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									Developing Your Asset Allocation
    Strategy for Retirement

 Developed by Barbara O‟Neill, Ph.D., CFP,
      Rutgers Cooperative Extension
       Adapted by Jean Lown, Ph.D.
 Family, Consumer & Human Development
            Lown@cc.usu.edu
            Overview

 Asset Allocation Principles
 Risk-Return Relationship
 Application to TIAA-CREF
  Retirement Investment Options
  » 9 new investment choices (as of
    2003)

                                      2
     What Is Asset Allocation?

   Process of diversifying portfolio
    investments among several investment
    categories to reduce investment risk
   Example: 50% stock, 30% bonds, 10%
    real estate, 10% cash assets
   Objective: lower investment risk by
    reducing portfolio volatility
   Loss in one investment may be offset by
    gains in another
                                           3
     The Callan Periodic Table of
         Investment Returns
   http://www.callan.com/resource/periodic_
    table/pertbl.pdf
   Illustrates the need for asset allocation
   Shows how various asset classes
    performed during the last 20 years
   Best performing asset class changes
    One year‟s “winner” can be next year‟s
    “loser,” so invest in a variety of assets
                                                4
         Why Asset Allocation?
     Because Market Timing is Futile

   Value of $100 invested in large company
    stocks (S&P 500 index) from June 1980 to
    June 2000:
    »   $2,456 stayed invested entire time
    »   $613 if you missed the best 15 months
   Biggest market gains are often concentrated
    in short periods (can‟t afford to miss)


                                                  5
Second Example: The Futility
     of Market Timing

   Based on S&P 500 stock market index
   If investor stayed fully invested, return
    was 41.4%
   If investor missed top 10 trading days of
    1998, 1999, and 2000: -41.7% return
   Moral: stay invested in both bull & bear
    markets
                                                6
Determinants of Portfolio Performance

                         Security                    Market                  Other
                         Selection                   Timing                  2.1%
                           4.6%                       1.8%




                                                                                       Asset
                                                                                     Allocation
                                                                                      91.5%




Source: “Determinants of Portfolio Performance II, An Update” by Gary Brinston, Brian D. Singer and Gilbert L.
Beebower, Financial Analysts Journal May-June 1991
For illustrative purposes only. Not indicative of any specific investment.                               7
    The Importance of Asset
          Allocation

 Asset allocation is the MOST important
  decision an investor makes (i.e., buying
  some stock, NOT Coke versus Pepsi)
 Asset allocation determines about 90%
  of the return variation between portfolios
 This study has been repeated numerous
  times, by different researchers, with
  similar results.
                                           8
Downside of Asset Allocation

   A diversified portfolio MAY generate a
    lower rate of return when compared to a
    single “hot” asset class (e.g., growth
    stocks from 1995-99) BUT
   You never know the “hot” asset class in
    advance (i.e., Callan table)
   Asset allocation reduces volatility to
    provide a competitive rate of return
                                              9
           Factors To Consider

   Investment objective (e.g., retirement)
   Time horizon for a goal (e.g., life
    expectancy for retirement)
   Amount of money you have to invest
   Your risk tolerance and experience
    »   Caution about risk tests
   Your age and net worth
                                              10
           Major Asset Classes

   Stocks                       Bonds
     » Large company               » Domestic
       growth & value              » International
     » Mid cap growth &            » Corporate
       value                       » Municipal
     » Small growth & value
                                 Real estate (e.g.,
     » International              REITs)
                                 Cash (CDs, I-bonds,
                                  MMMFs, Treasury bills)

                                                       11
    Historical Average Annual
         Rates of Return

 Small Co. U.S. stocks = 12.6%
 Large Co. U.S. stocks = 10.4%
 Government Bonds = 5.1%
 Treasury Bills = 3.8%
 Inflation = 3.1%




                                  12
           Stock Capitalization

   Large Cap companies: valued at >$5
    billion
    »   ExxonMobil, General Electric, Microsoft
   Mid-Cap: $1-5 billion
    »   Bath & Beyond, Monsanto, Hilton Hotels
   Small-Cap: <$1 billion
    »   Earthlink, FirstFed Financial, Vintage
        Petroleum

                                                  13
    Why Invest Internationally?
 Correlations among world markets are
  low (e.g., U.S. and foreign stocks)
 World markets (especially small
  companies) are driven by local
  dynamics
 Investing in U.S. multinationals does not
  deliver the same level of diversification
 The benefits of diversification outweigh
  currency, market, & political risks
 U.S. accounts for less than 1/3 of the
  world‟s equity (stock) markets            14
 Other Things to Know About
       Asset Allocation

 Portfolio risk decreases as the # of
  asset classes increases
 Best results are achieved over time

 Diversify holdings within each asset
  category
   » Stock: different industry sectors
   » Bonds: different types and maturities

                                             15
16
                    RISK

   Is a 4 letter word
   Remember 2000-
    2003?
     » S&P 500 lost 40%
       of its value




                           17
    Risk-Return Relationship

 Low risk = low return
 High risk = possibility of high return
 Risk: chance of loss of principal in the
  short run
   » 2000-2003 most U.S. stocks lost
     value (after incredible run-up in prices
     in 1990s)

                                            18
    Relationship Between Risk and Return
   High
                                                                                        Int’l Stocks


                                                                       U.S. Stocks

                                                         Real Estate
Expected
 Return                                  Int’l Bonds


                         U.S. Bonds

              Cash
             Equivalents
  Low

           Low                                      Risk                                      High
                 For illustrative purposes only. Not indicative of any specific investment.
                                                                                                  19
Diversification From Combining
          Investments
     No Diversification                           Complete
            Portfolio
                                                  Diversification
                                                                Portfolio
Investment A1                                                   2
                                                Investment
                                                C


                        Investment B                                     Investment
                                                                         D


                             Some Diversification
                                              Portfolio 3
                         Investment E




                                      Investment F

                                                                                      20
         For illustrative purposes only. Not indicative of any specific investment
 Stocks are Risky in Short Run

 Very volatile in sort run (1-5 years)
   » annual returns -50% to +50%!!
   » Remember 2000-2003?
   » 2003 was a great year to buy stocks
     when all news was gloom & doom
 Large Co. U.S. stocks = 10.7% (avg.
  returns since 1926)
                                           21
Time Horizon for Retirement?

 Until the day you retire?
 Until the day you die?




                              22
         Invest for Growth
 There is no such thing as a risk-free
  investment!
 Retirement $ must grow faster than
  inflation to provide financial security
   » Average inflation = 3.1%
 Risk is relative
   » Short term volatility=long term growth
   » Invest in stocks for growth
                                              23
         Recent Example

 2000-2003 was a gut check
 Thank goodness some of my portfolio
  was in bonds & real estate!
   » Stocks tanked
   » Bonds held steady
   » Real estate saved the day


                                        24
    “Safe” Investments are Risky in
             the Long Run

 Inflation = 3.1%
 Government Bonds = 5.1% -3.1% = 2%
 Treasury Bills = 3.8% - 3.1% = 0.7%
 Subtract the impact of taxes and „safe‟
  investments yield negative returns
 You will not reach your goal with low risk
  investments
                                           25
    Understand Risk Tolerance
 Beware of taking risk tests and settling
  for a conservative portfolio
 Conservative investors risk outliving
  their assets
 Life expectancy calculators
   » http://www.ces.purdue.edu/retirement/
     Module1/module1b.html

                                         26
    The Asset Allocation Process

   Define goals and time horizon
   Assess your risk tolerance
   Identify asset mix of current portfolio
   Create target portfolio (asset model)
   Select specific investments
   Review and rebalance portfolio yearly
                                              27
        Tips For Funding a Tax-
        Deferred Employer Plan
   Diversify across asset classes
   Avoid market timing
   Choose investments with good historical
    performance
    »   Past returns are NO guarantee for the
        future!!
    »   <10 year track record is too short!
   Choose funds with low fees

                                                28
            The Big Picture

   Same principles can be applied to
    » 401(k) plans
    » Individual retirement accounts (IRAs)
    » Other retirement plans




                                              29
Questions?




             30
    5 TIAA-CREF Asset Classes

 Guaranteed (low risk; low return)
 Fixed-Income (bonds)
 Equities (stocks)
  » High return; volatile in the short run
 Real Estate
  » Inflation protection; reduce volatility
 Money Market (safe but very low return)
                                          31
     Global vs. International

 Global: U.S. and foreign investments
 International: “all” foreign




                                         32
    TIAA-CREF Options (pre-2003)

 TIAA Traditional    CREF Stock
 TIAA Real Estate    Global Equities
 CREF Money          Growth
  Market              Equity Index
 CREF Social          » LOTS of overlap!
  Choice (bond &
  stock)

                                       33
    9 New Fund Choices (2003)

   Real Estate          Mid-Cap Value
    Securities           Mid-Cap Growth
   Growth & Income      Small-Cap Equity
   S&P 500 Index        International
   Large Cap Value       Equity
   Social Choice
    Equity


                                             34
          Murky Mixture
 Few of the CREF funds are “pure”
 CREF Stock
  » 80% Large-, 15% Mid-, 5% Small-Cap
  » Some foreign stocks
 Mid-Cap Growth
  » 59% Large-! 39% Mid-, 2% Small-Cap
 Read Prospectus (or at least the summary)

                                          35
 Growth Portfolio: 3 asset classes

 STOCKS for growth
   » Large-cap Domestic
   » 10-15% Mid-Cap
   » 10-15% Small-cap
   » 10-15% International
 10-15% Real Estate (to beat inflation)
 10-15% Bonds (to dampen volatility)
                                           36
    New Funds Offer Diversity

 Lots of different stock accounts DO NOT
  mean diversification (overlapping)
 International Equity
 Small-cap Equity
 Real Estate Securities (to complement
  TIAA Real Estate)


                                        37
        Your “Action” List
 Review your current asset allocation
 Consider your other retirement accounts
 Use the TIAA-CREF web site
 Understand risk-return relationship
 Talk with a TIAA-CREF rep (at USU)
 Sign up for automatic rebalancing
  » Limits on moving $ out of TIAA
 Re-visit, Reallocate, Rebalance

                                        38
      Key Considerations For
       Successful Investing
   Educate yourself to make informed decisions
   Establish policies and objectives
   Monitor investment performance
   Stick to your plan and stay focused

   If you need help, seek professional advice

                                                  39
Financial Planning for Women

   Second Wednesday of the month
     » 12:30-1:30 in Family Life 318
        – bring your lunch
     » 7-8:30 p.m. at Family Life Center (500 N &
       700 E – bottom of Old Main Hill)
     » February 8 FPW: Investment Basics
   For mo. email news & reminder: Sign up
    sheet or send email to Lown@cc.usu.edu

                                                    40
   Questions? Comments?
       Experiences?


                        February 8 FPW:
                        Investment Basics

Baby Boomer Women Retirement Study
USU IRB approved research
Step 1: Survey- return by Feb 3 for prize drawing
Step 2: Focus Group ($25 compensation)

                                                    41

								
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