Asset Allocation – Your Most Important Investment Decision

[Upbeat music]

[Tom Cowans

Portfolio Manager & Wealth Advisor

CIBC Private Wealth – Wood Gundy]

With investing, your first and most important decision is how to divide your money into

different types of assets.

Hello, my name is Tom Cowans, and I’d like to talk about Asset Allocation – your most

important investment decision.

[Asset Allocation:

Your Most Important Investment Decision]

Most investments can be considered one of two basic asset classes: equities or fixed

income.

[Graphic of a balanced seesaw, with the titles Equities (Stocks) and Fixed Income

(Bonds) on opposite sides.]

These are also called stocks and bonds, different words for essentially the same thing.

Equities and fixed income differ greatly. The balance greatly affects the risk and

return of your portfolio so you need to focus on this first. With fixed income you are

usually paid a fixed rate of interest with the principal to be repaid at maturity. Fixed

income varies by who is guaranteeing the payments and also by the term, the length of

time your money is tied up. Fixed-income investments include things like Savings

accounts, GICs, bonds and preferred shares.

The main benefit of fixed income is your return is more certain and known in advance.

The main drawback is it’s often not that high and is eroded by inflation. So, your “real”

return, after inflation, is uncertain and could be much lower than you expected.

[Image of a business meeting with 5 individuals at a table, 2 of them are shaking hands]

[For any one company, future profits are uncertain.]

[Graphic of 10 unidentified companies with different line graphs showing their

unidentified profits and losses]

[If you look at all companies together, profits are more stable]

Equities represent ownership in businesses. Owners of stocks own a share of the profits

of companies; which ultimately determine their value. For any one company, future

profits are uncertain - every company faces competition. However, if you look at all

companies together, profits are more stable.

[Animation showing profits of one company’s line graph cancelling out the loss of

another company line graph, leaving 6 line graphs remaining, all with profit line graphs

ascending.]

[One line graph ascending showing overall profits increasing]

One company's decline is usually offset by another company's gain.

[A column graph with the heading ‘The U.S. S&P 500 group of companies have never

experienced a negative year of aggregate earnings”.

The Y-axis has dollar values from $0 ranging to $250 at the top. The X-axis shows

years in 10-year increments from 1871 to 2021. The column graph depicts the slight ups

and downs but is consistently trending upwards. From 1871 to 1961, the columns are in

the range of$0-$50. From 1961-2001 the columns are in the range of $50-$100. From

2001-2011, the columns are in the $100-$150 range. From 2011-2021, the columns are

range from $100 to just over $200 at the peak.]

In fact, as shown by research from the economist Robert Shiller, since good data

became available the largest 500 public companies in the U.S. have never had a

negative year of earnings.

Aggregate earnings fluctuate due to the business cycle. But declines typically recover

quickly as companies adjust their businesses.

Over the longer term, earnings on equities are usually higher than the interest on fixed

income and provide a long-term hedge against inflation.

They also benefit from improvements in productivity as is shown by the upward trend in

their “real” earnings.

[A chart with two-line graphs with the heading “Real Growth from $1000 – 1871-2023”

On the Y-axis, the dollar value ranges from $100 to $100,000,000. The X-axis shows years,

ranging from 1870-2023, increasing by 8 years each increment. The stock line graph shows

a steady increase from $1,000 in 1870 to nearly $100,000,000 in 2023. Along the stock line

graph, diƯerent events are marked throughout the years – “The end of WWI, Spanish Flu”,

“Great Depression”, “U.S. Enters WWII”, “End of WWII”, “OPEC Oil Crisis”, “Dot Com

Boom”, “Dot Com Bust”, “Global Financial crisis”.

The bonds line graph shows less of an increase, from $1,000 in 1870 to approximately

$15,000 in 2023.]

When we look at how stock returns have compared to bonds in the past, we see that stocks

are the clear winner over the long run.

Over the past 150+ years, after inflation, stocks have returned over 1000 times as much as

bonds.

[A chart with two-line graphs with the heading “Real Returns for 1 Year – 1871 to 2023” The

Y-axis has values beginning at -40 and increasing by 20 each increment to 100. The X-axis

shows years, beginning in 1871 increasing by 5-year increments ending in 2021.

A formula to the side shows:

Real growth from $100,000

Stocks show an average of $7,416. The best at $79,780. The worst at $35,025 and a

negative of 31%

Bonds show an average of $2,400. The best at $23,764. The worst at $13,636 and a negative

of 29%]

However, if you look at annual returns we see stocks are more volatile. If you need money

for spending in a year’s time, stocks would clearly be riskier than bonds. But what about

the money you aren’t planning to spend in the next year?

[A chart with two-line graphs with the heading “Average Annual Real Returns for 10 Years –

1871 to 2023” The Y-axis has values beginning at -40 and increasing by 20 each increment

to 100. The X-axis shows years, beginning in 1881 increasing by 5-year increments ending in

2021.

A formula to the side shows:

Real growth from $100,000

Stocks show a median of $112,165. The best at $397,063. The worst at $33,289 and a

negative of 6%

Bonds show a median of $19,953. The best at $119,849. The worst at $30,164 and a

negative of 25%]

As you look at longer and longer time horizons and consider the eƯects of inflation, stocks

look better because returns compound faster and risk falls relative to fixed income.

If you can invest for 10 or more years, the chances of a negative real return are considerably

lower than that of bonds. Bonds turn out to be riskier than stocks in the long run once you

take inflation into account.

[A chart with two-line graphs with the heading “Average Annual Real Returns for 20

Years – 1871 to 2023” The Y-axis has values beginning at -40 and increasing by 20

each increment to 100. The X-axis shows years, beginning in 1881 increasing by 5-year

increments ending in 2021.

A formula to the side shows:

Real growth from $100,000

Stocks show a median of $308,811. The best at $1,092,667. The worst at $13,418 and

a negative of 0%

Bonds show a median of $49,129. The best at $295,415. The worst at $29,995 and a

negative of 15%]

And when you look at 15 or 20 years or longer, stocks look better yet. Over 20 year

periods, the worst return for stocks was a profit of $13,000 above inflation, compared to

a nearly

$30,000 loss for bonds.

[The time horizon of your money is critical in determining the right asset allocation.]

So, the time horizon of your money is critical in determining the right asset allocation.

Short term needs should be mostly in fixed income but money for longer-term needs

can have more invested in equities.

[A chart with six-line graphs with the heading “Best Mix Equities Percentages” The Yaxis has values beginning at 0.0% and increasing by 10.0% each increment to 100.0%.

The X-axis values is the “Holding Period (years), starting at 1 increasing by 2 year

increments to 17.

The line graphs are labelled, “Aggressive”, “Tolerant”, “Moderate”, “Prudent”,

“Conservative”, and “Minimum Risk”.

Aggressive begins at 30.0% at year 1 and increases to 100.0% between years 3 and 5.

Tolerant begins at 10.0% at year 1 and increases to 100.0% between years 5 and 7.

Moderate begins at 10.0% at year 1 and increases to 100.0% between years 5 and 7.

Prudent begins at 10.0% at year 1 and increases to 100.0% by year 9.

Conservative begins at 10.0% at year 1 and increases to 100.0% between years 11 and

13. Minimum Risk begins at 5.0% at year 1 and increases to 100.0% by year 17.]

Our team thoroughly analyzed risk and return since 1871 and determined the Best Mix

Equities Percentages for six different levels of risk and for holding periods ranging from

1 to 30 years.

We then built into our Personal Financial Plan, unique to our team, a process to

determine an overall asset mix that is ideal for you, based on your specific future plans.

We also consider your comfort level with volatility to ensure your equities target is

properly customized to you.

Do you remember your last review meeting and all the time we spent discussing your

goals and vision for the future? Well, that was important work and time well spent

because we need to clarify these in order to get your asset allocation right.

Sylvia has a video titled “The Importance of Financial Planning” that explains how it all

ties together. If you haven’t done so already, be sure to check it out.

Once your asset allocation mix is determined the key is to then stick closely to the

chosen target. As shown by research in Behavioral Finance, this helps us avoid the

mistakes and losses that come from trying to time the market’s ups and downs.

Hopefully you’ve been reading Stan’s Perspectives articles or even seen his video on

behavioral finance and how it is at the core of the work we do together.

Our final point on Asset Allocation and how we work with you to get it right is to

remember your situation changes over time, and your ideal Equities Target can also

change. That's why it's important we do regular reviews of your financial plan to make

sure you stay on track. We’ll usually reach out to you when we think it’s time to

schedule a review, but we are happy to update your plan any time you’d like.

I also invite you to learn more about Asset Allocation and how our team incorporates

behavioral finance and our unique financial planning and rules-based investing

strategies to grow and protect your wealth. You can find more about all of these,

including summary videos on each by Stan, Sylvia and Mike, on the “Our Perspectives”

section of our team’s website.

And please contact us by phone or email if you would like to discuss how any of this

applies to your specific situation.

[CIBC Logo

CIBC Private Wealth

The Stan Clark Financial Team]

[Best Mix Equities Percentages are based on the calculations of the Stan Clark

Financial Team.

CIBC Private Wealth consists of services provided by CIBC and certain of its

subsidiaries, including CIBC Wood Gundy, a division of CIBC World Markets Inc. The

CIBC logo and “CIBC Private Wealth” are trademarks of CIBC, used under license.

“Wood Gundy” is a registered trademark of CIBC World Markets Inc.

This information, including any opinion, is based on various sources believed to be

reliable, but its accuracy cannot be guaranteed and is subject to change. CIBC and

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The contents of this video are for informational purposes only and are not being

provided in the context of an offering of a security, sector, or financial instrument, and is

not an endorsement, recommendation, or solicitation to buy, hold or sell any security.

Commissions, trailing commissions, management fees and expenses all may be

associated with mutual fund investments and the use of an asset allocation service.

Please read the prospectus of the mutual funds in which investment may be made

under the asset allocation service before investing. Mutual funds are not guaranteed,

their values change frequently and past performance may not be repeated.

Tom Cowans is a Portfolio Manager and Wealth Advisor with CIBC Wood Gundy in

Vancouver. The views of Tom Cowans do not necessarily reflect those of CIBC World

Markets Inc.

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