Session 2 Preparation Print


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Session 2 Preparation Print

  2. 2. Success is Achieving Set Goals <ul><li>Set Goals </li></ul><ul><li>Save </li></ul><ul><li>Invest </li></ul><ul><li>Protect </li></ul><ul><li>Achieve Goals </li></ul><ul><li>Fundamentals of Financial Planning – 1 </li></ul><ul><li>Fundamentals of Financial Planning – 2 </li></ul><ul><li>Income Tax Management </li></ul><ul><li>The Way Forward </li></ul>
  3. 3. We are Here <ul><li>Fundamentals of Financial Planning – 1 </li></ul><ul><li>Fundamentals of Financial Planning – 2 </li></ul><ul><li>Income Tax Management </li></ul><ul><li>The Way Forward </li></ul>
  4. 4. what is wealth?
  5. 5. Take 2 minutes. Close your eyes Write what you see. imagine a wealthy person.
  6. 6. A person's wealth is defined by how long a period of time he/she can sustain their lifestyle if they stop working.
  7. 7. The longer you can go on living your life without working another day, the richer you actually are.
  8. 8. Your wealth is therefore defined by three things <ul><li>Your monthly expenses, </li></ul><ul><li>Your liquid assets and </li></ul><ul><li>Your passive income. </li></ul>
  9. 9. Value of Long-Term Investing Programs <ul><li>Many people don’t start investing because they only have a small amount to invest </li></ul><ul><li>but.... </li></ul><ul><li>Small amounts invested regularly become large amounts over time. </li></ul>
  10. 10. The Mantra <ul><li>TIME </li></ul>Start early Use the power of compounding
  11. 11. What is growth / return? <ul><li>Time Value for Money </li></ul><ul><li>Relative Growth </li></ul><ul><li>Nominal Interest Rate Vs Effective Interest Rate </li></ul>
  12. 12. Asset Allocation <ul><li>Investment Horizon </li></ul><ul><li>Market Expectations </li></ul>
  13. 13. What is Risk? <ul><li>Actual Returns </li></ul><ul><li>Vs </li></ul><ul><li>Expected returns </li></ul>
  14. 14. Factors Affecting the Choice of Investments <ul><li>Safety and risk. </li></ul><ul><ul><li>Safety means minimal risk of loss. </li></ul></ul><ul><ul><li>Speculative investments are high risk, and made to make a large profit in a short time. </li></ul></ul><ul><li>Risk is uncertainty about an outcome. </li></ul><ul><ul><li>Inflation risk. </li></ul></ul><ul><ul><li>Interest rate risk. </li></ul></ul><ul><ul><li>Business risk. </li></ul></ul><ul><ul><li>Market risk. </li></ul></ul>
  15. 15. Comparing Investment Avenues <ul><li>The Comparison of Investment Avenues </li></ul>
  16. 16. Investment Pyramid Commodities Penny Stocks Options High risk Low risk Blue Chip Stocks Government Securities Corporate bonds Gold, Silver Money Market Savings Accounts Cash Rental property High Quality Stocks Mutual funds
  17. 17. Factors That Reduce Investment Risk <ul><li>Develop and implement a personal investment plan. </li></ul><ul><li>Establish realistic goals. </li></ul><ul><li>Evaluate risk and potential return. </li></ul><ul><li>Evaluate your investment program periodically </li></ul><ul><li>But most importantly… DIVERSIFY !!!! </li></ul>
  18. 18. Diversification <ul><li>Diversification is the process of spreading you assets among several types of investments to reduce risk. </li></ul><ul><li>“ Don’t put all your eggs in one basket.” </li></ul><ul><li>For diversification to work, assets must have negative or very low correlations amongst each other </li></ul>
  19. 19. Perfect Positive Correlation Time Return A B Mean 0
  20. 20. Perfect Negative Correlation Time Return A B Mean 0
  21. 21. Zero Correlation Time Return A B Mean 0
  22. 22. What does diversification buy? <ul><li>It buys variance reduction. </li></ul><ul><li>When the correlation between assets is not 1, then as long as some of both assets is held in the portfolio, diversification reduces variance for any level of expected return. </li></ul><ul><li>The preceding graphs shows that this is not true for perfectly correlated assets. </li></ul>
  23. 23. What happens when the number of assets in the portfolio, n, becomes large? deviation standard Portfolio Nonsystematic risk Systematic/Market risk Number of securities 5 10
  24. 24. The bottom line <ul><li>Practitioners have shown that putting 30 securities to your portfolio guarantees sufficient diversification </li></ul><ul><li>When diversification is possible, all you care about is non-diversifiable risk, also termed systematic risk. </li></ul><ul><li>Mutual Funds provide an easy and inexpensive way to diversify </li></ul>
  25. 25. Monitoring Your Investment <ul><li>Monitor the value of your investments. </li></ul><ul><li>Keep accurate and current records. </li></ul><ul><li>Be aware of tax considerations, including tax deferred and tax exempt investments. </li></ul><ul><li>Keep track of capital gains and losses, interest income, rental income, and dividends. </li></ul><ul><ul><li>Cash dividends must be reported as income. </li></ul></ul><ul><ul><li>Dividends in the form of additional shares are generally not taxable. </li></ul></ul>
  26. 26. Investment Strategies <ul><li>Long-term techniques. </li></ul><ul><ul><li>Buy and hold . </li></ul></ul><ul><ul><li>Rupee cost average. </li></ul></ul><ul><li>Short-term techniques. </li></ul><ul><ul><li>Liquid Mutual Funds </li></ul></ul><ul><ul><li>Day Trading </li></ul></ul><ul><ul><li>Trading in Index and Commodity Futures </li></ul></ul>
  27. 27. Common Sense Investing * * Tennessee Securities Division <ul><li>Don’t believe claims that you can make big profits with risking the loss of some or all of your money </li></ul><ul><li>Invest only in what you understand </li></ul><ul><li>Ask for a prospectus and read it before investing </li></ul><ul><li>Recognise the difference between Savings and Investing </li></ul><ul><li>Calculate what you investment will cost </li></ul><ul><li>Investigate sellers and products </li></ul><ul><li>Balance emotion with caution </li></ul><ul><li>For Some – Experience is the best teacher </li></ul><ul><li>Be alert for potential problems </li></ul><ul><li>Just say no if you are not interested </li></ul><ul><li>All things don’t come to those who wait </li></ul><ul><li>Pride goes before a fall – accept you made a mistake / something is wrong </li></ul><ul><li>One wrong turn doesn’t deserve another. </li></ul>
  28. 28. Sources of Investment Information <ul><li>The internet and online computer services. </li></ul><ul><ul><li>Use a search engine such as Yahoo or Alta Vista to find information. </li></ul></ul><ul><ul><li>View sites such as,, and </li></ul></ul><ul><li>Newspapers and news programs. </li></ul><ul><li>Business periodicals and government publications. </li></ul><ul><li>Corporate Reports. </li></ul><ul><li>Statistical Averages. </li></ul><ul><li>Investor Services and newsletters. </li></ul>
  29. 29. If spending money brings you enjoyment, you will never be rich. However if making money brings you enjoyment, then your wealth is guaranteed.
  30. 30. Take Away <ul><li>Wealth Defined </li></ul><ul><li>Investment avenues –Characteristics </li></ul><ul><li>Investment Risks – Managing them </li></ul><ul><li>Investment Strategies </li></ul><ul><li>Common Sense Investing </li></ul>