Burton G. Malkiel Chemical Bank Chairman’s Professor of Economics Princeton University “Investing in a Restrained Market” University of Pennsylvania January 17, 2006
Exhibit 1
Exhibit 2 January, 2006
Exhibit 3
Exhibit 4
Exhibit 5
Exhibit 6 So Does Rebalancing
Exhibit 7
Exhibit 8 Asset Allocation for Person in Mid-Fifties
Exhibit 9 Suggested Asset Allocation Retirement Portfolio
Exhibit 10 BOW TO THE WISDOM OF THE MARKET • Markets are reasonably efficient • Index Funds Outperform • Past is not prologue
Exhibit 11 The Case for Indexing continues to be strong The Case for Active Management continues to be weak Percent of Large Capitalization Equity Funds Outperformed by Index Ending December 31, 2004. 1 Yr S&P vs. Large Cap Equity Funds 3 Yrs 5 Yrs 10 Yrs 20 Yrs 74% 76% 63% 86% 90%
Exhibit 12 Index Funds tend to outperform by Over Two Percentage Points Comparison of Returns-Average Equity Fund vs. Indexes 10 Yrs 20 Yrs to 12/31/04 12. 00% 12. 78% Average Equity Fund* 9. 30% 10. 54% S&P 500 Advantage (percentage points) 2. 70 S&P 500 Index 2. 48 Source: Lipper, Wilshire, & the Vanguard Group. *Consists of ALL Lipper equity categories.
Exhibit 13
Exhibit 14 Getting Burned by Hot Funds Fund Name 12/31/1996 12/31/1999 Ann Total Return 12/31/1999 12/31/2002 Ann Total Return 99 – 02 Rank (851 total funds) 1 Rydex: OTC Fund; Inv 65. 82 -37. 07 841 2 RS Inv: Emerg Growth 62. 46 -31. 17 832 3 Morg Stan Cap Oppty; B 59. 47 -40. 72 845 4 Janus Olympus Fund 58. 49 -27. 42 791 5 Janus Twenty 54. 79 -28. 63 801 6 Managers: Capital Apprec 53. 28 -28. 20 798 7 Janus Mercury 51. 51 -27. 24 790 8 Fidelity Aggr Growth 51. 46 -39. 09 843 9 Van Wagoner: Emrg Growth 50. 05 -51. 66 851 10 WM: Growth; A 49. 67 -27. 88 793 11 Janus Venture 49. 56 -29. 70 819 12 Van Kampen Emerg Growth; A 49. 34 -26. 38 785 13 Fidelity New Millennium 49. 22 -14. 90 500 14 PBHG: Sel Equity; PBHG 49. 14 -33. 45 837 15 Janus Enterprise 48. 71 -33. 11 836 16 TCW Galileo: SC Growth; Instl 45. 95 -39. 32 844 17 Morg Stan Inst: MC Growth; l 45. 42 -23. 28 735 18 Morg Stan Spec Growth; B 45. 34 -41. 46 846 19 IDEX: Jan Growth; T 44. 96 -28. 70 802 20 ING: Sm. Cp Opptys; B 44. 06 -30. 64 826 Average – Top 20 51. 44 -32. 00 S&P 500 27. 56 -14. 55
Exhibit 15
Exhibit 16 Percentage of Actively Managed Bond Funds Outperformed by Benchmark 10 Years Ended 12/31/04 Gov’t. Corp. GNMA High-Yield 98% 100% 90% 83% Intermediate-term 90 99 Long-term 75 83 Short-term Source: Lipper Inc. and Morningstar, Inc.
Exhibit 17 How to Buy Bonds Taxable vs. Tax Exempt Mutual Funds NJ/PA Money Market Fund NJ/PA (insured) Long-Term Bond Fund Buy Bonds Directly Only buy insured new issues Yields today about 4½% for insured bonds (AAA)
Exhibit 18 DON’T BE YOUR OWN WORST ENEMY AVOID STUPID INVESTOR TRICKS • Overconfidence • Herding • Loss Aversion • A couple of other common errors - Hot tip Investing - New Issue Investing
Exhibit 19 Retirement Strategies Buy Annuities Pro: Surest way to guarantee you won’t Outlive your money Con: Expensive, inflexible, and inconsistent With a bequest motive. Do it Yourself 1. Determine the takeout rate Assume Portfolio half equities (7 ½ % return) and half bonds (5% return). Average return 6¼% Minus Inflation Adjustment 2 % Takeout rate 4¼% 2. Rebalance– Take money out of best performing asset class
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