Transcript 2. Investment Plan

“…we draw two morals for our readers:
Obvious prospects for physical growth in a
business do not translate into obvious
profits for investors.
The experts do not have dependable ways of
selecting and concentrating on the most
promising companies in the most promising
industries.”
Benjamin Graham
From last week:
• 5. Diversify
• 9. The past is past; future returns will
be different.
• 10. The four most expensive words in
the English language are “This time it’s
different.”
Markets
• Two goals:
• Match buyers and sellers
• Establish prices
• “Money on the sidelines”
• “Sellers flooded the market"
6. Stocks have prices;
businesses have value.
“In the short term the market is a voting
machine; in the long term it is a weighing
machine.”
Benjamin Graham
The “lost” decade 2000-20009
Pascal’s Wager
• To believe in God costs little if you are wrong
• Not to believe He exists and be wrong results
in an eternity of pain
• Applied to investing, we can’t be sure that
markets won’t collapse so why take the risk of
total loss.
Return to the 30’s?
• Caused by the state of the economy
• The FED learned its lesson
• Largest and most robust economy in the
world
• Emergency political intervention
Buyers = Sellers
• Who are you buying from?
• Why are they selling?
• Someone disagrees with your decision…
Equity Mutual Funds
• Costs Kill
– Trading Costs
– Management Fees
– Taxes
• Odds of sustained performance 1 in 3
The Game
• 200,000 “Investors”
– Tell 100,000 the stock will rise
– Tell 100,000 the stock will fall
• Take the 100,000 rise group
– Tell 50,000 the stock will rise
– Tell 50,000 the stock will fall
REPEAT…
The Game
• after 5 or 6 “Correct Calls” ask for $10
• Guarantee return if wrong
• Next time $50, same guarantee…
“We are thus led to the following logical if
disconcerting conclusion: To enjoy a
reasonable chance for continued better
than average results, the investor must
follow policies which are (1) inherently
sound and promising, and (2) are not
popular in Wall Street.”
Benjamin Graham
3. Markets are people; life is uncertain.
So:
– You can’t pick winning individual stocks
– No one can do it for you
– Mutual funds aren’t the answer ( 8. Costs
kill )
Only a 5. Diversified portfolio of index
funds give you any chance at all.
Next Week’s Key Points
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Text: Chapter 3
Save as much as you can – always.
Diversify widely in index funds.
Two factors in determining asset allocation
between stocks and bonds: age followed by
risk tolerance.
• Table on page 77 can be used as a first cut at
relating asset allocation to risk tolerance.
2. Investment Plan
1. Estimate your expenses.
2. Determine your sources of non-investment
income.
3. Decide if you will save each year, retain your
portfolio at its current level, or spend down
some of it over the remainder of your life.
4. Determine the composition of your portfolio
to generate the necessary additional income
Investment Plan
Planning is something that you DO,
not something that is DONE
Revise when your life changes…
NOT when markets change…
2. Investment Plan
1. Estimate your expenses.
2. Determine your sources of non-investment
income.
3. Decide if you will save each year, retain
your portfolio at its current level, or spend
down some of it over the remainder of your
life.
4. Determine the composition of your portfolio
to generate the necessary additional income
Three Alternatives
1. Life is uncertain - saving all your life as the
best course
2. Retain the value of our investment portfolio
in personal real terms.
3. Spend a portion of your assets as well as the
income in the belief you will die before your
assets are totally depleted
• 15% of surviving spouses live to at least 97!
• So you need to plan on more than 35 years of
retirement !!!
35 Years seems like Forever
• Assume you need $40,000 income
• Return of 4% in real terms
• Need $1,000,000 in your portfolio. This can
go on indefinitely.
• At 4% real return, withdrawing $40,000 a
year, and dying 35 years later with nothing
left over – need $746,585
Be Careful!
• Assumed that we can earn 4% each and every
single year
• There is only a 50% likelihood of earning 4%
or better on average.
• A with-drawl rate of 2% (rather than 4%) has a
90% chance of success.