1

Coupon Payments
Taxable Tax-Free Deferred Zero Coupon Bonds Frequency
Corp Bonds every six months Government Bonds six months Mortgage-backed every month

Credit Rating System

Credit Risk
Prime Excellent Upper Medium Lower Medium

S&P
AAA AA A BBB

Moodys
Aaa Aa A Baa

Fitch
AAA AA A BBB

Length of Loan
Intermediate Long Term Ultra Short
0 Years

Short

10 Years

20 Years

30 + Years

Ownership of Bonds

Bearer Bonds Registered Bonds Book Entry Bonds

Interest Rate Risk

Inverse Relationship: When Interest rates rise When Interest rates fall bond prices fall bond prices rise

Reinvestment Risk

In a declining interest rate environment, you are forced to reinvest income or principal at those lower rates

Inflation Risk
Tomorrows dollar may have less purchasing power

Call Risk

Some corporate, municipal and agency bonds have a call feature Declining interest rates may accelerate the redemption of a callable bond

10

Liquidity Risk

May be unable to find a buyer or be forced to sell at a significant discount to market value

11

Prepayment Risk
For mortgage backed securities, the risk of declining interest rates, or a strong housing market, will cause mortgage holders to refinance or otherwise repay their loans sooner than expected

12

13

Treasury Notes & Bonds

Non-Callable Tax Savings Liquidity Purchased through Bank, Broker or US Treasury 30 year Bonds discontinued in 2001- Still bought on open market & reintroduced 02/09/2006 Notes issued in shorter terms of 2 years, 3 yrs, 5yrs, 7 yrs and 10 yrs

14

T-Bills
Bought at a discount Terms of 4 weeks, 13 weeks and 26 weeks Auctions occur in Feb, May, August and November. Bought through Banks, Brokers, at US Treasury

15

TIPS
Term is ten years
Coupon is fixed Interest Payments every 6 months Inflation Adjusted Principal not Semi-annual interest payments based

upon inflation- adjusted principal

Taxes due every year on adjusted

amount
Bought through your bank, broker or at

the US Treasury

paid until maturity

16

Muni Bonds
Significant Tax Benefits Revenue Bonds
Bridge Tolls Sewer Bonds

General Obligation (GO) Bonds Full Faith & Credit of Issuer

17

Types of Corporate Bonds

Secured or asset-backed bonds:
Mortgage Bonds Equipment Trust Certificate Collateral trust Certificate

Debentures: Not secured by property Dependent upon assets and earning power of the issuer

18

Mortgage Backed Securities

Linked to Real Estate Market

Prepayment Risk

Extension Risk

19

Examples

Federal National Mortgage Association (Fannie Mae) Federal Home Loan Mortgage Association (Freddie Mac) Government National Mortgage Association (Ginnie Mae)

20

21

22

23

Key Formulas
Current Yield Formula for Bonds Annual Coupon Payment Price of Bond Example: $60.00 $800.00 = Current Yield

7.5% Current Yield

24

Key Formulas
Taxable Equivalent Yield (TEY) for Munis and Treasuries
Muni Yield/100% - 28% Federal Tax Bracket = Taxable Equivalent Yield
Example: 4% Muni Yield/100 - 28 = 5.5 TEY

Treasury Yield/100% - State Tax = TEY for Treasuries

Example: 4% Treasury Yield/100 - 11 = 4.49

Key Formulas

Yield to Maturity Approximation Formula for Bonds:

( Annual Interest Payment + (Par Value-Current Bond Price)/ # of Years to Maturity ) divided by (Par Value + Current Bond Price)/2

25

Summary of Bond Yield Relationships

When the bondholder pays:
Less than par value- (discount) Yield to maturity>Current Yield > Nominal Yield Par Value- Nominal Yield = Current Yield=Yield to Maturity More than par value- (premium) Nominal Yield > Current Yield > Yield to Maturity

Why Own Bonds- Lending vs. Owning

Stability Diversification Income

26

Where to go for information

WSJ http://treasurydirect.gov www.investinginbonds.com www.bondsonline.com Moody's Standard & Poor's

27

The End

Seeing Is Not Believing

Which gray circle is bigger? Which gray bar is longer? Are the gray horizontal lines parallel?

2009 Morningstar, Inc. All rights reserved. 3/1/2009

28

Rational Minds Can Act Irrationally

They are the same size They are the same size The horizontal lines are parallel

2009 Morningstar, Inc. All rights reserved. 3/1/2009

Keys to Successful Investing

29

Set Guidelines that Work

30

Philosophy determines direction

Learn to Pay Yourself First:

#1 Error: Failure to set Financial Goals

31

When should you start to pay yourself?

32

When should you start to pay yourself?

Immediately!

Drinking your retirement away?

According to Bureau of Labor Statistics
Average Consumer spends $5.60 per day on non-alcoholic beverages

Over 40 years, at an average stock market return, this equals $______________

33

Drinking your retirement away?

According to Bureau of Labor Statistics
Average Consumer spends $5.60 per day on non-alcoholic beverages

Over 40 years, at an average stock market return, this equals $904,659.18

When to start your retirement savings plan?

NOW!

34

The value of starting your retirement savings now

Age Years Amount Rate Balance

25

40

$3,000.00

10.00%

$1,327,777.00

45

20

$23,182.00

10.00%

$1,327,777.00

50

15

$41,790.00

10.00%

$1,327,777.00

35

Prioritize your financial goals

Are you protecting your current income and future income?
- Look at all aspects of risk including disability, life insurance, medical, liability coverage, LTC.

Fund your retirement before your children's education Be careful about paying off your home mortgage faster

36

Develop a long-term Investment Perspective

There Have Always Been Reasons Not to Invest

World Events
Black Tuesday Crash of New York Stock Exchange Korean Conflict Black Monday Fall of Dow Jones Industrial Average

10/19/87
Vietnam War (U.S. Engagement) Operation Desert Storm

Attacks on the World Trade Center and Pentagon

195053

9/11/01

Subprime Lending Crisis

10/29/29

196473

1991

2007

193945
World War II

197981
Iran Hostage Crisis

10/27/97 1988
Bloody Monday Fall of Dow Jones Industrial Average

2008
Global Credit Meltdown Operation Iraqi Freedom

10/24/29
Black Thursday Plunge of New York Stock Exchange

1962
Cuban Missile Crisis

Savings & Loan Crisis

2003Present

37

HISTORY FAVORS A RETURN TO THE MEAN

75

Most Years Have Been Positive

Calendar Year Returns for the S&P 500 Index, 19262011

This chart is for illustrative purposes only and does not reflect the performance of any Franklin, Templeton or Mutual Series fund.
Source: 2012 Morningstar. Indexes are unmanaged, and one cannot invest directly in an index. Past performance does not guarantee future results.

HISTORY FAVORS A RETURN TO THE MEAN

76

The Same Goes for Decades

10-Year Rolling Returns for the S&P 500 Index

This chart is for illustrative purposes only and does not reflect the performance of any Franklin, Templeton or Mutual Series fund.
Source: 2012 Morningstar. Indexes are unmanaged, and one cannot invest directly in an index. Past performance does not guarantee future results.

38

HISTORY FAVORS A RETURN TO THE MEAN

77

The Five Worst 10-Year Rolling Periods What Happened Next?

S&P 500 Index Worst 10-Year Returns and Subsequent 10-Year Returns

This chart is for illustrative purposes only and does not reflect the performance of any Franklin, Templeton or Mutual Series fund.
Source: 2012 Morningstar. Indexes are unmanaged and one cannot invest directly in an index. Since no subsequent 10-year results are available for years past 2001, only the 10-year period ended 2008 was included to demonstrate that the next 10 years are still unknown. For the 10-year periods ended 2009, 2010 and 2011, the S&P 500 Index returned -0.95%, 1.41% and 2.92%, respectively. Past performance does not guarantee future results.

39

Understanding the real risk to your financial well-being

Maintaining your buying power

Longevity Risk

Age

Years

40

Inflation Shrinks Your Buying Power

U.S. Stamp

Gallon of Milk

New Car

College Tuition

1991 2011 2031

$0.29 $0.44 $0.72

$2.80 $3.57 $5.83

$15,473 $25,245 $41,313

$16,276 $28,500 $46,640

Inflation Risk

41

42

Overconfidence

Concentrated positions Market timing

Would you rather have $2 million or $1.7 million in your retirement portfolio?

43

Concentrated Portfolio
Scenario 1:
Married couple Husband 65-Wife 62
$2,000,000 in total assets $60,000 withdrawn/annually from portfolio 50% Concentrated Portfolio, the rest invested 60/40

Keep Principal Intact

44

Scenario 1 50% Concentrated Portfolio

35% Failure rate

Diversified Portfolio

Scenario 2:
Married couple Husband 65-Wife 62
$1,730,000 in total assets $60,000 withdrawn/annually from portfolio Rebalanced Portfolio 60/40

Keep Principal Intact

45

Scenario 2 Diversified 60/40 Portfolio

3% Failure rate

Asking the right question could be the key to your success

Would you rather have a 35% failure rate or a 3% failure rate in your retirement portfolio?

46

Dangers of Market Timing

47

LT1330.8

Performance of the S&P 500 Index

Daily: January 1, 1970-December 31, 2011

$50,662 $45,431

Growth of $1,000

$32,940

$19,130 $12,068 $9,190

Total Period Annualized Compound Return 9.80%

Missed 1 Best Day 9.51%

Missed 5 Best Single Days 8.68%

Missed 15 Best Single Days 7.28%

Missed 25 Best Single Days 6.11%

One-Month US T-Bills 5.42%

Performance data for January 1970-August 2008 provided by CRSP; performance data for September 2008-December 2011 provided by Bloomberg. The S&P data are provided by Standard & Poors Index Services Group. US bonds and bills data Stocks, Bonds, Bills, and Inflation Yearbook, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield). Indexes are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Dimensional Fund Advisors is an investment advisor registered with the Securities and Exchange Commission. Information contained herein is compiled from sources believed to be reliable and current, but accuracy should be placed in the context of underlying assumptions. This publication is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. Past performance is not a guarantee of future results. Unauthorized copying, reproducing, duplicating, or transmitting of this material is prohibited. Date of first use: June 1, 2006.

48

LT1330.8

Performance of the S&P 500 Index

Daily: January 1, 1970-December 31, 2011

The best single day was October 13, 2008.

The best one-month return, October 1974, happened immediately after the second-worst one-year period.
Annualized Compound Returns % Total Period Day 10/19/87 10.36% 9.80%
10% 8% 6% 4% 2% 0%

Best/Worst Missed Period

Month 10/87 10.43% 3 Months Ending 11/08 10.72% 6 Months Ending 2/09 11.22% 12 Months Ending 2/09 11.29% Worst Periods and the Return If Missed

The occurrence of strongly positive returns has been especially unpredictable. Investors attempting to wait out an apparent downturn ran a high risk of missing these best periods.

14% 12%

9.51% 10/13/08

9.40% 10/74

9.18% 10/82

8.89% 6/75

8.56% 6/83

Nine of the top 25 days occurred between September 2008 and February 2009, during which time the S&P dropped 41.8%

Best Periods and the Return If Missed

Five of the Top 10 days occurred between October 2008 and November 2008, during which time, the S&P 500 dropped 21.5%.

Time periods greater than one month are based on monthly rolling periods, and dates indicated are end of period. The S&P data are provided by Standard & Poors Index Services Group. Indexes are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Dimensional Fund Advisors is an investment advisor registered with the Securities and Exchange Commission. Information contained herein is compiled from sources believed to be reliable and current, but accuracy should be placed in the context of underlying assumptions. This publication is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. Past performance is not a guarantee of future results. Unauthorized copying, reproducing, duplicating, or transmitting of this material is prohibited. Date of first use: June 1, 2006.

Bull and Bear Markets

S&P 500 Index (USD)
Monthly Returns: January 1926June 2011

116 mos. 491%

Average Duration Bull Market: Bear Market: 32 Months 11 Months

Average Return Bull Market: Bear Market: 119% -27%

Months = Duration of Bull/Bear Market % = Total Return for the Bull/Bear Market
61 mos. 282%

92 mos. 355%

44 mos.

2 mos.

193%

92% 6 mos.

49 mos. 210%

100%
3 mos. 23 mos.

26%
4 mos.

133%
9 mos.

12%

61%
5 mos.

48 mos. 105%

43 mos. 90%

22%
5 mos. 12%

30 mos. 26 mos. 76% 52%

9 mos. 33 mos. 55% 86% 15 mos. 35%

61 mos. 108% 30 mos. 71% 24 mos. 63% Jun 2011 -8%

6 mos. 4 mos. -30% 13 mos. -16% 2 mos. -50% 31 mos. 34 mos. -19% -30% -83% 6 mos. -21% 4 mos. -10%

6 mos. -22%

7 mos. -10% 5 mos. -15%

6 mos. -22%

3 mos. 14 mos. 20 mos. 6 mos. -11% -14% -17% -22% 19 mos. 21 mos. -29% -43%

5 mos. 3 mos. -15% -30%

2 mos. -15%

25 mos. -45%

16 mos. -51% Feb 2009

Indices are not available for direct investment; its performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results. The S&P data are provided by Standard & Poors Index Services Group. Bull and bear markets are defined in hindsight using cumulative monthly returns. A bear market (1) begins with a negative monthly return, (2) must achieve a cumulative return less than or equal to -10%, and (3) ends at the most negative cumulative return prior to achieving a positive cumulative return. All data points which are not considered part of a bear market are designated as a bull market.

49

Thinking you are smarter than the market

Missing Opportunity
Strong performance among a few

Compound Average Annual Returns: 1926-2011 All US Stocks Excluding the Top 10% of Performers Each Year Excluding the Top 25% of Performers Each Year

stocks accounts for much of the markets return each year.

There is no evidence that managers

can identify these stocks in advanceand attempting to pick them may result in missed opportunity.
Investors should diversify broadly

9.6% 6.2%

and stay fully invested to capture expected returns.

-0.7%

50

Failure to understand Capitalism

Creative Destruction

51

Allowing Uncle Sam to determine your portfolio structure

52

Naive 401k Investing

Splitting your investment exactly as the assets are offered

Way too much in company stock

53

Naive 401k Investing

Allocation of various retirement plans:
TIAA-CREF: One Stock Fund, One Fixed Income 50/50 TWA Pilots: Stock/Bond

Five Stock, One Fixed Income 75/25 Stock/Bond

University of California:

One stock, Four Fixed Income 34/66 Stock/Bond

54

Avoid chasing the hot stock

Tip shopping Investing based upon your

(buddy, family CPA, Stockbroker) hot idea

55

"Get-Evenitis"
Loss Aversion is a documented phenomenon We all hate to admit our mistakes Understand the mathematics of losses 50% loss means 100% gain to breakeven 80% loss means 400% gain to breakeven

56

Herding Effect
96% of new money in 1999 was invested in Technology or Growth Stocks 85% of new money in 2002 was invested in Bond Funds 2006-2007 International Funds were the hot item

57

Investor Misbehavior
Investor Misbehavior Gap
Investor Return

Market Return

Benchmark Returns & Inflation

58

Average Mutual Fund Retention Rates

Average Mutual Fund Retention Rates (Based on 20 - Year Analysis)
5 4 3.29 3.09 4.42

Years

3 2 1 0 Equity Fixed Income Asset Allocation

Annualized 20 Year Investor Returns

Annualized Investor Returns vs. Benchmark 9 8 7 6 5 4 3 2 1 0
7.81 % 6.5 %

3.49 %

0.94 % Average Equity Investor S&P 500 Average Fixed Income Investor Barclays Aggregate Bond Index

59

60

The cost of misbehaving

$100,000.00 invested
Market returns $ 449,967 over the last 20 years ending 2011 Investor returns = $198,594 Misbehavior Gap cost $251,372
Market Return $449,967 Investor Return $198,594

Investor Misbehavior Gap $ 251,372

61

Economic Hedging
A conservative method to address many of these issues we have covered tonight
Cash Bonds Domestic Equities International Equities Real Estate (REITs) Gold/ Commodities

A conservative method to address many of these issues we have covered tonight What assets should you include in your portfolio? How much should you have in stocks, bonds, real estate, cash.etc. When should you rebalance? Where does your home fit in your financial picture? How does your IRA, 401k etc., fit into this picture?

62

63

64