Secure Your Financial Future In Three Steps


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A presentation provided to early career medical professionals on avoiding common mistakes in financial planning and investment management

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Secure Your Financial Future In Three Steps

  1. 1. Secure Your Financial Future a discussion with Fellows & Residents October 7th, 2013 Charles R. Korger, CFP®
  2. 2. Are you wondering? 1. How do I best save for retirement? 2. Should I pay off my school loans? 3. When can I afford a home? 4. How do I fund my child’s education? 5. What if something happens to me? 6. How do I balance these priorities?
  3. 3. What steps can I take to get my ducks in a row?
  4. 4. Three Steps to a Secure Financial Future 1. Focus Your Approach 2. Use Rigorous Planning Techniques 3. Stay Disciplined
  5. 5. Five Common Financial Planning Mistakes 1. Lack of a Comprehensive Process 2. Emotional Decisions about Money 3. Speculating rather than Investing 4. Failure to understand Costs 5. Not Revisiting the Plan
  7. 7. How does wealth management fit into your life? Travel Fund Children’s Education Retirement Time with Family Maintain Health Hobbies Time with Friends Manage Career
  8. 8. People normally address financial planning after big change happens…
  9. 9. Focus on being proactive
  10. 10. Reactive financial decision making is expensive Performance of the S&P 500 Index Daily: January 1, 1970-December 31, 2011 $50,662 $45,431 $32,940 $19,130 $12,068 $9,190 Growthof$1,000 Performance data for January 1970-August 2008 provided by CRSP; performance data for September 2008-December 2011 provided by Bloomberg. The S&P data are provided by Standard & Poor’s Index Services Group. US bonds and bills data © Stocks, Bonds, Bills, and Inflation Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield). Indexes are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Dimensional Fund Advisors is an investment advisor registered with the Securities and Exchange Commission. Information contained herein is compiled from sources believed to be reliable and current, but accuracy should be placed in the context of underlying assumptions. This publication is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. Past performance is not a guarantee of future results. Unauthorized copying, reproducing, duplicating, or transmitting of this material is prohibited. Date of first use: June 1, 2006.
  11. 11. Focus on the issues that matter THESE Relationships Values Diversification NOT THESE The next “hot” stock The big IPO Predicting the marketLong-Term Goals Discipline The “Sure Thing” Getting Rich Quick
  12. 12. Following a proactive process can help you achieve your financial goals
  13. 13. Identify and organize your issues Values Wealth Management
  14. 14. Address them Comprehensively and Focus on the Important Issues ValuesInterests Process Goals Assets Relationships Wealth Management
  15. 15. What is comprehensive?
  17. 17. The central questions in planning are:
  18. 18. Applying probability based simulations to wealth management gives you the framework for a plan …Or, does a 90% probability of success give you more comfort? Is a 50% chance of accomplishing your goals enough Clarity?…
  19. 19. Sample Plan Scenario Results 18
  20. 20. Sample Results - Detailed 19
  21. 21. Sample Results – Choosing a Portfolio 20
  22. 22. For illustration purposes only. Source: J.P. Morgan Asset Management. Bonds are subject to interest rate risks. Bond prices generally fall when interest rates rise. The price of equity securities may rise or fall because of changes in the broad market or changes in a company’s financial condition, sometimes rapidly or unpredictably. Equity securities are subject to “stock market risk,” meaning that stock prices in general may decline over short or extended periods of time. Investing in alternative assets involves higher risks than traditional investments and are suitable only for the long term. They are not tax efficient and have higher fees than traditional investments. They may also be highly leveraged and engage in speculative investment techniques, which can magnify the potential for investment loss or gain. Match Your Investments to Your Planning Needs
  23. 23. Coordination Must Exist
  24. 24. Much less effective without coordination Taxable Account Value: $2,287,927 Tax-Deferred Account Value: $5,031,328 Are you maximizing tax-advantaged opportunities? • Tax deferral has a major impact over time • For example: Look at the growth of $500,000 in a taxable vs. tax-deferred portfolio over 30 years. (assumes 8% annualized return and the 35% tax bracket)
  26. 26. The financial services industry and the news media want you to be undisciplined
  27. 27. Most investors aren’t disciplined Indexes used are as follows: REITS: NAREIT Equity REIT Index, EAFE: MSCI EAFE, Oil: WTI Index, Bonds: Barclays Capital U.S. Aggregate Index, Homes: median sale price of existing single-family homes, Gold: USD/troy oz, Inflation: CPI. Average asset allocation investor return is based on an analysis by Dalbar Inc., which utilizes the net of aggregate mutual fund sales, redemptions and exchanges each month as a measure of investor behavior. Returns are annualized (and total return where applicable) and represent the 20-year period ending 12/31/11 to match Dalbar’s most recent analysis.
  28. 28. Return and Risk Periodic Table of Investment Returns Annual returns for selected asset classes (1993 – 2012) Ranked in order of performance (best to worst) 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 MSCI EAFE MSCI EAFE Large Value Real Estate Large Value S&P 500 MSCI EAFE Real Estate Small Value US Bonds Russell 2000 Real Estate MSCI EAFE Real Estate MSCI EAFE US Bonds MSCI EAFE Real Estate Real Estate Small Value 32.94% 8.06% 38.36% 37.05% 35.18% 28.58% 27.30% 31.04% 14.02% 11.02% 47.25% 33.16% 14.02% 35.97% 11.63% 5.70% 32.46% 28.07% 9.37% 18.05% Small Value Real Estate S&P 500 S&P 500 S&P 500 MSCI EAFE Russell 2000 Small Value Real Estate Real Estate Small Value Small Value Real Estate MSCI EAFE US Bonds Small Value Real Estate Russell 2000 US Bonds MSCI EAFE 23.85% 2.66% 37.58% 22.96% 33.36% 20.33% 21.26% 22.80% 12.35% 3.58% 46.02% 22.25% 13.82% 26.86% 7.23% -28.92% 28.46% 26.85% 8.74% 17.90% Russell 2000 S&P 500 Russell 2000 Large Value Small Value Large Value S&P 500 US Bonds US Bonds Small Value MSCI EAFE MSCI EAFE Equally Weighted Portfolio Small Value S&P 500 Equally Weighted Portfolio Russell 2000 Small Value S&P 500 Large Value 18.89% 1.32% 28.45% 21.65% 31.80% 15.65% 21.04% 11.84% 8.51% -11.42% 39.17% 20.70% 7.58% 23.48% 5.49% -30.17% 27.17% 24.50% 2.11% 17.51% Equally Weighted Portfolio Equally Weighted Portfolio Small Value Small Value Russell 2000 US Bonds Equally Weighted Portfolio Large Value Russell 2000 Equally Weighted Portfolio Real Estate Russell 2000 Large Value Large Value Large Value Russell 2000 S&P 500 Equally Weighted Portfolio Large Value Real Estate 18.69% 0.59% 25.75% 21.37% 22.38% 9.47% 9.90% 7.02% 2.49% -10.12% 36.18% 18.32% 7.03% 22.24% -0.17% -33.79% 26.46% 18.00% 0.39% 17.12% Large Value Russell 2000 Equally Weighted Portfolio Equally Weighted Portfolio Equally Weighted Portfolio Equally Weighted Portfolio Large Value Equally Weighted Portfolio Equally Weighted Portfolio Large Value Equally Weighted Portfolio Equally Weighted Portfolio Small Value Equally Weighted Portfolio Equally Weighted Portfolio Large Value Equally Weighted Portfolio Large Value Equally Weighted Portfolio Russell 2000 18.12% -1.82% 24.43% 18.25% 21.83% 6.54% 7.35% 6.77% -0.58% -15.53% 32.39% 17.96% 4.71% 20.75% -0.63% -36.85% 22.57% 15.51% 0.07% 16.35% Real Estate Small Value US Bonds Russell 2000 Real Estate Russell 2000 Small Value Russell 2000 Large Value MSCI EAFE Large Value Large Value S&P 500 Russell 2000 Russell 2000 S&P 500 Small Value S&P 500 Russell 2000 S&P 500 15.14% -1.54% 19.24% 16.54% 19.66% -2.56% -1.49% -3.03% -5.59% -15.66% 30.03% 16.49% 4.91% 18.37% -1.56% -37.00% 20.56% 15.06% -4.18% 16.00% US Bonds Large Value Real Estate MSCI EAFE US Bonds Small Value US Bonds S&P 500 S&P 500 Russell 2000 S&P 500 S&P 500 Russell 2000 S&P 500 Small Value Real Estate Large Value MSCI EAFE Small Value Equally Weighted Portfolio 10.98% -2.00% 12.24% 6.36% 9.75% -6.44% -2.15% -9.10% -11.89% -20.48% 28.69% 10.88% 4.55% 15.80% -9.78% -39.20% 19.69% 8.21% -5.50% 15.55% S&P 500 US Bonds MSCI EAFE US Bonds MSCI EAFE Real Estate Real Estate MSCI EAFE MSCI EAFE S&P 500 US Bonds US Bonds US Bonds US Bonds Real Estate MSCI EAFE US Bonds US Bonds MSCI EAFE US Bonds 10.07% -3.51% 11.55% 2.91% 2.06% -17.01% -2.58% -13.96% -21.21% -22.10% 4.68% 4.20% 2.37% 3.78% -17.55% -43.06% 4.52% 6.59% -11.73% 4.84% U.S. Small Value Stocks (Russell 2000 Small Value) U.S. Small Stock (Russell 2000) U.S. Large Stocks (S&P 500 Index) Securitized Real Estate (Dow Jones US Select REIT Index) U.S. Large Value Stocks (Russell 1000 Large Value) Large International Stocks (MSCI EAFE Index) U.S. Bonds (Barclays Government/Credit Index) Equally Weighted Portfolio Source: DFA Returns Program
  29. 29. 2008/2009 Investors in 2008 who were able to go back to their “Plan”, stayed disciplined and benefited from the recovery. They were far better off than those who panicked and tried to “Time the Market”.
  30. 30. Investors continue to be undisciplined Source: Dalbar 2012
  31. 31. Create a plan that will keep you on track
  32. 32. Garbage in / Garbage out
  33. 33. You can only set your course after you have a realistic range of possibilities Stated Goals % Chance of Success Comfortable Retirement… 97% Pass $7MM to Heirs… 76% * Science would agree that an 80% chance of success is a high degree of probability when forecasting 30 (or more) years into the future.
  34. 34. The plan will be “wrong” Retirement can be 30 years or more - Forecasting that far down the road WILL require adjustment…
  35. 35. It must be reviewed in the event of: Extreme Market Turbulence Death or Divorce Relocation Change in Goals Retirement or other Milestones Health and Disability issues
  36. 36. The next steps
  37. 37. RESOURCES 37
  42. 42. Disclosures Asset class returns and allocations are shown for illustrative purposes only. Actual account allocations and returns vary based on investment objectives and individual portfolio construction. Any probabilities shown are inherently speculative and shown for illustrative purposes only. This analysis may include forward-looking statements. All statements other than statements of historical fact are forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”). Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements. Views regarding the economy, securities markets or other specialized areas, like all predictors of future events, cannot be guaranteed to be accurate and may result in economic loss to the investor. Investment in securities, including mutual funds, involves the risk of loss. Expected returns are based on historical market performance of a similarly situated portfolio. Clients should understand that Independence Advisors, LLC cannot and does not guarantee that actual performance of their portfolio will equal or exceed expected returns indicated in this presentation. Any information provided by Independence Advisor’s LLC regarding historical market performance is for illustrative and education purposes only. Clients or prospective clients should not assume that their performance will equal or exceed historical market results and/or averages. The projections or other information generated by Monte Carlo analysis tools regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. Results may vary with each use and over time. Monte Carlo simulations are a deterministic approach where historical figures are used as a guide to estimate portfolio’s future returns. The relevant calculations may be impacted greatly if assumed variables such as capital contributions, withdrawal amounts, inflation rates, expected rate of return, and volatility deviate from expectations. 42