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Investment Basics and SIP Investment Funds. SRNS. Summer 2012. Presented by Benefits and Payroll Accounting. Build A Sound Financial Plan . Financial Planning: Lifetime Phases. Phase Two: Accumulation Maximize Contributions to Your SIP in a Customized Investment Strategy,

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Presentation Transcript
slide1

Investment Basics and

SIP Investment Funds

SRNS

Summer 2012

Presented by Benefits and Payroll Accounting

financial planning lifetime phases
Financial Planning: Lifetime Phases

Phase Two:

Accumulation

Maximize Contributions to Your SIP in a Customized Investment Strategy,

and Develop Long Term Financial Goals

Phase Three:

Deccumulation

Live Off Your Assets During Retirement

Phase One:

Cash Management

SAVE, Balance Budget, Manage Debt,

and Build a Cash reserve (3 to 6 months)

Your SIP is the Most Important Investment Vehicle to Achieve Your Investment, Retirement, and Financial Planning Goals.

slide4

Phase One:

Cash Management &

Budgeting Basics

phase 1 cash management budgeting basics
Phase 1 - Cash Management & Budgeting Basics

Step 1 - Develop a Long Term Plan

Set goals and create a written plan

Step 2 - Learn to Save! Spend Less Than You Earn

Learn to be content and develop self control spending habits.

People can always see what you spend, but not what you Save

Step 3 - Build and Maintain Emergency Savings

An emergency fund will help you survive the difficult times

Step 4 - Minimize the Use of Debt

Utilize a debt repayment schedule

Debt will increase risk and potential financial problems, as well as, potential stress

step 1 develop a long term plan
Step 1 – Develop A Long Term Plan

1. Summarize Present Financial Situation:

Calculate your cash flow margin by adding income less expenses.

Then, add the cash flow margin to your appreciation of assets to determine your growth in net worth.

2. Develop Financial Goals:

Financial Independence

Pay Off Debts

Lifestyle Desires (home, vacation, car)

Giving to Charities

3. Find Ways To Increase Your Cash Flow Margin

4. Control Your Cash Flow

step 2 learn to save spend less than you earn
Step 2 - Learn to Save! Spend Less Than You Earn

You Can See

What People Spend

But Not What They Save!

Use Ebates or other discount/ rebate sites for shopping online

Compare rates for utilities & other services

Get rid of your landline

Save money with the library

Buy used items will always save money

Simplify your wardrobe

Make money with your clutter

Maintain items

Save energy = save money

Save money on exercise

Regularly shop insurance rates

Use cash back debit cards

Live in a smaller home

Buy a used car

Shop after the season

Shop when no else wants to

Save money on your home entertainment

Buy jewelry from a discounter

Save money at hospital

Go out to dinner half price

step 3 build and maintain emergency savings
Step 3: Build and Maintain Emergency Savings

Design a roadmap to achieve you goals.

step 4 minimize and pay off debt
Step 4 - Minimize and Pay Off Debt

1 - Use a Debt Repayment Schedule to List All Your Debts:

2 – Select An Appropriate Debt Repayment Approach:

Debt Snowball Approach – ranks and pays off the smallest debts first. As each debt balance is paid off, the same amount is applied to the next balance. Dave Ramsey and other personal finance experts recommend this approach because it is easy and provides motivation as number the of debts are paid off quicker.

Debt Avalanche Method – ranks and pays off the highest interest rates first. As each debt balance is paid off, the same amount is applied to the next balance. This approach is mathematically superior because you will pay less interest over time.

Additional Support Strategies:

Debt Snowflake Method – is in addition to the other strategies. You find ways to save and then, apply the savings to debt repayment.

Debt Calving Method – is applying additional money received to your debts.

slide10

Phase Two & Three:

Investment Basics

investing basics timeless common sense wisdom
Investing Basics: Timeless Common Sense Wisdom

Compound Interest – Albert Einstein stated Compound Interest was the greatest discovery in the 20th century. Compound Interest is when interest is added to the principal from that moment into the future. Basically, the interest will be added to itself and earn interest. This addition of interest to the principal is called compounding.

Dollar Cost Averaging - Invest equal monetary amounts on a regular and periodic basis over specific time periods (such as $1,000 monthly) in a particular investment or portfolio. As a result, more shares are purchased when prices are low and fewer shares are purchased when prices are high. The point of this is to lower the total average cost per share of the investment, giving the investor a lower overall cost for the shares purchased over time. (Wikipedia)

Diversification – Invest across a variety of asset classes to reducing risks. Diversification is recognized as one of the most important investment techniques to reduce investment risk in a portfolio.

Asset Allocation – Asset allocation applies diversification. Asset allocation is the process to choose among asset classes to determine the appropriate mix of asset classes to best meet the needs and objectives of the investor. A large part of the investment side of financial planning focuses on asset allocation.

Rebalance - A disciplined rebalance of your asset allocation on a periodic basis to your established percentages in order to stay the course with your goals will avoid misallocations over time.

1 compound interest example
1 - Compound Interest: Example

Question:

If you were to invest $1,000 over a four year period, which market return scenario would return the highest amount?

1 compound interest example1
1. Compound Interest – Example

Answer:

Scenario D provides the greatest return by investing in a less volatile scenario.

1 compound interest old plan sip participant example
1. Compound Interest – Old Plan SIP Participant Example

Footnote: The illustration hypothetically assumes the market returns is 8% annually; and $17,000 is the 401K maximum limit. Also, the employee earns $95,000 annually; and makes a $14,150 annual contribution to their 401K.

A SIP Participant under the Old Plan, can earn close to $500,000 over a 15 year period by maximizing your 401K contribution limit of $17,000

1 compound interest new plan sip participant example
1. Compound Interest – New Plan SIP Participant Example

Footnote: The illustration hypothetically assumes the market returns is 8% annually; and $17,000 is the 401K maximum limit. Also, the employee earns $75,000 annually; and makes a $10,250 annual contribution to their 401K.

A SIP Participant under the New Plan, can build a significant amount of retirement assets over a 35 year period by maximizing your 401K contribution limit of $17,000

2 dollar cost averaging
2. Dollar Cost Averaging

The famous Warren Buffet example about Dollar Cost Averaging…

A short quiz:

If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices on beef? Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices? These questions, of course, answer themselves.

But now for the final exam:

If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the “hamburgers” they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.

2 dollar cost averaging1
2. Dollar Cost Averaging

Illustration is from Vanguard Investments material

Dollar Cost Averaging protects you from making the mistake of “timing the market” and thus providing you the opportunity to make more money over longer period of time.

3 diversification steps to diversify
3. Diversification - Steps to Diversify

Identify your investment goals

(ideal asset amount to retire, estimated annual retire income)

2. Determine your investor profile

( investment experience, risk tolerance, time horizon)

Choose your asset allocation

Select your investments within your asset allocation mix

Review you plan on an annual basis

3 diversification overall risk return analysis
3. Diversification - Overall Risk Return Analysis

Illustration is from Vanguard Investments material

Diversification is recognized as one of the most important investment techniques to reduce investment risk in a portfolio.

4 asset allocation overview of main asset classes
4. Asset Allocation – Overview of Main Asset Classes

1. Cash:

Advantage is liquidity

Disadvantage is the loss in future purchase power due to inflation

2. Fixed Income or Bonds:

Definition is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest (the coupon) to use and/or to repay the principal at a later date, termed maturity

Advantages is the steady stream of income and stability in value

Disadvantage is the exposure to interest rates risks and credit risks

Equities or Stocks:

Definition is direct ownership of a business entity represents the original capital paid into or invested in the business by its founders

Advantage and disadvantage to owning a stock is the potential volatility in market value

4 asset allocation risk return profile
4. Asset Allocation – Risk Return Profile

Return %

Risk (Standard Deviation)

5 disciplined rebalancing generates balanced returns
5. Disciplined Rebalancing – Generates Balanced Returns

Greater returns are generated using diversification and rebalancing!

the sip investment fund line up
The SIP Investment Fund Line Up

Tier 1 – Target Date Funds

Tier 2 – Index Funds (Passive Management)

Tier 3 – Active Funds (Active Management)

Vanguard Target Retirement Income Vanguard Target Retirement 2010 Vanguard Target Retirement 2015 Vanguard Target Retirement 2020

Vanguard Target Retirement 2025 Vanguard Target Retirement 2030 Vanguard Target Retirement 2035 Vanguard Target Retirement 2040

Vanguard Target Retirement 2045 Vanguard Target Retirement 2050 Vanguard Target Retirement 2055Vanguard Target Retirement 2060

Equity or Stock FundFixed Income or Bond Fund Real Estate Fund

Vanguard Total Stock Market Index SSgA Passive Bond Market Index Vanguard REIT Index

MSCI U.S. Broad Market Index Barclays Aggregate Bond Index MSCI REIT Index

SSgA S&P 500 Flagship

S&P 500 Index

SSgA Russell 1000 Value

Russell 1000 Value Index

Vanguard Small Cap Value Index

Performance Benchmark

Blackrock All Country World Ex-U.S. Index

MSCI All Country World ex-U.S. Index

Equity or Stock FundFixed Income or Bond Fund Blend or Asset Allocation FundStable Value Funds

T. Rowe Price Inst. Large Cap Growth PIMCO Total Return Fund Fidelity Puritan Vanguard REIT Index

MSCI U.S. Broad Market Index Barclays Aggregate Bond Index 60% = S&P 500 Index $ 40% Aggregate Bond Index Citigroup 90-Day T-Bill Index & Hueler Stable Value Index

Vanguard Selected Value Fund

Russell MidCap Value Index

Rainier Small/Mid Equity Inst. Fund

Russell 1000 Value Index

Jennison Small Cap Equity Fund

Russell 2500 Index

Dodge and Cox Global Stock Fund

MSCI All Country World ex-U.S. Index

questions
Questions

Discuss the different options for life insurance (term, universal, whole, etc.).

What are some of the best ways to save for a son/daughter's college fund? What do you think of the Gerber College Fund?

How much accessible cash should I have in Savings? 1 month, 2 month, 3 month? What are your personal experiences with needing to pull from savings?

What are the pros and cons in rental homes as investment properties?

Most interested in home buying information.

What are some ways to save when you have children?

Where do I find the best deal on a refinancing?