c m Cumulare Asset Management Br idging the Past and the F utur e : Inve sting for Ge ne r ational We alth – T he Re d T ips Me thod IA Ma y 18 th 2018 by Alan Mille r CF A F T his pre se ntatio n e xpre sse s o ur o pinio ns and do e s no t c o nstitute inve stme nt, le g al o r tax advic e
Cumular e Asse t Manage me nt: Info Cumulare is a Re giste re d Inve stme nt Advisor (RIA) • – Re g iste re d with F lo rida Offic e o f F ina nc ia l Re g ula tio n (CRD# 288846) – Se pa ra te Ma na g e d Ac c o unts fo r e a c h o f o ur c lie nts – I nde pe nde nt Custo dia n is I nte ra c tive Bro ke rs L L C Alan Mille r, CF A • – F e llo w o f the I nstitute o f Ac tua rie s in L o ndo n, I nve stme nt spe c ia liza tio n – E x-CE O o f Ba rc la ys’ So uth Afric a n inve stme nt ma na g e me nt b usine ss – E xpe rt in a pplying q ua ntita tive to o ls to a sse t ma na g e me nt – E q uity o rie nta tio n, b ut e xpe rie nc e d in a ll a sse t c la sse s Stuart Brisge l • – Jo hn Ab b o tt Co lle g e in Mo ntre a l, e x-Mo rg a n Sta nle y – De ve lo pe d Po we rOne Stra te g y fo r pre fe rre d se c uritie s – Pa ssio n fo r finding a nd e xplo iting ma rke t ine ffic ie nc ie s – F ixe d inc o me & pre fe rre d se c urity o rie nta tio n 2
Inve sting for Ge ne r ational We alth • “Ge ne ra tio n” = Ab o ut 30 ye a r time spa n • T a king lo ng te rm vie w o n inve stme nt pe rfo rma nc e • I de a is to pa ss o n a s muc h we a lth a s po ssib le to sub se q ue nt g e ne ra tio ns…. • …while ma na g ing the risks a nd pitfa lls tha t c a n g e t yo u o ff tra c k • No ma g ic fo rmula , b ut so me ke y fa c to rs to c o nside r • Summa rize d list o f ke y fa c to rs: “RE D- T IPS” 3
RE D- T IPS • Ma ximize lo ng te rm RE URNS b y inve sting ma inly in e q uitie s T (c o mmo n sto c ks) • Sta rt a s E Y a s po ssib le ARL Y yo ur inve stme nts • DIVE RSIF AX e ffic ie nc y • T • Use Adviso r with a n INDE NT Custo dia n PE NDE • De ve lo p a writte n PL AN a nd stic k to it • Ha ve the rig ht le g a l ST URE fo r yo ur inve stme nts RUCT 4
Histor ic ally E quitie s have give n gr e at long te r m Re tur ns Co mpo und Annua lize d Re turns in USD fro m 01/ 01/ 1987 thro ug h 04/ 30/ 2018. Ba se d o n pub lishe d I nde x Pe rfo rma nc e b e fo re a ny fe e s o r c ha rg e s: US E q uitie s: 10.3% p.a . S&P 500 I nde x, T o ta l Re turns US Gro wth E q uitie s: 13.6% p.a . Na sda q 100 I nde x, T o ta l Re turns US Bo nds: 6.1% p.a . Blo o mb e rg Ba rc la ys US Ag g re g a te Bo nd I nde x, T o ta l Re turns US I nfla tio n: 2.7% p.a . US Co nsume r Pric e I nde x, Urb a n Are a s 5
Why do E quitie s usually pe r for m we ll ove r the long te r m? E q uitie s (c o mmo n sto c ks) re pre se nt a n e ntitle me nt to the pro fit stre a m o f the • unde rlying c o rpo ra tio ns. Ove r time , a s the e c o no my g ro ws, c o rpo ra te pro fits g ro w, a nd c o rpo ra tio ns • pa y hig he r divide nds to sto c kho lde rs. I n the lo ng run, infla tio n sho uld flo w thro ug h to c o rpo ra te pro fits, the re fo re • e q uity inve sto rs a re so me wha t pro te c te d a g a inst c ha ng e s in infla tio n. Yo ur lo ng te rm re turn fro m e q uitie s is the sum o f: • – T he divide nd yie ld (c urre nt divide nd / sto c k pric e ) e .g . 2.5% – Gro wth in e a rning s a nd divide nds o ve r time (re a l e c o no mic g ro wth + infla tio n, ma yb e 3% + 2.5% = 5.5%) L o ng te rm histo ric a l re turns fro m U.S. e q uitie s ha ve b e e n 8-12%, whic h is mo re • tha n mo st o the r a sse t c la sse s. “Gro wth” e q uitie s (e .g . Na sda q -liste d c o mmo n sto c ks) ha ve o utpe rfo rme d the • g e ne ra l e q uity ma rke t, b ut with muc h hig he r vo la tility a nd risk. 6
L ong T e r m Re tur n Compar ison Slig htly mo re tha n 30 ye a rs, wa nt to inc lude 1987 b e c a use wa nt to inc lude • impa c t o f the “Cra sh o f 1987” Assume tha t yo u sta rte d with $1 millio n o n 01/ 01/ 1987. • I nve ste d in a dive rsifie d po rtfo lio o f E q uitie s (S&P 500)o r Bo nds (Blo o mb e rg • Ba rc la ys US Ag g re g a te I nde x), b e fo re T a xe s a nd I nve stme nt Cha rg e s, a nd a ssuming tha t a ll divide nds a nd inte re st a re re inve ste d. Ac c umulate d Por tfolio Value s as of 04/ 30/ 2018: • – E quity Portfolio = $21,759,669 – Bond Portfolio = $6,397,775 E q uitie s o utpe rfo rme d b o nds b y a hug e ma rg in a nd a re muc h mo re • vo la tile …b ut if yo u a re inve sting fo r g e ne ra tio na l we a lth, ma yb e yo u ne e d to “lo o k thro ug h” the vo la tility? 7
8 F ig ure s sho wn a re b a se d o n ind e x d a ta a nd a ssume re inve stme nt o f inc o me . No fe e s o r ta xe s ha ve b e e n d e d uc te d .
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Ar e E quitie s Ove r - Pr ic e d Right Now? L ong T e rm Growth T re nd-L ine I f we ta ke 01/ 01/ 1987 a s the b a se , the c urre nt le ve l o f the S&P 500 is ve ry c lo se to its • lo ng te rm g ro wth tre nd-line , whic h sug g e sts tha t e q uitie s a re no t c urre ntly o ve r- pric e d. T he tre nd-line wa s c a lc ula te d using a line a r re g re ssio n o f lo g a rithmic c umula tive • re turns. Pric e : E arnings Ratio T he Pric e : E a rning s (P/ E ) Ra tio o f the S&P 500 I nde x, is a me a sure o f ho w ma ny ye a rs’ • e a rning s a re re fle c te d in the c urre nt inde x va lue . T he g re a te r the ra tio , the mo re e xpe nsive is the S&P 500, re la tive to its c urre nt e a rning s. T he c urre nt P/ E Ra tio o n the S&P 500 is 20.8 time s, ve rsus a lo ng te rm a ve ra g e (1987- • 2018) o f 19.3 time s. On this b a sis, the e q uity ma rke t a ppe a rs to b e slig htly o ve r-pric e d rig ht no w…b ut • do e s tha t re a lly ma tte r if yo ur time ho rizo n is 30 ye a rs? 11
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DIVE RSIF Y Inve stme nts Hig h vo la tility o f e q uitie s me a ns tha t 100% in e q uitie s is no t usua lly a ppro pria te . • So me Asse t-Cla ss Dive rsific a tio n is no rma lly a dvisa b le • Mo st c o mmo n a sse t mix is 60% e q uitie s, 40% b o nds • An e q uity po rtfo lio sho uld a lso b e dive rsifie d b y: • – Se c to r (e .g . Ba nks / T e c hno lo g y / Co nsume r / Industria l) – Individua l sto c ks (e .g . fo r T e c h se c to r: ho ld a mix o f Apple , Ama zo n, Alpha b e t, F a c e b o o k, Ne tflix…no t a ll in o ne sto c k). A b o nd po rtfo lio sho uld b e dive rsifie d b y: • – Ma turity da te – Issue r (a nd pre fe ra b ly, o nly c o nside r inve stme nt-g ra de issue rs) T he c o mb ine d e xpo sure to a ny o ne c o rpo ra tio n (e q uity + b o nd ho lding s) • sho uld no t e xc e e d 10% o f the po rtfo lio va lue . 14
T he Ma g ic of Dive rsific a tion: Combining Unc orre la te d Asse ts Re duc e s Risk Equity Volatility 14.5% Bond Volatility 4.3% Average (50:50) Volatility of Equities and Bonds 9.4% Actual Volatility of 50:50 Balanced Portfolio 7.6% "Free Lunch" Reduction of Risk 1.8% 15
Star t as E ARL Y as possible • E inste in sa id: “Co mpo und inte re st is the mo st po we rful fo rc e in the unive rse ”. • Whe n po sitive re turns a re re inve ste d, g ro wth ta ke s pla c e o n a b ig g e r c a pita l b a se a nd re turns “c o mpo und”. • 41% + 41% = 100% • 25% + 25% + 25% = 100% • T he lo ng e r yo u c a n ke e p inve sting , the g re a te r the po we r o f c o mpo unding . 16
What Age Should You Star t Inve sting? • Co nside r thre e pe o ple e a rning the sa me sa la ry, o f $200 000 pe r a nnum a t a g e 30, who inve st 10% o f the ir sa la ry. • Assume : – inve stme nt re turns: 8.0% p.a . – sa la ry inc re a se s: 4.5% p.a . – CPI infla tio n 2.5% p.a . – No ta x o r c ha rg e s Re a l (Infla tion Adjuste d) Va lue of Ca pita l a t Ag e 65: • – Sta rte d a t 30: $2.55 million – Sta rte d a t 40: $1.50 million – Sta rte d a t 50: $0.75 million 17
T ax Syste m F avor s a L ong T e r m, E quity Or ie nte d Por tfolio • F o r a lo ng -te rm o rie nte d e q uity po rtfo lio , with infre q ue nt tra nsa c tio ns (lo w turno ve r), re turns a re typic a lly in the fo rm o f: – L o ng te rm c a pita l g a ins – Qua lifie d Divide nds • Bo th o f the se ite ms a re ta xe d a t the L o ng T e rm Ca pita l Ga ins T a x Ra te (ma ximum ra te c urre ntly 20% + 3.8% NI I T = 23.8% ) • F ixe d I nc o me / Bo nd Re turns a re g e ne ra lly ta xe d a s re g ula r inc o me (ma ximum ra te 37% ). • A sho rt-te rm tra ding o rie nte d po rtfo lio (e q uitie s o r b o nds) will b e ta xe d o n sho rt te rm c a pita l g a ins (ma ximum ra te 37% ) • Re tire me nt a c c o unts like I RAs a nd 401(k)s o ffe r a dditio na l ta x a dva nta g e s. 18
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