TEN WAYS TO

WEALTH
Lon W. Broske, CFS
TEN WAYS TO WEALTH

1. Have a long-term plan

to reach 2 your goals
2. Do not follow the
crowd
3. Do not speculate
4. Do not buy stocks on
rumor
5. Do not use margin
TEN WAYS TO WEALTH

6. Hire a professional
financial advisor
7. Do not let emotion
overrule logic
8. Own a diversified
portfolio
9. Do not time the
market
10.Update your plan every
 • Define Specific Goals

• Define Your Investment

Objectives

#1 HAVE A LONG- • Know Your Risk

TERM PLAN TO Tolerance
REACH MY
• Build A Portfolio That Fits
FINANCIAL GOALS Your Objectives And Your
Risk Tolerance
 #2 DO NOT
FOLLOW THE CROWD

• Inflows of new cash into certain

sectors are almost entirely driven by
the most recent performance of that
sector.

• The most common mistake investors

make is to pile into “hot” sectors
that have become extremely
overvalued.

Source: Morningstar, Inc. Past performance is no guarantee of future results.

 DO NOT
FOLLOW THE CROWD
• The Morgan Stanley Hi-Tech
Index returned 111% in 1999.
• In the first 3 months of 2000,
investors poured nearly $34
billion into this sector.
• Result? For the 5 years ending
8-31-05, the Hi-Tech Index lost
89% of its value.
Source: Commodity Systems, Inc., Lipper Inc., Past performance is no guarantee of future results.
The Morgan Stanley Technology Index is unmanaged and cannot be invested into directly. 1999 was a period of unusually high performance for
the technology sector.
 HAZARDS OF CHASING
PAST PERFORMANCE:
Booms and Busts
Examples of large variances from year to year

Gold/ Equity
Year Silver REIT Hi-Tech
End Index Index Index
1993 85%
1994 -17%
1997 13%
1998 -22%
1999 111%
2000 -27%
Source: Commodity Systems, Inc., NAREIT
The Philadelphia Stock Exchange Gold/Silver Index, the Nareit Equity Index, and the Morgan Stanley Technology Index are all
unmanaged and cannot be invested into directly. 1999 was a period of unusually high performance for the technology sector. Past
performance is no guarantee of future results.
 #3 DO NOT SPECULATE
“Everyone knows that most people who speculate or
gamble in the market lose money at it in the end. The
people who persist in trying it are either unintelligent or
willing to lose money
for the fun of the
game…In any case,
they are not really
investors at all.”

-- Benjamin Graham
RW = Q + T + D
#4 DO NOT BUY
STOCKS ON
RUMOR
#5 DO NOT USE MARGIN
“What’s in Your Wallet?”
 #5 DO NOT USE MARGIN
“What’s in Your Wallet?”
• Borrowing money to buy stock dramatically
increases your risk

• You have to pay interest on the money you

borrow to buy the stock on margin

• A margin call could force you to sell your stock

at a depressed price
 A Margin Horror
Story
Assume that shortly after
Berkshire Hathaway acquired
General Re in April 1998, a
friend told you that “No one
has ever lost money in
Berkshire, and this is the
biggest bet that Warren Buffett
has ever made.”
You decide to buy 10 shares of
Berkshire Class A on June 22,
1998 for $84,000 per share-- an
$840,000 total investment.
Feeling confident, you decide to
use 50% margin….
Unfortunately Berkshire declines
to $40,800 by February of 2000.
Unable to put up more margin,
you are forced to sell. Your
$420,000 investment is now worth
ZERO.
By the end of 2002, Berkshire
recovers to $72,750, but
unfortunately, you were forced
out of your position.
 #6 Hire a
Professional
Financial
Advisor
WHY HIRE A PROFESSIONAL
FINANCIAL ADVISOR?
• Quality advice can make a
difference.
• To help you work toward
financial security.
• To help you clarify your goals
and identify your ability to
withstand market fluctuations.
WHY HIRE A PROFESSIONAL
FINANCIAL ADVISOR?

• To develop and monitor a

diversified portfolio designed to
help you meet your goals.
• To help you remain “on course”
with your long term objectives
especially in those times when it is
emotionally difficult to do so.
WHY HIRE A PROFESSIONAL
FINANCIAL ADVISOR?
• To help you get your financial
matters in order so you are
prepared for the unexpected.
• To help you maximize tax savings
and take advantage of money
saving opportunities.
• “Our job is not to make you rich,
but to save you from becoming
poor.”
What do each of the following
have in common?
ANSWER: THEY ALL HAVE
PERSONAL COACHES
 A Professional
Advisor’s Most
Important Job
According to University of Nebraska
Sports Psychologist, Dr. Jack Stark:
“Behavior management is probably the
most important element in the service that
a professional financial advisor can provide
for his clients.”
 #7 DO NOT LET EMOTION
OVERRULE LOGIC

Do not let the news of the day distract you

from your long-term plan.
 The Cycle of Market Emotions
Point of Maximum Financial Risk
- Investors Beware of Higther
Investment Risk

Euphoria
Anxiety
Thrill
Denial
Excitement
Fear
Optimism Desperation Optimism

Panic
Relief
Capitulation Hope
Depression
Despondency

Point of Maximum Financial

Opportunity - Investors Realize
Investment Opportunity
Bear Markets May Provide Opportunity
End date of 1 years 5 years 10 years
Bear market later later later
December 1957 43.4% 13.3% 12.8%
June 1962 31.0% 14.2% 10.4%
September 1966 30.5% 8.7% 6.9%
June 1970 41.9% 9.3% 9.0%
September 1974 38.1% 16.7% 15.6%
July 1982 59.3% 29.6% 19.2%
November 1987 23.3% 17.3% 18.7%
October 1990 33.5% 17.3% 19.4%
August 1998 39.8% 13.19 –
Average 37.9% 15.8% 14.0%

Source: Thomson Financial - Past performance is no guarantee of future results.

Returns shown are for the Standard & Poor’s 500 Index. The S&P 500 index is unmanaged
and cannot be invested into directly.
 S&P 500 vs “Panic Points”

Since World War II

It is not possible to invest directly in a market index. Past performance is no guarantee of future performance.
 If, at December 31, 1925,
you knew what was coming
1929 - Stock Market crashes
1933 - U.S. banks closed, depression
1939 - World War II begins
1941 - Japan bombs Pearl Harbor
1950 - Korean War begins
1962 - Cuban Missile Crisis
1963 - Kennedy assassinated
1973 - OPEC oil embargo
1974 -Nixon Resigns, Watergate
1980 - Inflation rate rises to 14%
1982 - Worst recession in 50 years
1987 - Dow crashes 23 % in one day
1989 - S&L crisis, $500bn bailout
1990 - Persian Gulf War, recession
1997 - Asian financial crisis
1998 - Russian default
1999 - Clinton impeachment trials
2001 - Terrorist attacks on America
What would
you have invested in?

• Stocks?
• T-Bills?
 If you answered “stocks”,
you would have been right:

$12,000,000
$9,799,411 Reflects the growth of $10,000
$10,000,000
invested on Dec. 31, 1927 to
$8,000,000 Dec. 31, 2004
$6,000,000
$4,000,000
$2,000,000
$174,400
$0
1
Stocks 2
T-Bills

Ibbotson Associates cumulative total return indices for S&P 500 and 3-Month Treasury Bills. It is not possible
to invest directly in an index. Past performance is no guarantee of future results.
What if you wanted
to seek preservation of
principal?
 T-BILLS MAY NOT BE
THE BEST SOLUTION….”
After inflation and taxes, $10,000 continuously
reinvested in 3-month T-bills was worth only
$5,221. Your after-tax, inflation-adjusted
purchasing power would’ve been reduced by
48% after having invested for 76 years !

Ibbotson Associates cumulative total return indices for 3-Month Treasury Bills adjusted for both inflation and
taxes. Investment period from 12/31/25 - 12/31/01. It is not possible to invest directly in an index. Past
performance is no guarantee of future results. Your results will vary. Taxes are based upon the top marginal
personal income tax rate in the U.S. each year. Inflation is based upon the change in the Consumer Price Index.
How diversified are you really?
 #8 OWN A DIVERSIFIED
PORTFOLIO
Commodities 12.4%

Real Estate 12.5%

Foreign Stocks 12.5%

U.S. Stocks 13.2%

Assume it is 12/31/71 and you are blessed with perfect

foresight about these annual asset class returns over the
next 29 years. How would you allocate your retirement
plan?
Indices used to represent asset classes depicted above are the S&P 500, the Morgan Stanley EAFE Index, the NAREIT Equity REITs Index
and the Goldman Sachs Commodity Total Return Index, respectively. It is not possible to invest directly in a market index. Past
performance is no guarantee of future performance.
 AND THE WINNER IS...
25% in Each Asset 14.0%

Commodities 12.4%

Real Estate 12.5%

Foreign Stocks 12.5%

U.S. Stocks 13.2%

By combining four non-correlated asset classes, you were

actually able to obtain a portfolio return which is higher
than any of the four individual asset classes in which you
invested and with less risk!
The “25% of Each” Portfolio was rebalanced on January 1 of each year, 1972-2000. Indices used to represent asset classes depicted above
are the S&P 500, the Morgan Stanley EAFE Index, the NAREIT Equity REITs Index and the Goldman Sachs Commodity Total Return
Index, respectively. It is not possible to invest directly in a market index. Past performance is no guarantee of future performance.
 Why Diversify? Because Winners Rotate:
LARGE- SMALL- REAL
YEAR COMPANY COMPANY ESTATE FOREIGN
STOCKS STOCKS STOCKS STOCKS

1982 21.6 25.0 21.6 -1.9

1983 22.6 29.1 30.6 23.7
1984 6.3 -7.3 20.9 7.4
1985 31.7 31.1 19.1 56.2
1986 18.7 5.7 19.2 69.4
1987 5.3 -8.8 -3.6 24.6
1988 16.6 25.0 13.5 28.3
1989 31.6 16.3 8.8 10.5
1990 -3.1 -19.5 -15.4 -23.5
1991 30.4 46.0 35.7 12.1
1992 7.6 18.4 14.6 -12.2
1993 10.1 18.9 19.7 32.6
1994 1.3 -1.8 3.2 7.8
1995 37.5 28.5 15.3 11.2
1996 23.0 16.5 35.3 6.1
1997 33.4 22.4 20.3 1.8
1998 28.6 -2.6 -17.5 20.0
1999 21.0 21.3 -4.6 27.0
2000 -9.1 -3.0 26.4 -14.0
2001 -11.9 2.5 13.9 -21.4
2002 -22.1 -20.5 3.9 -15.9
The indices used for Large-cap, Small-cap, Real Estate, and Foreign Stocks are the S&P 500, Russell 2000, NAREIT Equity REITs
Index, and the Morgan Stanley EAFE Index, respectively. One cannot invest directly in an index. Past performance does not
guarantee future results.
 Which $100,000 investment would
have a higher return over 20 years?
• A guaranteed interest rate of 8% per year or-
• An equal-weighted portfolio of five asset
classes with the following returns:
– A has a 100% loss
– B returns 0% a year
– C returns 5% a year
– D returns 10% a year
– E returns 20% a year
• $100,000 grew to $466,096 when invested
at a fixed return of 8%.

• $100,000 grew to $974,376 in the

diversified portfolio despite a total loss on
one asset and a zero return on another asset.
• Diversification can enable
one to offset disappointing
results on individual holdings
and offer the potential for
rewarding long-term portfolio
returns.
This is a hypothetical case and is not representative of any specific securities
 #9 DO NOT TIME
THE MARKET
• Mark Hulbert runs the Hulbert Financial
Digest, which independently monitors the
investment performance of stock market
newsletters
• Hulbert has tracked 137 newsletters since
1980
• There is no evidence of any market-timing
ability even by those who make it a full
time job: Only 4 of 137 (2.9%)
outperformed the performance of simply
buying and holding the Wilshire 5000
Index.
Source: Hulbert Financial Digest. It is not possible to invest directly in a market index.
Past performance is no guarantee of future performance.
 #9 DO NOT TIME
THE MARKET
Warren Buffett offered some useful
counsel on this subject: “We make
no attempt to predict how security
markets will behave; successfully
forecasting short-term stock price
movements is something we think
neither we, nor anyone else, can
do… We’ve long felt that the only
value of stock market forecasters is
to make fortune tellers look good.”
 #9 DO NOT TIME
THE MARKET
Market Prophecy is a Waste of Time
Predicted Actual Margin
Year S&P S&P of
Gain Gain Error
1996 6.1% 26.0% 19.9%
1997 3.4% 31.0% 27.6%
1998 4.9% 26.7% 21.8%
1999 0.1% 19.5% 19.5%
2000 6.1% -10.1% 16.2%
2001 18.0% -12.1% 30.0%
2002 15.0% -22.1% 37.1%
Source: Business Week’s Consensus Yearend Forecast
The S&P 500 index is unmanaged and cannot be invested into directly.
REDUCE TIMING-RISK WITH
DOLLAR-COST AVERAGING
• Dollar-cost averaging involves spreading out
your investments over several future time
periods.
• This can significantly reduce the risk of being
locked into a low equity return due to unusually
bad timing in investing a lump sum.
• By investing at regular intervals, periods of
adverse volatility may actually be working to the
investor’s advantage.
 Bear Market Building
Dollar-Cost Averaging is a Potential Way to
Build Wealth in Both Bull and Bear Markets
 Bear Market Building
Dollar-Cost Averaging is An Effective Way to
Build Wealth in Both Bull and Bear Markets
Annualized returns investing in the S&P 500 Index:
Initial Annual
investment investments
of $10,000 of $1,000
Recent Bull Market (1980-2000) 15.7% 15.2%

Long Bear Market (1928-1948) 3.1% 6.8%

DCA improved returns by 119% in the Bear Market, while only

penalizing returns by 3% in the Bull Market period.

The above illustration is hypothetical; actual returns may vary in a different time period. Dollar cost averaging does not assure a profit or
protect against a loss in a declining market. For the strategy to be effective, you must continue to purchases shares in both up and down
markets. As such, an investor needs to consider his/her financial ability to continuously invest through periods of low price levels. It is not
possible to invest directly in a stock market index. Past performance is no guarantee of future results.
 #10 - UPDATE YOUR
PLAN EVERY 2-YEARS
Have your goals changed?
Were the assumptions
made two years ago still
valid today?
Do you need to adjust…
Time, Risk Level, Amount
Saved, Retirement Date,
Desired Standard of Living
at Retirement?
HAVE A LONG-TERM PLAN TO
REACH MY FINANCIAL GOALS

YEAR 1

STARTING
POINT 
HAVE A LONG-TERM PLAN TO
REACH MY FINANCIAL GOALS

YEAR 2

YEAR 1

STARTING
POINT 
HAVE A LONG-TERM PLAN TO
REACH MY FINANCIAL GOALS

YEAR 2

YEAR 1

STARTING
POINT 
 Time
Time is
is on
on your
your side
side
Time is on your side
Positive Returns Negative Returns
1954 Stocks
52.6% have offered positive performance
’58 43.4
more often than not
Stocks have offered positive performance more often than not
’95 37.6 Positive returns Average annual total returnsNegative
through returns
9/30/02
’75 37.3 1954 52.6%
’58 43.4 50-year 25-year 10-year 5-year 1-year
’97 33.4 Average annual total returns through 9/30/02
’95 37.6 S&P 500 Index 11.08% 12.60% 8.99% –1.62% –20.47%
’80 32.5 ’75 37.3 50-year 25-year 10-year 5-year 1-year
’85 31.7 ’97 33.4 S&P 500 Index 11.08% 12.60% 8.99% –1.62% –20.47%
’80 32.5
’89 31.7 ’85 31.7
’55 31.6 ’89 31.7
’55 31.6
’91 30.5 ’72
’91 30.5
18.9%
’72 18.9%
’98 28.6 ’98 ’86
28.6 18.7
’86 18.7
’61 26.8 ’61 ’79
26.8 18.5
’79 18.5
’51 24.0 ’52 18.4 ’92 7.6%
’51 24.0 ’67 ’52
24.0 18.4
’88 ’92
16.6 ’567.6%6.6 1953 – 1.0%
’67 24.0 ’76 ’88
23.6 16.6
’64 ’56 ’786.6 6.5 1953’90 –– 3.1
16.4 1.0%
’96 23.0 ’71 14.3 ’84 6.3 ’81 – 5.0
’76 23.6 ’64
’63 22.7
16.4
’65
’78 ’876.5 5.3 ’90 ’77 –– 7.4
12.4
3.1 ’66 – 10.1%
’96 23.0 ’83 ’71
22.6 14.3
’59 ’84 ’706.3 4.0 ’81 ’69 –– 8.5
12.0 5.0 ’57 – 10.8
‘02
‘02 – –22.1%
’63 22.7 ’82 ’65
21.6 12.4
’68 ’87 ’945.3 1.3 ’77 ’62 –– 8.8
11.1 7.4 ’01’66– 11.9
– 10.1% 22.1%
’99 21.1 ’93 10.1 ’60 0.5 ’00 – 9.1 ’73 – 14.8 ’74 – 26.9
’83 22.6 ’59 12.0 ’70 4.0 ’69 – 8.5 ’57 – 10.8
>20% 10% to 20% 0% to 10% –10% to 0% –20% to –10% <–20%
’82 21.6 ’68 11.1 ’94 1.3 ’62 – 8.8 ’01 – 11.9 ‘02 – 22.1%
’99 21.1 ’93 10.1 ’60 0.5 ’00 – 9.1 ’73 – 14.8 ’74 – 26.9
>20% 10% to 20% 0% to 10% -10% to 0% -20% to 0% <-20%
Source: Thomson Financial as of 12/31/02
Source: Thomson Financial as of 12/31/02
Past performance is no guarantee of future results. The Standard & Poor’s 500 Index is an unmanaged group of large-company stocks. It is not available for
Past performance is no guarantee of future results. The Standard & Poor’s 500 Index is an unmanaged group of large-company stocks. It is not available for
direct investment. During the periods shown, a number of index stocks could have had significantly negative performance. It is possible for index performance to
direct investment. During the periods shown, a number of index stocks could have had significantly negative performance. It is possible for index performance to
be positively or negatively influenced by a relatively small number of stocks.
be positively or negatively influenced by a relatively small number of stocks.
I already have a plan

• Do you know your

chances of it
succeeding?
• A plan is only as good
as the assumptions
within it
• Most plans are based
on many poor
assumptions
 WHAT
have we
learned?
• Bull and bear markets will
occur and planning for them
is important.
• Your average return has little
to do with your investments.
• Aiming for higher return by
taking on more risk might
lower your odds.
• Having and adjusting a plan
could be the single most
important component in
determining your success.
 POSITIVES FOR 2005

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