1. Copyright Leslie Lum Six Strategic Steps Roadmap for Investing Wisely for a Lifetime

2. Copyright Leslie Lum The Roadmap Focus on financial goals Understand returns Understand and learn to like risk Asset allocation NOT investment selection Improve after-tax returns Monitor your investments

3. Copyright Leslie Lum Finding money to invest

4. Copyright Leslie Lum How much does a typical family make?

5. Copyright Leslie Lum What happens to your income over your life?

6. Copyright Leslie Lum How are we doing at savings?

7. Copyright Leslie Lum Could we save more?

8. Copyright Leslie Lum OneTwoThreeFourFive Average annual expenditures23,65743,69347,40655,20152,565 Food2,8315,4326,1737,4728,178 Food at home1,5253,1283,6644,4725,157 Food away from home1,3062,3042,5093,0003,020 Alcoholic beverages280468419436358 Housing8,76813,53615,59618,32216,930 Apparel and services8371,5471,9162,5032,698 Transportation3,8398,6839,56210,45910,185 Health care1,5583,0932,5322,5812,379 Entertainment \21,0412,4212,2632,8212,554 Personal care products and services316563603693689 Reading93159130135110 Education4985979381,4261,119 Tobacco products and smoking supplies193310351329364 Miscellaneous423650658801661 Cash contributions1,0321,8101,1791,2701,385 Personal insurance and pensions1,9484,4245,0875,9524,956 Personal taxes \11,5923,7012,3322,8381,444

9. Copyright Leslie Lum 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. Copyright Leslie Lum The time value of money or making your money work for you.

11. Copyright Leslie Lum Making your money work for you. What would you have if you did the following with $100 in 1996? Bought a round of beer (or a good meal) Put it in the bank for 5% interest per year Bought a stock index fund

12. Copyright Leslie Lum Let’s use compounding another way—to find the (future) cost of a purchase decision 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 it’s historically the rate of return on investments over a long period of time.) –$1785 –$3393 –$4837 –$6991

13. Copyright Leslie Lum (Future) costing 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?

14. Copyright Leslie Lum Setting Goals

15. Copyright Leslie Lum Lay out your goals Down payment on house (The more you put down the less risk to default and less monthly payments) Wedding (yours or your kids) Car (Budget or goal?) College tuition (you/your kids/your grandkids) (http://cgi.money.cnn.com/tools/collegecost/collegecost.html) Starting your own business Retirement (Rule of thumb – annual income divided by 4%) (http://sites.stockpoint.com/aarp_rc/wm/Retirement/Retirement.asp?act=L OGIN)http://sites.stockpoint.com/aarp_rc/wm/Retirement/Retirement.asp?act=L OGIN Estate (Inheritance or charity)

16. Copyright Leslie Lum How do you save for big goals? $40,000 down payment on a house in 10 years $50,000 college tuition for your kid in 15 years $800,000 for retirement in 30 years Just a minute---is it possible to save for big goals?

17. Copyright Leslie Lum For big goals save every year (8% return) $40,000 down payment on house in 10 years ($2761 every year) $50,000 college tuition in 15 years ($1841 every year) $800,000 retirement in 30 years ($7062 every year)

18. Copyright Leslie Lum Which is more? Saving $4000 a year from 25 to 45 years old and then no more savings Saving $8000 (double) a year from 45 to 65 years old

19. Copyright Leslie Lum You’re 25 and plan to retire in 40 years. How much do you save every year to have a $1 M nest egg. If you start at age 45. If you start at age 35. If you start now.

20. Copyright Leslie Lum It’s a moving target House in 10 years. Today’s price $200,000 Kid’s college education in 18 years. Today’s price $50,000 2% inflation 3% inflation?

21. Copyright Leslie Lum That’s not the only uncertainty $800,000 retirement goal in 30 years At 8% returns? At 10% returns?

22. Copyright Leslie Lum Katie is 25 and trying to plan her financial future. Here are her financial goals in today’s dollars (black) and inflated to when they are due (red).

23. Copyright Leslie Lum 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.

24. Copyright Leslie Lum Understanding returns

25. Copyright Leslie Lum Returns Always calculate returns on an annualized basis

26. Copyright Leslie Lum Calculate the return You will get your paycheck next week but you need $100 now. You arrange for a payday loan paying a fee of $15 for the use of $100. The payday loan company will collect the $100 electronically from your bank account when your pay check is deposited next week. What is the rate charged?

27. Copyright Leslie Lum Historical returns of major asset classes Average annual returns over the past 30 years: Cash 7% Bonds 9% Stocks 15% Conclusion: If you need higher returns to reach financial goals, you have to invest in stocks.

28. Copyright Leslie Lum Investment Risk

29. Copyright Leslie Lum Major asset classes: Risk & Return

30. Copyright Leslie Lum

32. If you receive an offer of a guaranteed high return, is that possible? Only if they guarantee a high loss as well. There are no guarantees in any investment. All investments go up and down. Higher return means higher risk.

33. Copyright Leslie Lum Given the same return, the investment with less risk is better

34. Copyright Leslie Lum The Northwest is the best.

35. Copyright Leslie Lum Bonds – Risk Return

36. Copyright Leslie Lum US Stocks – Risk Return

37. Copyright Leslie Lum Sectors – Risk Return

38. Copyright Leslie Lum International – Risk Return

39. Copyright Leslie Lum Combined – Risk Return

40. Copyright Leslie Lum Inflation is also risk

41. Copyright Leslie Lum Which is the best return?

42. Copyright Leslie Lum After inflation, the 6% return is the best!!

43. Copyright Leslie Lum Asset Allocation

44. Copyright Leslie Lum Can you predict the best return?

45. Copyright Leslie Lum Does the risk double with two investments? The key is having two investments which aren’t correlated.

46. Copyright Leslie Lum Adding a riskier investment to your portfolio decreases overall risk.

47. Copyright Leslie Lum If you allocate the right amount you reduce risk and increase return!

48. Copyright Leslie Lum Some investors think of risk as the maximum loss they are willing to take. What does asset allocation do for that?

49. Copyright Leslie Lum You can reduce your maximum loss by diversifying.

50. Copyright Leslie Lum How “smart money” asset allocates Calpers is the California pension system which manages $216 B. Check out their current and target asset allocation (available on their Web site www.calpers.ca.gov under Quick Facts). What differences do you see? What does their target allocation suggest?

51. Copyright Leslie Lum Maximize After-Tax Returns

52. Copyright Leslie Lum Retirement Traditional IRAs - $4000 per year (Catch-up for those over 50 years) Tax deferred. Depending on income, may be able to contribute pre-tax Taxes are paid at ordinary income rate when money is withdrawn. Roth IRA - $4000 per year (Catch-up for those over 50 years) No taxes when withdrawn. Contributions are after-tax. Limited to those under AGI of $90,000 (single) and $150,000 (couple) 401KEmployer may match at typically 50 cents for every dollar. Tax deferred. Contribute with pretax dollars. Tax credits for low- income ($25,000 single, $50,000 couple). Taxed at ordinary income when money is withdrawn.

53. Copyright Leslie Lum Education 529Up to total of about $300,000 for some plans. Must be used for tuition, fees, room, board, and graduate school. CoverdellContribute up to $2,000 a year. Post-secondary costs; K-12 costs, some computers. Income limits. Savings BondsInterest earned is tax-free if used for qualified higher- education purposes. Tuition and mandatory fees. Income limits.

54. Copyright Leslie Lum Monitor

55. Copyright Leslie Lum 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 Compare your performance to the indexes. Don’t make whipsaw changes to your asset allocation