1 Roadmap for Investing Wisely for a Lifetime Leslie Lum Bellevue Community College

2 The Roadmap Save Focus on financial goals Understand returns Understand risk Asset allocation Monitor your investments

3 Rule #1: You can make more money saving aggressively than you can investing aggressively

4 How much does a typical family make?

5 What happens to your income over your life?

6 How are we doing at savings?

7 Could we save more?

8 Rule #2: If you dont have goals, you wont achieve them.

9 Annual Budget vs Long-Term Financial Goals Trade off between spending money now and setting aside money for long-term goals How do you make your decision? What are the costs?

10 Lay out your goals Down payment on house Wedding College tuition Starting your own business Retirement Estate (Inheritance or charity)

11 Rule #3: Know how to measure returns.

12 Returns Always calculate returns on an annualized basis

13 Calculate the annualized return You have an outstanding balance of $500 on your credit card. You are late in paying and were only able to pay the minimum $10. Your APR on the card is 22% above prime. The late payment charge is $35. Assume the prime rate is 7% now.

14 Calculating returns – time value of money

15 Calculating lost return You want to buy a HDTV set for $1500. What is this (future) costing you? (Use 20 years and 8% return. We use 8% because its historically the rate of return on investments over a long period of time.) –$1785 –$3393 –$4837 –$6991

16 You are a typical employee in your 20s who when you left your job in 2005 cashed out (66% do) your 401K account of less than $10,000. What is the cost of cashing out your account if your balance was $8000? Calculating lost return

17 Which is more? Saving $4000 a year from 25 to 45 years old and then no more savings but hold in account Saving $8000 (double) a year from 45 to 65 years old

18 Its a moving target House in 10 years. Todays price $200,000 Kids college education in 18 years. Todays price $50,000 2% inflation 3% inflation?

19 Thats not the only uncertainty $800,000 retirement goal in 30 years At 8% returns? At 10% returns?

20 The financial plan Katie is 25 and trying to plan her financial future. Here are her financial goals in todays dollars (black) and inflated to when they are due (red).

21 Katie does her plan and knows that her heaviest savings will happen in her 30s and 40s. She also does sensitivity analysis on various inflation and return rates. She knows that she should save as much as she can when she is younger.

22 Rule #4: Understand risk

23 Investment Risks Market risk Business risk Interest rate Inflation risk Political risk Fraud risk

24 Major asset classes

25 Bonds

26 Stocks

27 Lessons to learn: If you want a higher return, you need to invest in riskier assets (stocks) The more return, the more risk. 322% gain guaranteed? Only if 322% loss guaranteed! Return versus Risk

28 Given the same return, the investment with less risk is better

29 The Northwest is the best.

30 Bonds – Risk Return

31 Stock – Risk Return

32 Sectors – Risk Return

33 International – Risk Return

34 Combined – Risk Return Rank the categories in order of return Rank the asset classes in order of risk

35 How do you get both a good return and low risk?

36 Risk of loss in stocks is high year to year

37 Over 5 years, risk of loss is lower

38 Over 10 years, risk of loss is small

39 Lesson? Buy and hold market index funds (doesnt work for individual stocks) Have an emergency fund (3 to 6 months) to tide you over Have other sources of income so you dont have to cash out during down markets

40 Rule #5: Asset allocate

41 All eggs in one basket? 34.6 percent of families had stock in only one company 59.5 percent had stock in three or fewer companies 9.5 percent had stock in fifteen or more companies Source: 2004 Consumer Finance Survey

42 Can you predict the best return?

43 Does the risk double with two investments? The key is having two investments which arent correlated.

44 Adding a riskier investment to your portfolio decreases overall risk.

45 If you allocate the right amount you reduce risk and increase return!

46 Pension Fund Portfolio

47 Millionaires Portfolio

48 401K Allocations by Age Source: Investment Company Institute

49 Rule # 6: Always watch your money.

50 Investment Advice Take care in choosing your advisor –Experienced –Relevant education –Certified by professional body –Check for disciplinary actions ( Dont invest in anything you dont understand Watch what your advisor does

51 Use indices to monitor your portfolio

52 Monitor Your Investments Rebalance periodically – but if you buy and sell a lot you will lose money Change allocation if you have different cash flow requirements Risk and return - Prune the low return/high risk investments Dont make whipsaw changes to your asset allocation

53 The Roadmap Save Focus on financial goals Understand returns Understand risk Asset allocation Monitor your investments