 1%Rates Up 1%
5-Year5-Year
10-Year10-Year30-Year30-Year
*Based on current 5-year ( 3 7/8% 5/15/09), 10-year (4 3/4% 05/15/14), 30-year (5 3/8% 02/15/31) U.S. Treasury Bonds.Source: CMS BondEdge, Bloomberg. CMS BondEdge simulation assumes instantaneous effect of 100 basis point parallel shift up or down the entire yield curve across all maturities. There can be no assurance the price gains indicated above will actually occur. A bond’s value may fluctuate based on interest rates, market conditions, credit quality and other factors. You may have a gain or loss if you sell your bonds prior to maturity. Of course, bonds are subject to the credit risk of the issuer. Portfolio characteristics are subject to change without notice. Please see Market Index Descriptions and Additional Disclosures page.
As of June 30, 2004
LargestLoss
The Consumer Price Index for December 2002 is preliminary.Data: Rolling 1 year returns using monthly data (624 Observations)
Percent ofYear Ending Largest Average Average Average Largest Percent PercentReturns Greater
12/02 Loss Loss Return Gain Gain Negative PositiveThan Inflation
90% StocksNo Bonds10% Cash
70% Stocks20% Bonds10% Cash
60% Stocks30% Bonds10% Cash
50% Stocks40% Bonds10% Cash
40% Stocks50% Bonds10% Cash
30% Stocks60% Bonds10% Cash
20% Stocks70% Bonds10% Cash
10% Stocks80% Bonds10% Cash
12.4%55.9%
-34.3%
11.7%52.5%
-30.2%
11.1%49.1%
-26.2%
10.4%45.7%
-22.2%
9.7%42.3%
-18.2%
9.0%38.9%
-14.1%
8.3%35.5%
-10.1%
7.6%32.1%
-6.1%
7.0%28.9%
-3.9%
6.3%30.2%
-4.2%
AverageReturn
LargestGain
80% Stocks10% Bonds10% Cash
-16.3% -30.2% -7.0% 11.7% 16.6% 52.5% 21% 79% 71%
1.0% -10.1% -2.2% 8.3% 9.2% 35.5% 8% 92% 70%
11.4% -4.2% -1.4% 6.3% 7.2% 30.2% 10% 90% 64%
-
-9.3% -22.2% -4.9% 10.4% 13.5% 45.7% 17% 83% 71%
-5.9% -18.2% -3.7% 9.7% 12.1% 42.3% 15% 85% 70%
-2.4% -14.1% -2.8% 9.0% 10.6% 38.9% 12% 88% 70%
4.5% -6.1% -1.9% 7.6% 8.2% 32.1% 5% 95% 71%
8.0% -3.9% -1.3% 7.0% 7.4% 28.9% 5% 95% 70%
This copyright protected illustration is for internal use only. Under no circumstances may this illustration be copied, reproduced or redistributed in whole or in part including the data contained herein, without prior written permission from Crandall, Pierce & Company.The information presented herein was compiled from sources believed to be reliable. It is intended for illustrative purposes only, and is furnished without responsibility for completeness or accuracy. Past performance does not guarantee future results.
-12.8% -26.2% -6.1% 11.1% 15.0% 49.1% 19% 81% 71%
Total Return: Calendar Years 1950-2002
One Year Returns
WorstReturn
The Consumer Price Index for December 2002 is preliminary.
Percent of Period Ending Worst Average Average Average Largest Percent PercentReturns Greater
12/02 Return Loss Return Gain Return Negative Positive Than Inflation
70% Stocks20% Bonds10% Cash
60% Stocks30% Bonds10% Cash
50% Stocks40% Bonds10% Cash
40% Stocks50% Bonds10% Cash
30% Stocks60% Bonds10% Cash
20% Stocks70% Bonds10% Cash
10% Stocks80% Bonds10% Cash
12.0%27.4%
-3.2%
11.4%25.9%
-2.1%
10.7%24.4%
-0.9%
10.1%22.9%
0.2%
9.5%21.4%
1.3%
8.8%19.9%
1.9%
8.2%18.9%
2.1%
7.6%18.8%
2.3%
6.9%18.6%
2.2%
6.3%18.5%
0.7%
AverageReturn
LargestReturn
80% Stocks10% Bonds10% Cash
0.7% -2.1% -0.7% 11.4% 11.5% 25.9% 1% 99% 81%
3.1% 1.3% ---- 9.5% 9.5% 21.4% 0% 100% 81%
3.9% 1.9% ---- 8.8% 8.8% 19.9% 0% 100% 81%
4.7% 2.1% ---- 8.2% 8.2% 18.9% 0% 100% 80%
5.6% 2.3% ---- 7.6% 7.6% 18.8% 0% 100% 80%
6.4% 2.2% ---- 6.9% 6.9% 18.6% 0% 100% 80%
7.2% 0.7% ---- 6.3% 6.3% 18.5% 0% 100% 76%
* Less Than 0.5%
Data: Rolling 5 year returns using monthly data (576 Observations)Stocks: Standard & Poor's 500 Stock Index • Bonds: 5 Year Treasury Bonds • Cash: 90-Day Treasury Bills • Inflation: Consumer Price Index
This copyright protected illustration is for internal use only. Under no circumstances may this illustration be copied, reproduced or redistributed in whole or in part including the data contained herein, without prior written permission from Crandall, Pierce & Company.The information presented herein was compiled from sources believed to be reliable. It is intended for illustrative purposes only, and is furnished without responsibility for completeness or accuracy. Past performance does not guarantee future results.
Total Return: Calendar Years 1950-2002
Five Year Returns
The Consumer Price Index for December 2002 is preliminary.
Portfolio Mix:
No Stocks90% Bonds10% Cash
Percent of Period Ending Smallest Average Average Average Largest Percent PercentReturns Greater
12/02 Gain Loss Return Gain Gain Negative Positive Than Inflation
Data: Rolling 10 year returns using monthly data (516 Observations)Stocks: Standard & Poor's 500 Stock Index • Bonds: 5 Year Treasury Bonds • Cash: 90-Day Treasury Bills • Inflation: Consumer Price Index
The information presented herein was compiled from sources believed to be reliable. It is intended for illustrative purposes only, and is furnished without responsibility for completeness or accuracy. Past performance does not guarantee future results.
Total Return: Calendar Years 1950-2002
Ten Year Returns
• Income Tax Rate 35.0%
• Short-Term Capital Gain Rate 35.0%
• Long-Term Capital Gain Rate 15.0%
• Unrealized Capital Gain Rate 0.0%
4. Remember Taxes
Source: Ibbotson Associates.Hypothetical value of $10,000 investment returning 8% annually with a 35% marginal tax rate. The taxable account is taxed every year, while the tax-deferred account is not taxed. Tax-deferred accounts are typically subject to taxation at ordinary income rates upon withdrawal. Estimates are not guaranteed. Past performance is no guarantee of future results. The hypothetical results presented herein are based on historical index data. The results do not represent the performance of any Neuberger Berman managed account or product and do not reflect the fees and expenses associated with managing a portfolio. These returns are used for discussion purposes only. They are not intended to represent, and should not be construed to represent a prediction of future rates of return.
45,759
27,562
75,968
10,520 16,602
100,627
217,245
46,610
10,80021,589
-$20,000
$20,000
$60,000
$100,000
$140,000
$180,000
$220,000
1 Year 10 Years 20 Years 30 Years 40 Years
Taxable Account Tax-Deferred Account
Valu
e a
t End o
f Peri
od
Number of Years Elapsed
Benefits of Tax Deferral
Strive to Optimize Portfolios to Achieve Risk-Adjusted, Tax-Efficient Returns
Higher Risk
Lower Risk
Tax-Inefficient
Tax-Efficient
PrivateEquity
High TurnoverEquity
ManagementHigh YieldBonds
Hedge Funds
High Grade Bonds
Equity Indexi
ng
Municipal Bonds
Low Turnover
Equity Managemen
t STRATEGICCORE
PORTFOLIO
Asset Classes Based Upon Various Tax, Return and Risk Characteristics
Review Tax Efficiency of Investments
• Determine Your Investment Objectives:- Current Holdings- Long-Term Goals- Time Horizons
• Seriously Gauge Your Personal Risk Tolerance
• Construct Proper Asset Allocations Based Upon Your Goals
Prescriptions for Success
• Diversify, Diversify, Diversify- Stocks, Bonds, Cash- Large Cap, Mid Cap, Small Cap- Growth and Value
• Avoid Emotional Pulls of Short-Term Volatility
• Don’t Market Time – Time is On Your Side
• Review, Revise, Rebalance Based Upon Life Changes