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Market Volatility And The Long Term Investor
1. George Salter, CFP®
Financial Planning Specialist
Guided Portfolio Manager
george.salter@smithbarney.com
(925) 930-3849
James E. Salter
Financial Planning Associate
james.salter@smithbarney.com
(925) 930-3889
Market Volatility and the
Long-Term Investor
INVESTMENT PRODUCTS: NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE
3. The Medium-Term Focus
S&P 500: 9/30/02 to 9/30/08
1,600
1,500
+42%
1,400
1,300
1,200
1,100
1,000
900
800
700
600
2002 2003 2004 2005 2006 2007 2008
Past performance is not a guarantee of future results. For informational purposes only. 3
Data Source: Consulting Group
4. The Long-Term Focus
S&P 500: 9/30/77 to 9/30/08
1,800
1,600
1,400
1,200
1,000
+1,107%
800
600
400
200
0
1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007
Past performance is not a guarantee of future results. For informational purposes only. 4
Data Source: Consulting Group
5. A Clearer Perspective
S&P 500 on a Percentage Log Scale
2000 to 2002
1987 Bear Market
Crash
1973 to 1974
Bear Market
1973 1978 1983 1988 1993 1998 2003 2008
5
Past performance is not a guarantee of future results. For informational purposes only.
Data Source: Consulting Group
6. Is the Market Getting Riskier?
“Postponing an attractive purchase because
of fear of what the general market might do
will, over the years, prove very costly.”
Philip A. Fisher
6
7. Volatility Cycles 1977-2007
Number of Daily Moves in the S&P 500 Index of More Than 1%
150
125
100
75
30-Year
Average:
50 57
25
0
77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07
Past performance is not a guarantee of future results. For informational purposes only.
7
Data Source: Consulting Group
8. What About the Down Side?
Monthly Returns on the S&P 500
January 1978 Through December 2007
100
83
Number of Monthly Returns
77 73
80
60
47
43
37
40
20
0
1/78 - 12/87 1/88 - 12/97 1/98 - 12/07
Positive Monthly Returns Negative Monthly Returns 8
Past performance is not a guarantee of future results. For informational purposes only.
Data Source: Consulting Group
9. A Look at Some Other Popular Asset Classes
• Treasury Bonds
• Corporate Bonds
• Treasury Bills
• Other Cash Instruments
9
10. And the Winner Is . . .
Cumulative Return on an Invested Dollar: 1926 Through 2007
$100,000
$15,092
$10,000
$3,255
$1,000
$100 $77
$20
$10 $12
$1
$0
1926 1931 1936 1941 1946 1951 1956 1961 1966 1971 1976 1981 1986 1991 1996 2001 2007
Small Cap Large Cap LT Gov Bonds T-Bills Inflation 10
Past performance is not a guarantee of future results. For informational purposes only.
Data Source: Consulting Group
11. Rates of Return
Annualized Returns: 1926 Through 2007
12.5%
10.4%
5.4%
3.7%
3.1%
LT Gov
Small Large
Inflation
T-Bills
Bonds
Stocks Stocks 11
Past performance is not a guarantee of future results. For informational purposes only.
Data Source: Consulting Group
12. Leader of the Pack
Top-Performing Asset Class 12/31/45 Through 12/31/07
50
44
43 43
40
Number of Periods
36
30
20
15
11 10
7
10
5
2
0 0
0
Annual Rolling 5 Year Rolling 10 Year Rolling 20 Year
LT Gov
Stocks T-Bills 12
Bonds
Past performance is not a guarantee of future results. For informational purposes only.
Data Source: Consulting Group
13. Where Do We Go From Here?
“An investor who has all the answers
doesn't even understand the questions.”
Sir John Templeton
13
14. The Bear Facts
Declines of 20% or More in the S&P 500: 1950 Through 2007
Decline Recovery
(in months) (in months)
Peak-to-Trough
Date
2000-02 -49% 30.5 57
1990 -20% 3 4
1987 -34% 3 20
1980-82 -27% 19 3
1973-74 -48% 21 70
1968-70 -36% 18 21
1966 -22% 8 7
1962 -28% 6 14
1956-57 -22% 15 11
Average: -31.8% 13.7 23.0
14
Past performance is not a guarantee of future results. For informational purposes only.
Data Source: Consulting Group
15. The Real Story
“The true objective for any long-term investor
is maximum total real return after taxes.”
Sir John Templeton
15
16. The Case for Waiting Out the Storm
Cumulative Growth of Three Portfolios
Dec. 31, 1972 Through September 1984
$351,758
Investor #2
Investor #3 stays in stocks
$244,301
adds $25,000
$100,000
$93,451
Investor #1 sells stocks, earns 5% return
72 73 74 75 76 77 78 79 80 81 82 83
16
The above represents a hypothetical investment and does not reflect the deduction for investment-management fees or transaction costs.
Actual results would be reduced by these costs. Each customer’s specific situation, goals and results may differ. Past performance is not a
guarantee of future results. For informational purposes only.
Data Source: Consulting Group
17. Buying at the Top
Cumulative Growth
January 1962 Through December 2007
$10,000
$2.74 million
$10,000
$10,000
$10,000
$10,000
$10,000
$10,000 $10,000 $502,716
62 67 72 77 82 87 92 97 02 07
Treasury Bills
Stocks
17
The above represents a hypothetical investment and does not reflect the deduction for investment-management fees or transaction
costs. Actual results would be reduced by these costs. Each customer’s specific situation, goals and results may differ. Past
performance is not a guarantee of future results. For informational purposes only.
Data Source: Consulting Group
18. Buying at the Bottom
Cumulative Growth
December 1961 Through December 2007
$10,000 $3.68 million
$10,000
$10,000
$10,000
$10,000
$10,000
$10,000
$10,000 $469,367
62 67 72 77 82 87 92 97 02 07
Treasury Bills
Stocks
18
The above represents a hypothetical investment and does not reflect the deduction for investment-management fees or transaction
costs. Actual results would be reduced by these costs. Each customer’s specific situation, goals and results may differ. Past
performance is not a guarantee of future results. For informational purposes only.
Data Source: Consulting Group
19. What the Experts Say About Market Timing
“I have never met a person who could
forecast the market.”
Warren Buffett
“Don’t try to buy at the bottom and sell at the
top. This can’t be done—except by liars.”
Bernard Baruch
“There is no basis for assuming the average
investor can anticipate market movements
more successfully than the general public, of
which he is a part.”
Benjamin Graham
19
20. And the Losers . . .
“It’s no trick at all to be right on the market.”
Jesse Livermore
A famous Wall Street trader during the “Roaring ’20s,”
Livermore lost his entire fortune in a failed effort to time
the stock market.
20
21. Easy Boat to Miss
Annualized Increase in the S&P 500: 1980 Through 2007
20%
Net of Dividends
14.4%
15%
11.3%
9.0%
10%
7.0%
5.2%
3.6%
5%
0%
Full Period Less the 10 Less the 20 Less the 30 Less the 40 Less the 50
Biggest Up Biggest Up Biggest Up Biggest Up Biggest Up
Days Days Days Days Days 21
Past performance is not a guarantee of future results. For informational purposes only.
Data Source: Consulting Group
22. On the Rebound
10 Worst Days for the S&P 500: 1950 Through 10/30/2008
Following Following Following
Date Decline Day Week Year
-20.5%
#1 Oct. 19, 1987 +5.3% +1.3% +23.2%
-9.0%
#2 Oct. 15, 2008 +4.3% -1.2% NA
-8.8%
#3 Sept. 29, 2008 +5.3% -4.5% NA
-8.3%
#4 Oct. 26, 1987 +2.4% +12.3% +37.9%
-7.6%
#5 Oct. 9, 2008 -1.2% +4.0% NA
-6.9%
#6 Oct. 27, 1997 +5.1% +7.1% +26.1%
-6.8%
#7 Aug. 31, 1998 +3.9% +6.9% +7.5%
-6.8%
#8 Jan. 8, 1988 +1.7% +3.6% -4.8%
-6.7%
#9 May 28, 1962 +4.6% +3.7% -12.8%
-6.6%
#10 Sept. 26, 1955 +2.3% -0.3% +17.6%
Average: -8.8% +3.3% +13.5%
+3.4% 22
Past performance is not a guarantee of future results. For informational purposes only.
Data Source: Consulting Group
23. The Costs of Short-Term Investing
Returns on a Buy-and-Hold Approach Versus a Market-Timing Strategy
December 1977 Through December 2007
$3.87 million
$1.71 million
77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07
Buy and Hold Market Timing 23
The above represents a hypothetical investment and does not reflect the deduction for investment-management fees or transaction
costs. Actual results would be reduced by these costs. Each customer’s specific situation, goals and results may differ. Past
performance is not a guarantee of future results. For informational purposes only.
Data Source: Consulting Group
24. A Bad Time for Bad Timing
• Bear markets can be points of maximum
vulnerability to poor market-timing decisions.
• Historically, net cash outflows by investors
have marked major market bottoms.
24
25. A Winning Hand
“The stock market is like a gambling
casino where the odds are rigged in
favor of the players.”
Burton Malkiel
25
26. The Odds Favor the Long-Term Investor
Distribution of Returns on the S&P 500: 1926 Through 2007
2006
2004
1993
Up Years: 59 (72%)
1988 2003 1997
2000
Down Years: 23 (28%) 1986 1999 1995
1990 2007
1979
1981 1998 1991
2005
1994 1972 1996 1989
1977
1983 1985
1969 1992 1971
1962 1968 1982 1980
1987
1953 1984 1965 1976 1975
1964 1967 1955
1978
1946
2001 1970
1940 1959 1963 1950
1973 1960
1939 1952 1961 1945
1966 1934 1956 1938
1949 1951 1958
2002
1957 1943
1932
1974 1948 1944 1936 1935 1954
1927 1933
1930 1942 1928
1929
1941 1926
1937 1947
1931
-40% -20% 0% +10% +20% +30% +40% +50%
-10%
-30% 0%
26
-50% -30% -20% -10% +10% +20% +30% +40% +50% +60%
-40%
Past performance is not a guarantee of future results. For informational purposes only.
Data Source: Consulting Group
27. More Hits Than Misses
Probabilities of Various Annual Returns 1926 Through 2007:
Up 10% or more: about 3 in 5
Up 20% or more: about 2 in 5
Up 30% or more: about 1 in 5
Down 10% or more: 1 in 8
Down 20% or more: 1 in 16
Down 30% or more: 1 in 40
27
Past performance is not a guarantee of future results. For informational purposes only.
Data Source: Consulting Group
28. Time Pieces
Positive and Negative Returns on the S&P 500: 1945 Through 2007
One-Year Five-Year Ten-Year
Periods Periods Periods
48
53 5 53
14
Positive Returns Negative Returns 28
Past performance is not a guarantee of future results. For informational purposes only.
Data Source: Consulting Group
29. In a Nutshell:
• Volatility is a fact of life in the stock market.
• Over the long run, stocks have offered
significantly higher returns than bonds or T-bills.
• Market timing can be an expensive undertaking.
• Historically, the odds have favored the bulls.
“Patience is a necessary ingredient of genius.”
Benjamin Disraeli
29
30. Important Smith Barney Disclosures
Past performance is not a guarantee of future results. Each customer’s specific situation, goals and results may differ. This data is presented for
informational purposes only. Historical returns do not necessarily account for fees or transaction costs, which may be charged when investing in an actual
portfolio or securities.
Although the statements of fact and data in this presentation have been obtained from, and are based upon, sources that the firm believes to be reliable, we
do not guarantee their accuracy, and any such information may be incomplete or condensed. All opinions included in this presentation constitute the firm’s
judgment as of the date of this presentation and are subject to change without notice. This report is for informational purposes only and is not intended as
an offer or solicitation with respect to the purchase or sale of any security.
The charts depicted within this presentation are not indicative of future performance. The data do not reflect the material differences between stocks, bonds,
bills and inflation, such as fees (including sales and management fees), expenses or tax consequences. Common stocks generally provide an opportunity
for more capital appreciation than fixed income investments but are also subject to greater market fluctuations. Corporate bonds, US Treasury bills and US
government bonds fluctuate in value but, if held to maturity, offer a fixed rate of return and a fixed principal value. Government securities are guaranteed as
to the timely payment of interest and provide a guaranteed return of principal. The principal value and interest on treasury securities are guaranteed by the
US government if held to maturity.
The Standard & Poor’s 500 Index is a market capitalization-weighted index of 500 widely held common stocks. Investors cannot directly invest in an index.
Actual results may vary based on an investor’s investment objectives and portfolio holdings.
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be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Any such taxpayer should seek advice
based on the taxpayer's particular circumstances from an independent tax advisor.
Bonds are affected by a number of risks, including fluctuations in interest rates, credit risk and prepayment risk. In general, as prevailing interest rates rise,
fixed income securities prices will fall. Bonds face credit risk if a decline in an issuer's credit rating, or creditworthiness, causes a bond's price to decline.
High yield bonds are subject to additional risks such as increased risk of default and greater volatility because of the lower credit quality of the issues.
Finally, bonds can be subject to prepayment risk. When interest rates fall, an issuer may choose to borrow money at a lower interest rate, while paying off
its previously issued bonds. As a consequence, underlying bonds will lose the interest payments from the investment and will be forced to reinvest in a
market where prevailing interest rates are lower than when the initial investment was made.
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