personal financial planning guide
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Personal Financial Planning Guide. Chapter 3-6: Building Wealth through Investment Planning. Investment Planning Steps. Steps to investment planning: Set goals Know investment vehicles Know financial markets and concepts Develop strategy Implement strategy Monitor performance. - PowerPoint PPT PresentationTRANSCRIPT
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Investment Planning Steps
Steps to investment planning:1. Set goals
2. Know investment vehicles
3. Know financial markets and concepts
4. Develop strategy
5. Implement strategy
6. Monitor performance
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Step 1: Financial Goals
Factors affecting financial goals:– __________________ horizon– __________________– Your _________________________ situation– Personal profile
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Personal Profile
Your investment profile includes– _______________________– _______________________– _______________________ needs– _______________________ needs– _______________ rate– _______________ tolerance
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Step 2: Investment Vehicles
Major categories of investments– Cash– Bonds– Stocks– Other (real estate, gold, etc.)
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Categories of Investments: Cash
• Cash includes any asset with high liquidity and little or no risk.
• Examples:– Bank accounts– __________________________ mutual funds– US Treasury bills– Savings bonds
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Categories of Investments: Bonds
• Bonds are debt instruments issued by corporations and governments.
• Advantages of bonds– Regular _________________– Diversify other investments
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Categories of Investments: Bonds
Types of bonds– Corporate– US Government– Municipal– Mortgage-backed securities
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Categories of Investments: Municipal Bonds
• The interest earned on municipal bonds is frequently exempt from ______________ ___________.
• In choosing between bonds, you must always consider the after-tax return.
• Municipal bonds:– Good for investors with high _____________.– Bad in a ______________________ account.
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Categories of Investments: Stocks
• Common stock provides return through dividends and capital gains.
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Step 3: Know Financial Markets and Concepts
Important financial concepts:– ________________– ________________– Portfolio structure/asset allocation
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Financial Concepts: Return
• Historical returns can be observed and measured, but what is important to investors are ____________________ returns.
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Financial Concepts: Risk
Investments, by risk (low to high)– Cash– US government securities– Investment grade bonds (corp., muni)– Stock and junk bonds
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Financial Concepts: Portfolio Structure
Diversification by itself does not increase returns. However, by diversifying, you reduce ________________.
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Step 4: Develop Investment Strategy
One of the most important parts of your investment strategy, is ____________ ________________________:– Identify asset classes to be included– Determine % to be invested in each– Periodically rebalance
Investment Strategy (Cont.)
• Another important consideration: take advantage of payroll deduction:• Payroll deduction makes saving and investing
automatic.• By investing every month, you take advantage of
“_________________________________________.”
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Investment Strategy (Cont.)
• Another important consideration: take advantage of tax shelters.• Tax shelters (401k accounts, IRAs) ______________
payment of taxes.• Many employers match contributions to your
retirement account.
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Step 5: Implement Your Strategy
Implementing your financial plan includes:– Who to invest with (“how to buy”)– When to buy
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Implement Your Strategy
Your financial plan can be implemented with:– A financial planner– A broker– Professional money manager– Mutual funds
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Implement Your Strategy
When to buy: on a ___________________ ________________.
One of the biggest mistakes investors make is to “time the market.” This usually results in buying high and selling low.
Saving and investing through payroll deduction avoids trying to second guess which way the market is going.
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Step 6: Monitor Performance
• It is important to measure investment returns and to compare your returns with _____________________.
• Investment benchmark: an index of returns.
• Your benchmarks should be based on your __________________ allocation.
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Mutual Funds
• The most popular method of investing in stocks and bonds is through mutual funds.
• When you invest in a mutual fund, you become part owner in the portfolio of securities held by the fund.
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Mutual Funds
• Mutual funds offer:– Professional management– Record keeping– _______________________– Low _____________________ costs (in
some cases)
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Types of Mutual Funds
• Mutual funds can be classified by the types of assets they hold:– Stock funds– Bond funds– Money market funds– Index– Sector
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Mutual Funds
Cost of investing in mutual funds include:– Front-end and back-end loads– Annual management fees– 12 b-1 fees
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Mutual Fund Information
Sources of info on mutual funds include:– Morningstar– Value Line– Investment Company Institute– Popular press (Wall Street Journal, Barron’s,
Business Week)– Prospectus– Fund’s website