Generational Wealth Management - Week 4

Wealth Management
An Unbiased Approach to Managing Your Investments
Designed for the Affluent Investor

Wealth Management Process
Week 4: Managing Your Investments
Manager Selection
Financial Advisor
Implementation
Investment Policy
Performance Monitoring

Methods
Implementation Methods:
Lump-Sum Investing
Dollar-Cost Averaging
Modified Dollar-Cost Averaging
Modified DCA differs from
normal DCA in that it takes
movements in the market into
consideration.
DCA does not assure a profit and does not protect against loss in declining markets. Such a plan involves continuous
investment in securities regardless of fluctuating price levels and and investor should consider their financial ability to
continue their purchases through periods of low price levels.

Methods
Calling the bottom is impossible (Review)
Boston Globe, Aug 12, 2000 - "…at these undervalued prices…we're not
selling any stock at these prices". (On Monday, Aug 14, the S&P 500
closed at 1491. Four years later on Aug 12 2004, the S&P fell a
further 29% to close at 1063.)
Wired Magazine, Dec 4, 2000 - "Fred Siegel, president of investment
management firm Siegel Group, believes that it is unlikely that the
Nasdaq will drop more than another 200 points." (The Nasdaq fell
over 1,000 points shortly after Siegel made his prediction.)
Market guru and former hedge fund manager Jim Cramer of
TheStreet.com said it well in Jan 2001: “I get paid to call bottoms. I
don't see one yet, but in my 18 years of trading I've never called one
exactly right yet. I don't see why this time will be any different."
DCA does not assure a profit and does not protect against loss in declining markets. Such a plan involves continuous
investment in securities regardless of fluctuating price levels and and investor should consider their financial ability to continue
their purchases through periods of low price levels.

Methods
DCA vs. Lump Sum Investing
A couple has $500,000 to invest. What are the possible ways to
invest and what are the possible outcomes?
DOLLAR COST
AVERAGING
LUMP SUM
INVESTING
Declining Market
Bound Market
Increasing Market
?
?
?
?
?
?

Dollar Cost Averaging Example: Declining Market
DATE
TOTAL
VALUE
2000.00
2222.22
2500.00
2857.14
3333.33
$50.00
$45.00
$40.00
$35.00
$30.00
TOTAL
$100,000
$100,000
$100,000
$100,000
$100,000
$500,000
2000.00
4222.22
6722.22
9579.37
12912.70
12912.70
$100,000.00
$190,000.00
$268,888.89
$335,277.78
$387,380.95
$387,380.95
PRICE
TOTAL
SHARES
OWNED
SHARES
PURCHASED
DOLLAR
AMOUNT
INVESTED
PRICES ARE DECREASING
01/01/13
02/01/13
03/01/13
04/01/13
05/01/13

Dollar Cost Averaging Example: Declining Market
YOUR AVERAGE COST IS ACTUALLY LOWER
THAN THE AVERAGE PRICE
Average Price of XYZ
Average Cost of XYZ
Your Average Cost
$40.00
$38.72
$1.28 less than average price

…vs. Lump Sum Investing: Declining Market
DATE
TOTAL VALUE
(LUMP SUM)
$50.00
$45.00
$40.00
$35.00
$30.00
TOTAL
$500,000
0
0
0
0
10,000.00
10,000.00
10,000.00
10,000.00
10,000.00
$500,000.00
$450,000.00
$400,000.00
$350,000.00
$300,000.00
$300,000.00
PRICE
TOTAL
SHARES
OWNED
DOLLAR
AMOUNT
INVESTED
PRICES ARE DECREASING
TOTAL VALUE
(DCA)
$100,000.00
$190,000.00
$268,888.89
$335,277.78
$387,380.95
$387,380.95
01/01/13
02/01/13
03/01/13
04/01/13
05/01/13

Dollar Cost Averaging Example: Bound Market
DATE
TOTAL
VALUE
2000.00
2222.22
1818.18
2000.00
2000.00
$50.00
$45.00
$55.00
$50.00
$50.00
TOTAL
$100,000
$100,000
$100,000
$100,000
$100,000
$500,000
2000.00
4222.22
6040.40
8040.40
10040.40
10040.40
$100,000.00
$190,000.00
$332,222.22
$402,020.20
$502,020.20
$502,020.20
PRICE
TOTAL
SHARES
OWNED
SHARES
PURCHASED
DOLLAR
AMOUNT
INVESTED
PRICES ARE FLUCTUATING
01/01/13
02/01/13
03/01/13
04/01/13
05/01/13

Dollar Cost Averaging Example: Bound Market
YOUR AVERAGE COST IS SIMILAR TO THE
AVERAGE PRICE
Average Price of XXX
Average Cost of XXX
Your Average Cost
$50.00
$49.80

…vs. Lump Sum Investing: Bound Market
DATE
TOTAL VALUE
(LUMP SUM)
01/01/13
02/01/13
03/01/13
04/01/13
05/01/13
$50.00
$45.00
$55.00
$50.00
$50.00
TOTAL
$500,000
0
0
0
0
10,000.00
10,000.00
10,000.00
10,000.00
10,000.00
$500,000.00
$450,000.00
$550,000.00
$500,000.00
$500,000.00
$500,000.00
PRICE
TOTAL
SHARES
OWNED
DOLLAR
AMOUNT
INVESTED
PRICES ARE FLUCTUATING
TOTAL VALUE
(DCA)
$100,000.00
$190,000.00
$322,222.22
$402,020.20
$502,020.20
$502,020.20

Dollar Cost Averaging Example: Increasing Market
DATE
TOTAL
VALUE
2000.00
1818.18
1666.67
1538.46
1428.57
$50.00
$55.00
$60.00
$65.00
$70.00
TOTAL
$100,000
$100,000
$100,000
$100,000
$100,000
$500,000
2000.00
3818.18
5484.85
7023.31
8541.88
8541.88
$100,000.00
$210,000.00
$329,090.91
$456,515.15
$591,631.70
$591.631.70
PRICE
TOTAL
SHARES
OWNED
SHARES
PURCHASED
DOLLAR
AMOUNT
INVESTED
PRICES ARE INCREASING
01/01/13
02/01/13
03/01/13
04/01/13
05/01/13

Dollar Cost Averaging Example: Increasing Market
YOUR AVERAGE COST IS ACTUALLY STILL LOWER THAN THE
AVERAGE PRICE OF THE STOCK
Average Price of XXX
Average Cost of XXX
Your Average Cost
$60.00
$58.54

…vs. Lump Sum Investing: Increasing Market
DATE
TOTAL VALUE
(LUMP SUM)
$50.00
$55.00
$60.00
$65.00
$70.00
TOTAL
$500,000
0
0
0
0
10,000.00
10,000.00
10,000.00
10,000.00
10,000.00
$500,000.00
$550,000.00
$600,000.00
$650,000.00
$700,000.00
$700,000.00
PRICE
TOTAL
SHARES
OWNED
DOLLAR
AMOUNT
INVESTED
PRICES ARE INCREASING
TOTAL VALUE
(DCA)
$100,000.00
$210,000.00
$329,090.91
$456,515.15
$591,631.70
$591.631.70
01/01/13
02/01/13
03/01/13
04/01/13
05/01/13

Conclusion
LUMP SUM
INVESTING
Declining Market
Bound Market
Increasing Market
$387,381
$502,050
$618,506
$300,000
$500,000
$700,000
DOLLAR COST
AVERAGING
Does lump sum investing have a higher risk and higher reward?
FOOD FOR THOUGHT
A couple has $500,000 to invest. What are the possible ways to
invest and what are the possible outcomes?

Louie the Loser
Think you
have bad
timing?
Meet
Louie
the
Loser© American Funds Distributors, Inc.

Louie the Loser
He cancelled his
dental insurance the
day before his root
canal flared up.
His vacation in the
desert was rained
out.
He misses planes
but catches colds.
Why is he so happy?
© American Funds Distributors, Inc.

Louie the Loser
Starting in 1987, invested $10,000
a year in a large cap fund
Invested for 20 Years
Chose the Worst Day Each Year — Market
High
Total Investment: $200,000

Louie the Loser
…20 years later
$10,000 a year, starting in 1987:
Worst-day investments (market highs)
Account value $637,185
Average annual total return 10.7%
Best-day investments (market lows)
Account value $772,705
Average annual total return 12.0%
Market highs and lows based on Dow Jones Industrial Average. Cumulative volume discount applied when appropriate.
Figures are past results and are not predictive of results in future periods. Current and
future results may be lower or higher than those shown. Share prices and returns will
vary, so you may lose money. Fund results are for Class A shares and reflect deduction
of maximum sales charge (5.75%).

What We Know for Sure
It’s time in, not timing, the
market that counts
© American Funds Distributors, Inc. AI-20069

CLASS 4: Managing Your Investments
Manager Selection
Financial Advisor
Implementation
Investment Policy

Investment Professionals
Investment Advisors
Financial Advisors
Financial Planners
Financial Consultants
Stock Brokers
Discount Brokers
Relationship Managers

Assets vs. Transactions
Fees vs. Commissions
Counseling vs. Selling
Process vs. Product

A good financial advisor should have the following
three characteristics:
Integrity
Intelligence
Motivation

What should you look for in an advisor?
Level of Education
Types of Clients
Industry Experience
Professional Memberships
Applicable Market Knowledge
Ability to Educate You

Sample Questions
How many client relationships do you have?
Describe your ideal client?
What is your specialty?
Do you hold any professional designations?
Do you use an investment policy statement with your clients?
May I see an example of an investment policy statement that you use?
Describe the process you use with clients.
Which responsibilities do you handle personally and which do you delegate?
How do you evaluate performance?
What performance should I expect from my investments?
What level of risk/volatility should I expect?

Sample Questions Continued…
How do you select managers, funds or individual stocks for my portfolio?
What is your disciplinary record?
How would I fit into your practice?
What level of communication should I expect?
Do you employ options and/or future strategies?
How many brokerage firms have you worked for?
If firm has been changed in the past 5 years, why did you change firms?
What would you like to be doing in five years?
Describe everything that I would be paying for to accomplish the
investment programs you advise. Include commissions, expenses,
account fees, transaction fees, 12b-1 fees, maintenance fees, etc.

The Stages of Service
Evaluate current situations (every 12 months)
Determine goals and objectives (every 12-24 months)
Determine risk tolerance
Asset allocation analysis (every 90 days)
Manager and manager comparison analysis (every 90 days)
Timing
Tax issues (every 12 months)
Will, Trusts, FLLC (3-5 years)
Insurance (every 12 months)
Monitoring (every 90 days)
Rebalancing (every 90 days)

The Stages of Service
EVERY 90 DAYS
ANNUALLY
EVERY 12-24 MONTHS
EVERY 3-5 YEARS
YEARS
0 1 2 3 4
ASSET ALLOCATION ANALYSIS
MANAGER COMPARISON ANALYSIS
MONITORING
REBALANCING
EVALUATE CURRENT SITUATION
TAX ISSUES
INSURANCE
DETERMINE GOALS & OBJECTIVES
WILL, TRUSTS, FLLC

Things to look out for:
Trigger words like “Guarantee” or absolute terms like “never”
Promising wealth without risk
Margin or other leverage
Extensive timing schemes
Concentration in single stock, asset class, etc.

How do I check my investment advisor’s securities
disciplinary record?
Request from the Financial Industry Regulatory Authority
(FINRA) a disciplinary record for your broker at:
http://www.finra.org/Investors/ToolsCalculators/BrokerCheck/

Implementation
Depending on the nature of your investment management team, some or all of
the implementation process may be your responsibility.
An experienced financial planning professional will likely have experience and
expertise to provide advice in each “Stage of Service”; yet, they may not be able
to give tax or legal advice without the proper licensure. In this case, they may be
able to act as a quarterback for your professional “Circle of Trust”.
YOU
CPA /
Accountant
Insurance
Agent
Attorney
Financial
Planner
Personal
Banker

CLASS 4: Managing Your InvestmentsManager Selection
Financial Advisor
Implementation
Investment Policy

The Investment Policy Statement
What is an IPS?
The means for turning your vision into reality. It is a living
document that guides all investment decisions.
Establishes a clear understanding between decision makers.
Provides a meaningful basis for the evaluation.
Enables the client, the advisor and portfolio managers to protect
the fund from ad hoc revisions of sound long-term policy
when short-term exigencies are most distressing and the
policy is in doubt.

Why is it important to develop an IPS?
Puts structure to your goals
Manager or Broker Succession
Control Emotional Decisions
Identifies Responsibilities
Determine Asset Allocation
Sets Up Performance Measurement Criteria

Do I need an Investment Policy Statement?
1. What rate of return have your investments achieved over the
last three years? Last five years?
2. How are the returns calculated?
3. Are you a fiduciary?
4. What procedures do you use to select your investments and/or
your investment managers (or funds)?
5. What is your investment allocation?
6. What system, if any, do you use to time the market or to
rebalance your portfolio?
7. What asset classes are permitted for your use? Which are
restricted?

Do I need an Investment Policy Statement?
8. What is your target rate of return and how was it determined?
Is it a nominal rate or in relation to some benchmark, such as
inflation or the S&P 500?
9. What level of risk is acceptable to you and how do you qualify
that?
10. How much liquidity is required for your portfolio and how do
you determine that level?
If your response to any of the above was “I don’t know,” your
answer was less than clear, or if you answered “yes” to
question 3, then you need an Investment Policy Statement
and this section of the class is intended for you.

Q: Who is Responsible for its Development?
A: The Client and the Investment Professional!
For the Client, it serves the useful purpose of requiring thinking
about preferences and expectations with respect to the market.
For the Investment Professional, an IPS provides the basis for
recommendations and for investment decisions in situations of
uncertainty.

Client Responsibilities
Communicate your goals
Determine your time horizon
Gather personal financial data
Consolidate holdings
Know your fees and expenses
Determine you risk tolerance

Investment Professional Responsibilities
Help in determining your risk tolerance
Help determine long term goals
Provide asset allocation recommendations
Explain what appropriate fees and expenses should be
Help select appropriate managers
Set standards for performance reporting

Seven Elements of a Well Constructed IPS
1. Executive Summary/Statement of Purpose
2. Investment Goals and Objectives
3. Statement of Responsibility
4. Investment Guidelines
5. Asset Mix Guidelines
6. Communication
7. Performance Review and Evaluation

1. Executive Summary/Statement of Purpose
This section lays out the groundwork for the rest of the
document. It first answers the question, “Who are you?” Next, it
describes your broad aims. It also documents the intended
purpose of the financial assets considered in the portfolio design.
An explanation of the purpose of the IPS, objectives, and
legal structure.
The size of the portfolio, future payment information, and
disbursement schedules.
The tax status of the portfolio.
A description of participant demographics.
TO BE INCLUDED:
Source: The Complete Guide to Managing a Portfolio of Mutual Funds, by Ronald K. Rutherford.

2. Statement of Responsibility
This section describes the related parties involved in the IPS
design and implementation process. It includes the investment
advisor and the custodian. It may also include others such as the
co-trustee, an auditor of the records, and those rendering tax and
legal advice about the IPS.
Source: The Complete Guide to Managing a Portfolio of Mutual Funds, by Ronald K. Rutherford.

3. Investment Goals and Objectives
Time Horizon
Risk Tolerance
Asset Class Preferences
Expected or Desired Rate of Return
Lifestyle needs

4. Investment Guidelines
Guidelines are established to identify the parameters within the
investment strategy. This section is the appropriate place to
articulate concerns and expectations, and acknowledge the
uncertainties of investing in the capital markets. This section
should include restrictions including prohibited transactions.

5. Asset Mix Guidelines
Asset mix guidelines can include restrictions placed by the client or
client circumstances on securities or investment categories. This is also
the place to document restrictions suggested by the advisor. For
example, an unrestricted asset allocation model may assign all financial
assets to two or three categories or asset classes.

6. Communication
Example-Investment Manager(s) Communication with the Trustees
Provide monthly statements, quarterly portfolio valuations and
transaction listings
Meet at least (quarterly, semi-annually, annually)
Review past investment performance, evaluate the current
investment outlook, and discuss investment strategy
Provide information regarding major changes in investment policy
that may result in major investment strategy changes.

7. Performance Review
1. Up is good, Down is bad
2. Performance at or above goal
3. Performance within volatility tolerance
4. Relative Performance
5. Trend of Performance vs. Goal

Sample Investment Policy Statement

Sample Portfolio Review
Client: John & Jane Adams
Period: 3/26/2012-3/26/2013
*IMPORTANT: All Investment Names, Indices, Performance Data, and Allocations are fake and do not represent any true
investment and should not be considered investment advice.

Activity Summary
Period YTD
Beginning Market Value (Including Bond Accrual) 1,053,842.89$ 1,153,551.35$
Contributions 40,000.00$ 10,000.00$
Distributions -$ -$
Transfer In/Out 50,000.00$ -$
Dividends and Interest 5,346.29$ 1,537.55$
Miscellaneous Charges (320.55)$ (85.00)$
Advisory Fees Paid (5,062.87)$ (1,255.20)$
Bond Accrual 160.00$ 50.00$
Market Value Increase/Decrease 88,750.65$ 68,917.71$
Ending Market Value (Including Bond Accrual) 1,232,716.41$ 1,232,716.41$
Gross Performance 8.433% 5.996%
Returnsare GrossofFees, First 12 Month Returnsnot Annualized

Allocation Summary
$ %
459,756.00$ 37.3%
536,493.10$ 43.5%
150,588.31$ 12.2%
55,879.00$ 4.5%
30,000.00$ 2.4%
Asset Category
US Fixed Income
US Equity
International
Emerging Markets
Cash & Equivalents
Check Actual % Compare to Target % Rebalance

ConsolidatedHoldings
Name Symbol Quantity
Beginning $
Amount Price (3/25/13) Ending $ Amount
Position
Performance
Portfolio
Composition Category
XYZIntermediateBondFund VWXYZ 2,015.55 250000 133.24$ 268,554.12$ 7.42% 22% USFixedIncome
ConvertibleBondFund BBBBB 1,500.20 30000 22.15$ 33,232.46$ 10.77% 3% USFixedIncome
LMNOPMortgageBackedSecurityFund LMNOP 1,011.55 50000 55.80$ 56,446.21$ 12.89% 5% USFixedIncome
MunicipalBondFund MUNIB 788.55 100000 128.75$ 101,523.21$ 1.52% 8% USFixedIncome
Benchmark:USAggregateBondIndex 7.20%
GenerixGrowthFund GGROW 2,525.00 200000 115.25$ 291,005.45$ 20.50% 24% USEquity
HighDividendValueFund VALEW 3,112.55 200000 74.85$ 232,987.65$ 16.49% 19% USEquity
SprinklerCompanyofAmericaStock SCA 150.00 20000 83.33$ 12,500.00$ -37.50% 1% USEquity
Benchmark:USLargeCapEquityIndex 15.30%
GlobalEx-USALargeCapEquityFund GLOBE 4,005.33 120000 33.72$ 135,056.20$ 12.55% 11% InternationalEquity
RussianSocialMediaCompany RUSS 200.00 15000 77.66$ 15,532.11$ 3.55% 1% InternationalEquity
Benchmark:InternationalEquityIndex 9.60%
EmergingEconomies Fund EMECF 1,009.56 50000 55.35$ 55,879.00$ 11.76% 5% EmergingMarkets Equity
Benchmark:EmergingMarketsEquityIndex 10.50%
MoneyMarketFunds MMFXX 17,842.89 18842.89 1.00$ 30,000.00$ 0.00% 2% Cash&Equivalents
1,053,842.89$ 1,232,716.41$ 8.43% 100%
Class 2 Flashback:
Most Returns are Derived from Asset Allocation,
make sure to track the performance of your individual
investments vs. the Benchmark for that asset class.

Index Comparison - Returns areGross of Fees - First 12 Month Returns arenot annualized
Period(3/26/12-
3/26/13) QTD YTD 1 Year 3 Year 5 Year 10 Year Inception
Client Portfolio 8.43% 5.99% 0.0599 8.43% 5.51% 3.78% 5.75% 6.22%
BenchmarkPortfolio* 6.25% 4.75% 0.0475 6.25% 5.60% 3.90% 4.50% 5.26%
*50%USLargeCapIndex /10%International EquityIndex /40%Aggregate BondIndex
Portfolio Value vs. Benchmark Since Inception
-It can be easy to focus on how your portfolio compared to popular
indices, like the S&P 500, but your portfolio’s benchmark should be
blended based off your target risk and return profile.

Account Detail - John Smith IRA
Beginning $
Amount Price (3/25/13)
Ending $
Amount
Portfolio
XYZ IntermediateBond Fund VWXYZ 2015.55 250,000.00$ 133.24$ 268,554.12$ 22% US Fixed Income
Sprinkler Company of America Stock SCA 150 20,000.00$ 83.33$ 12,500.00$ 1% US Equity
Russian Social Media Company RUSS 200 15,000.00$ 77.66$ 15,532.11$ 1% International Equity
Emerging Economies Fund EMECF 1009.56 50,000.00$ 55.35$ 55,879.00$ 5% Emerging Markets Equity
335,000.00$ 352,465.23$ 29%
Account Detail - John and Betty Smith Joint Tenants with ROS
Beginning $
Amount Price (3/25/13)
Ending $
Amount
Portfolio
ConvertibleBond Fund BBBBB 1500.2 30,000.00$ 22.15$ 33,232.46$ 3% US Fixed Income
LMNOP Mortgage Backed Security Fund LMNOP 1011.55 50,000.00$ 55.80$ 56,446.21$ 5% US Fixed Income
Municipal Bond Fund MUNIB 788.55 100,000.00$ 128.75$ 101,523.21$ 8% US Fixed Income
Generix Growth Fund GGROW 2525 200,000.00$ 115.25$ 291,005.45$ 24% US Equity
High Dividend ValueFund VALEW 3112.55 200,000.00$ 74.85$ 232,987.65$ 19% US Equity
Global Ex-USA LargeCap Equity Fund GLOBE 4005.33 120,000.00$ 33.72$ 135,056.20$ 11% International Equity
Money Market Funds MMFXX 17842.89 18,842.89$ 1.00$ 30,000.00$ 2% Cash & Equivalents
718,842.89$ 880,251.18$ 71%
-Some investments make more sense to be in certain types of accounts.
Higher cash balances in taxable checkwriting accounts, tax-advantaged
investments in taxable accounts, high-income investments in non-
taxable accounts, etc.

-Income generation and cash flow can be extremely important,
depending on where you are in your financial life cycle. Many reports
will estimate future income based off of current yield figures.
Estimated Income
Asset Symbol Quantity Price (3/25/13) Current Value % ofAssets
Annual
Income Rate
Annual
Income Total Current Yield
XYZ IntermediateBondFund VWXYZ 2,015.55 133.2411104 268,554.12$ 22% 0.34 8,190.90 3.05%
ConvertibleBondFund BBBBB 1,500.20 22.15201973 33,232.46$ 3% 0.098 186.10 0.56%
LMNOP MortgageBacked Security Fund LMNOP 1,011.55 55.80170036 56,446.21$ 5% 0.35 1,749.83 3.10%
MunicipalBondFund MUNIB 788.55 128.7466996 101,523.21$ 8% 0.22 2,791.89 2.75%
GenerixGrowth Fund GGROW 2,525.00 115.2496832 291,005.45$ 24% 0.282 2,240.74 0.77%
High Dividend ValueFund VALEW 3,112.55 74.8542674 232,987.65$ 19% 0.394 3,098.74 1.33%
Sprinkler Company of AmericaStock SCA 150.00 83.33333333 12,500.00$ 1% 0.075 50.00 0.40%
GlobalEx-USALargeCap Equity Fund GLOBE 4,005.33 33.71911927 135,056.20$ 11% 0.355 2,822.67 2.09%
Russian SocialMediaCompany RUSS 200.00 77.66055 15,532.11$ 1% 0.2 194.15 1.25%
Emerging Economies Fund EMECF 1,009.56 55.34985538 55,879.00$ 5% 0.469 961.12 1.72%
Money MarketFunds MMFXX 17,842.89 1 30,000.00$ 2% 0.003 75.00 0.25%
Totals 1,232,716.41 100% 22,361.15 1.81%

Reaching Your Goals
Financial Independence
Financial independence is when you can maintain
your desired lifestyle for the remainder of your life
without the worry of money.
LIFESPAN
INCOME
PRODUCTIONCAPACITY
DESIRED LIFESTYLE
FINANCIAL INDEPENDENCE
FINANCIAL DEPENDENCE

Reaching Your Goals
“Whoever acquires knowledge but does not put it
to use is as one who plows but does not sow.”
-Sa’di

Generational Wealth Management - Week 4

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