1. Vicentiu Covrig 1 Managing Your Financial Assets Managing Your Financial Assets (see chapter 21, plus Allen family and Mason family cases)

2. Vicentiu Covrig 2 Relationships among various investment alternatives must be considered Six steps - Investment Policy Statement:  Determine objectives and constraints - Determine expectations for asset classes - Develop and implement a strategy - Monitor portfolio - Rebalance portfolio - Evaluate performance Portfolio Management as a Process

3. Vicentiu Covrig 3 Life Cycle Approach Risk/return position at various life cycle stages - A: Accumulation phase - early career - B: Consolidation phase - mid-to late career - C: Spending and Gifting phases Risk Return C B A

4. Vicentiu Covrig 4 The Portfolio Management Process 1. Policy statement - Specifies investment goals and acceptable risk levels - The “road map” that guides all investment decisions

5. Vicentiu Covrig 5 Return - Inflation  Steadily erodes real wealth  Historically more damaging to bond performance than stock performance Risk - Investors should establish risk level, then seek highest returns for that level Determining Objectives

6. Vicentiu Covrig 6 Liquidity - Important consideration for asset allocation Time Horizon Taxes - Capital gains vs. ordinary income - Marginal vs. average rates Regulations Unique needs and preferences 21 -6 Determining Constraints

7. Vicentiu Covrig 7 The Portfolio Management Process 2. Study current financial and economic conditions and forecast future trends - Determine strategies that should meet goals within the expected environment - Requires monitoring and updates since financial markets are ever-changing - First, study carefully historical returns - Remember that common stocks are risky - The chance that an investor will actually achieve some compound rate of return over time from stocks may be lower than he/she believes

8. Vicentiu Covrig 8 Involves deciding on weights for cash, bonds, and stocks - Most important decision  Differences in allocation can cause large differences in portfolio performance Factors to consider - Return requirements, risk tolerance, time horizon Construct and optimize portfolio by selecting securities and weights Asset Allocation

9. Vicentiu Covrig 9 The Portfolio Management Process 4. Monitor and update - Revise policy statement as needed - Monitor changing financial and economic conditions - Evaluate portfolio performance - Modify portfolio investments accordingly

10. Vicentiu Covrig 10 Allen family case Investment policy: the Trust Objectives: Return requirements Risk tolerances Constraints: Liquidity Time Horizon Laws and regulations Taxes Unique preferences and circumstances

11. Vicentiu Covrig 11 Investment policy: George Allen Objectives: Return requirements Risk tolerances Constraints: Liquidity Time Horizon Laws and regulations Taxes Unique preferences and circumstances

12. Vicentiu Covrig 12 Capital market outlook Asset Allocation

13. Vicentiu Covrig 13 Final Exam Final Exam Take home exam is a Financial Planning Case Study downloable from the class’s website