Financial planning (see chapter 2 in the reading package, plus Allen family and Mason family cases)
Individual Investor Life Cycle <ul><li>The individual investors life cycle can often be described using four separate phas...
Accumulation Phase <ul><li>Early to middle years of careers </li></ul><ul><li>Attempting to satisfy intermediate and long-...
Consolidation Phase <ul><li>Past career midpoint </li></ul><ul><li>Have paid off much of their accumulated debt </li></ul>...
Spending Phase <ul><li>Usually begins at retirement </li></ul><ul><li>Living expenses covered by Social Security and retir...
Gifting Phase <ul><li>Can be concurrent with spending phase </li></ul><ul><li>If resources allow, individuals can now use ...
The Portfolio Management Process <ul><li>1. Policy statement </li></ul><ul><ul><li>Specifies investment goals and acceptab...
The Portfolio Management Process <ul><li>2. Study current financial and economic conditions and forecast future trends </l...
The Portfolio Management Process <ul><li>3. Construct the portfolio </li></ul><ul><ul><li>Given the policy statement and t...
The Portfolio Management Process <ul><li>4. Monitor and update </li></ul><ul><ul><li>Revise policy statement as needed </l...
The Policy Statement <ul><li>Don’t try to navigate without a map! </li></ul><ul><li>Important Inputs: </li></ul><ul><ul><l...
Investment Objectives <ul><li>Need to specify return and risk objectives </li></ul><ul><ul><li>Need to consider the risk t...
Investment Objectives <ul><li>Possible broad goals: </li></ul><ul><li>Capital preservation </li></ul><ul><ul><li>Maintain ...
Investment Objectives <ul><li>Current income </li></ul><ul><ul><li>Look to generate income rather than capital gains </li>...
Investment Constraints <ul><li>These factors may limit or at least impact the investment choices: </li></ul><ul><li>Liquid...
Investment Constraints <ul><li>Tax Concerns </li></ul><ul><ul><li>Realized capital gains vs. Ordinary income? </li></ul></...
Allen family case  Investment policy: the Trust Objectives: Return requirements Risk tolerances Constraints: Liquidity Tim...
Investment policy: George Allen Objectives: Return requirements Risk tolerances Constraints: Liquidity Time Horizon Laws a...
Capital market outlook Asset Allocation
Final Exam  <ul><li>Final Exam Take home exam is a Financial Planning Case Study handed out in hard copy in class by the i...
<ul><li>Learning outcomes: </li></ul><ul><li>How and why do investment goals change over a person’s lifetime and circumsta...
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Class notes meeting 10

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Class notes meeting 10

  1. 1. Financial planning (see chapter 2 in the reading package, plus Allen family and Mason family cases)
  2. 2. Individual Investor Life Cycle <ul><li>The individual investors life cycle can often be described using four separate phases or stages: </li></ul><ul><li>Accumulation Phase </li></ul><ul><li>Consolidation Phase </li></ul><ul><li>Spending Phase </li></ul><ul><li>Gifting Phase </li></ul>
  3. 3. Accumulation Phase <ul><li>Early to middle years of careers </li></ul><ul><li>Attempting to satisfy intermediate and long-term goals </li></ul><ul><li>Net worth is usually small, debt may be heavy </li></ul><ul><li>Long-term investment horizon means usually willing to take moderately high risks in order to make above-average returns </li></ul>
  4. 4. Consolidation Phase <ul><li>Past career midpoint </li></ul><ul><li>Have paid off much of their accumulated debt </li></ul><ul><li>Earnings now exceed living expenses, so the balance can be invested </li></ul><ul><li>Time horizon is still long-term, so moderately high risk investments are still attractive </li></ul>
  5. 5. Spending Phase <ul><li>Usually begins at retirement </li></ul><ul><li>Living expenses covered by Social Security and retirement plans </li></ul><ul><li>Changing emphasis toward preservation of capital, but still want investment values to keep pace with inflation </li></ul>
  6. 6. Gifting Phase <ul><li>Can be concurrent with spending phase </li></ul><ul><li>If resources allow, individuals can now use excess assets to provide gifts to other individuals or organizations </li></ul><ul><li>Estate planning becomes important, especially tax considerations </li></ul>
  7. 7. The Portfolio Management Process <ul><li>1. Policy statement </li></ul><ul><ul><li>Specifies investment goals and acceptable risk levels </li></ul></ul><ul><ul><li>The “road map” that guides all investment decisions </li></ul></ul>
  8. 8. The Portfolio Management Process <ul><li>2. Study current financial and economic conditions and forecast future trends </li></ul><ul><ul><li>Determine strategies that should meet goals within the expected environment </li></ul></ul><ul><ul><li>Requires monitoring and updates since financial markets are ever-changing </li></ul></ul>
  9. 9. The Portfolio Management Process <ul><li>3. Construct the portfolio </li></ul><ul><ul><li>Given the policy statement and the expected conditions, go about investing </li></ul></ul><ul><ul><li>Allocate available funds to meet goals while managing risk </li></ul></ul>
  10. 10. The Portfolio Management Process <ul><li>4. Monitor and update </li></ul><ul><ul><li>Revise policy statement as needed </li></ul></ul><ul><ul><li>Monitor changing financial and economic conditions </li></ul></ul><ul><ul><li>Evaluate portfolio performance </li></ul></ul><ul><ul><li>Modify portfolio investments accordingly </li></ul></ul>
  11. 11. The Policy Statement <ul><li>Don’t try to navigate without a map! </li></ul><ul><li>Important Inputs: </li></ul><ul><ul><li>Investment Objectives </li></ul></ul><ul><ul><li>Investment Constraints </li></ul></ul>
  12. 12. Investment Objectives <ul><li>Need to specify return and risk objectives </li></ul><ul><ul><li>Need to consider the risk tolerance of the investor </li></ul></ul><ul><ul><li>Return goals need to be consistent with risk tolerance </li></ul></ul>
  13. 13. Investment Objectives <ul><li>Possible broad goals: </li></ul><ul><li>Capital preservation </li></ul><ul><ul><li>Maintain purchasing power </li></ul></ul><ul><ul><li>Minimize the risk of loss </li></ul></ul><ul><li>Capital appreciation </li></ul><ul><ul><li>Achieve portfolio growth through capital gains </li></ul></ul><ul><ul><li>Accept greater risk </li></ul></ul>
  14. 14. Investment Objectives <ul><li>Current income </li></ul><ul><ul><li>Look to generate income rather than capital gains </li></ul></ul><ul><ul><li>May be preferred in “spending phase” </li></ul></ul><ul><ul><li>Relatively low risk </li></ul></ul><ul><li>Total return </li></ul><ul><ul><li>Combining income returns and reinvestment with capital gains </li></ul></ul><ul><ul><li>Moderate risk </li></ul></ul>
  15. 15. Investment Constraints <ul><li>These factors may limit or at least impact the investment choices: </li></ul><ul><li>Liquidity needs </li></ul><ul><ul><li>How soon will the money be needed? </li></ul></ul><ul><li>Time horizon </li></ul><ul><ul><li>How able is the investor to ride out several bad years? </li></ul></ul><ul><li>Legal and Regulatory Factors </li></ul><ul><ul><li>Legal restrictions often constrain decisions </li></ul></ul><ul><ul><li>Retirement regulations </li></ul></ul>
  16. 16. Investment Constraints <ul><li>Tax Concerns </li></ul><ul><ul><li>Realized capital gains vs. Ordinary income? </li></ul></ul><ul><ul><li>Taxable vs. Tax-exempt bonds? </li></ul></ul><ul><ul><li>Regular IRA vs. Roth IRA? </li></ul></ul><ul><ul><li>401(k) and 403(b) plans </li></ul></ul><ul><li>Unique needs and preferences </li></ul><ul><ul><li>Perhaps the investor wishes to avoid types of investments for ethical reasons </li></ul></ul>
  17. 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. 18. Investment policy: George Allen Objectives: Return requirements Risk tolerances Constraints: Liquidity Time Horizon Laws and regulations Taxes Unique preferences and circumstances
  19. 19. Capital market outlook Asset Allocation
  20. 20. Final Exam <ul><li>Final Exam Take home exam is a Financial Planning Case Study handed out in hard copy in class by the instructor </li></ul>
  21. 21. <ul><li>Learning outcomes: </li></ul><ul><li>How and why do investment goals change over a person’s lifetime and circumstances? </li></ul><ul><li>What are the four steps in the portfolio management process? </li></ul><ul><li>Why is a policy statement important to the planning process? </li></ul><ul><li>What is asset allocation? </li></ul>

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