Market Volatility Toolkit KMA

Staying the Course through Market Volatility March 2008 Greg Williams is a registered representative of and offering securities through Securities Service Network, Inc., member FINRA/SIPC Fee based advisory services are offered through SSN Advisory, Inc., a registered investment advisor Office of Supervisory Jurisdiction: 10207 Technology Drive, Suite One, Knoxville TN 37932 (865) 777-4677 Navigating through Market Turbulence • Recent market volatility has left some investors feeling uneasy about their portfolios • S&P 500 declined 10% from October 9th to November 26 • S&P 500 rebounded in December, ending the year at 3.5% • And the rollercoaster ride continues… • Through the first three weeks of January 2008, the S&P has declined 9.7% As we come to terms with recent volatility, it is important to revisit some basic principles about the stock market 2007 S&P 500 Roller Coaster Ride US Equity Markets - A Wild and Bumpy Ride… Nov 1st – US Financials fall 4.6%, the most since September 2002 Apr 16th – S&P 500 surged to its highest in more than six years Aug 9th – All 10 industry groups in the S&P 500 dropped more than 2% Feb 27th – US stocks plunged, erasing all of 2007 gains after selloff in China spreads and sparked the biggest rout in four years Aug 28th – Financial shares drive the S&P 500 down 2.4% as 487 of its members fell March 13th – Mortgage Bankers Association reports that delinquencies for sub-prime reached 13.33% in Q4, highest since Q203 Source: Bloomberg Putting Recent Volatility in Perspective • October 9th to November 26th - S&P 500 Declined Just Over 10% • Past 12 Months 1/02/07 through 12/31/07: – S&P appreciated roughly 3.5% – Total return basis nearly 5.5% (includes dividend reinvestment) • Year-to-Date through 1/18/08: – S&P down roughly 9.75% – Total return basis 9.67% (includes dividend reinvestment) Short-term Market Swings are the Norm, Not a Signal that the Sky Is Falling Be Wary of Market Hysteria and Chicken Little! • “This is not a prediction, it is a certainty - there will be serious disruption in the world’s financial services industry It’s going to be ugly” -The Sunday Times, London - As we know, Y2k came and went smoothly • “Capitalism will come to an end in the United States around the year 2000” • “Stock markets will start crashing by the end of 1997” - Dr Ravi Batra, Prof of Economics, The Great Depression of 1990 - S&P 500 proceeded to return in excess of 20% for the years 1997, 1998 and 1999 It is important to evaluate financial news with a trusted Advisor Pundits and Media Contribute to the Hysteria… Jan 12th - “The biggest concern that investors have is not that a recession is likely but that growth might be too strong” Jan 24th - “After this sluggish start to the year, we should have a pretty good stock market as we go through 2007” Feb 20th - “While the mortgage market for borrowers with poor credit is behaving in a ‘very problematic way’, the issue is unlikely to spread to the rest of the bank industry….most of the problem loans are outside the banking system” Mar 13th - “People are panicking…Everyone is concerned about credit and that access to capital will be severely restricted If that happens, nothing gets done.” Mar 20th - “It supports many peoples’ soft-landing scenarios, where housing doesn’t get that bad.” Aug 9th - “The overnight rate banks charge each other in dollars jumped to the highest in six years.” Aug 28th - “The Conference Board reported today consumer confidence fell the most since 2005, while the S&P/CS Schiller said home values had the steepest tumble in at least five years in June.” Nov 1st - “There is more downside in financials We just don’t know what the ultimate impact is going to be for all the sub-prime difficulties.” Dec 10th - “Negative news from the banking industry are not that shocking anymore Now the question is what would the right timing for buying bank shares.” Source: Bloomberg The Stock Market Can Be a Roller-Coaster Ride: Be Careful When You Get Off! •Over the short-term, stocks are volatile and difficult to predict •Market response to concern about subprime mortgages and other “recessionary” concerns: • Investor panic that the economy would collapse • Dow drops by 416 points on February 27 • Biggest one-day fall since the 9/11 attacks • Dow then reaches a record high of 13,633 on May 30 • Breaks record more times, reaching 14,164 on October • 4th Quarter pullback stretches into 2008 • Dow closes at 12,099 on January 18 (down 8.8% in 2008) • Dow opens 400 points down at the opening bell on January 22 • Federal funds rate cut by three quarters of a percentage point •Resist market panic, and evaluate buy/sell decisions with your Advisor If a Recession is Underway, It Would Keep the Market in Retreat But It Could Also Lead to an Investment Opportunity Based on the 10 post-war recessions, we see that the markets could recover relatively quickly and investors could miss the rebound with market timing The 10 post-war recessions have lasted a median of 10 months Average Performance Before, During & After recession Average & Median Performance from S&P500 Low During Recession (i.e Rebound) Source: Ned Davis Research; S& P 500 Index returns based 10 post-war recessions, “Recession Could Lead to Table Pounding Buy”, January 14, 2008 The Stock Market Delivers Over the Long-term • From 1966 through 2005, the S&P 500 has returned an average of 10.53% • However, the returns received each year varied greatly, from –26% to +37% Source: Ibbotson Associates, SEI S&P 500 Annual Returns Below -20% -20% to -10% 2002 1974 2001 1973 1966 -10% to 2000 1990 1981 1977 1969 (1968-2007) to +10% 2007 2005 1994 1993 1992 1987 1984 1978 1970 +10% to +20% Over +20% 2006 2004 1988 1986 1979 1976 1972 1971 1968 1985 1983 1982 1980 1975 1967 2003 1999 1998 1997 1996 1995 1991 1989 The indices illustrated herein are unmanaged indices You cannot invest directly in an index Index returns not reflect the impact of any management fees, transactions costs, or expenses The information seen is for illustrative purposes only and are not reflective of the performance of any SEI funds Past performance is no guarantee of future results Market Timing: Moving In and Out of Cash During Volatile Times Can Be Costly Investment Period Average Annual Total Return Fully Invested (2,519 days) 5.89% Minus 10 Best Days 1.91% Minus 20 Best Days -0.82% Minus 30 Best Days -3.23% Minus 40 Best Days -5.25% Treasuries* 2.65% Source: S & P 500 Index: 01/01/98 to12/31/07 * Lehman US Short Treasury Bills 10 Asset Class Returns Vary Throughout Time 11 12 Managing Volatility through Diversification A broad set of asset classes helps to smooth out volatility and cushion market declines During the stock market’s rocky th quarter, some asset classes had positive returns: Stocks - as measured by the S & P 500 Bonds - Lehman US Aggregate Treasuries - Lehman 1-3 Gov’t Bond - 3.3% + 3.0% + 2.3% This trend continued during the first three weeks of 2008: Stocks - as measured by the S & P 500 Bonds - Lehman US Aggregate Treasuries - Lehman 1-3 Gov’t Bond - 9.7% + 1.7% + 1.3% Use a balanced approach to investing 13 Investors Should Benefit from a Long Term and Diversified Exposure to the Broad Markets • Natural oscillation between fear and greed may lead to sub-optimal portfolio decisions • The credit market has suffered regardless of fundamentals; many managers see a lot of under-valued credits; while still in full swing, the credit crisis is showing signs of mending • Fears of a slowdown in global growth may be exaggerated – Overall global growth remains as strong as it has been in the last 25 years Emerging market economies now make up 50% of the world’s GDP and about 75% of the world’s recent growth Emerging markets could continue to grow since they are still in the middle of a productivity revolution i.e investing in their own infrastructure and running significant current account surpluses • We live in a world of cycles (economic, market and investors sentiment) that should lead to viable investment opportunities • A well diversified asset allocation can weather turbulent times • Experienced managers understand that we live in a world of cycles; they don’t panic and maintain their discipline; they look for opportunities where others see uncertainty and fear; they’re humble; they re-assess their positioning as new data becomes available • Investors should focus on their long term goals and try not to give into the natural inclination toward greed and fear 14 The Disciplined Investment Approach A Simple Six-Step Process Asset Allocation: Design a customized portfolio based on your personal objectives, time horizon and risk tolerance Portfolio Structure: Diversify across asset classes and market sectors to maximize returns and moderate risk Tax Management: Increase your investment returns by reducing taxes Specialist Managers: Take advantage of the expertise provided by money managers who specialize in specific areas of the market Portfolio Management: Monitor your portfolio on a regular basis to evaluate manager performance and rebalance as necessary Consult with Me: Review your progress and discuss any changes in your objectives, time horizon or risk tolerance to maintain your strategic positioning 15 Asset Allocation is the Primary Determinant of Total Portfolio Return Security Selection 4.6% Market Timing 1.8% Other 2.1% Asset Allocation 91.5% Source: Brinson, Singer, and Beebower (1991) 16 The Benefits of a Systematic Investment Approach Identify Client Objectives Identify Relevant Risks Identify Appropriate Portfolios Structured Efficient Manager Continuous Tax Asset Portfolio Selection Portfolio Management Allocation Construction Monitoring 17 Staying the Course: What You Can Expect from Me As your advisor, it is my responsibility to: • Help you assess and re-assess your risk tolerance throughout time • Guide you in making decisions to meet your individual goals • Design the optimal portfolio structure based on your objectives, time frames and risk tolerance • Continuously monitor your portfolio performance • Provide you with regular reporting statements • Keep you abreast of any additional opportunities to improve your chances of achieving financial success 18 Where Do We Go from Here? • Nobody has a crystal ball and we can’t predict the market • We can ensure that we are implementing the best possible strategy • Recent events remind us of the need to re-assess you risk tolerance as well as review and rebalance your portfolio structure to maintain your strategic positioning • Decisions and alternatives also need to be weighed within the context of the broader economic landscape 19 Disclosure Information This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results This information should not be relied upon by the reader as research or investment advice This information is for educational purposes only Index returns are for illustrative purposes only and not represent actual fund performance Index performance returns not reflect any management fees, transaction costs or expenses Indexes are unmanaged and one cannot invest directly in an index Past performance does not guarantee future results To determine if the fund(s) are an appropriate investment for you, carefully consider the fund’s investment objectives, risk factors and charges and expenses before investing This and other information can be found in the Fund’s prospectus, which may be obtained by calling 1-800-DIAL-SEI Please read it carefully before investing There are risks involved with investing, including loss of principal SEI Investments Management Corporation is the adviser to the SEI funds, which are distributed by SEI Investments Distribution Co (SIDCO) SIMC and SIDCO are wholly owned subsidiaries of SEI Investments Company 20 ... Throughout Time 11 12 Managing Volatility through Diversification A broad set of asset classes helps to smooth out volatility and cushion market declines During the stock market s rocky th quarter,... As we come to terms with recent volatility, it is important to revisit some basic principles about the stock market 2007 S&P 500 Roller Coaster Ride US Equity Markets - A Wild and Bumpy Ride…...Navigating through Market Turbulence • Recent market volatility has left some investors feeling uneasy about their portfolios • S&P