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Financial Planning (Not Rocket Science)

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A simple exlpanation of financial planning, adn how a professional adviser can add value

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Financial Planning (Not Rocket Science)

  1. 1. HASSAN & ASSOCIATES personal financial advisers © 2009 Financial planning (not rocket science) August 2009 Simon Hassan CFPCM , CLU
  2. 2. HASSAN & ASSOCIATES personal financial advisers© 2009 Preface • Simon Hassan – Professional, fee‐based financial  – planner for 20 years – Certified Financial PlannerCM – Fellow and Past President  Institute of Financial Advisers www.ifa.org.nz • Disclosure Statement: www.hassan.co.nz • Questions: simon@hasssan.co.nz
  3. 3. HASSAN & ASSOCIATES personal financial advisers© 2009 What, why, how • What is a personal financial plan? • Why financial planning is important • How to get started 
  4. 4. HASSAN & ASSOCIATES personal financial advisers© 2009 WHAT is financial planning? • Making the financial arrangements required  to achieve your life goals • A pyramid  • A graph
  5. 5. HASSAN & ASSOCIATES personal financial advisers© 2009 A pyramid TaxEstateRetirement InsurancesDebtFinancial management Investments • The top brick draws the most attention • But the foundations are essential
  6. 6. HASSAN & ASSOCIATES personal financial advisers© 2009 20 26 32 38 44 50 56 62 68 74 80 86 92 98 Age Wealth A graph • Changing net worth/wealth … • … over a lifetime
  7. 7. HASSAN & ASSOCIATES personal financial advisers© 2009 WHY? Protect what you can • Wasted resources (budget, tax planning) • Lost breadwinner (life, TPD cover) • Lost ability to earn (income, trauma cover) • Big medical costs (health, trauma cover) • Lost assets (insurance cover, estate planning) • Retirement lifestyle (KiwiSaver, planning) • Lost investment value (diversification, asset  allocation)
  8. 8. HASSAN & ASSOCIATES personal financial advisers© 2009 HOW: Financial management • Not enough income… • …or too much of it spent? • Understand debt, structure and use it wisely
  9. 9. HASSAN & ASSOCIATES personal financial advisers© 2009 Insurance, a necessary evil • Before you take insurance, consider the  alternatives • Don’t keep insurance you no longer need  (Would you wear a parachute on the ground?) • Good insurance can be money well spent
  10. 10. HASSAN & ASSOCIATES personal financial advisers© 2009 How much life insurance? • Immediate cash – Final expenses, pay bills & tax, and clear debt – Adjustment sum for survivors • Lump sums for future needs – Education and care – Now to retirement for surviving spouse – After retirement for surviving spouse • Less available assets and insurance
  11. 11. HASSAN & ASSOCIATES personal financial advisers© 2009 Retirement planning • Every Kiwi who can should join KiwiSaver • $1,000, plus (if over 18) $for$ subsidy up to $20  per week from the government (taxpayer) • Plus (if employed) $for$ employer subsidy • Eg: join at 20, earn $30k pa from 25, rising to  $46k pa over 5 years, and retire at 67 • You save $38k, others add $76k: $362k by 67 • $309 per week for 33 yrs (NZ Super: $239)
  12. 12. HASSAN & ASSOCIATES personal financial advisers© 2009 Investment planning basics • Time frame • Diversification • Asset allocation • Risk profile • Look for hidden costs (commissions, fees,  transaction and funds costs can add up) • Allow for inflation by using “real” returns
  13. 13. HASSAN & ASSOCIATES personal financial advisers© 2009 Inflation and real returns • What do you have to do to turn $100  into $78? Nothing (just wait 10 years with 2.5% inflation) • Gross, net and real returns – eg, invest $100 Gross return 6.0% $106.00 Less tax and costs ‐2.0% ‐$2.00 Net return 4.0% $104.00 Less inflation ‐2.5% ‐$2.50 Real return 1.5% $101.50
  14. 14. HASSAN & ASSOCIATES personal financial advisers© 2009 RF IR Risk and return • All investments involve risk • Each investment has risk‐ return characteristics • Can’t beat the “Efficient  Frontier” (EF) • There is also a “Risk Free” option (RF) to consider • A tangent from RF hits EF at  the “Ideal Risky Mix” (IR) • Portfolio design is all about  the right RF‐IR mix Return Risk, volatility EF
  15. 15. HASSAN & ASSOCIATES personal financial advisers© 2009 Time lowers risk • Growth assets are unpredictable over short periods • But – Black Swans aside – uncertainty levels lessen  over time (mean reversion) Time Expected return 30% 15% 0% -15% High end of likely range Low end of likely range Returnsinceinception Actual return
  16. 16. HASSAN & ASSOCIATES personal financial advisers© 2009 But investing is like a car ... … without a  windscreen
  17. 17. HASSAN & ASSOCIATES personal financial advisers© 2009 And there are Black Swans Just because something hasn’t happened,….
  18. 18. HASSAN & ASSOCIATES personal financial advisers© 2009 And optimistic bias
  19. 19. HASSAN & ASSOCIATES personal financial advisers© 2009 Global share markets Down 40%, up 40% $0 $20 $40 $60 $80 $100 $120 $140 Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 AORD CAC 40 DAX FTSE 100 NIKKEI 225 NZX50 S&P 500 40% fall 40% rise
  20. 20. HASSAN & ASSOCIATES personal financial advisers© 2009 Make room for China (extend left hand scale from $140 to $250) $0 $50 $100 $150 $200 $250 Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 $250
  21. 21. HASSAN & ASSOCIATES personal financial advisers© 2009 Global share markets Shanghai: down 70%, up 100% $0 $50 $100 $150 $200 $250 Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 70% fall 100% rise
  22. 22. HASSAN & ASSOCIATES personal financial advisers© 2009 But shares usually do well over very long periods $0 $10 $20 $30 $40 $50 $60 $70 $80 $90 $100 Jan 50 Jan 60 Jan 70 Jan 80 Jan 90 Jan 00 Jan 10 US shares since 1950
  23. 23. HASSAN & ASSOCIATES personal financial advisers© 2009 Log scale easier to make sense of over very long periods $1 $10 $100 Jan 50 Jan 60 Jan 70 Jan 80 Jan 90 Jan 00 Jan 10 US shares since 1950 (log scale)
  24. 24. HASSAN & ASSOCIATES personal financial advisers© 2009 It can pay to get good advice • Over the 20 years 1986 and 2005: – US shares gained 11.9% pa – But the average investor in US share funds made just 3.9%  pa, and stayed invested for less than 3 years* • The main reason investors do badly?   • Reacting to the news (“noise”), they went in  and out for wrong reasons at wrong times * DALBAR’s ongoing Quantitative Analysis of Investor Behaviour compares investment flows with changes in asset levels to determine returns earned by investors. DALBAR Inc is an independent North American firm specialising in financial services research.
  25. 25. HASSAN & ASSOCIATES personal financial advisers© 2009 Choosing a financial adviser • Adviser’s qualifications, experience? • Professional body membership, credentials? • Feel okay? (likely long‐term relationship) • Commission can lead to problems • Fees can help you be sure your adviser works  for you – they can also be less than  commissions
  26. 26. HASSAN & ASSOCIATES personal financial advisers© 2009 The process • Initial discussion (typically no charge) • Collect and analyse data (situation, goals,  issues, strategies), draft a plan integrating and  interrelating the issues (financial  management, tax, insurance, estate,  retirement, investments) • Discuss, revise, agree and implement • Periodic review and adjustment 
  27. 27. HASSAN & ASSOCIATES personal financial advisers© 2009 Action points 1. Situation audit 2. Review your budget (get tool from  www.hassan.co.nz), collate your financial  details, think about your goals, priorities and  values 3. Identify, prioritise and plan future actions 4. There is a great satisfaction in taking that  first step…
  28. 28. HASSAN & ASSOCIATES personal financial advisers© 2009 Thank you • Questions – you can also email these   simon@hassan.co.nz

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