Essential Personal Finance Chapter 9 Make wise investments © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Contents Introduction Goals and timescale Risk and return Asset classes Building a portfolio Investment strategies Tax and charges Financial advice Conclusions © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Introduction © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Goals and timescale Savings Investments © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Goals and timescale: real returns © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Risk and return Figure 9.1 Risk and return trade-off © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Risk and return: risk dimensions Attitude towards risk (ATR) Capacity for loss Define Give examples © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Asset classes Fixed-interest Equities Cash Property © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Asset classes Types of product or security? Risk and return? Liquidity? Cash © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Asset classes Fixed-interest Types of product or security? Risk and return? Liquidity? © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Fixed-interest: yield and price Figure 9.2 Inverse relationship between bond price and interest rates © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Asset classes Types of product or security? Risk and return? Liquidity? Property © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Asset classes Types of product or security? Risk and return? Liquidity? Equities © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Asset classes: risk-return spectrum Expected Equities Total – including income. Compounding! Property Fixed-interest Cash © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Building a portfolio © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Building a portfolio Demand © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Markowitz diversification © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Markowitz diversification Figure 9.4 Constructing a two-investment portfolio using Markowitz theory © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Capital Asset Pricing Model (CAPM) Figure 9.5 Constructing a portfolio using the Capital Asset Pricing Model © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Efficient Markets Hypothesis (EMH) Weak Semi-strong Strong Define? Implications for portfolio building? © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Behavioural finance Herd behaviour Hot-hand fallacy © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Investment strategies Rules of thumb Rebalancing Active vs passive Pound-cost averaging © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

100% - Age = Equities Rules of thumb Model portfolios © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Rebalancing © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Active vs passive Active Passive Aim Beat the market Track the market Strategy Stock-picking Market timing Buy and hold whole market* Costs Higher Lower Products Actively managed investment funds Tracker funds Index funds * Or replicate this strategy through the use of derivatives (complex products whose performance is linked to that of underlying assets, such as equities) © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Pound-cost averaging Worst time to buy Average price paid Best time to buy © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

May be via a ‘tax wrapper’ Tax and charges Tax Charges Tax relief or bonus on investment Tax-free build-up No tax when cash in May be via a ‘tax wrapper’ Ongoing charges: Annual management charge Fund administration costs Direct costs to fund, e.g. dealing charges Platform fees Advice fees © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Financial advice Invest more wisely? Consumer protection Asset allocation and rebalancing Pattern of investing and withdrawing Behaviour gap Consumer protection Suitable advice Complaints and compensation systems if not © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Conclusions Investors - behaviour gap: save too little and bad timing Goals and timescale Short- to medium-term: savings Medium- to long-term: investments Risk and return Long-term: higher capital risk-higher returns but ‘safe’ savings increase inflation and shortfall risks But attitude towards risk and capacity for loss important too Asset classes - cash, fixed-interest, property, equities Portfolio building - diversification (Markowitz, CAPM, EMH) Investment strategies Active vs passive Rules of thumb, rebalancing, pound-cost averaging Tax and charges - reduce returns Financial advice - may close behaviour gap; consumer protection © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne