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Are you looking for a constructive way to talk risk to participants
and plan sponsors, especially in turbulent markets?
1. Focus on What Really Matters to Your Clients.
Regardless of how financially or statistically
sophisticated your client and their participants may be,
forget standard deviations, betas and the like. Instead,
zero in on what’s really at stake: the risk of losing
money. Framing the conversation this way emphasizes that
your advice is aligned with the client’s interests. And,
it sets a more relaxed, less intimidating tone.
2. Respect the Fear.
Acknowledge that cash equivalents are considered safe,
while equities are considered risky. This traditional
view of risk is well-founded. Treasury bills, for
example, have had positive annual returns each year
since 1950. But small-cap stocks have lost money in 16
of the 57 calendar years since 1950, including a 30.9%
drop in 1973. And large-cap stocks have lost money in 13
calendar years over the same period, including a
negative 26.5% return in 1974.
3. Provide the Missing Insight. Time dramatically changes the relative risk of asset classes. This
insight, which is the basis for Seligman’s Time Horizon
asset allocation strategy, is overlooked in the
traditional view of risk, which is based on volatility
over short holding periods. On a rolling 10-year basis,
the historical risk of losing money in equities was
reduced significantly. Out of the 48 10-calendar-year
periods from 1950 through 2006, the worst return
— the 10 years ending in 1974 — was a positive
3.2% average annual return for small-caps and a
positive 1.2% for large-caps.
Relative risk changes even more dramatically over rolling 20-year
periods. For the 38 20-calendar-year periods from 1950
through 2006, the worst rolling 20-year average
annual return for small-caps was positive 8.2%
for the period ending in 1974. That worst
small-cap return for the same period is better than the
best average annual return for Treasury bills,
which was 7.2% for the high interest rate period ending
in 1991.
These observations are illustrated in the chart below. The relative
risk of stocks, bonds and cash seen over one-year
periods clearly changes over longer time frames.
Figures derived from Ibbotson, Citigroup and FactSet.
Average annual returns for periods ended 12/31. Past
performance is no guarantee or indication of future
results. The return and principal value of an investment
in stocks will fluctuate with changes in market
conditions. Returns assume reinvestment of any
distributions and do not include sales charges or the
effect of any taxes; if such charges and taxes had been
included, performance would have been lower. Indices are
shown for illustrative purposes only and do not
represent the performance of any Seligman Fund, or any
other security, including any of the Seligman Mutual
Funds.
For a description of asset classes used and relative
risks of the asset classes shown above, please see
“Important Risk Information” and “Description of Asset
Classes” at the conclusion of this article.
A critical risk that retirement participants and sponsors should
consider is the risk of not having enough money at
retirement. Investments traditionally considered “safe”
may, over the long term, jeopardize a participant’s
financial health by failing to provide sufficient
growth. For the longer time horizon of most retirement
savers, prudent but meaningful allocations to equity
investments have the potential to make a dramatic
difference in a participant’s future standard of living.
To learn more about Seligman’s Time Horizon asset
allocation strategy, please contact Seligman Advisors,
Inc. at 888-597-1553.
Description of Asset Classes:
US Small-Company Stocks: 1979 – 2006: Russell 2000; 1950
– 1978: Ibbotson Small Stock Index. US Large-Company
Stocks: Standard & Poor’s 500 Composite Stock Index (S&P
500). Investment Grade Fixed Income: 1973 – 2006: Lehman
Brothers Government/Credit Bond Index; 1969 – 1972:
Estimated as the Citigroup High Grade Corporate Index;
1950 – 1968: Ibbotson Long- Term Corporate Bonds
estimate. US Government Bonds: 1973 – 2006: Lehman
Brothers Government Bond Index; 1950 – 1972: Ibbotson
Long-Term Government Bond Index. Treasury Bills:
Ibbotson One Bill Portfolio.
Important Risk Information:
Stock prices fluctuate and you could lose money. The
stocks of smaller companies may be subject to
above-average price fluctuations. Bonds are subject to
interest-rate risk, credit risk, prepayment risk, and
market risk.
Past performance is no guarantee of future results. The
return and principal value of an investment will
fluctuate with market conditions. Returns do not
represent the performance of any Seligman mutual fund,
and do not reflect the effect of any management fees or
trading costs. If such charges had been included,
performance would have been lower.
Diversification does not ensure a profit or protect
against loss in a declining market.
The views and opinions expressed are provided for
general information only, and do not constitute specific
tax, legal, or investment advice to, or recommendations
for any person. There can be no guarantee as to the
accuracy of market forecasts. Opinions, estimates, and
forecasts may be changed without notice.
This material is authorized for use only in case of a
concurrent or prior delivery of the offering prospectus
of a Seligman mutual fund, which includes complete
information about the investment objectives and
strategies, sales charges, expenses, and risk factors.
Please read it carefully before investing or sending
money.
The Seligman Group of Funds is distributed by Seligman
Advisors, Inc. This material is distributed by Seligman
Advisors, Inc.
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