behavioral finance: avoiding common investor...

Behavioral Finance: Avoiding Common Investor MistakesApril, 2011

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The views expressed in this presentation are those of the investment professional and are subject to change at any time. These views donot necessarily reflect the views of Pioneer or others in thePioneer organization.

23841-02-0411 | April 2011 |

Agenda

Behavioral Finance & The Emerging Field of Neuroeconomics

Common Investor Mistakes

Identifying Your Own Biases and Avoiding Common Mistakes

How Pioneer Investments Can Help

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Average Return S&P 500 1990 – 2010

9.14%

Data sources: Dalbar, Inc. and INGPast performance is no guarantee of future results. The Standard & Poor’s 500 Index is an unmanaged capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Investors cannot invest directly in an index.

23841-02-0411 | April 2011 |

Average Equity Investor Return 1990 – 2010

9.14%

Data sources: Dalbar, Inc. and INGPast performance is no guarantee of future results. The Standard & Poor’s 500 Index is an unmanaged capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Investors cannot invest directly in an index.

3.83%

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Why do so Many Investors Underperform the Market?

Studying biases

Studying brain activity during the decisionmaking process

Identifying real life decision making criteria

The study of behavioral finance and neuroeconomics seeks to explain investor behavior by

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Behavioral Finance Enhances Traditional Economic Theory

Traditional Theory In PracticeInvestors have clear goals

Investors calculate odds of success

Investors efficiently processall available information

Goals are unclear and change often

Transactions based on tips andgut feelings

Investors often buy at the top and sell at the bottom

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Agenda





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Money Is Emotional – Emotions Are Not Necessarily Rational

Our emotions are critical parts of our decision making process for anything that relates to our basic human needs

In today’s world, money is a critical ingredient for all 5!

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Human Instinct – “Fight or Flight” When Threatened

Fire

Hurricane

Grizzly bear

Bear market

Get the family out safely!

Batten down the hatches!

Run!

????

Threat Reflex

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Savvy Investors often Find Ways to Avoid Relying on Instinct

Morningstar

Analyst reports

CNBC, etc

“Be greedy when others are fearful,and be fearful when others are greedy.”

(Warren Buffet)However, many sources of information only reinforce the herd mentality.

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Instincts are Based on Experience

Over time we create biases in order to simplify and speed up our thought processes

Common behavioral biasesand investing obstacles– Herd mentality

– Loss aversion

– Familiarity bias

– Errors of omission vs errorsof commission

– Relativity & Framing

– Counter-factual thinking

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The Herd MentalityHow do you start a stampede? Once it is started, how doyou stop it?

Humans are social creatures; we tend to feel safer and more comfortable when we are conforming with others.

Which two lines are the same size?

A B C DSource: Solomon Asch Experiment – A Study of Conformity, 1958 and ING

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Loss Aversion

Duke University Basketball Fans– Lottery losers: How much will they pay for a ticket

to the big game? $170

– Lottery winners: How much will they sell their ticketto the big game for? $2400!

Why the 14x difference between buyersand sellers?– Lottery winners selling “lifelong memories.”

– Lottery losers buying ticket andbased price on other ways to spend $170.

– “Endowment Effect”: human tendency to becomeattached to our possessions.

Source: Predictably Irrational: The Hidden Forces That Shape Our Decisions by Dan Ariely, 2009.

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Loss AversionWe feel losses more powerfully than gains

Scenario 1: – Option A) win $3,000 for sure

– Option B) 80% chance of winning $4,000 and 20% of winning $0

Scenario 2, yes you have to pick one– Option A) lose $3,000 for sure

– Option B) 80% chance of losing $4,000 and 20% of losing $0

Which did you choose?

Most people do not pick the best option– Scenario 1) $3,000 vs (.8* $4,000 + .2* $0) = $3,200 … B is best

– Scenario 2) -$3,000 vs (.8* -$4,000 + .2* $0) = -$3,200 … A is best

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Familiarity Bias

Humans tend to be more comfortable in familiar environments.– Place cells: Neurons that fire when

confronted with specific stimulus

– The more often our place cells fire, the more relaxed we feel and the more easily we cope with stress.

– Place cells breed confidence in our surroundings

How does this affect investors?– Roughly 5 million US investors have 60% of their retirement fund in their

employer’s stock

– Investors typically fear investing in things they are unfamiliar with, like foreign companies

Source: Your Money and Your Brian by Jason Zweig

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Errors of Omission vs. Errors of Commission

Let’s Make A Deal!– You each have a ticket and we are going

to have a drawing for a “Pioneer logo item”

– Who thinks they have the lucky ticket? Anyone think their ticket is unlucky?

– Will you trade your ticket with someone else?

How does this show up in investors’ behavior?– Your investment is down and your advisor recommends selling in favor

of another opportunity

– Which would you regret more:

1) Not making the trade and the other investment outperforms or

2) Making the trade and your previous investment outperforms?

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Relativity and Framing

Two separate questions – whichdo you prefer?

Source: Predictably Irrational by Dan Ariely

Set 2A) Economist.com online subscription $59.00 B) Economist print subscription $125.00

C) Economist.com online & print subscription $125.00

Set 1 A) 68% B) 32%Set 2 A) 16% B) 0% C) 84% Why?

Set 1A) Economist.com online subscription $59.00

B) Economist print subscription $125.00

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Take the last 3 digits of your phone number and add 400.Now imagine that this is a year.For example 237 + 400 = year 637 AD.

Do you think that Attila the Hun was conquered before or after that year?

What year do you think Attila the Hun was conquered?

Did your phone number affect your estimate of when Attila the Hun was defeated?

Attila the Hun; Source of picture: http://www.heritage-history.com/books/horne/soldiers/zpage059.gif, Accessed 11/02/10

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400 - 599

600 - 799

800 - 999

1,000 – 1,199

1,200 – 1,399

629 AD

680 AD

789 AD

885 AD

988 AD

Phone number + 400 Average estimate of Attila’s defeat

Answer: Attila the Hun was conquered in the year 451 AD.

Source: Your Money and Your Brain: How the New Science of Neuroeconomics Can Help Make You Rich by Jason Zweig, 2007

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Counter-Factual Thinking

“If only I had…” “If only I hadn’t”

Ralph buys a movie ticket and wins $100 for being the theater’s 10,000th customer.– Meanwhile, Bill wins $150 for being another

theater’s 1,000,001st customer.

– Who would you rather be?

Moments later Bill learns that the person ahead of him in line won $10,000 for being the 1,000,000th customer at the theater.– How do you feel about your choice now?

Source: Your Money and Your Brain: How the New Science of Neuroeconomics Can Help Make You Rich by Jason Zweig, 2007

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Agenda





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Identifying Your Biases

Most people are vulnerable to all of these biases in one way or another. – Analyze your past investment decisions

– Is there is a particular bias you should be aware of?

Having someone informed to discuss investment opportunities with can be helpful– Point out potential biases in real time

– Just make sure it’s someone who understands the biases and emotional responses – Not CNBC!

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Strategies for Avoiding Common Mistakes

Build an investment plan in writing…and stick to it!– State your expectations and rationale for

an investment in writing

– Refer back to it when making decisions about buying or selling in the future

– Rebalance on a regular basis

Don’t be afraid to take losses, the tax laws are in your favor

When in doubt, reframe the question –you may see things differently

Remember, deciding to do nothing is a decision

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Agenda





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Pioneer’s Tools for Avoiding Common Mistakes

Certain products can help you overcome irrational behavior and volatility while protecting you from your own weaknesses– Funds with a broad mandate: More asset classes = more

opportunities and greater diversification

– Funds that take a “value” perspective: Can help avoid bias of loss aversion, commission vs. omission and framing/relativity throughrigorous research and analysis

– Funds that are actively managed: Can help avoid counter-factual thinking and herd mentality by delegating real-time decision making to the Portfolio Manager

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Emerging MarketsConvertibles

U.S. High YieldBank Loans

Municipals

International Investment Grade

Investment-Grade Corporates

Non-AgencyMBS/ABS

Agency Mortgage-Backed-Securities

US Treasury/Agency

Cash

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Jun-99

Dec-99

Jun-00

Dec-00

Jun-01

Dec-01

Jun-02

Dec-02

Jun-03

Dec-03

Jun-04

Dec-04

Jun-05

Dec-05

Jun-06

Dec-06

Jun-07

Dec-07

Jun-08

Dec-08

Jun-09

Dec-09

Jun-10

Dec-10Spreads

betweenU.S. High Yield and U.S. 10-Year Treasuries

2%

16%

14%

6%

13%

9%

March 31, 2011 RatioJune 30, 1999 Ratio

3%

15%

Pioneer Strategic Income FundActive Historical Sector Allocations as of March 31, 2011

Source: Pioneer InvestmentsThe fund is actively managed; sector allocations will vary over other periods and do not reflect a commitment to an investment policy or sector.

4.9% 4.8% 6.2% 9.2% 8.2% 8.2% 8.8% 8.9% 6.1% 4.2% 4.1% 3.1% 3.9% 3.7% 3.4% 2.9% 3.0% 5.9% 7.4% 18.1% 10.6% 6.4% 7.1%

17%

25%

19%

12%

3%

19%

5.4% 4.8%

Mar-11

5%

15%

3%

4%

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Pioneer Strategic Income FundSummary

Extensive diversification through investment in broad range of fixed income sectors which have low correlations

Active allocation approach designed to add incremental excess return by strategically overweighting sectors with superior relative value appeal

Rigorous research process which includes fundamental and quantitative analysis to find those securities that are most attractively valued and offer strongest return potential

Diligent risk management to provide strong risk/return profile

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Different Macro Environments Call For Dynamic Asset Allocation“One Size Does NOT Fit All”

GD

P G

row

thLo

w

H

igh

Low High Inflation

Oil

Precious Metals

Large Cap Equities

Treasuries

Real Estate

AgriculturalCommodities

TIPS

Gold

Oil

Small-CapEquities

Emerging Markets

High Yield Bonds

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Pioneer Multi-Asset Real Return Fund: Key Characteristics and Benefits

Dynamic multi-asset product with the goal of generating real returns(i.e. returns in excess of inflation) of approximately 300 bps over CPI over a full market cycle on an annualized basis. There can be no assurance that the Fund will meet this target over the long term.*

Key Benefits– Inflation hedge

– Complements traditional asset allocations

– Focused on generating real returns

– Risk-management focus

– Transparent, liquid 1940-Act open-end mutual fund

*A typical full market cycle may generally last from 6-8 years and include both a market peak and a market trough.

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A Word About Risk

Pioneer Strategic Income FundWhen interest rates rise, the prices of fixed income securities in the fund will generally fall. Conversely, when interest rates fall, the prices of fixed income securities in the fund will generally rise. Investments in the fund are subject to possible loss due to the financial failure of underlying securities and their inability to meet their debt obligations.

Prepayment risk is the chance that mortgage-backed bonds will be paid off early if falling interest rates prompt homeowners to refinance their mortgages. Forced to reinvest the unanticipated proceeds at lower interest rates, the fund would experience a decline in income and lose the opportunity for additional price appreciation associated with falling interest rates.

The securities issued by U.S. Government sponsored entities (i.e., FNMA, Freddie Mac) are neither guaranteed nor issued by the U.S. Government. The portfolio may invest in mortgage-backed securities, which during times of fluctuating interest rates may increase or decrease more than other fixed-income securities. Mortgage-Backed securities are also subject to pre-payments. Investments in high yield or lower-rated securities are subject to greater-than-average risk. Investing in foreign and/or emerging markets securities involves risks relating to interest rates, currency exchange rates, economic, and political conditions. At times, the fund’s investments may represent industries or industry sectors that are interrelated or have common risks, making it more susceptible to any economic, political, or regulatory developments or other risks affecting those industries and sectors. These risks may increase share price volatility.

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A Word About RiskPioneer Multi-Asset Real Return Fund:All investments are subject to risk, including the possible loss of principal. The Pioneer Multi-Asset Real Return (“MARR”) Fund was newly organized as an open-end investment company (“mutual fund”) in March, 2010 and has no history of operations. Unlike most mutual funds, The Pioneer MARR Fund has the ability to invest in a wide variety of securities and asset classes. In addition, the Fund is non-diversified which means it can invest a higher percentage of its assets in the securities of any one or more issuers. This will increase the Fund’s potential risk exposure. The Fund may invest in underlying funds (ETFs and unit investment trusts). In addition to the Fund’s operating expenses, you will indirectly bear the operating expenses of investments in any underlying funds. The Fund and some of the underlying funds employ leverage, which increases the volatility of investment returns and subjects theFund to magnified losses if an underlying fund’s investments decline in value. The Fund and some of the underlying funds may use derivatives, such as options and futures, which can be illiquid, may disproportionately increase losses, and have a potentially large impact on Fund performance. The Fund and some of the underlying funds may employ short selling, a speculative strategy. Unlike the possible loss on a security that is purchased, there is no limit on the amount of loss on an appreciating security that is sold short. The portfolio may invest in inflation-linked securities. As inflationary expectations increase, inflation-linked securities may become more attractive, because they protect future interest payments against inflation. Conversely, as inflationary concerns decrease, inflation-linked securities will become less attractive and less valuable. The portfolio may invest in credit default swaps, which may in some cases be illiquid, and they increase credit risk since the fund has exposure to both the issuer of the referenced obligation and the counterparty to the credit default swap. The Fund may invest in subordinated securities which may be disproportionately adversely affected by a default or even a perceived decline in creditworthiness of the issuer. The Fund may invest in floating rate loans. The value of collateral, if any, securing a floating rate loan can decline or may be insufficient to meet the issuer’s obligations or may be difficult to liquidate. The portfolio may invest in event-linked bonds. The return of principal and the payment of interest on event-linked bonds are contingent on the non-occurrence of a pre-defined “trigger” event, such as a hurricane or an earthquake of a specific magnitude. The portfolio may invest in commodities. The value of commodity-linked derivatives may be affected by changes in overall market movements, commodity index volatility, changes in interest rates, factors affecting a particular industry or commodity, international economic, political and regulatory developments, supply and demand, and governmental regulatory policies. Investments in equity securities are subject to price fluctuation. Small-and mid-cap stocks involve greater risks and volatility than large-cap stocks. International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. Investments in fixed income securities involve interest rate, credit, inflation, and reinvestment risks. As interest rates rise, the value of fixed income securities falls. High yield bonds possess greater price volatility, illiquidity, and possibility of default. There is no assurance that these and other strategies used by the Fund or underlying funds will be successful. Please see the prospectus for a more complete discussion of the Fund’s risks.

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Investment Suitability Is Important

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Before investing, consider the product’s investment objectives, risks, charges and expenses. These risks may increase share price volatility. Contact your advisor or Pioneer Investments for a prospectus containing this information. Read it carefully.

Neither Pioneer, nor its representatives are legal or tax advisors. In addition, Pioneer does not provide advice or recommendations. The investments you choose should correspond to your financial needs, goals, and risk tolerance. For assistance in determining your financial situation, please consult an investment professional.

Securities offered through Pioneer Funds Distributor, Inc. Underwriter of Pioneer mutual funds, Member SIPC

60 State StreetBoston, Massachusetts

us.pioneerinvestments.com©2010 Pioneer Investments

Securities offered through Pioneer Funds Distributor, Inc. Underwriter of Pioneer mutual funds, Member SIPC

60 State StreetBoston, Massachusetts

www.pioneerinvestments.com©2010 Pioneer Investments

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