ew19-1-beginning-investing-2019-08-19.pptx

Education Week 2019
Bringing Christ into Our Finances
Beginning Investing:
A Principles and Applications Based
Approach
Or
10 Steps to Better Investing
August 19, 2019
Bryan Sudweeks, Ph.D., CFA
From the website at
www.personalfinance.byu.edu
1

Abstract:
• Personal finance is simply part of the gospel of
Jesus Christ, and investing is part of personal
finance. To do finance properly, we must
bring Christ into our finances. I propose a 10
step plan to help us become better investors,
including the importance of making investing
part of our learning, education and prayers.
2

1. Build your foundation upon Christ
2. Understand what to do before you invest
3. Understand the principles of successful investing
4. Understand investment factors you control
5. Wisely select your investment vehicles
6. Determine your risk level
7. Set your asset allocation consistent with risk
8. Create your investment plan
9. Decide what makes a good mutual fund
10. Select your financial assets wisely, rebalance tax-
efficiently, and hold your assets for 40 years
3

Step 1. Build Your Foundation Upon Christ
• Ways to lose your money quickly:
• Precious metals (historically poor returns)
• Market Timing (impossible to do)
• Derivatives (very tough and high fees – avoid)
• Hedge funds (very expensive and volatile)
• Unaudited/unregistered investments (license to take
your money)
• Borrow against home for investments (NEVER)
• “Guaranteed” variable annuities and life insurance
products (huge fees and give up all the upside)
• 5-10% per month guaranteed investments (no such
thing)
4

Your Foundation (continued)
• Other ways to lose your money quickly:
• Sell your 401k to buy cash value insurance (no!)
• Free meal seminars (no free lunch)
• Email/hot stock tips (if it was that good, why share
with you?)
• Real estate flipping (high risk)
• Nothing down real estate (high risk)
• Real estate telephone consultants (why share?)
• Timeshare real estate (high fees and high risk)
• Internet solicitation (if that good, why share?)
• High-trust relationships (bishop, stake president,
etc., avoid)
5

• Strengthen your spiritual foundation
• It is based on four key points:
• Personal finance is simply part of the gospel of
Jesus Christ
• Personal finance is everything to do with managing
of your money and saving/investing
• The gospel is our Heavenly Father’s plan for the
happiness and salvation of His children.
• Therefore, anything that is part of God’s Plan for
the happiness and salvation of His children and
to help us live meaningful and happy lives is part
of the gospel of Jesus Christ

• Doctrines and principles, confirmed by the Spirit,
changes behavior
• Boyd K. Packer said: “True doctrine, understood,
changes attitudes and behavior. The study of the
doctrines of the gospel will improve behavior
quicker than a study of behavior will improve
behavior. (“Little Children,” Ensign, Nov. 1986, 17.)
• David A. Bednar added, “President Packer did not
teach that simply knowing true doctrine changes us.
Rather, doctrine must be understood. . . Thus, true
doctrine confirmed in the heart as true by the witness
of the Holy Ghost changes attitudes and behavior.
(Increase in Learning, Deseret Book, 2011, p. 154.)

• How important are doctrines and principles?
• Somehow we seem to be drawn to application as the
primary way to ‘fix’ things, to make life better. . . And
far too often we emphasize application without the
necessary understanding and divorced from the doctrinal
content. . . Whatever the reasons, emphasizing the
application to the exclusion of fundamental doctrines
and principles does not produce spiritual power,
protection, and direction. . . Appropriate applications are
necessary but can never stand alone. What is needed is a
balance among doctrines, principles and application. . .
The answers always are in the doctrines and principles.
And the doctrines and principles need to be in us.
(Bednar, Increase in Learning, p. 170.)

• Based on this, the key is to understand doctrine
• What are the key doctrines of Finance?
• The key “doctrines” or “why’s” are:
• Spiritual: To bring us to Jesus Christ
• Temporal: To help us be wiser stewards
• Family: To return with our families back to
Heavenly Father’s presence
• Individual: To accomplish our divine
missions
• If we are doing our finances correctly, we will
accomplish the above doctrines
9

• Then we understand principles
• What are the principles (of finance)?
• Ownership: We do not own the things we have
• Stewardship: We are stewards over all God has
blessed us with
• Agency: The right to choose is one of God’s
greatest gifts to us
• Accountability: We will be held accountable for
our choices, including our financial ones
• If we understand and follow these principles, it will
not be hard to give to the Lord that which is His
10

• On the questions of what is really ours, Elder Neal
A. Maxwell stated:
• The submission of one’s will is really the only
uniquely personal thing we have to place on
God’s altar. The many other things we “give,”
brothers and sisters, are actually the things He
has already given or loaned to us. However,
when you and I finally submit ourselves, by
letting our individual wills be swallowed up in
God’s will, then we are really giving something
to Him! It is the only possession which is truly
ours to give! (italics added, “Swallowed Up in
the Will of the Father,” Ensign, Nov. 1995, 22).
11

• Application is an invitation to learn and create
• Application, or the creative process, is how we go
from the spiritual creation to the physical creation.
• M. Russell Ballard said:
• Over the years, I have observed that those who
accomplish the most in this world are those with a
vision for their lives, with goals to keep them
focused on their vision and tactical plans for how
to achieve them. Knowing where you are going
and how you expect to get there can bring
meaning, purpose, and accomplishment to life.
(“Return and Receive,” Ensign, May 2017.)

• How important are vision, goals and plans?
• Creation entails five general steps. We:
• Catch our vision. The scriptures teach “Where there is
no vision, the people perish” (Proverbs 29:18)
• Develop our goals. Goals are tools to help us keep us
focused on our vision
• Make our plans and strategies. Making these goals is
not enough; we must make plans to carry them out.
• Determine constraints. These are things which could
keep us from our goals
• Work with our accountability partners. These are
others who can help us along the way

• Our conduct on our journey is as important as our
destination
• It is not “the end justifies the means” as we go
through life
• Rather, the key in life is what we become
• As such, turning to the Lord and our daily
conduct will takes us from the flawed people
we are now to becoming more like our
Savior
14

• Key terminology for this session:
• Cash: Short-term cash investments (low risk, low return)
• Bonds/fixed income: Short- and long-term borrowing
by companies/governments (higher risk, slightly higher return)
• Stocks/equities: Ownership (higher risk, higher return)
• Risk: Volatility of returns (standard deviation)
• Asset classes: Types of securities (baskets of similar assets)
• Asset allocation: How you invest in different asset
classes which determines risk (how you invest in the baskets)
• Financial assets: Stocks, bonds, cash, mutual funds
(groceries you put in your different shopping carts)
• Investment vehicles: Tax frameworks with tax
advantages (shopping carts where you put your assets/groceries)
15

• Benchmarks: Unmanaged portfolios of assets (shows
performance of an asset class without fees and transactions costs)
• Rebalancing: Selling certain assets and buying other
assets (to bring the portfolio back to your planned risk level)
• Mutual Funds: Professionally managed investment
fund that pools money to purchase securities (you generally
get professional management, diversification, and economies of scale,
which can be bought and sold once per day)
• Index Funds: Mutual funds that invest in the same
proportion of assets as does a specific benchmark (it
matches the benchmark instead of trying to beat the benchmark)
• Exchange Traded Fund: Mutual funds that trade
throughout the day like a stock (these can be mutual funds or
index funds but can be bought and sold throughout the day)
16

Step 2. Know What to do Before you Invest
• Are there things you should do before investing?
• Priority of paying bills?
• Certain things you should never do without?
• Other bills more important than investing?
• Know why are you investing?
• Have written personal and family goals?
• Living on a budget and saving each week?
• Have an investing plan?
17

Before You Invest: The Hourglass Top
4. Have you written your personal/family vision and goals,
live on a budget, and have a well-written Investment Plan?
If you can answer yes to these 4 questions, you are ready to invest!
3. Are you out of high-interest rate credit card and consumer debt?
2. Do you have adequate health and life insurance?
1. Are priorities in order and are you “square” with the Lord?
18

Before you Invest (continued)
• What does the top of the hourglass do?
• Helps you keep your priorities in order
• What should your priorities be?
• God
• Family
• Personal responsibility
19

Step 3. Understand the Principles
of Successful Investing
• What are the key principles of investing?
• Richard G. Scott commented:
• Joseph Smith’s inspired statement, “I teach them
correct principles, and they govern themselves,”
still applies. The Lord uses that pattern with us.
. . Your consistent adherence to principle
overcomes the alluring yet false life-styles that
surround you. Your faithful compliance to
correct principles will generate criticism and
ridicule from others, yet the results are so
eternally worthwhile that they warrant your
every sacrifice (italics added, “The Power of
Correct Principles,” Ensign, May 1993, 32). 20

Principles of Successful Investing (continued)
• How have most equity investors done?
• Each year, DALBAR puts out an annual book on
Quantitative Analysis of Investor Behavior. It
discusses how average equity fund investors have
done versus benchmarks over the past 20 years.
Investor Index
• Year Period Returns* Returns Difference
• 2015 1995-2014 5.2% 9.9% -4.7%
• 2016 1996-2015 4.7% 8.2% -3.5%
• 2017 1997-2016 4.8% 7.7% -2.9%
• 2018 1998-2017 5.3% 7.2% -1.9%
• 2019 1999-2018 3.9% 5.6% -1.7%
• * Dalbar 2015-2019

• How have most bond investors done?
• According to DALBAR, bond investors have done
equally poorly versus the bond benchmark over the
past 20 years.
Investor Index
• Year Period Returns* Returns Difference
• 2015 1995-2014 0.8% 6.2% -5.4%
• 2016 1996-2015 0.5% 5.3% -4.8%
• 2017 1997-2016 0.5% 5.0% -4.5%
• 2018 1998-2017 0.4% 4.6% -4.2%
• 2019 1999-2018 0.2% 4.6% -4.4%
• * Dalbar QAIB 2015-2019, www.dalbar.com, ** Estimate

Elder Dallin H. Oaks commented:
We live in a complex society, where even the simplest
principle can be exquisitely difficult to apply. I admire
investors who are determined not to obtain income or
investment profits from transactions that add to the
sum total of sin and misery in the world. But they will
have difficulty finding investments that meet this high
standard. Such complexities make it difficult to
prescribe firm rules. We must rely on teaching correct
principles, which each member should personally
apply to govern his or her own circumstances (italics
added, “Brother’s Keeper,” Ensign, Nov. 1986, 20,
italics added). 23

Principle 1. Know yourself
• Know your vision, goals and plans
• Have well-written and thought-out vision, goals,
plans, constraints and accountability
• Know your budget
• Live within your means, and save and invest
• I recommend people save 20% gross
• Know your ability to tolerate risk
• Know what kind of investor you are
• Invest accordingly
• Develop a sleep-well portfolio – based on
principles you can depend on for a lifetime
24

• Watch overconfidence
• Men trade 45% more than women
• Their annualized returns were 2.7% less
• Single men trade 67% more than single women
• Their annualized returns were 1.4% less
• Watch on-line trading
• Before on-line, investors beat the market by 1.9%
• Afterwards, they underperformed by 3.6%
Carla Fried, “The Problem with your Investment Approach,” Business
2.0, November 2003, p. 146
25

Principle 2. Seek, receive and act on the Spirit’s
guidance
• Carlos E. Asay said,
• When the Spirit is with us, we can think
thoughts we’ve never thought before, we can
say words we’ve never said before, we can
perform beyond our natural abilities. That
power is related to truth, to the scriptures, to the
stirring of the Spirit within. And the power
won’t come unless we’re actively courting the
influence of the Holy Ghost (“Scriptures and
Sunday Classes,” Ensign, January 1986).
26

Principle 3. Understand risk
• Risk is inherent in all investing activities
• There are lots of different types of risk
• Inflation, business, interest rate, financial,
market, political and regulatory, exchange
rate, call, and liquidity risk
• Invest at a risk level you are comfortable with
• Find that risk level
• Taking a risk tolerance test may help. Take
A Risk Tolerance Test (LT16) to get a
sense on how much risk you can tolerate
27

Principle 4. Stay diversified
• Always invest in different asset classes and assets
• Diversification is your key defense against risk
• Make sure you understand the risks of each
and every asset class you invest in
• Invest in broadly diversified funds
• It’s a risky place out there. Be prepared!
• Remember that the numbers you see for
specific asset class performance are from
diversified portfolios, not single assets!
28

Principle 5. Invest low cost and tax-efficiently
• Control what you can.
• You cannot control returns, but you can control
your costs, fees, and taxes
• A $1 saved is more than a $1 earned
because:
• You pay taxes on every new dollar
earned, and a dollar saved can earn
income and income on income
(compound interest)
• Realize that frequent trading incurs significant
costs, both in terms of transactions costs and
taxes
29

• Minimize costs
• Markets are unpredictable, costs are forever
• Costs significantly depress returns
• I recommend lower cost mutual and index funds
which have tended to perform better
• Defer or eliminate taxes
• Wisely use retirement investment vehicles
• Roth 401k, 403b, IRA: Pay taxes now and
eliminate future taxes
• 401k, 403b, IRA: Defer taxes to the future
• Invest tax-efficiently so you don’t have to pay more
taxes each April
30

Principle 6. Invest long-term and disciplined
• Avoid short-term trading
• Its expensive
• It generates transactions costs and taxes
• Don’t chase winners
• Chasing winners is a loser’s game
• Invest wisely
• There are no get-rich-quick schemes that work
31

Principle 7. If you must invest in individual stock
and bond assets (which is not required),
know what you are investing in
• When investing in individual assets, do your
homework
• Know the key financials and strategic position
of the company and be aware of the many
different environments in which the company
operates (financial, operational, legal, etc.)
33

Principle 8. Monitor portfolio performance
• Measure performance. President Thomas S.
Monson stated:
When performance is measured, performance
improves. Where performance is measured and
reported, the rate of improvement accelerates
(General Conference reports, 1970).
• How can you know how you are doing if you
don’t check your performance against some
benchmark?
• Interestingly, most investors have underperformed
the market benchmarks over the last 20 years
• (DALBAR’s Annual Quantitative Analysis of Investor Behavior 2018)
34

Principle 9. Don’t waste too much time, money,
and energy trying to beat the market, unless
you have a lot of time, money, and energy
• It is very difficult, expensive, and time consuming
to try and beat the market
• If you want to trade, trade tax-efficiently and in
tax-deferred accounts
35

Principle 10. Invest only with high quality,
licensed, and reputable people and institutions
• When help is needed, don’t be afraid to get help.
• But get good help from good people consistent
with the principles discussed
• And compare the performance of that help to
your benchmarks after taxes (and to a passive
portfolio)
• Know how your help are licensed and
compensated--get references
36

Principle 11. Develop a good investment plan
consistent with your vision, goals, budget, and
these principles, and follow it closely
• Think it through and write it wisely
• It’s your roadmap to success
• If you write it wisely and invest accordingly, it will
save you much heartache in the future
• And you will likely achieve your personal goals
37

Principles Doctrines
1. Know yourself, your goals and vision Identity
2. Seek, receive and act on guidance Obedience
3. Understand risk (there is lots of it) Stewardship
4. Stay diversified Accountability
5. Invest low-cost and tax efficiently Stewardship
6. Invest long-term Stewardship
7. Know what you invest in Accountability
8. Monitor performance vs. benchmarks Accountability
9. Don’t waste time Stewardship
10. Invest with good people and firms Stewardship
11. Develop a good Plan (IPS) and follow it Stewardship

Changing mundane obedience into holy acts of
consecration
• I am a child of a Creator (identity), living worthy of the
Spirit (obedience), striving to understand myself and
my risk tolerance (agency), and learning to understand
financial markets and instruments (accountability). I
am developing my investing talents carefully
(stewardship), so I can invest my resources wisely
(agency), to accomplish my personal mission and
individual and family vision and goals.

Step 4. Understand Investment Factors you
Control
40

Factors You Control (continued)
What are the factors controlling investment returns?
Jim Seaberg shares the five factors you control:
• 1. How much you save
• 2. How long your investments grows, i.e., how long
you are invested in the market
• 3. Your risk level or mix of investments, i.e., your
asset allocation
• 4. How much you pay in expenses (critical)
• 5. How much you pay in taxes
You do not control your investment returns
41

Step 5. Wisely Select Investment Vehicles
(for investing and retirement)
• What is an investment vehicle?
• A tax-law defined framework for retirement that
has specific tax advantages, i.e., 401k, 403b, IRA,
SEP IRA, Roth IRA, Roth 401k, etc.
• It is like a shopping cart
• What is a financial asset?
• A security that may be invested in using
investment vehicles above, i.e., stocks, bonds,
mutual funds, REITs, MMMFs, ETFs, CDs, etc.
• It is like groceries
• Investing is putting groceries in your shopping cart
42

Select Investment Vehicles (continued)
• What are your three main types of accounts?
• Tax-now: Brokerage, banks and mutual fund
accounts
• Tax-deferred: 401k, 403b, Sep IRA, IRA
retirement accounts
• Never-tax: Roth IRA, Roth 401k, and Roth 403b
retirement accounts
• If possible, try to have balance in each type
• Emphasize Roth vehicles if possible as you are
saving more for retirement (see Roth versus
Traditional Accounts)
43

Select Investment Vehicles for 2019 (before catch-up)
Tax- Tax- Maximum
Plan deferred eliminated Amount For Employees of:
401-k Y $19,000 Businesses w/plans
Roth 401-k Y 19,000 Businesses w/plans
403-b Y 19,000 Non-profit, tax-exempt
Roth 403-b Y 19,000 Non-profit, tax-exempt
457 Y 19,000 State/municipalities
SEP IRA Y 58,000 Small businesses
SIMPLE IRA Y 12,500 Small businesses
IRA Y 6,000 Individuals
Roth IRA Y 6,000 Individuals
Education IRA Y 2,000 Individual Education
529 Plans Y >485,000 p.c. Individual Education

First priority: Free money
• Money that is made available by your company,
generally on a matching basis, to encourage greater
participation in company sponsored retirement
plans, i.e., 401k, Roth 403b, Keogh, etc.
• For information on retirement, see:
• Retirement Plan Summary 2018
• Retirement 1: Basics PPT
• Retirement 2: Social Security PPT
• Retirement 3: Employer Qualified Plans PPT
• Retirement 4: Individual and Small Business Plans PPT
• Roth versus Traditional: Which is Better? (LT28)
45

Second Priority: Tax-advantaged money
• a. Elimination of all future taxes
• Money used at retirement (or for education)
without penalty and without taxes, i.e., Roth
IRA or Roth 410k/403b for retirement, and 529
Funds and Education IRA for education
b. Tax-deferred money:
• Money invested before-tax, with principle and
earnings taxed only at retirement (IRA, SEP
IRA, etc.)
46

Third Priority: Tax-efficient and wise
investments
• Money invested tax-efficiently and wisely,
consistent with the principles discussed where you:
• 1. Know the impact of taxes
• 2. Look to capital gains—defer earnings and
taxes to the future
• 3. Minimize turnover and taxable distributions
• 4. Replace interest income with stock dividends
• 5. Invest tax-free
47

Step 6. Determine your Risk Level
• Consider risk in your portfolio construction
• Portfolio selection strategies will differ by
individual, portfolio manager, institution and view
of the market
• But general concepts and principles are
applicable to everyone
• I call this the “bottom of the investment
hourglass”
• See Investments 7: Building Your Portfolio PPT
48

Risk Tolerance: the Hourglass Bottom
Taxable Assets Retirement Assets
1. Basics: Emergency Fund and Food Storage
2. Core: Broad Market Index Funds/ETFs, or Core Mutual Funds
3. Diversify: Broaden and Deepen your Asset Classes
4. Opportunistic: Individual Stocks and Sector Funds
(this is totally optional)
49

Risk Tolerance (continued)
• The investment hourglass bottom teaches 3
important lessons:
• 1. It helps keep risk in perspective
• It starts investing from lowest to highest risk
• 2. It teaches the “how to” about investing
• You invest first in lower-risk assets, and then
take on more risk as your assets and investment
experience increase
• 3. It separates out taxable and retirement assets
• Retirement and taxable assets should be
managed differently
50

Risk Tolerance
• Risk tolerance is your willingness to accept risk
• Invest at your risk level you are comfortable with,
i.e., select your asset allocation carefully
• It is related to your current or expected holdings
• A higher risk tolerance indicates a
willingness to take on more risk as shown by
holding more “risky” asset classes, i.e., more
equities, REITs, international, etc.
• A lower risk tolerance indicates a willingness
to take on less risk as shown by holding less
“risky” asset classes, i.e., more bonds, CDs,
large capitalization equities
• See A Risk Tolerance Test (LT16)
51

• How is risk tolerance determine?
• Risk tolerance is determined in two main ways:
• 1. Derived from an investor’s age and their
current holdings, i.e., an implied risk tolerance
• 2. Estimated by an investor answering specific
questions regarding investor demographics
including age, characteristics, spending habits,
history, and investment experience, i.e., from a
“risk tolerance test”

• Is risk tolerance an absolute number or a
general category?
• For our purposes, it is considered a general
category:
• Very conservative, Conservative, Moderate,
Aggressive, and Very aggressive
• What is the purpose of risk tolerance?
• The purpose of risk tolerance is to help you
determine an appropriate asset allocation or
investment mix based on your willingness to
accept risk
53

• Lets take a Risk Tolerance Test (RTT) (Learning
Tool 16 from the www.personalfinance.byu.edu website)
• The process:
• 1. Review each of the 8 questions
• 2. Honestly answer each question
• 3. Add up your points from each question
• There are five potential responses to each
question, worth 1 to 5 points
• Add up the points next to the correct
response and sum your points (8 questions)
• 4. From your total points, we will have
recommended actions
54

Risk Tolerance : Risk and Demographics
• 1. Age: What is your age currently?
• 1. 65 and over
• 2. 45 to 64
• 3. 35 to 44
• 4. 25 to 34
• 5. 24 and under
• The younger you are generally, the more willing you
should be to tolerate risk and the longer time horizon in
which to grow assets. If you are younger, should think
about taking a little more risk. A general rule of thumb
is that you should include bonds in your portfolio equal
to your age.

Risk Tolerance: Risk and Time Horizon
• 2. Time Horizon: What is your investment time
horizon for this money?
• 1. 1 year
• 2. 2 - 5 years
• 3. 5 - 10 years
• 4. 10 - 20 years
• 5. 20 years or longer
• Your time horizon will impact on how much risk you
take. You will have different time horizons for different
“buckets” (remember that money in the stock market is
subject to more risks). If your time horizon is less than
3-5 years, it may not be a good idea to invest in market.

Risk Tolerance: Risk and Investment Goals
• 3. Investment Goals: What is your primary objective
for this money?
• 1. Preservation of Principal
• 2. Current Income
• 3. Growth and Income
• 4. Conservative Growth
• 5. Aggressive Growth
• Your goals will, to a degree, drive your willingness to
take on risk and will make a big difference on where
you invest. If your goal is safety, you should take on
little risk. If your goal is aggressive growth, you
should be willing to take on much more risk.

Risk Tolerance: Risk and Income
• 4. Expected Personal Earnings: Regarding your
current income, do you expect it to:
• 1. Decrease dramatically in the future
• 2. Decrease a slight amount in the future
• 3. Stay about the same
• 4. Increase with the pace of inflation
• 5. Increase dramatically
• Income is an important driver of your investments. If
you feel your income will decline, you will likely be
much less willing to tolerate risk than if you think your
income will increase dramatically. Expectations of
your earning will have an impact on risk.

Risk Tolerance : Risk and Emergency Funds
• 5. Emergency Fund: How much money do you have
set aside for emergencies? (This does not include
credit but money you can access quickly)
• 1. None
• 2. Enough to cover three months of expenses
• 3. Enough to cover six months of expenses
• 4. Enough to cover nine months of expenses
• 5. Over twelve months of expenses
• The larger your emergency fund, the more you are able
to take on risk. Generally, with your first investments,
you should take on very little risk. As your asset size
increases, so should your willingness to increase risk.

Risk Tolerance: Risk and Investment Experience
• 6. Investment Experience: What is your personal
investment experience?
• 1. I have never invested any money in any financial instrument.
• 2. I am relatively new investor--only a few years.
• 3. I have invested in IRAs and employer plans (401k), but now
I am ready to develop additional strategies outside of that plan.
• 4. I have invested for quite some time and am fairly confident
in my investment decisions.
• 5. I have invested money for years and have a definite
knowledge of how financial markets work.
Generally, the more experience investors have with
financial markets, the more risk they are able and willing
to bear. However, this should be tempered by your
willingness to accept risk.

Risk Tolerance: Risk and Investment Type
• 7. Investment Risk: Regarding your view of risk,
which investment would you be more comfortable
making?
• 1. I am comfortable investing in savings accounts, CDs, and
other short-term financial instruments.
• 2. I invest in savings accounts/CDs, but I also own income-
producing bonds and bond mutual funds.
• 3. I have invested in a broad array of stock and bond mutual
funds, but only the highest quality.
• 4. I have invested primarily in growth stocks /mutual funds.
• 5. I like to pick new and emerging growth companies/funds.
• What you own is an indicator of your risk level. If invested
only in CDs/“safe” investments, you are likely risk averse. If in
aggressive stocks/funds, you are willing to take on more risk.

Risk Tolerance : Risk and Investment
Preferences
• 8. Investment Preferences: Which investment would you
be more likely to invest in? The investment has:
• 1. A 20-year average return of 0-1%, with infrequent downturns and
no years of negative returns.
• 2. A 20-year average return of 2-3% with mostly positive returns
but less than a year of negative returns.
• 3. A 20-year average return of 3-5% with a few downturns and
more than one-year of negative returns.
• 4. A 20-year average return of 6-7% with several periods of
negative returns
• 5. A 20-year average return of 8% or greater with several periods of
substantially negative returns.
• Higher returns require higher risk, If comfortable with lower
returns, you can position your portfolio. If you want the higher
returns (and risk), invest according to your risk level.

• You now have your total score
• From your total score, it can help us understand
what type of investor you are: “Very conservative,”
“Conservative,” “Moderate,” “Aggressive,” and
“Very aggressive”
• Each score will have a recommended action
regarding increasing or reducing risky assets

• Very Conservative (8 to 12 points)
• Cash +5%
Bonds +15%
Stocks -20%
• Conservative (13 to 20 points)
• Cash: +0%
Bonds: +10%
Stocks: -10%
• Moderate (21 to 28 points)
• Cash 0%
Bonds 0%
Stocks 0% 64

• Aggressive (29 to 36 points)
• Cash -5%
Bonds -5%
Stocks +10%
• Very Aggressive (37 to 40 points)
• Cash -5%
Bonds -15%
Stocks +20%
• Investors are free to shift between the cash and bond
allocations without any change in effectiveness of the
test. I personally prefer to always have, at minimum, a
5% allocation to cash 65

Step 7. Determine Your Asset Allocation
Consistent with your Risk
• What is asset allocation?
• It is the process of determining how the assets of a
portfolio are divided, mainly into which asset
classes (baskets) your money is invested
• A well diversified portfolio should have broad
diversification across many asset classes
(baskets) to reduce overall portfolio risk
• A broadly diversified portfolio (with
investments in many baskets) is an investor’s
key defense against volatility or risk
66

Asset Allocation (continued)
• Why is asset allocation so important?
• Asset allocation is important for two reasons:
• 1. Research has shown that most of the returns
from financial assets are mainly a function of
returns from the asset class decision (basket),
and not from the individual stock decision
• 2. In the process of selecting your asset
allocation (baskets), you are selecting your risk
level for your portfolio
67

• What is the process of determining your asset
allocation, or where does risk tolerance come
in?
• Asset allocation is a three-step process:
• Step 1: Set your initial bonds and cash allocation
to equal your age as a percent of your overall
portfolio allocation
• For example, if you are 40 years old, you
should have 40% of your portfolio in bonds
and cash, and 60% in equities
68

• Step 2: Take a risk tolerance test
• Based on your results, you will adjust that
allocation to take into account your individual
risk tolerance and come up with an risk-
appropriate asset mix
• If you are more conservative you will
increase your bonds and cash allocation and
decrease your equity allocation
• If you are more aggressive, you will do the
opposite
69

• Step 3: Determine your preferred asset classes
based on risk within your major asset classes
• If you are a conservative investor, you will likely
have many different bond asset classes (short-term,
long-term corporates, governments, municipals,
etc.), but likely only large cap equities, and perhaps
a small amount of other equity asset classes
• If you are more aggressive, you will do the
opposite, have more small cap, international,
emerging markets, REITs, etc.
70

• How does this scoring work?
• For example, if you scored 19 points, you would be
considered a “conservative” investor
• This is your risk tolerance or type of investor
• To get your asset allocation from your risk tolerance:
• Start with your age in bonds. For example,
assume you are age 40 so assume 40% in bonds
• Next, do what the results suggest. For an
“conservative” investor, you would add 10% to
bonds/cash and subtract 10% from equities, so
50% in bonds and 50% in equities
71

• Can you have two individuals with similar
asset allocations yet with different risk levels?
• Yes. This is due to their different ages
• For example, three investors each have a 50%
equity and 50% bond/cash allocation
• Investor A is age 40 and is Conservative
• Investor B is age 50 and is Moderate
• Investor C is age 60 and is Aggressive
• Please note that their allocations within the equity
and bond allocations will likely be very different
72

Step 8. Create Your Investment Plan
• What is the most important document you will prepare
to guide you in your investing activities?
• Your Investment Plan (also called an Investment
Policy Statement or IPS)
• Why is it so important?
• Your Investment Plan sets the framework on every
investing activity you will do
• See Investment Plan Example Template (LT05) and
Investments 2: Your Investment Plan PPT

Your Investment Plan (IPS)
• What will it help you do?
1. Represent yourself
• It explains your risk tolerance, personal constraints,
budget, and how those relate to your asset allocation
and investment strategy
2. Articulate what you will and will not do
• It clearly states what you will and will not invest in,
how you will invest, what you will invest in, your
benchmarks, and other areas relating to investing
3. Provide an investment framework and guidelines for
making wise investment choices
• It provides an investment framework and guidelines to
help you reason through decisions now which could
have a major impact on future financial goals

Your Investment Plan (continued)
I. Risk and Return Objectives
• A. What are your expectations for returns?
• Your return expectations will drive your asset
allocation decisions. A return of:
• 1-2%: an undiversified, very low-risk portfolio
• 3-4%: a diversified, low-risk portfolio
• 5-6%: a diversified, moderate-risk portfolio
• 7-8%: a diversified, high-risk portfolio
• 9+%: an undiversified, very high-risk portfolio
heavily involved in high-risk assets
• Look to the long-term history of your asset classes
as estimates (see Expected Return Simulation (LT27))

• B. What are your expectations for risk?
• What is your risk tolerance?
• Where you are in the life cycle will have an
impact on how much risk you can take
• Balance your risk and return requirements
• Where are you in the life-cycle process?
• Younger: may be willing to take more risk
• Older: may be willing to bear less risk
• What kind of investor are you (see your Risk
Tolerance Test (LT16) results)?

II. Investment Guidelines and Constraints
A. What are Your Investment Guidelines?
• What are the different phases in your life in
regards to investing and how will you manage
your assets during those periods?
• e.g., Accumulation, Growth, Capital
Preservation, Income Generation, etc.
• Your Investment Guidelines are the general road
map on how you will be investing your assets
over your life cycle
• It integrates your personal vision and goals
and your financial vision and goals into a
complete financial perspective

B. What are your Investment Constraints?
• Liquidity
• The speed and ease with which an asset can be
converted into cash
• Investment Horizon
• When will you sell the investment?
• Tax Considerations
• What is your tax position, specifically your
marginal and average tax rates?
• Unique Needs
• What are your special needs?

III. Investment Policy
• What will you and will you not invest in, how will
those investments will be evaluated, how will the
assets be invested, how will your portfolio will be
funded, and any guidelines for new investments
• a. Acceptable and Unacceptable Asset Classes
• b. Investment Benchmarks
• c. Asset Allocation Strategy
• d. Investment Strategy
• e. Funding/Saving Strategy
• f. New Investment Strategy

Major Asset Classes
Equities:
• Large Capitalization
• Mid Capitalization
• Small Capitalization
• International
• Emerging Markets
• Hedge Funds
Real Estate
• REITs (Real Estate Investment
Trusts)
Currencies
Commodities
Fixed Income: Risk
• Cash
• Money Market
• Government Bonds
• Short, medium, and long-
term
• Corporate Bonds
• Short, medium, and long-
term, international
• Junk Bonds High Risk

• IV. Monitor your Portfolio, Reevaluate and
Rebalance as Necessary
• Monitor your performance
• Compare your performance to your benchmarks.
• How did you do? How versus benchmarks?
• Re-evaluate
• Re-evaluate your goals and performance over 2-
3 year periods.
• Rebalance
• Rebalance back to your asset allocation targets
through inflows of new money and tax-
minimizing selling

Investment Plan Note
• Because of the detail and importance of this
Plan, I have created an example Investment Plan
Example Template (LT5A) or Investment Policy Statement)
• Instructions are found in Investment Plan Example
Instructions (LT5B).
• Please feel free to copy this plan, and then change it
to represent your personal views on risk and return,
constraints, investment policy, etc.
• While this plan contains the areas I deem
important, you can add any additional areas to
your plan you feel necessary

Step 9. Understand What Makes a Good
Mutual Fund
• What is the process to pick good mutual funds?
1. Determine the asset classes needed for your Plan
and choose the appropriate benchmarks
2. Determine what makes a good mutual fund and which
asset classes you need exposure, then understand the key
principles for that asset class, i.e., low costs, no-load, no
12b1 fees, diversification, etc. to identify potential funds
3. Using a database program (see LT07), set those
principles and evaluate each of the potential mutual funds
4. Select the best mutual funds and record your choices
(LT7B)
5. Once you have selected your funds, purchase them,
monitor performance, rebalance tax efficiently, and keep
them for 40 years

Good Mutual Funds (continued)
• What are the 7 criteria for a good mutual fund?
1. Good diversification
2. Low cost
3. Tax efficiency
4. Low turnover
5. Low un-invested Cash
6. No manager style drift
7. Small (or positive) tracking error
• Please note that these slides refer to Morningstar Pages for specific funds.
The first title is the Morningstar Button. The second is the tab (separated by
a colon if available), and the third is the heading (separated by a dash). For
example, Portfolio: Portfolio – Market Capitalization, refers to the Market
Capitalization heading from the Portfolio tab of the Portfolio button

1. Good Diversification
• Diversification is your key defense against
market risk
• Stay diversified at all times. Pick a fund with many
companies in their portfolios within each asset class
• Diversification your primary defense against
things that might go wrong in investing
• Remember where you are in the hourglass
• Avoid sector (industry) funds, individual
stocks or concentrated portfolios of any kind
until you have sufficient education,
experience, and assets
• And even then, keep that percentage of these
assets small in relation to your overall assets

Where do you find Diversification?
• Diversification by:
• Numbers (Portfolio: Holdings)
• Total: Number of Stock, Bond, and Other
Holdings
• Concentration: Assets in top 10 holdings
• Type (Portfolio: Summary)
• Type of holdings (stocks, bonds, cash)
• Location (Portfolio: Summary)
• World Regions: Location of companies invested
in by geographic area
• Sector Weightings (Portfolio: Summary)
• Sector (or industry) weightings

Good Diversification
Source: All Morningstar charts are from Morningstar
Library Edition, 2019-03-05
3a
3b

2. Low Cost
• Invest low cost
• In a world where investment returns are limited,
investment costs of any kind reduce your returns
• Invest in no-load mutual funds
• You should rarely (if ever) pay a sales load of
any kind (front end, level load, 12-b1, etc.).
• Rear-end loads are OK, since you are long-
term investor, as long as the loads are less
than 180 days
• Keep management fees to the lowest possible
within the sector
• Remember: A dollar saved is a dollar you can earn
more money with (and that has already been taxed)

Where do you find costs?
• Costs (Expense)
• Expense Relative to Category
• This is a key ratio: Total Expense Ratio
• Compare that to your category average
• Maximum Sales Fees (or Loads)
• Initial
• Deferred
• Redemption
• Other Fees/Expenses
• Administrative costs
• Management fees
• 12b-1 Fees

Low Cost (Fees and Expenses)
Source: Morningstar 2019
4b
4c
4d
4f
4e

3. Tax Efficiency
• Invest in taxable funds with an eye to obtaining
high returns while keeping taxes low
• Taxes reduce the amount of money you can use for
your personal and family goals
• Watch the historical impact of taxes, for it will
likely continue
• Remember: It is not what you earn, but what
you keep after taxes that makes you wealthy

Where do you find Tax Efficiency?
• Tax analysis
• Pretax Return: Return before taxes
• Tax-adjusted Return: Return after taxes
• Tax Cost Ratio: The percent of nominal Fund
return attributable to taxes, assuming the fund is
taxed at the highest rate. If a fund had an 8.0%
return, and the tax cost ratio was 2.0%, the fund
took home (1 + return) * (1 – tax cost ratio) -1 or
(1.08*.98)-1 or 5.84%
• Potential Cap Gains Exposure: An estimate of the
percent of a funds asset’s that represent gains. If
this is high, the probability is high that these may
come to the investor as capital gains

Tax Efficiency
6b is the average of 1 year -15 year rank in
category

4. Low Turnover
• Keep turnover low, as it’s a proxy for fund
expenses and taxes
• The costs associated with turnover are hard to
quantify and may not be disclosed in the
prospectus. These costs include commissions,
bid-ask spreads, and market impact
• Each transaction generates a taxable event for you,
and these cumulative costs can be very expensive.
• Stick to funds with the low turnover (and low
management fees), as they generally have lower
costs and are more tax efficient as well

Where do you find Turnover?
• Turnover
• Annual Turnover (Portfolio: Holdings, Quote)
• This is the Fund turnover
• Category Average Turnover (Portfolio: Holdings)
• This is the turnover of Fund’s in the same asset
class or category

Low Turnover
4a

5. Low Un-invested Cash
• High cash levels are drags on performance.
Keep un-invested cash low
• Many funds hold cash to fund potential
redemptions, or as part of their investment
policy, which are drags on performance
• Choose funds that are fully invested (95%-99%
depending on the asset class and fund size) in the
market segment that you are targeting
• Do not pay others to manage cash
• Please note that some frictional cash is OK
though for open-end mutual funds

Where do you find Un-invested Cash?
• Un-invested Cash (or cash drag)
• Percent of cash in the fund (Snapshot - Asset
Allocation)

Un-invested Cash
1a

6. No Manager Style Drift
• Make sure the managers investment style
remains constant
• Investment fund managers have no authority to
change the asset class
• If you purchase a small cap fund, the
manager should purchase small cap shares
• The fund's prospectus should clearly define the
market, size company, and portfolio style tilt
• If you are looking for a domestic small value
fund, screen for funds with the all of their assets
invested in the U.S., the smallest average
company size, and the highest book-to-market
(or lowest price-book) ratios

Where do you find Manager Style drift?
• Managers Style
• Managers Style Box
• (Portfolio: Summary)
• The style box should not change
over time
2a

7. Low (or positive) Tracking Error
• Tracking error should be small
• Tracking error is the historical difference
between the return of a fund (i.e. a mutual fund)
and its specific market/sector benchmark or
index.
• The smaller the tracking error, the better the
performance of the Index fund relative to the
benchmark
• However, you won’t complain if the tracking
error is positive (i.e., your fund had higher
returns than the index or benchmark)

Where do you find Tracking Error?
• Tracking Error (Performance: Growth of $10k)
• Returns. Fund annual returns
• +/- S&P 500 TR. This is tracking error versus the
S&P 500 Index (+/- Index). Note that
Morningstar’s choice of index is sometimes very
poor, i.e., using MSCI EAFE for emerging markets
• +/- Category. Tracking Error versus the Category.
In this case it is large cap blend. This is a better
check on performance—versus all funds in a similar
category
• % Rank in Category (Number is in top %--the lower
the number the better)

Tracking Error
7a

Step 10. Select Assets Wisely, Rebalance Tax-
efficiently, and Hold for 40 Years
• The process to pick mutual funds is:
Determine the asset classes needed for your Plan
• Choose the appropriate benchmarks
• Determine what makes a good mutual fund and
which asset classes you need exposure
• Using a database program, set those principles and
evaluate each of the potential mutual funds
• Select the best mutual funds, see Using Morningstar
to Select Funds (LT7) and Mutual Fund Selection
Worksheet (LT7B) (with hints on the “Filled in” tab)
• Put your Investment Plan together

Selecting Assets (continued)
• Assume your asset class was Large Cap, and
you choose SWPPX for your fund. What next?
• 1. Go to Morningstar, and type the ticker “SWPPX” in
upper right box
• Where it says PDF Report (if available), print off this
report. If there is no PDF Report, just print off the
entire “Quote” Page. Include these in your
Investment Plan as Exhibit III. Fund Support
Exhibits
• If you need help, see Mutual Fund Selection Worksheet

• 2. Download the Investment Process Spreadsheet (LT13)
• For most, the first 4-10 asset tab will be sufficient.
• Put in your Salary and emergency fund goal and percentage.
• It will automatically determine your target portfolio fund
size (your emergency fund amount divided by your
bonds/cash percentage).
• Assuming a salary of $60,000, a $25,000 Emergency
Fund and a 25% allocation to bonds and cash. Your
target portfolio size would be $100,000.

Select Assets (continued)
• 3. Add data to the Investment Process Spreadsheet (LT13)
• Put in your asset classes and benchmarks, and percentages in
Panel I. Use the dropdown boxes for asset classes and
benchmarks
• Then put in the tickers and Fund names
Note: these
Funds are just
examples. Do
not just use
these funds or
you will lose
points!

• 4. Print off all your Exhibits
• Print off your filled in Exhibit I. Expected Return
Simulation (LT27)
• Print off your filled in Exhibit II. Investment
Process Spreadsheet (LT13)
• Print off Exhibit III. Mutual Fund Pages from
Morningstar. There should be a minimum of 4
funds from 4 different asset classes
• Include these with your completed and filled in
Investment Plan and you should be good

• Choose financial assets carefully
• Should you pick individual stocks and bonds?
• I recommend you avoid picking individual
stocks and bonds until your portfolio is
sufficiently large (i.e., > $750,000, if at all)
• You can have a successful portfolio without
ever purchasing individual stocks and bonds
• Why is this the case?
• It violates key principles of investing
• See Investments 8: Picking Financial Assets PPT 110

• Stock selection is not required for a successful portfolio.
You can improve returns and reduce risk more by buying
low cost and no-load mutual and index funds
• Buying individual stocks violates these principles:
• Principle 4: Stay Diversified. Picking single assets in a
small portfolio violates the principle of diversification
• Principle 5: Invest Low Cost. Investing in stocks when
you have a small portfolio is very expensive
• Principle 7: Know What You Invest In. Picking stocks
when you have not developed the knowledge base
necessary to evaluate is risky, bordering on speculation
or gambling
• Principle 9: Don’t spend too much time trying to “Beat
the Market.” Picking individual stocks is very costly,
challenging and difficult
111

• What is the alternative to picking stocks and
bonds?
• I like investing in no-load low-cost diversified
index funds (or Exchange Traded Funds (ETFs)
• What are index funds?
• Mutual funds or ETFs which hold specific
shares in proportion to those held by an index
• Their goal is to match the benchmark
performance, not beat it
• Why have they come about?
• Investors are concerned that most actively
managed funds have not been able to beat
their benchmarks after all fees
112

• I also like no-load and low-cost “target date”
mutual funds
• These funds will change their allocation consistent
with your age
• As you get older, these funds increase their
allocations to bonds and decrease their
allocations to equities
• These can be low cost, diversified, tax efficient
mutual funds
113

Source: S&P SPIVA Scorecard 2019, “S&P Indices Versus Active Funds (SPIVA) Scorecard”, S&P Research,
2019 at http://www.spindices.com/documents/spiva/spiva-us-year-end-2018.pdf.

• Jason Zweig, a senior writer for Money
Magazine commented:
• With an index fund, you're on permanent auto-
pilot: you will always get what the market is
willing to give, no more and no less. By enabling
me to say "I don't know, and I don't care," my
index fund has liberated me from the feeling that I
need to forecast what the market is about to do.
That gives me more time and mental energy for the
important things in life, like playing with my kids
and working in my garden (Jason Zweig, “Indexing
Let’s You Say Those Magic Words,” CNN Money,
August 29, 2001). 115

• Warren Buffet commented:
• By periodically investing in an index fund, the
know-nothing investor can actually outperform
most investment professionals. Paradoxically, when
'dumb' money acknowledges its limitations, it
ceases to be dumb (Warren Buffett, Letter to
Berkshire Hathaway Shareholders, 1993).
116

Final Cautions
• Final thoughts on investing:
• Do not go into debt to invest
• This includes taking equity out of your home
• Beware of self-serving financial advisors
• Don’t shift from a 401k and pay penalties to buy
another asset (usually cash value insurance
(IULs))
• Beware the agency problem
• Some advisors sell products based on their
commissions, not what is best for you
• Listen to the Spirit
• If it seems too good to be true, it probably is
117

Cautions (continued)
• M. Russell Ballard said:
• There are no shortcuts to financial security.
There are no get-rich-quick schemes that work.
Do not trust your money to others without a
thorough evaluation of any proposed
investment. Our people have lost far too much
money by trusting their assets to others. In my
judgment, we never will have balance in our
lives unless our finances are securely under
control (“Keeping Life’s Demands in Balance,”
Ensign, May 1987, 13.)
118

1. Build your foundation on Jesus Christ
2. Understand what to do before you invest
3. Understand the principles of successful investing
4. Understand investment factors you control
5. Wisely select investment vehicles
6. Determine your risk level
7. Set your asset allocation consistent with risk
8. Create your investment plan
9. Decide what makes a good mutual fund
10. Select your financial assets wisely, rebalance tax-
efficiently, and hold them for 40 years
119

Build Your Foundation on Christ
• Strengthen your spiritual foundation
• Personal finance is simply part of the gospel of Jesus
Christ
• Lets keep Him at our center and work with Him
• Doctrines and principles, confirmed by the Spirit,
changes behavior
• The answers are in the doctrines and principles
• Application is an invitation to learn and create
• Lets keep learning and creating
destination
• Keep on the covenant path as you work toward
your goals, and you will achieve them and more!

destination
• It is not “the end justifies the means” as we go
through life
• Rather, the key in life is what we become
• As such, turning to the Lord and our daily
conduct will takes us from the flawed people
we are now to becoming more like our
Savior
121

Review (continued)
• Investing is simply part of the gospel of Jesus
Christ. As we bring Christ into our finances,
we will do better and accomplish more that
we could possibly do on our own
• I leave you with one of my favorite scriptures:
• For verily, I say unto you, that great
things await you (D&C 45:62).
For great things truly await you as you work
on your investing, seek to come closer to the
Savior, understand doctrines, principles and
application, and you make your conduct
consistent with what you know and believe 122

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