2011 cabot investor conference - cabot financial planning 2011
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Cabot Money Management Financial Planning 2011TRANSCRIPT
CABOT’S 22ND ANNUAL INVESTMENT CONFERENCE &
LUNCHEONFriday, September 23, 2011
FINANCIAL PLANNING DURINGUNCERTAIN ECONOMIC TIMES
Presented by:TOM VAUTIN, CFA, CFP®, EA - Senior Financial PlannerGREG STEVENS, CFP® - Senior Financial Counselor
Planning in an Uncertain Environment
• Taxes: Nowhere to Go But Up!– Income Taxes:
• “Reprieve” until 2013
• After 2012, higher brackets likely for some taxpayers?
• Dividends and capital gains back to 2001 levels?
– Payroll Taxes
• Temporary tax “cut” in an effort to spur growth
• Where do things go from here?
– Estate Taxes
• Exemption raised to $5 million
• Added benefit of portability
• Uncertainty after 2012 = need for planning now!
*Please refer to the Appendix at the end of this presentation for disclosures.
• The Economy and Stock Prices– Recovery, double dip, or long-lasting depression?
– Unemployment
– Real estate prices
– Energy prices
– Inflation
– Interest rates
Not much has changed since 2008
*Please refer to the Appendix at the end of this presentation for disclosures.
BOTTOM LINE: There is a Lot of Uncertainty
Out There!
WHY DO WE INVEST?
TO MAKE MONEY! We expect investing will benefit us over the long-term.
Range of S&P 500 returns, 1926-2009(Source: www.schwab.com)
*Please refer to the Appendix at the end of this presentation for disclosures.
WHY DO WE INVEST?
• But, How Much Money is Enough?– It depends on a few uncertain things:
• Investment returns
• Inflation
• Tax policy
– And some certain things:
• Your asset allocation
• Tax minimization
• Most importantly – your financial goals!
*Please refer to the Appendix at the end of this presentation for disclosures.
WHY DO WE INVEST?
• To Meet Our Financial Goals– Long-term expenses
• Retirement
• College planning
– Shorter-term expenses
• Wedding
• New car
• Medical expenses
*Please refer to the Appendix at the end of this presentation for disclosures.
DEVELOP A ROADMAP
The starting point is your current financial situation.
Your goals are the finish line.
Bridge the gap between start and finish.
Which route should you take?*Please refer to the Appendix at the end of this presentation for disclosures.
DEVELOP A ROADMAP
• Make realistic assumptions for the uncertain variables.
– Historical inflation = 3%
– Investment returns based on historical averages
– Taxes: Current laws with an educated guess about the future
*Please refer to the Appendix at the end of this presentation for disclosures.
WHY DO WE INVEST?
• But, How Much Money is Enough?– It depends on a few uncertain things:
• Investment returns
• Inflation
• Tax policy
– And some certain things:
• Your asset allocation
• Tax minimization
• Most importantly – your financial goals!
*Please refer to the Appendix at the end of this presentation for disclosures.
FOCUS ON WHAT IS MORE CERTAIN
• Take inventory of your goals and what you want to accomplish!
– Retirement
– Vacation home
– College expenses
– Leaving a legacy
*Please refer to the Appendix at the end of this presentation for disclosures.
FOCUS ON WHAT IS MORE CERTAIN
• Multi-Year Tax Planning– Keep tax-inefficient investments in tax-deferred
accounts• Traditional IRAs
• Roth IRAs (Conversion?)
• Employer-sponsored plans (401(k), profit sharing plans, etc.)
– Always know your marginal tax rate. How much will your next dollar of taxable income cost you?• Tax bracket published in the IRS tables
• Phaseouts of tax benefits
• Alternative Minimum Tax
• State income tax rate*Please refer to the Appendix at the end of this presentation for disclosures.
FOCUS ON WHAT IS MORE CERTAIN
• Determine an Appropriate Asset Allocation
– Will significantly impact your investment returns over the long-term.
– Investment returns in the short-term are uncertain.
– Performance of a broad asset allocation over the long-term can be estimated with more confidence.
– There is no free lunch. Higher returns come with a price – higher volatility.
*Please refer to the Appendix at the end of this presentation for disclosures.
THE EFFICIENT FRONTIER
For a given target rate of return, get the most bang for your buck.
*Please refer to the Appendix at the end of this presentation for disclosures.
HYPOTHETICAL 50% STOCK PORTFOLIO
Asset Class %
Money Market Funds 5%
US Core Equities 25%
US Aggressive Equities 10%
US Bonds 20%
Foreign Bonds 5% Foreign Equities
(Developed) 10%
Foreign Equities (Emerging) 5%
Alternative 20%
*Please refer to the Appendix at the end of this presentation for disclosures.
THE IMPACT OF VOLATILITY
Portfolio: Higher Volatility Portfolio: Lower Volatility
Average Yearly Return 8% 8%
Standard Deviation 13% 8%
Ending Portfolio Value $819,319 $927,937
All else equal, lower volatility will result in a higher portfolio value at the end of the plan.
Example: Assume two portfolios with value of $100,000 invested over a 30-year period with an average rate of return of 8% but different volatilities:
*Please refer to the Appendix at the end of this presentation for disclosures.
DEVELOP A ROADMAP
• Which Allocation Should You Choose?– Quantitative Factors: What the numbers say…
• Short-term goals may call for a low-risk and low-return combination or vice-versa for long-term goals
– Qualitative Factors:
• Is there a certain level of volatility that will keep you awake at night?
– More than one possible allocation may result in success.
*Please refer to the Appendix at the end of this presentation for disclosures.
DEVELOP A ROADMAP
• Potential tradeoff between the math and the “sleep at night” factor.
– Investors have recently become more risk averse at the wrong time (sell low and buy high).
– EXAMPLE: Retirees may have a longer time horizon than they realize and might benefit from having a riskier portfolio than they are comfortable with.
*Please refer to the Appendix at the end of this presentation for disclosures.
TACTICAL ASSET ALLOCATION
• An active manager may choose to deviate slightly from the target allocation on a short-term basis.
– Attempt to boost investment performance in excess of a benchmark (Alpha).
• Overweight or underweight certain asset classes (including cash)
• Overweight or underweight certain economic sectors
– The manager could be right or wrong.
– Examples: Tech bubble rise and fall, recent financial crisis
*Please refer to the Appendix at the end of this presentation for disclosures.
MARKET TIMING CAN BE RISKY
*Please refer to the Appendix at the end of this presentation for disclosures.
S&P 500, 1926-2009(Source:
www.schwab.com)
PUTTING IT ALL TOGETHER
• Run Monte Carlo Simulation to find the success rate of your plan– The simulation runs thousands of trials based on
the variables:• Taxes• Inflation• Projected investment returns / Asset allocation• Goals
– Some of the trials are successful and some are not. A “probability of success” is estimated.
*Please refer to the Appendix at the end of this presentation for disclosures.
PUTTING IT ALL TOGETHER
• If the estimated success rate is not adequate, make adjustments with the things you can control.
– Asset allocation• Expected rate of return
• Expected volatility
– Goals• Change future standard of living
• Change current standard of living (saving rate)
*Please refer to the Appendix at the end of this presentation for disclosures.
PUTTING IT ALL TOGETHER
CURRENT PLAN: Probability of Success:
46%Below Confidence Zone
WHAT-IF PLAN:Probability of Success:
80%In Confidence Zone
*Please refer to the Appendix at the end of this presentation for disclosures.
Don’t Forget about Estate Planning
• Revocable Trusts– Helps with probate– Offers a vehicle for estate tax planning– Lets you control how your assets are split and who controls them
• Beneficiary Designations– Do they fit in with the scope of your overall plan?
• Durable Power of Attorney/HC Proxy– Designate who will step in to handle your affairs if you are incapacitated
• Advanced Planning– GRAT, CRAT, QPRT, etc.– Annual gifts ($13K per person)– Transfer assets now to exclude future growth from your estate
SUMMARY
• In an uncertain environment, you can do things to minimize the uncertainty:
• Focus on what you can control.
• Remember that the markets historically have gone up more often than they have gone down.
• Diversification still works.
• Create a multi-year tax minimization strategy.
• Develop a roadmap and monitor your progress to gain peace of mind!
*Please refer to the Appendix at the end of this presentation for disclosures.
THANK YOU!
APPENDIX: DISCLOSURES
• Past performance is not indicative of future results. Investments are not insured and may lose value.
• No amount of asset or sector allocation or diversification can protect against principal loss.
• Individual security selection may result in returns that deviate from the security’s corresponding benchmark.