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Essential Personal Finance

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Presentation on theme: "Essential Personal Finance"— Presentation transcript:

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

2 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

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

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

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

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

7 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

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

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

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

11 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

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

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

14 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

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

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

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

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

19 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

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

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

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

23 100% - Age = Equities Rules of thumb Model portfolios
© 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

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

25 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

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

27 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

28 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

29 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

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