1. Ferro Financial, LLC
CLIENT EDUCATION SERIES
MARKET OVERVIEW
SESSION 1
2121 N. Causeway Blvd Suite
160 Ferro Financial, LLC
Metairie, LA 70001
2. Objectives of Presentation
• Provide a Basic Understanding of Capital
Markets
• Discuss Portfolio Construction
• The Importance of Diversifying Among Asset
Classes
• Market Volatility and Long Term Investing
• Ferro Financial, LLC Investment Philosophy
4. The Stock Market
World Market Capitalization
$35.6 Trillion as of December 31, 2010
Bloomberg Index Affiliation
Developed Markets
Capitalization Over Time
Emerging Markets
($ Trillions): Frontier Markets
5. The Stock Market
Own shares in a publicly traded company
IT IS OWNERSHIP
Apple Computer, Home Depot, AT&T, GAP
Clothing Store, Exxon
Why own companies?
Dividends
Long term capital growth
Better than sitting in cash
Beat rising prices (inflation)
6. The Bond Market
Size - $95 Trillion vs. $35.6 Trillion Global
Stock Market – MORE THAN TWICE THE
SIZE
Complexity – Government, Agency,
Corporate, Municipal, Mortgage, Asset-Backed
Risk – Generally less volatile than stocks
7. The Bond Market
LENDER
US Government
Foreign Government
Company
State
Cities
Why Lend Money?
To get your money back + Receive interest
10. Asset Classes
Asset Class. A group of securities that exhibit similar
characteristics, behave similarly in the marketplace, and are subject to
the same laws and regulations.
Commodities Cash
Real Estate 4% 2%
4%
Emerging Market Stocks
4%
Short Term US Bonds
19%
International Developed
Stocks
14%
International Developed
US Small Cap Stocks Bonds
10% 14%
Emerging Market Bonds
US Large Cap Stocks 5%
24%
12. Reducing Volatility with Bonds
Instead of eliminating riskier asset classes such
as stocks; invest more of the portfolio in bonds
to reduce volatility.
Stocks Bonds
13. In Portfolio Construction…
How asset classes work together is more
important than how the components work
individually.
Objective in portfolio construction - Enhance
the overall performance of the portfolio, and
reduce the downside risk.
14. Market Returns with Downside
%Cash % Bonds % Stocks Avg. Return
8% 64% 28% 8.07%
8% 54% 38% 8.34%
4% 51% 45% 8.57%
5% 40% 55% 8.81%
4% 35% 61% 9.00%
4% 24% 72% 9.26%
2% 16% 82% 9.54%
0% 9% 91% 9.82%
0% 0% 100% 10.03%
• Time Period – 1/1970 to 12/2011
• Return Information provided by the software MoneyGuide Pro
15. Market Returns with Downside
%Cash % Bonds % Stocks Avg. Return Worst 1 Yr
Loss
8% 64% 28% 8.07% -4.23%
8% 54% 38% 8.34% -9.05%
4% 51% 45% 8.57% -12.33%
5% 40% 55% 8.81% -17.40%
4% 35% 61% 9.00% -20.40%
4% 24% 72% 9.26% -25.80%
2% 16% 82% 9.54% -30.46%
0% 9% 91% 9.82% -34.68%
0% 0% 100% 10.03% -39.41%
• Time Period – 1/1970 to 12/2011
• Return Information provided by the software MoneyGuide Pro
16. How Diversification Works
Number of stocks that are held within an asset
class
Number of bonds held within a maturity period
Diversifying across asset classes
Diversifying within the sectors of the economy
17. Diversifying Bonds
Short Term Bonds
Intermediate Term Bonds
Long Term Bonds
21. Modern Portfolio Theory
Modern Portfolio Theory (MPT) was introduced
by Nobel prize winner, Harry Markowitz in 1952.
MPT attempts to maximize portfolio expected return for a given
amount of portfolio risk by carefully choosing the proportions of various
asset classes.
The fundamental concept behind MPT is that the assets in a portfolio
should NOT be selected individually, each on their own merits.
Rather, it is important to consider how each asset changes relative to
every other asset in the portfolio.
23. Active versus Passive
Management
Active Management Passive Management
Manager tries to beat the Manager tries to match the
market return of the market
High turnover – tax Low turnover – tax efficiency
inefficiency Low expense ratio
High expense ratio Low transaction costs – trade
High transaction costs – lots only to accommodate fund
of trading flows
24. Strategic versus Tactical
Strategic Management Tactical Management
Long-term focus Short-term focus
Select mix of Change mix of
investments and investments based on
maintain mix predictions and
Remain disciplined forecasts
despite markets ups React to market
and downs movements by
Rebalance to target mix changing mix
as market moves up Success depends on
and down ability to predict market
Changes based on life- movements
time events
26. Summary
Successful Long Term Investing:
Have an Investment Strategy that is Based on a Disciplined
Process:
Diversify among different Asset Classes
Use Diversified Securities
Diversification among different segments of the overall economy
Keep a long term time horizon
27. Ferro Financial, LLC
“PLANNING TODAY FOR
THE LIVE YOU’LL LIVE TOMORROW”
2121 N. Causeway Blvd Suite
160 Ferro Financial, LLC
Metairie, LA 70001