30
CABOT’S 22 ND ANNUAL INVESTMENT CONFERENCE & LUNCHEON Friday, September 23, 2011

2011 Cabot Investor Conference - Cabot Financial Planning 2011

Embed Size (px)

DESCRIPTION

Cabot Money Management Financial Planning 2011

Citation preview

Page 1: 2011 Cabot Investor Conference - Cabot Financial Planning 2011

CABOT’S 22ND ANNUAL INVESTMENT CONFERENCE &

LUNCHEONFriday, September 23, 2011

Page 2: 2011 Cabot Investor Conference - Cabot Financial Planning 2011

FINANCIAL PLANNING DURINGUNCERTAIN ECONOMIC TIMES

Presented by:TOM VAUTIN, CFA, CFP®, EA - Senior Financial PlannerGREG STEVENS, CFP® - Senior Financial Counselor

Page 3: 2011 Cabot Investor Conference - Cabot Financial Planning 2011

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.

Page 4: 2011 Cabot Investor Conference - Cabot Financial Planning 2011

• 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.

Page 5: 2011 Cabot Investor Conference - Cabot Financial Planning 2011
Page 6: 2011 Cabot Investor Conference - Cabot Financial Planning 2011

BOTTOM LINE: There is a Lot of Uncertainty

Out There!

Page 7: 2011 Cabot Investor Conference - Cabot Financial Planning 2011

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.

Page 8: 2011 Cabot Investor Conference - Cabot Financial Planning 2011

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.

Page 9: 2011 Cabot Investor Conference - Cabot Financial Planning 2011

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.

Page 10: 2011 Cabot Investor Conference - Cabot Financial Planning 2011
Page 11: 2011 Cabot Investor Conference - Cabot Financial Planning 2011

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.

Page 12: 2011 Cabot Investor Conference - Cabot Financial Planning 2011

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.

Page 13: 2011 Cabot Investor Conference - Cabot Financial Planning 2011

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.

Page 14: 2011 Cabot Investor Conference - Cabot Financial Planning 2011

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.

Page 15: 2011 Cabot Investor Conference - Cabot Financial Planning 2011

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.

Page 16: 2011 Cabot Investor Conference - Cabot Financial Planning 2011

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.

Page 17: 2011 Cabot Investor Conference - Cabot Financial Planning 2011

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.

Page 18: 2011 Cabot Investor Conference - Cabot Financial Planning 2011

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.

Page 19: 2011 Cabot Investor Conference - Cabot Financial Planning 2011

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.

Page 20: 2011 Cabot Investor Conference - Cabot Financial Planning 2011

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.

Page 21: 2011 Cabot Investor Conference - Cabot Financial Planning 2011

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.

Page 22: 2011 Cabot Investor Conference - Cabot Financial Planning 2011

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.

Page 23: 2011 Cabot Investor Conference - Cabot Financial Planning 2011

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)

Page 24: 2011 Cabot Investor Conference - Cabot Financial Planning 2011

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.

Page 25: 2011 Cabot Investor Conference - Cabot Financial Planning 2011

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.

Page 26: 2011 Cabot Investor Conference - Cabot Financial Planning 2011

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.

Page 27: 2011 Cabot Investor Conference - Cabot Financial Planning 2011

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

Page 28: 2011 Cabot Investor Conference - Cabot Financial Planning 2011

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.

Page 29: 2011 Cabot Investor Conference - Cabot Financial Planning 2011

THANK YOU!

Page 30: 2011 Cabot Investor Conference - Cabot Financial Planning 2011

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.