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A Guide to Personal

Wealth Management
Guide to Wealth.qxd 2/13/03 12:31 AM Page 2

Table of Contents

3 DEVELOPING PROPER
INVESTMENT STRATEGIES

4 DEVELOPING PORTFOLIO
OBJECTIVES

5 ACHIEVING THE OBJECTIVES

7 RISK

8 ALLIANCE INVESTMENT STRATEGIES

11 TIME HORIZON

13 MARKET INDICES PERFORMANCES

14 THE REDUCTION OF VOLATILITY


IN THE U. S. FINANCIAL MARKET
OVER TIME

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Developing Proper
Investment Strategies

Developing the proper investment strategy


requires that the investor clearly defines the
long, short and medium term rational for the
portfolio. Several critical questions that should
be considered are:

• What are the investment


objectives of the portfolio?

• What appropriate investment


strategies achieves these objectives?

• What is the risk tolerance


relative to the objectives?

• What is the time horizon


for achieving the objectives?

• What is the investor’s risk tolerance?

Defining the investor’s objectives will


provide a clear road map for developing the
proper investment strategy, with the correct
balance of risk.

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Developing Portfolio Objectives THE PORTFOLIO MANAGEMENT PROCESS

It is important for the investor to establish the CLIENT POLICY


PROFILE OBJECTIVES
general purpose for creating the investment
Age Return Expectations
portfolio. Such analysis should be undertaken: Financial Needs Risk Parameters
Asset Adequacy Asset-Mix Parameters
Risk Tolerance Constraints
• For capital preservation; Preferences Performance Benchmarks
Special Circumstances

• For capital growth;

• For capital growth and cash-flow; INVESTMENT PORTFOLIO PERFORMANCE


STRATEGY CONSTRUCTION MEASUREMENT

• For cash-flow; Economic & Market Outlook Absolute & Real Returns
Active Asset Allocation Relative Returns
Common-Factor Emphasis Risk-Adjusted Returns
Selection Bias Performance Attribution
• For aggressive growth;

• For maximum liquidity


without capital risk; SECURITY
SELECTION

• For U.S. Dollar-based investments; Valuation


Momentum
Technical
• For a diversified international portfolio; Other

• For wealth building.

A complete explanation of the portfolio’s Achieving the Objectives


objectives will provide the foundation for
building the optimum investment portfolio Through a balancing process of the potential
strategy, with the correct balance of the risk risk return trade-off, the portfolio objectives
return trade-off. can be achieved. All investment strategies
used to achieve the objectives must focus on
these two important portfolio elements,
“Risk & Return.”

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Risk

Risk means, the degree of volatility registered


by an investment, how returns fluctuate over a
given period of time, and the probability for
loss of capital. It is accepted in the world of
investments that the lowest form of risk is with
assets held in very liquid instruments such as
Government Treasury-Bills and fixed term
deposits. From that level of risk all other
investment classes are measured.
RISK-RETURN PROFILE OF A MODERATE
GROWTH PORTFOLIO AND VARIOUS ASSET
CLASSES OF THE EFFICIENT FRONTIER,
1970 – 2001

14 International Stocks
13

12
Return (%)

U. S. Stocks
11

10 (20% T-Bills, 40% Bonds, 40% Stocks)

9 U. S. Bonds

8 Real Estate

7 T-Bills
6
0 2 4 6 8 10 12 14 16 18 20 22 24

Risk
Measured by Standard Deviation (%)

Source: Alliance Investment Management based


on data bonds, bills & inflation: 2001 Year Book
(Ibbotson Associates, 2001)

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Alliance Investment Strategies

Cash Capital Moderate Wealth Aggressive


Flow Preservation Growth Building Growth
(0-3 years) (3 – 5 years) (5 – 7 years) (7 – 15 years) (15 years)

Liquidity & income Two-year Duration Five-year Duration Ten-Year Duration Unlimited Horizon
100% short term 30% cash 20% cash 5% cash 45% equity
90% bonds 20% stocks 40% stocks 80% stocks 25% futures
10% cash 50% fixed income 20% fixed income 15% fixed income 10% commodities

The best investment strategy is the one that TOTAL RETURN AND RISK OF ASSET
achieves the investor’s objectives with the ALLOCATIONS BY HOLDING PERIODS,
1950-2001
correct balance of the risk return trade-off,
viewed over the proper Duration/Time Horizon.
Average Annual Rate of Return (%)

14
13 100% Stocks

The asset class, which produces the best return 12 80% Stocks / 20% Bonds

over the long term risk adjusted, is Equities, 11


60% Stocks / 40% Bonds
10
followed by Bonds. Equities also contain the 40% Stocks / 60% Bonds
9
highest degree of risk (Volatility). However, the 8 20% Stocks / 80% Bonds
longer the investor’s duration/time horizon for 7
100% Bonds
Equities, the lower the volatility. 6
5
2 3 4 5 6 7 8 9 10 11 12 13 14 16 17 18
Alliance Investment Management Ltd. Risk
Measured by Standard Deviation (%)
believes in the concept of developing the
Ten-Year Returns Three Year Returns
best investment strategy for our clients through Five-Year Returns One-Year Returns

an asset allocation across various asset classes and


strategies. Our investment products offers
competitive returns at different levels of risk and Source: Alliance Investment Management Services,
offers the potential for competitive long-term based on data bonds, bills & inflation: 2001 Year Book
real rates of growth risk adjusted. (Ibbotson Associates, 2001)

A combination of strategies we believe


can achieve the best investment returns for
investors relative to their objectives.

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Time Horizon

Because of market volatility, we advise investors


to diversify their portfolios and look towards
the longer-term strategy. This means using a
time horizon that achieves the desired returns
given the risk. Investors in our products must
appreciate the time horizon risk and return
potential. We advocate that the longer an
investor can remain in the investment strategy,
the better the chances of achieving
the desired objective.

RANGE IN AVERAGE RATES OF RETURN


OF VARIOUS ASSET MIXES, 1945 - 2001

60
50
40
Rate of Return (%)

30
20 14.43

10 10.08
5.74
0
-10
-20 Average
-30
100% Stocks 50% Stocks / 50% Bonds 100% Bonds

Source: Alliance Investment Management Ltd. based on


data from stocks, bills, and inflations: 2001 Year Book
(Ibbotson Associates, 2001)

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Market Indices Performances

There is no guarantee that historical


performance will be reproduced in the future,
however it is the only measure investors can
use in order to judge the potential returns
which could be achieved.

U.S. STOCK AND BOND HISTORICAL


ANNUAL RETURNS, 1945 – 2001

60
50
40
Rate of Return (%)

30
20
10
0
-10
-20
-30
1950 1960 1970 1980 1990 2000 2001
Years

Stocks Bonds

Source: Alliance Investment Management Ltd. based on


data from stocks, bills, and inflation: 2001 Year Book
(Ibbotson Associates, 2001)

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The Reduction of Volatility in RISK AND RETURN: THE RANGE OF


POTENTIAL ANNUAL RETURNS BY ASSET
the U.S. Financial Market Over
CLASS, 1926-2001
Time, 1926-2001

35
Compound Annual Return (%)

140

Annual Rate of Return (%)


30
100
25
60 20
20 15
10
0
5
-20 0
-60 -5
Small Common Corporate Long-Term T-Bills -10
Stocks Stocks Bonds Govt. Bonds
-15
Portfolio Assets A B C D E F G H
One-Year Period Five-Year Period Twenty-Year Period
Common Stocks 0% 0% 30% 40% 40% 50% 60% 100%

Long-Term Govt. Bonds 0 100 30 40 60 50 40 0


U.S. T-Bills 100 0 40 20 0 0 0 0

Source: Alliance Investment Management Ltd. based on Average


Ibbotson Associates data.

Source: Alliance Investment Management Ltd.


The principle displayed by the above graph based on Ibbotson Associates data.
supports focusing on a long-term investment
plan, because the longer the holding period,
the less the risk. The graph also indicates that
the volatility of Equities against other
investment instruments over 1 year, 5 years,
and 20 years,
is lower the longer the holding period.

We believe that our investment strategies can


be utilized to create the optimum Portfolio
Management Process Logic and Investment
Portfolio, whilst achieving a proper balancing
of the investor’s risk-return trade-off.

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A F F I L I AT E OF THE BENCHMARK GROUP OF C O M PA N I E S


British American Insurance House, Ground Floor
Marlborough Street & Navy Lyon Road
P. O. Box SS-19051 | Nassau, The Bahamas
Tel: 242-326-7333 | Fax: 242-326-7336
Website: www.allianceinvest.com | Email: info@allianceinvest.com