Post on 29-Dec-2015
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©Copyright 2001, Financeware, Inc. All rights reserved
Using Wealthcare to Unlock
Concentrated Stock Positions
Applying Wealthcare: Concentrated Stock Positions
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© WEALTHCARE CAPITAL MANAGEMENT 2004 ALL RIGHTS RESERVED PAGE 2
Main Issues
Clients With Concentrated Holdings Need Wealthcare Too…
Its Just Harder For Them to Pull the Trigger
Wealthcare is About Making the Most of The One Life Investors Have
Without Needless Compromises
And Without Unnecessary Investment Risk
If You Connect On the Value Proposition…
If You Understand Their Goals
If You Understand How They Prioritize Their Goals
They Will Buy Your Recommendation
Applying Wealthcare: Concentrated Stock Positions
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© WEALTHCARE CAPITAL MANAGEMENT 2004 ALL RIGHTS RESERVED PAGE 3
Risk of Single Stocks vs. the “Market”
Predicted Risk of an Average Stock by Universe vs. S&P 500 Index
Source: BARRA & Parametric 6/02
35%38%
45%49%
65%
16%
0%
10%
20%
30%
40%
50%
60%
70%
S&P 500Stock
Russell 1000Stock
Russell 3000Stock
Russell 2000Stock
EntireUniverse
S&P 500Index
Applying Wealthcare: Concentrated Stock Positions
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© WEALTHCARE CAPITAL MANAGEMENT 2004 ALL RIGHTS RESERVED PAGE 4
Problems With Obtaining Standard Deviation
Pop Quiz: What is the Standard Deviation of the S&P 500?
A) 15% B) 18% C) 20% D) 30%
S&P500 IBM GE MO*52 WK High 32% 40% 40% 95%52 WK Low 11% 18% 18% 17%
What Standard Deviation Do You Use?
*MO – Philip Morris
Applying Wealthcare: Concentrated Stock Positions
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© WEALTHCARE CAPITAL MANAGEMENT 2004 ALL RIGHTS RESERVED PAGE 5
Financeware Asset Allocation Page
Alternative / Other Assets
Concentrated Large Cap
Standard Dev and Arithmetic Mean
And Their Impact on the Geometric Mean
Applying Wealthcare: Concentrated Stock Positions
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Arithmetic vs. Geometric Returns1st Example:
Starting With $100Year 1 Return +100% $100 + ($100 * 1) = $200Year 2 Return -50% $200 + ($200 * -.5) = $100Ending Value $100
Geometric Return ((Ending Value - Starting Value) - Starting Value) / Starting
Value = 0%Arithmetic Return(Year 1 Rtn + Year 2 Rtn) / 2 = 25%
The Geometric Return Reflects Compounding…
Applying Wealthcare: Concentrated Stock Positions
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© WEALTHCARE CAPITAL MANAGEMENT 2004 ALL RIGHTS RESERVED PAGE 7
Arithmetic vs. Geometric
2nd Example
A B
Arithmetic Mean 12% 12%
Standard Deviation 18% 54%
Resulting Geometric Mean 10.58% 0.89%
The Higher The Volatility, The Greater The Delta Between The Geometric & Arithmetic Means
Arithmetic Means Are Used In Monte Carlo Simulation
Geometric Means Are Used In Most Marketing Material
Applying Wealthcare: Concentrated Stock Positions
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© WEALTHCARE CAPITAL MANAGEMENT 2004 ALL RIGHTS RESERVED PAGE 8
Measuring Confidence Against Inflation
What are the ODDS of beating INFLATION over a 10 Year Time Horizon? Any One Stock: 42%
Applying Wealthcare: Concentrated Stock Positions
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© WEALTHCARE CAPITAL MANAGEMENT 2004 ALL RIGHTS RESERVED PAGE 9
Measuring Confidence Against Inflation
What are the ODDS of beating INFLATION over a 10 Year Time Horizon? Any One Stock: 42%Entire Universe of Stocks: 94%
Applying Wealthcare: Concentrated Stock Positions
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© WEALTHCARE CAPITAL MANAGEMENT 2004 ALL RIGHTS RESERVED PAGE 10
Measuring Confidence Against Inflation
What are the ODDS of beating INFLATION over a 10 Year Time Horizon? Any One Stock: 42%Entire Universe of Stocks: 94%Balanced (60/40): 98%
Applying Wealthcare: Concentrated Stock Positions
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© WEALTHCARE CAPITAL MANAGEMENT 2004 ALL RIGHTS RESERVED PAGE 11
Why Wealthcare?
»We Know The Risk Of Holding is High
»But, The Tax Cost to Diversify Can Be High
»And The Emotional Cost To Sell Can Be High
»With the deck stacked against us, how can we provide Comfort?
Applying Wealthcare: Concentrated Stock Positions
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© WEALTHCARE CAPITAL MANAGEMENT 2004 ALL RIGHTS RESERVED PAGE 12
Case Study – Gary and Terrie Jones
»Gary – Age 58 & Terrie – Age 56
-no children, but love their pets»Household Income $325,000 (Gary – Circuit City Executive
& Terrie – Veterinarian)»Total Investment Assets
IRAs (saving $30k per year) $2,250,000
Brokerage Accounts (saving $10k per year) $1,200,000
Comfortable With Current Savings Levels ($40k per year)
Current Bear Market Has Been PAINFUL
Looking Forward To A “RELAXING RETIREMENT”
Applying Wealthcare: Concentrated Stock Positions
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© WEALTHCARE CAPITAL MANAGEMENT 2004 ALL RIGHTS RESERVED PAGE 13
»GOALS:
Retire @ 60, but no later than 65
Spend $140k, but $120k would be enough
Reduce Savings by $10k, but could save $10k more
Ideally Spend Month In Australian Outback ($30k)
Minimum Vacation of a Week ($10k)
Leave Large Estate (To Build an Animal Shelter)
preferably $1,000,000, but at least $250,000
Minimize Investment Risk
Case Study – Gary and Terrie Jones
» GOALS:
Retire @ 60, but no later than 65
Spend $140k, but $120k would be enough
Reduce Savings by $10k, but could save $10k more
PRIORITIES:
Ideally Spend Month In Australian Outback ($30k)
Minimum Vacation of a Week ($10k)
Leave Large Estate (To Build an Animal Shelter)
preferably $1,000,000, but at least $250,000
Minimize Investment Risk
Applying Wealthcare: Concentrated Stock Positions
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Case Study – Gary and Terrie Jones
Applying Wealthcare: Concentrated Stock Positions
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© WEALTHCARE CAPITAL MANAGEMENT 2004 ALL RIGHTS RESERVED PAGE 15
Case Study – Gary and Terrie Jones
Because you focused on what they valued most, THEY BUY YOUR ADVICE…
Knowing their Goals and Priorities, building a Recommendation is Simple…
Applying Wealthcare: Concentrated Stock Positions
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Implementation
Portfolio Components
Your Recommended Portfolio:» Risk Averse Allocation
Gary Reminds You Of His Employer: CIRCUIT CITY…and that in March 2000, CC was $43.48 per share…and now in January 2004, CC is $10.35 per share
While he indicated his goal was “Minimize Investment Risk!” and it was a Priority
…he does not want to sell their stock for such a loss…
DOES THIS SOUND FAMILIAR?
Applying Wealthcare: Concentrated Stock Positions
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© WEALTHCARE CAPITAL MANAGEMENT 2004 ALL RIGHTS RESERVED PAGE 17
Comparison of Recommendations
6 Times
Standard Deviation
10 Times
Downside Risk
Recommended = Comfort
Concentrated = Uncertain
Applying Wealthcare: Concentrated Stock Positions
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© WEALTHCARE CAPITAL MANAGEMENT 2004 ALL RIGHTS RESERVED PAGE 18
Using Our Crystal Ball…
What Does the Future Hold for The Jones Family?
Their Stock Could Help Them Leave $60 Million More
Applying Wealthcare: Concentrated Stock Positions
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Using Our Crystal Ball…
What Does the Future Hold for The Jones Family?
Their Stock Could Help Them Leave $60 Million MoreOr…The Results Could Be The Same, But With More Pain
Applying Wealthcare: Concentrated Stock Positions
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© WEALTHCARE CAPITAL MANAGEMENT 2004 ALL RIGHTS RESERVED PAGE 20
Using Our Crystal Ball…
What Does the Future Hold for The Jones Family?
Their Stock Could Help Them Leave $60 Million MoreOr…The Results Could Be The Same, But With More PainOr…they could run out of money @ age 85
Applying Wealthcare: Concentrated Stock Positions
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© WEALTHCARE CAPITAL MANAGEMENT 2004 ALL RIGHTS RESERVED PAGE 21
Using Our Crystal Ball…
What Does the Future Hold for The Jones Family?
Their Stock Could Help Them Leave $60 Million MoreOr…The Results Could Be The Same, But With More PainOr…they could run out of money @ age 85Or…they could run out of money @ age 73
Which Market Will Occur?
Applying Wealthcare: Concentrated Stock Positions
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© WEALTHCARE CAPITAL MANAGEMENT 2004 ALL RIGHTS RESERVED PAGE 22
Comparison of Recommendations
To Have Comfort…
>>Work 3 Years Longer
>>Spend $60,000 Less
>>Lose the Animal Shelter
>>Save $70,000 More
>>No More Safari Trips
What Would It Cost Them To Keep Their Stock?
Applying Wealthcare: Concentrated Stock Positions
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© WEALTHCARE CAPITAL MANAGEMENT 2004 ALL RIGHTS RESERVED PAGE 23
In Conclusion
Don’t Let Your Clients Gamble Their Future…Use Wealthcare To Unlock Their Highly Concentrated Positions
With Concentrated Positions…
Experience Unnecessary Pain (and likely Un-Rewarded Pain)
Confidence and Comfort Compromised (Coin-Flip)
Contradictory to Making The Most of Their Life
With Wealthcare…
Avoid Unnecessary Investment Risk
Achieve Comfort and Confidence
Live Life Without Needless Sacrifice