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CUBIC 2016 Day 4 Personal Finance Bob Donchez Maymester 2016 The Financial Planning Process Personal Finance Topics 1) 2) 3) 4) 5) 6) 7) 8) 9) Financial planning process Assessing financial position Basics of personal taxes Insurance Managing personal debt Setting and achieving goals Retirement topics Investment topics Putting it all together Maymester 2016 ?? Question You have quite a bit of money invested in the stock market. Lately the market has fallen a lot. What is your “instinct” for taking action? A. B. C. D. Sit tight—I’m in it for the long haul Bail out (sell) now before it gets worse Sell some now—make adjustments Buy now—it’s a good opportunity Maymester 2016 Investments “101” 8-1 General Approach to Investing No “secret” path to successful investing: • Regular, consistent savings (dollar cost averaging); • Over a long period of time; • Using simple, disciplined investment strategies. Most people maintain two basic investment portfolios: – Taxable portfolio for near term goals – Tax sheltered portfolios for long term goals (retirement) Maymester 2016 Investments “101” 8-1 General Approach to Investing Linking financial accounts Payroll Retirement Tax-deferred accounts Taxable investments For pre-retirement goals Checking Account Taxes Household spending Maymester 2016 Investments “101” 8-2 Investing Terms and Concepts Relationship between risk and return • Long term risk and return of various asset classes Empirical Evidence: (1925-2011) Growth in $1 Small-company stocks $15,532 Large-company stocks 3,045 Long-term corp. bonds 167 Long-term govt. bonds 119 Intermediate govt. bonds 92 U.S. treasury bills 21 Inflation 13 Return 16.5% 11.8 6.4 6.1 5.5 3.6 3.1 Risk(σ) 32.5% 20.3 8.4 9.8 5.7 3.1 4.2 Maymester 2016 Investments “101” 8-2 Investing Terms and Concepts Diversification • Reduces total risk more than any other factor Maymester 2016 Investments “101” 8-2 Investing Terms and Concepts Diversification • The key to diversification is to use securities/asset classes that behave very differently in the market. Maymester 2016 Assessing Current Financial Position 8-2 Investing Terms and Concepts Asset Allocation measures: – Degree of diversification – Amount of risk/variation that may occur over time – Amount of return likely over long period of time Maymester 2016 Assessing Current Financial Position 8-2 Investing Terms and Concepts Asset allocation asset classes: – “Cash” • Cash, savings, money market, CD – Fixed income • Bonds, bond mutual funds and ETFs – Stock/equities • Stock, stock mutual funds and ETFs – “Alternatives” • Real estate, commodities, collectibles Maymester 2016 Investments “101” 8-2 Investing Terms and Concepts Asset Allocation • One suggestion for long term investing: “100 to 120 – age in years = equity proportion” Examples: 30 years old: equity = 70 – 90% 60 years old: equity = 40 - 60% Maymester 2016 Investments “101” 8-2 Investing Terms and Concepts Sample Asset Allocations and Characteristics “Conservative” “Moderate” “Aggressive” Maymester 2016 Assessing Current Financial Position 8-2 Current Investment Asset Allocation Sample Asset Allocations Maymester 2016 Assessing Current Financial Position 2-4 Current Investment Asset Allocation Sample Asset Allocations Maymester 2016 Investments “101” 8-2 Investing Terms and Concepts On-line resources: questionnaires to determine asset allocation: http://cgi.money.cnn.com/tools/assetallocwizard/assetallocwizar d.html http://www.calcxml.com/do/inv01 Maymester 2016 Investments “101” 8-3 Overview of Securities Forms of “cash” • Checking, savings • Money market mutual funds • Certificates of deposit Forms of fixed income securities • Bonds • Types of bonds – Corporate, Federal, “Muni” – High yield – Foreign Maymester 2016 Investments “101” 8-3 Overview of Securities Forms of equity securities • Common stock • Preferred stock “Alternate” investments • Real estate • Gold, Commodities • Collectibles Maymester 2016 Investments “101” 8-3 Overview of Securities Mutual funds and Exchange Traded Funds • Definition and characteristics • Differences between mutuals and ETFs • Active versus Index funds Maymester 2016 Investments “101” 8-3 Overview of Securities Mutual funds and Exchange Traded Funds • Types of funds – Money market – Bond funds • Short term bond funds • Intermediate bond funds • Hi yield bond funds • Total bond market • Foreign bond funds Maymester 2016 Investments “101” 8-3 Overview of Securities Mutual funds and Exchange Traded Funds • Types of funds – Equity • Large firms • Small firms • Total stock market • Value versus growth funds • Developed foreign markets • Emerging markets • Total world market Maymester 2016 Investments “101” 8-3 Overview of Securities On-line “screeners” stocks, bonds, mutuals, and ETFs Bond Screener http://screen.yahoo.com/bonds.html Stock Screener https://www.google.com/finance/stockscreener Mutual Fund Screener http://screen.yahoo.com/funds.html ETF Screener http://finance.yahoo.com/etf/browser/mkt Maymester 2016 Investments “101” 8-3 Overview of Securities Mutual funds and Exchange Traded Funds • Types of funds – Combination funds • Balanced • Asset Allocation • Life cycle/target retirement • On-line resources to lifecycle/target retirement funds: https://personal.vanguard.com/us/funds/vanguard/TargetRetirementList#targ etAnchor http://personal.fidelity.com/products/funds/content/WhatYouCanBuy/single_fu nd_solutions.shtml.cvsr Maymester 2016 Investments “101” 8-3 Overview of Securities Maymester 2016 Investments “101” 8-4 Investment Styles Comparison of Active versus Passive Investment Styles Active Style Passive Style Beat the market by buying low and selling high “Make” the market by buying and holding Selection and timing of security trading (fundamental and technical analysis) Setting asset allocation and dollar cost averaging Narrow focus, less diversification, very selective Broad focus, more diversification, indexing High turnover of positions, high trading and tax costs Low turnover, low expenses and taxes Maymester 2016 Investments “101” 8-4 Investment Styles Comparison of Active versus Passive Investment Styles Active Style Passive Style Time consuming to monitor portfolio Buy/hold takes little effort Requires high level of investing knowledge Less specific security knowledge required More trading, less diversification means more risk Less risk High risk in selecting managers who Manager skill not very important will actually do well Very hard to consistently beat benchmarks Very easy to make benchmarks Maymester 2016 Investments “101” 8-4 Investment Styles Active strategies • Fundamental analysis activities – Studying financial statements and public information – Determining “intrinsic” values and comparing to market values – Selecting specific securities, timing positions such that: • undervalued assets are bought and overvalued assets are sold Maymester 2016 Investments “101” 8-4 Investment Styles Active strategies • Technical analysis activities – Studying price trends, other measures – Determining what patterns exist, and opportunities to profit on future trends – Selecting specific securities, timing positions such that: • asset are sold that are likely to fall in value; assets are bought that are likely to rise in value Maymester 2016 Investments “101” 8-4 Investment Styles Technical Analysis—example: Moving averages Maymester 2016 Investments “101” 8-4 Investment Styles Technical Analysis—example: Support and resistance Maymester 2016 Investments “101” 8-4 Investment Styles Active versus passive strategies—evidence • Little evidence exists that it is easy to “beat” the market • Little evidence exists that it is easy to know what strategy will work in the future • Much evidence exists that passive strategies tend to out perform active strategies because of high costs of active strategies (taxes, commissions, etc) • This area of research and its results are extremely “contentious” and controversial Maymester 2016 Investments “101” 8-4 Investment Styles Maymester 2016 Investments “101” 8-4 Investment Styles Quotes related to investment styles: “Most investors would be better off in an index fund.” Peter Lynch, Fidelity Investments “When the dumb investor realizes how dumb he is and buys a low cost index fund, he becomes smarter than the smartest investors.” Warren Buffet, Berkshire Hathaway “The investment business is a giant scam. Most people think they can find fund managers who can outperform, but most people are wrong. You should simply hold index funds. No doubt about it.” Jack Meyer Manager, Harvard Endowment Maymester 2016 Investments “101” 8-5 Investing On-line Resources • Yahoo Finance: http://finance.yahoo.com • Morningstar Advisory www.morningstar.com • Vanguard Funds • Fidelity Funds www.vanguard.com www.fidelity.com Maymester 2016 Planning for Retirement Exercise 4A: Selecting a target date retirement fund Review exercise narrative and directions • Follow directions of exercise • Answer questions • Return completed answers and send by e-mail attachment. Include group number/names. Exercise 4A Narrative and Directions Maymester 2016 Planning for Retirement Exercise 4B: Selecting an investment fund Review exercise narrative and directions • Follow directions of exercise • Answer questions • Return completed answers and send by e-mail attachment. Include group number/names. Exercise 4B Narrative and Directions Maymester 2016 Wrap Up 9-1 Putting it all together Basic Approach from first day: • Learn basic concepts—knowledge is power • Spend within income • Save regularly “off the top”—pay yourself first • Use debt wisely—not to support lifestyle, but for key uses • Make retirement planning a top priority early in career Maymester 2016 Wrap Up 9-1 Putting it all together Basic Approach (continued): • Assess financial position annually • Set goals with a plan to achieve them • Invest wisely using key concepts • Use insurance to “protect the plan” • Use trusted sources for answers Maymester 2016 Wrap Up 9-1 Putting it all together Some Key Considerations: • Nothing happens without a plan • Remember the relationship between risk and return • Can’t get “something for nothing” • Diversification reduces risk • Make time value of money work for you • Optimize investment return by asset allocation • Minimize debt expense • Begin saving early 10-15% of pay Maymester 2016 Wrap Up 9-1 Putting it all together Some Key Considerations (continued): • Markets are efficient; hard to beat consistently • Consider low cost, diversified index funds • Beware the crowd-don’t “chase” returns • Beware people selling you something • Money isn’t everything Maymester 2016 Wrap Up 9-2 A Look at Financial Planning Software* • Quicken financial planning software Introductory overview http://quicken.intuit.com/ • “Mint”: on-line financial planning system http://www.mint.com/ Maymester 2016 Sample Mint notices Maymester 2016 Maymester 2016 Wrap Up 9-3 Resources Books • “Personal Finance—Turning Money Into Wealth” by Arthur Keown, 6th edition, 2013, Prentice Hall • “Personal Financial Planning”, 4th ed. By Koh and Fong, 2011, Prentice Hall Locating a Financial Planner: www.fpanet.org Maymester 2016 Wrap Up 9-3 Resources On-line resources http://investor.gov/ http://financialplan.about.com/ American Association of Individual Investors http://www.aaii.com/ Maymester 2016 Wrap Up 9-3 Resources On-line resources BYU Personal Finance Programs http://personalfinance.byu.edu/ FINRA http://www.finra.org/Investors/index.htm Investopedia http://www.investopedia.com/?viewed=1 Maymester 2016 Planning for Retirement Exercise 4C: Setting up a Mint account and credit score Go to: https://www.mint.com/ Review exercise information and directions • Evaluate the Mint site and resources • Optional: sign up for free service and obtain credit score • Complete questions • Return by e-mail attachment when completed. Be sure to include group number/names Exercise 4C Directions Maymester 2016