1. FIN437 Vicentiu Covrig 1 Financial planning Financial planning (see the Asset Allocation reading on the web, plus Allen family case on the web)

2. FIN437 Vicentiu Covrig 2 Individual Investor Life Cycle The individual investors life cycle can often be described using four separate phases or stages: Accumulation Phase Consolidation Phase Spending Phase Gifting Phase

3. FIN437 Vicentiu Covrig 3 Accumulation Phase Early to middle years of careers Attempting to satisfy intermediate and long-term goals Net worth is usually small, debt may be heavy Long-term investment horizon means usually willing to take moderately high risks in order to make above-average returns

4. FIN437 Vicentiu Covrig 4 Consolidation Phase Past career midpoint Have paid off much of their accumulated debt Earnings now exceed living expenses, so the balance can be invested Time horizon is still long-term, so moderately high risk investments are still attractive

5. FIN437 Vicentiu Covrig 5 Spending Phase Usually begins at retirement Living expenses covered by Social Security and retirement plans Changing emphasis toward preservation of capital, but still want investment values to keep pace with inflation

6. FIN437 Vicentiu Covrig 6 Gifting Phase Can be concurrent with spending phase If resources allow, individuals can now use excess assets to provide gifts to other individuals or organizations Estate planning becomes important, especially tax considerations

7. FIN437 Vicentiu Covrig 7 The Portfolio Management Process 1. Policy statement - Specifies investment goals and acceptable risk levels - The “road map” that guides all investment decisions

8. FIN437 Vicentiu Covrig 8 The Portfolio Management Process 2. Study current financial and economic conditions and forecast future trends - Determine strategies that should meet goals within the expected environment - Requires monitoring and updates since financial markets are ever-changing

9. FIN437 Vicentiu Covrig 9 The Portfolio Management Process 3. Construct the portfolio - Given the policy statement and the expected conditions, go about investing - Allocate available funds to meet goals while managing risk

10. FIN437 Vicentiu Covrig 10 The Portfolio Management Process 4. Monitor and update - Revise policy statement as needed - Monitor changing financial and economic conditions - Evaluate portfolio performance - Modify portfolio investments accordingly

11. FIN437 Vicentiu Covrig 11 The Policy Statement Don’t try to navigate without a map! Important Inputs: - Investment Objectives - Investment Constraints

12. FIN437 Vicentiu Covrig 12 Investment Objectives Need to specify return and risk objectives - Need to consider the risk tolerance of the investor - Return goals need to be consistent with risk tolerance

13. FIN437 Vicentiu Covrig 13 Investment Objectives Possible broad goals: Capital preservation - Maintain purchasing power - Minimize the risk of loss Capital appreciation - Achieve portfolio growth through capital gains - Accept greater risk

14. FIN437 Vicentiu Covrig 14 Investment Objectives Current income - Look to generate income rather than capital gains - May be preferred in “spending phase” - Relatively low risk Total return - Combining income returns and reinvestment with capital gains - Moderate risk

15. FIN437 Vicentiu Covrig 15 Investment Constraints These factors may limit or at least impact the investment choices: Liquidity needs - How soon will the money be needed? Time horizon - How able is the investor to ride out several bad years? Legal and Regulatory Factors - Legal restrictions often constrain decisions - Retirement regulations

16. FIN437 Vicentiu Covrig 16 Investment Constraints Tax Concerns - Realized capital gains vs. Ordinary income? - Taxable vs. Tax-exempt bonds? - Regular IRA vs. Roth IRA? - 401(k) and 403(b) plans Unique needs and preferences - Perhaps the investor wishes to avoid types of investments for ethical reasons

17. FIN437 Vicentiu Covrig 17 Allen family case Investment policy: the Trust Objectives: Return requirements Risk tolerances Constraints: Liquidity Time Horizon Laws and regulations Taxes Unique preferences and circumstances

18. FIN437 Vicentiu Covrig 18 Investment policy: George Allen Objectives: Return requirements Risk tolerances Constraints: Liquidity Time Horizon Laws and regulations Taxes Unique preferences and circumstances

19. FIN437 Vicentiu Covrig 19 Capital market outlook Asset Allocation

20. FIN437 Vicentiu Covrig 20 Final Exam Final Exam Take home exam is a Financial Planning Case Study you will find it under Final Exam Case on the class’ web site

21. FIN437 Vicentiu Covrig 21 Learning outcomes: How and why do investment goals change over a person’s lifetime and circumstances? What are the four steps in the portfolio management process? Why is a policy statement important to the planning process? What is asset allocation?