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Asset Allocation The 91.5% Solution

Asset Allocation The 91.5% Solution. Presented by William H. Keffer Certified Financial Planner™. Goals for Today. Your comfort with basics of asset types Your motivation to ‘control the controllable’ Action in your self interest. Speaker Notes. Bill Keffer

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Asset Allocation The 91.5% Solution

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  1. Asset AllocationThe 91.5% Solution Presented by William H. Keffer Certified Financial Planner™

  2. Goals for Today • Your comfort with basics of asset types • Your motivation to ‘control the controllable’ • Action in your self interest www.KefferFinancialPlanning.com

  3. Speaker Notes • Bill Keffer • Hourly, as-needed financial planner • Wheaton-based, sole proprietor • 26-years AIG American General • Credentials • Certified Financial Planner® • Registered investment advisor • MBA in finance • Contributor: Investing in an Uncertain Economy for Dummies www.KefferFinancialPlanning.com

  4. Introduction • Today’s focus: Asset allocation • Prerequisites: • Goals have been carefully quantified • Adequate savings are systematized • Most time on why & how to allocate • Briefly: • Distribution planning • Where & how to invest www.KefferFinancialPlanning.com

  5. Definition of Asset Allocation • How you divide your money among the different classes of investment assets, such as stocks, bonds, and cash • Critical: Finding the right mix for your risk tolerance, time horizon, and required returns www.KefferFinancialPlanning.com

  6. PrefaceIMPORTANCE OF ASSET ALLOCATION www.KefferFinancialPlanning.com

  7. How Asset Allocation Works • Basic concept: Impossible to predict which type of asset will do best year-to-year • Goal: A mix formulated for unique risk profile and required return • How: Different asset classes’ returns non-correlated reducing overall risk www.KefferFinancialPlanning.com

  8. Asset Allocation at Work www.KefferFinancialPlanning.com

  9. Which Would You Choose?(based on annual returns shown) www.KefferFinancialPlanning.com

  10. Which Would You Choose?(based on annual returns shown) www.KefferFinancialPlanning.com

  11. Rise of Index Funds • Importance of asset allocation, as opposed to stock selection, helps explain rise of index funds. • With no active stock selection going on, expenses decrease www.KefferFinancialPlanning.com

  12. Examples of Asset Classes The Two Major Asset Classes • Stocks: A share of ownership, grows through share of profits (dividends) and appreciation in market value • Bonds: A loan to a firm or government in return for fixed interest payments and promise to return principal www.KefferFinancialPlanning.com

  13. Stocks By size of company Large cap Small cap By style Value Growth By location Domestic U.S. Developed international Emerging markets Bonds By length of term Short Intermediate Long By riskiness of issuer Government Investment grade “Junk” By frequency of payments Asset Class Sub-Categories www.KefferFinancialPlanning.com

  14. Other Common Asset Types • Cash (money markets, CDs, savings) • Real estate (REITs) • Commodities • Currencies • Precious metals • Natural resources www.KefferFinancialPlanning.com

  15. Risk and ReturnWhere Asset Classes Rank Asset Class Return Risk www.KefferFinancialPlanning.com

  16. Sample Portfolios*(+historical returns & risk) *Model portfolios created by Harold Evensky, CFA, for Money Guide Pro financial planning software, a product of PIE Technologies. www.KefferFinancialPlanning.com

  17. Determining Your Allocation:3 Factors • Risk Tolerance • Willingness to take risk • Risk Capacity • Ability to take risk • Required Return • Need to take risk www.KefferFinancialPlanning.com

  18. Risk Tolerance: Willingness to Take RiskQuestionnaire & Scoring System www.KefferFinancialPlanning.com

  19. Questionnaire Answers* Preserving capital- 6 Growth- 6 Low volatility- 4 Inflation protection- 5 Current cash flow- 4 How much risk?- 5 Indicated Portfolio Allocation Stocks: 61% Bonds: 35% Cash: 4% An Example: Client’s Answers & Target Portfolio *Scale: 1 to 9, with 1=Not Important and 9=Very Important www.KefferFinancialPlanning.com

  20. Risk Tolerance: Willingness to Take RiskStomach Acid Test* *Larry Swedroe, The Only Guide to a Winning Investment Strategy You’ll Ever Need, St. Martin’s Press, New York, NY, 2005 www.KefferFinancialPlanning.com

  21. Risk Capacity: Ability to Take RiskThe Liquidity Test* *Larry Swedroe, The Only Guide to a Winning Investment Strategy You’ll Ever Need, St. Martin’s Press, New York, NY, 2005 www.KefferFinancialPlanning.com

  22. Required Return: Need to Take Risk www.KefferFinancialPlanning.com

  23. How to Decide When Risk Indicators Are Mixed? • When risk tolerance, capacity and need indicate different levels of stock/risk: • Objectively re-examine tolerance • Review answers to questions • Recall what you’ve done in past bear markets • Choose level you know you can stick with • Save more • Lower or delay the goal www.KefferFinancialPlanning.com

  24. Sources of Help • Online tools • Investment books & journals • Financial planner www.KefferFinancialPlanning.com

  25. As Retirement Approaches…Distribution Planning Process • Step 1: Determine retirement needs • Variables: after-tax living expenses, vehicles, travel, large gifts, etc. • Step 2: Project the results • Variables: sources of retirement income, the portfolio, expected returns, and life expectancy • Step 3: Test different options • Options: lower goals, delay goals, find new sources of income, alter the portfolio allocation, opt for a lump sum rather than a pension, use of different tools, such as immediate annuities • Step 4: Implement the best strategy • Step 5: Monitor spending & returns carefully www.KefferFinancialPlanning.com

  26. Where to Invest • Accounts • Basic emergency fund in savings • Fundamental risk management (insurance) • Pre-tax retirement plans to extent of match • Roth IRA, if qualified • Additional employer plan contributions to max • Taxable investment account • Investment Vehicles • Mutual funds for most • In taxable accounts • Exchange traded funds (if amounts justify) • Municipal bonds (based on after-tax yield) • Generally, minimize holdings of individual securities www.KefferFinancialPlanning.com

  27. How to Choose Among Investment Options • Fits allocation need • Broadly diversified • Low expense ratio • Low turnover • No-load • Large, established investment company • Keep it simple! Target allocation / lifestyle funds excellent (in most cases) www.KefferFinancialPlanning.com

  28. Summary • 1. Know your goals • 2. Put enough $ in: top priority! • 3. Allocate appropriately (91.5% solution) • 4. Diversify with broad-based funds • 5. Maintain discipline in rough times • 6. Be mindful of costs • 7. Get help if you need it www.KefferFinancialPlanning.com

  29. Questions? www.KefferFinancialPlanning.com

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