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©2002 The Arkansas Financial Group, Inc.
Decisions, Decisions, Decisions, Decisions, Decisions!Decisions!
Need to look at financial decisions from a holistic point of view
How does each decision affect the overall picture
©2002 The Arkansas Financial Group, Inc.
Planning IssuesPlanning Issues
Goal SettingCompany BenefitsRisk ManagementTax IssuesInvestment Issues
©2002 The Arkansas Financial Group, Inc.
Goal SettingGoal Setting
Short Term Goals:– Take into account “Pent Up Demand”– Pay off debt– Buy a House/Car/Furniture– Take a vacation
©2002 The Arkansas Financial Group, Inc.
Goal SettingGoal Setting
Long Term Goals– Take care of family in event of death/disability
How much life insurance do you need? How much disability income insurance do you
need? Do you have a will? What other legal documents should you have?
– College funds for children– Retirement
©2002 The Arkansas Financial Group, Inc.
Where are you now?Where are you now?
Do you have health and dental insurance?How much life insurance do you currently
have?Do you have disability income insurance?Do you have adequate coverage on your
home/auto?Do you have adequate professional/personal
liability coverage?
©2002 The Arkansas Financial Group, Inc.
What company benefits are What company benefits are available?available?
Health/DentalShort/Long term disability incomeLife insuranceRetirement – 401k or 403bOther miscellaneous
– Child care
©2002 The Arkansas Financial Group, Inc.
How do you plan to achieve How do you plan to achieve goals?goals?
Maximize company benefits first– Company may be paying portion, so it costs
you little or nothing!– Payroll deduction is painless – what you don’t
see in your checking account, you never miss!– Generally cost efficient
©2002 The Arkansas Financial Group, Inc.
What Next?What Next?
Life Insurance – if you have a family that depends on your income– NOT an investment– Buy Term – more important to have enough
coverage– If you have no dependants, you probably don’t
need life insurance
©2002 The Arkansas Financial Group, Inc.
What Next?What Next?
Disability Income– Need to cover 60% of of your gross income– Most important if you are responsible for your
self– Important to have benefits to age 65 – increase
waiting period to reduce premium
©2002 The Arkansas Financial Group, Inc.
What Next?What Next?
Legal Documents– Will
lets you determine where your assets will go If you have children, a must to be sure the children
will go to whom you would want
– Durable Power of Attorney– Health Powers
©2002 The Arkansas Financial Group, Inc.
How to avoid How to avoid “Credit Card Hell”“Credit Card Hell”
Key is to separate money for short term goals from your regular checking account
“Savings to Spend Account” – makes savings unconscious, and spending conscious
©2002 The Arkansas Financial Group, Inc.
How to avoid How to avoid “Credit Card Hell”“Credit Card Hell”
Determine how much you will spend annually on non-routine expenses– Clothing– Gifts– Vacations/Travel– Life/Disability insurance
©2002 The Arkansas Financial Group, Inc.
How to avoid How to avoid “Credit Card Hell”“Credit Card Hell”
Total non-routine expensesDivide by 12Have that amount automatically transferred
to a separate account (money market or savings account)
©2002 The Arkansas Financial Group, Inc.
How to avoid How to avoid “Credit Card Hell”“Credit Card Hell”
The key is the enforced discipline – automatic draft means you decide only once to save for your short term goals
The money is still available to pay for these expenses
Extra step of going to separate account makes you think a little longer before you spend the money
©2002 The Arkansas Financial Group, Inc.
Money MagazineMoney Magazine The creator of unrealistic expectations:The creator of unrealistic expectations:
It is possible to make good financial decisions if you read our magazine for two hours a month
It is possible to predict which investments will outperform the others
It is possible to know before the rest of the market when to buy or when to sell
Past Performance does indicate future results
©2002 The Arkansas Financial Group, Inc.
Fear is the Greatest Motivator Fear is the Greatest Motivator for Most Investorsfor Most Investors
Only 20% of the population feels comfortable with higher levels of risk¹
Investors tend to be more influenced by the prospect of loss than opportunity for gain¹
¹ Kathleen Gumey, Ph.D. Financial Psychology Corp.
©2002 The Arkansas Financial Group, Inc.
How Bad Can It GetHow Bad Can It Get
Since 1956, the stock market has experienced 9 bear markets which fell by more than 20% each
Average bear market duration: 12 months Average bear market decline: -25.1% Between January 11, 1973 and December 6, 1974
the stock market dropped 45.1% Between early 2000 and October 9, 2002 the
DOW dropped 37.85%; the S&P 500 fell 49.15%; and the NASDAQ crashed 77.92%
©2002 The Arkansas Financial Group, Inc.
Emotion-Based ExpectationsEmotion-Based Expectations
Fear of losses and greed brought by “great tips” are normal feelings.
Emotions from pride and regret can drive decisions – causing deviations from plan and risk of failure of achieving goals
Adhere to the policies and procedures set forth in the Investment Policy Statement
Avoid emotionally reacting to events, news and opinions
©2002 The Arkansas Financial Group, Inc.
Mistakes & MisperceptionsMistakes & Misperceptions
Dow Jones Industrial Average: Average Total Returns thru June 30, 1999
0%
5%
10%
15%
20%
25%21.7%
12.5%
Bull Market10/1/90 – 6/30/99
30 Years7/1/69 – 6/30/99
Source: Towers, Dow Jones Industrial Average, which is comprised of 30 large (NYSE) stocks. Total return, calculated by Wilshire Associates, Inc., includes reinvested dividends. An individual cannot invest directly in an index. Past performance cannot guarantee future results.
©2002 The Arkansas Financial Group, Inc.
Eliminate EmotionEliminate EmotionEstablish Objective ProceduresEstablish Objective Procedures
Risk Capacity and Risk ToleranceAsset AllocationInvestment Policy Statement
– Sets the policies and procedures to be followed– States the goals and the reasoning– Identifies criteria for evaluation
©2002 The Arkansas Financial Group, Inc.
Know ThyselfKnow Thyself
What messages did you get about money when you were growing up?
What is your most memorable investment experience?
How is your money invested now? How do you feel about that?
©2002 The Arkansas Financial Group, Inc.
Measuring RiskMeasuring Risk
Risk Tolerance– Willingness to tolerate risk (volatility/losses)
Risk Capacity– How much risk (volatility) is it prudent to have
in your portfolio based on your life circumstances?
©2002 The Arkansas Financial Group, Inc.
Factors Determining Risk Factors Determining Risk Tolerance and CapacityTolerance and Capacity
Tolerance– Time Horizon– Investment Experience– Education– Personality– Values– Political Philosophy– Background
Capacity– Stage of Life– Lifestyle– Income Tax Bracket– Liquidity Needs– Other Assets– General Financial
Situation
©2002 The Arkansas Financial Group, Inc.
Why Measure Risk Why Measure Risk Tolerance?Tolerance?
A key element in any planHelps determine which portfolio plan is
appropriateGives you a sound footing to refer back to
when your attitude or the market changes
©2002 The Arkansas Financial Group, Inc.
Over/Under-estimating Your Over/Under-estimating Your Risk ToleranceRisk Tolerance
Many investors overestimate the amount of risk they can tolerate
Some investors sell themselves short by being too conservative
©2002 The Arkansas Financial Group, Inc.
Measuring Risk Tolerance Measuring Risk Tolerance can be Difficultcan be Difficult
Most people generally do not know their own tolerance
Their experiences may have led them to irrational preferences or aversions
Responses are typically heavily weighted by recent experiences or actions in the investment markets
©2002 The Arkansas Financial Group, Inc.
Risk CapacityRisk Capacity
Your measurable capacity to withstand annual low or negative returns.
Capacity may or may not be consistent with your emotional or subjective risk tolerance
The more conservative of the two is the “safe route”
©2002 The Arkansas Financial Group, Inc.
Risk CapacityRisk Capacity
Life Expectancy -- 20%Income -- 20%Investment Assets -- 20%Debt -- 15%Liquidity -- 15%Family Responsibilities -- 10%
Source: PPC’s Risk Capacity Index
©2002 The Arkansas Financial Group, Inc.
Before you hire an advisor, Before you hire an advisor, what needs to be clarified?what needs to be clarified?
Your advisor’s role in the engagement Your role The advisor’s process; Practice Standards The education provided by the advisor The possibility of losses Degree and frequency of communication Compensation and how it is disclosed How the advisor ensures consistency between
financial plans and strategies with your goals and concerns
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