An Historical Perspective On the Market

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What about the Decade Of 2000 to 2010? Many news sources have reported that

the “’00s” were the lost decade for returns, but it depends on which numbers you choose. S&P 500 - .4% DJIA + 2.5% Small Cap + 6.2% World Index+ 1.3% Brazil +21.0% U.S. T-Bonds + 8.3%

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*Matt Moran, CBOE seminar, Oct. 29, 20107

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So, What Does This Data Tell Us? First, remember when people say “this

time is different” - it is never different. Markets over and under correct, but

they revert to the mean of their long term values.

Periods of over performance will be followed by periods of underperformance, etc.

Diversification is a key strategy for investing.

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Did the Markets Really Change in 2008? Probably not, but technology is driving

changes in the way the market operates. The globalization of markets should change

investment strategies for U.S. investors. Investors must diversify beyond the U.S. to capture

find returns. Growth rates in developed markets (e.g. U.S. and

Europe) projected under 2% Growth rates in BRIC countries projected at 5% to

7%. To earn the returns historically provided by

equities it will be necessary to invest globally. 10

The main investing principles you should learn from this class

We can’t predict the market accurately so, create a diversified portfolio of various assets.

The risk of the portfolio should be one that is appropriate to you.

Minimize trading, trading costs and taxes.

Rebalance at least annually to fit your investment objectives.

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Investing for the Next Decade

The WSJ Calls it the Age of “Macro” Investing

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What are “Macro” Events To understand these, we must

distinguish between the terms “risk” and “uncertainty”. Risk = a statistically measurable

result for a random variable eg. the outcome of the roll of a die (each side has a 1/6 chance.)

Uncertainty = outcomes for which there is no way to estimate their outcomes.

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Macro Uncertainty Examples: Natural Disasters:

Katrina, The Japanese earthquake

Political Turmoil The Arab Spring Terrorist Attacks European Debt Crisis

Economic Events The 2008 Recession Bankruptcy of Lehman Bros.

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A Little Perspective over the past 60 years

U.S. stocks enjoyed a great boom in the 1980’s and ’90’s – returns averaged 18% yearly.

2000’s decade returns: S&P returned 1% Bonds 6% annually.

A survey in 1951 about investing showed: 49% favored bonds, then real estate then bank

deposits Only 6% favored stocks. 28% said they would not

hold stocks because of “lack of safety”. Remember what the world was like in 1951?

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World Events the Past two Generations

A world war that cost 50 million lives Korean Conflict A cold war and Iron Curtain that threatened

world destruction. The Vietnam Conflict, the Oil Embargo in 1974,

severe inflation, wage and price controls, another oil shock, the dissolution of the Soviet Union.

Two wars in the Middle East, and 9/11/2001. The 2000’s that gave us a real estate bubble,

toxic mortgage securities, and near collapse of the world banking system. 16

What this Means for Investors Put your fears into perspective:

Warren Buffett: We have usually made our bet purchases when apprehensions about some macro event were at a peak”.

Is fear warping your perception of risk. Take selective risks:

If you endured the past decade, hang in there.

Exposure to factors like illiquidity, credit concerns, natural disasters and insurable events wil be better rewarded than in the past century.

Invest with a global perspective17

Why Demographics will Drive the Future Economic Growth

Demand for housing, autos, and consumer goods is driven by the 25 to 45 year age groups.

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Italy

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Germany

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United States

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Brazil

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India

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China

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So what will the next decade bring?

Here’s some data to help you decide

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