2-1 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Investment Proposals The Investment Process

2-2 Investing Overview Fundamental Question: Why invest at all? ―We invest today to have more tomorrow. ―Investment is simply deferred consumption. ―We choose to wait because we want more to spend later. Investors have their own investment objectives and strategies The Investment Policy Statement (IPS) ―Designed to reflect your objectives and strategies ―Two parts: 1) Objectives, 2) Constraints

2-3 Objectives: Risk and Return In formulating investment objectives, the individual must balance return objectives with risk tolerance. ―Investors must think about risk and return. ―Investors must think about how much risk they can handle. Your risk tolerance is affected by: ―Your ability to take risk ―Your willingness to take risk

2-4 Investment Proposal 1 – Portfolio Objectives The purpose of the assignment is to set a sample portfolio. It helps to have goals, and a strategy, so you need to start there. The following are your basic requirements: ―You must identify a goal for your investments. This needs to include a dollar value and a purpose. Make it something you care about. ―You must identify the time horizon and the risk tolerance you have for the portfolio. This will form your risk statement. Make it relate to how risk adverse you are. ―You must specify the starting and recurring (or subsequent one time) capital investments. Examples: Starting with $10,000 and monthly $100 after, or “invest the amount of a Starbucks coffee every week…” Make it apply to you. ―You must identify your investment and reinvestment strategy. Share your plan. 4

2-5 Portfolio Positioning Presentation The format for the assignment is a set of presentation slides. With a total of 5-7 Minutes, the typical person will have around 15 slides. A few more or less is fine. Your slides must be sufficient to understand the objectives and constraints of your portfolio You should identify at least 3 investments that you will make in your portfolio. 5

2-6 Tracking your portfolio After you have selected your 3 investments and your investment strategy, you will track your investments and your selected actions. Assume you buy your investments in accordance with your strategy and capital plan. Each subsequent investment opportunity will be an expansion on this, so track them well. 6

2-7 Keys to Success Keys to Success: ―Thoughtfulness – You need to show that you have thought through your strategy. If, for example, you come up with a strategy that is achieved by investing in CDs with a bank, that is not sufficient. ―Thoroughness - Smart investing requires a disciplined approach, full points requires demonstrating a disciplined approach. ―Insightful – The best proposals and investment evaluations show not only the raw numbers, but also insight. You need to explain why this investment is a good choice. 7

2-8 Sample What follows is a very simple sample, with the basic concepts. You are expected to expand on / enhance this basic structure. 8

2-9 George’s Example Portfolio Provide for baby Azilyn’s College fund! ―$500,00 Target by 2033 Constraints: ―Initial investment of $10,000 ―Subsequent investments of $100 / week ―Additional capital of $10,000 per year for first 3 years. 9

2-10 George’s Example – Risk / Return High Initial Risk threshold: ―Hate to say it, but she could just get some student loans…. ―Also, at least in the first few years, losses are sustainable. ―The rate of return required to achieve this objective is aggressive. Risk will be proportionate. Required Portfolio Yield: 10.5%! 10

2-11 George’s Example – Additional Considerations Initial capital is not sufficient for extensive diversification of portfolio. Concentration risk is high. Lack of target returns leading to ever increasing risk after first few years. Tax implications for dad. Consider Trust? Goal is dividend structure at the full term, target 4.5% 11

2-12 George’s Example – Initial Evaluation Traditional Bank Products: Not sufficient ―Savings account: Current average rate <1% 1 ―Certificates of Deposit: Peak Rate 3.25% 2 Index Investments (1/1/1997-1/1/2015) 3 ―S&P 500: 9.62% ―DJIA: 8.64% ―NASDAQ: 14.83% Selected Funds ―Vanguard Small Cap Growth (5 year run)22.74% ―Vanguard S&P 500 EFT (5 year run) 1.55% 1: Published rates from First Hawaiian Bank, Bank of Hawaii, Central Pacific Bank, and American Savings Bank 2: American Banker 1/15/2015 3: Yahoo Finance 12

2-13 George’s Example – The Model 13 Initial Conditions Initial buy in$10,000.00Goal$500,000 Monthly Add$ Period216Point in time Value Deposited Money$133,166.67MonthAmount Return %10.5% Pre-Tax value$501,204.48Income Option YieldMonthly Extra Capital4.50%$1, MonthAmount 12$10, $10, $10,000.00

2-14 George’s Example – Portfolio Strategy 14 Initial & Annual Capital High Risk Short term yield Moderate long term yield 50% Yield <12.5% Yield >= 12.5% Weekly Capital Infusion Long Term Income Yield > 11% or any funds above portfolio target All Returns

2-15 Questions? me if you have questions. 15