Transcript CUBIC 2016 Personal Finance Day 4x

CUBIC 2016
Day 4
Personal Finance
Tom C. Nelson, PhD
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
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Clicker 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
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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)
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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
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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
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Investments “101”
8-2 Investing Terms and Concepts
Diversification
• Reduces total risk more than any other factor
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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.
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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
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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
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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%
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Investments “101”
8-2 Investing Terms and Concepts
Sample Asset Allocations and Characteristics
“Conservative”
“Moderate”
“Aggressive”
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Assessing Current Financial Position
8-2 Current Investment Asset Allocation
Sample Asset Allocations
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Assessing Current Financial Position
2-4 Current Investment Asset Allocation
Sample Asset Allocations
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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
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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
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Investments “101”
8-3 Overview of Securities
Forms of equity securities
• Common stock
• Preferred stock
“Alternate” investments
• Real estate
• Gold, Commodities
• Collectibles
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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
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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
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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
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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
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Investments “101”
8-3 Overview of Securities
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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
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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
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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
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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
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Investments “101”
8-4 Investment Styles
Technical Analysis—example: Moving averages
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Investments “101”
8-4 Investment Styles
Technical Analysis—example: Support and
resistance
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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
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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
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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.
Link to 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.
Link to 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
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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
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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/
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Sample Mint notices
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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
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Wrap Up
9-3 Resources
On-line resources
http://investor.gov/
http://financialplan.about.com/
American Association of Individual Investors
http://www.aaii.com/
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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
Link to Exercise 4C Directions
Maymester 2016