TT05B - Investment Plan Example Instructions

8/13/2019 TT05B - Investment Plan Example Instructions

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Teaching Tool 5B Investment Plan Example Instructions

Personal Finance: Another Perspective

Introduction

The purpose of this Teaching Tool is to help you as you put together your Investment Plan. Inthis course, I teach investing in 9 separate chapters. Each chapter has different assignments andfinancial plan assignments, which, if completed, will in the end result in your completedInvestment Plan. To help you put this Plan together, I have included all the financial planassignments from each of the nine chapters on Investments in this document.

To put together your investment plan, there are three important issues and questions. The issuesare about financial markets, asset classes, and financial instruments or assets. In addition, youwill be answering three key questions. They are

!. "hat is your asset allocation# $sset allocation is how you divide your total portfolio

between stocks, bonds and cash. $sset allocation %as opposed to stock selection& isgenerally agreed to be the largest contributor to total portfolio returns.'. "hat are your investment ob(ectives, constraints, and policies# Investment ob(ectivesare your goals for risk and return for your portfolios. Investment constraints are thosethings that impact how and when you will invest. $nd investment policies are the thingsthat you will and will not do or invest in as you build and manage your portfolio.

). *ow will you build and manage your portfolio# This e+plains your order and processof what you will include in your portfolio. It includes your asset allocation, yourpriorities for investments, what assets you will include in your portfolio, what you will

purchase first, second, third, etc., and your framework for portfolio evaluation andrebalancing.

Investments 1: Before ou Invest ! Financial Plan Assignments

nderstanding yourself is a critical part of investing. It is important that you understand not onlyyour personal view of investing, but also your family view of investing-how you were broughtup.

eview "earning Tool21: Key Questions on Money in the Family."hat are the ma(ore+periences you had that influenced your views on money and investing# "hat were you taught

about money and investing when you were growing up#

eview the top of the investment hourglass. "here are you on the top of the hourglass# $re yourpriorities in order# /o you have adequate health and life insurance# $re you out of consumerand credit card debt# /o you know your goals, are you living on a budget, and are you ready tobegin writing your investment plan# /etermine where you are and determine the steps you musttake before you begin investing.

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1ou are ready to start creating your Investment Plan.

2irst, copy Teaching Tool 5A: Investment Plan Example. "hile you do not need toknow the entire Plan today, it is important that you read through this Plan. 2or thiscourse, you will complete this entire Plan.

3econd, complete the introduction to the Investment Plan and add the information onyourself and your spouse if you are married, including names and ages.

Third, complete the introductions to each of the four sections. In the introduction to3ection I, add the different accounts you will use. It is acceptable to include all the listedaccounts as you may use many of them during your lifetime. In addition, you mustdetermine two separate time stages for this Investment Plan. 4enerally, these time stagesequate to your time before retirement as 3tage ! and time in retirement as 3tate '. $ddthis information.

2ourth, take the risk tolerance test, such as Teaching Tool 1#: $is% Tolerance Test.

This will help you understand what kind of investor you are. 1ou can take this test, oryour can take any number of tests available on the internet. $fter taking this test, fill outthe type of investor you are in 3ection I.5.

2ifth, using that risk tolerance test results, develop equity, bond, and other targets fortime stages ! 6 ' for 3ection III.7.!. and III.7.'. 3tart first with the general rule ofthumb of your age in bonds. Then, after taking the risk tolerance test, ad(ust thoseallocations taking into account your risk tolerance. 3ee the notes at that back of the risktolerance test for ad(ustments to the general rule of thumb if you have questions. 1ouwill later come back and determine your allocations within the stock and bond assetclasses.

Investments &: 'reating a Personal Investment Plan ! Financial Plan

Assignments

8pen your copy of Teaching Tool 5A: Investment Plan Examplethat you copied before. akesure you understand the terminology related to investment plans. I will discuss many aspects ofthis plan in upcoming sections.

2irst, you will not have only one portfolio for your investments: you will likely havemany portfolios, all of which are important parts of your investment plan. eview yourgoals and ob(ectives. "hat are you trying to accomplish individually and as a family

through investing# "ith your investments, what are you trying to accomplish# Thinkthrough your general investment guidelines in 3ection II$ for both 3tage ! and 3tage ',and fill in those sections.

se Teaching Tool &(: Expected $eturn )imulation and Benchmar%s, input yourstocks and bond allocations from Investments !. 1ou will now need to add someadditional asset classes.

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There are four different asset classes for equities or stocks that I have data for. ;argecapitali


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III.#.1. Investent Strategy. /etermine how you will invest. Think about howyou will invest. "ill it be mutual funds or individual stocks. I stronglyrecommend mutual funds, at least initially when your assets are few.III.$. %un&ing Strategy. /etermine funding strategy. *ow will you save money

for investing and saving# "hat is your goal to save each week or each month#*ow will you keep your priorities in order# Think through your funding strategyand fill out 3ection III.E.

III.%.1. 'e( Investents Strategy. "hat is the ma+imum amount you will investin new investments# I recommend not investing more in any new investment than?0!>C %e+cept for broad based mutual funds with more than ?>D assets&.

III.%.2. Investents in "opany Stoc!. Think about the ma+imum that you willhave in your retirement fund in investments in your companys stock. Irecommend no more than about !>C due to diversification concerns.

III.%.3. Unliste& Investents. 2inally, what is the ma+imum amount you willinclude in unlisted investments, i.e. investments that are not listed on a recogni


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Third, determine whether you will use leverage to invest. ;everage is debt. I encourageyou to not short0sell securities or buy on margin, but you can include your guidelines in3ection III.$.). /o not invest with borrowed money.

2inally, determine your investment benchmarks. Investment principle @ counsels tomonitor portfolio performance. That means you must choose an appropriate benchmark

for each of your asset classes and for each of your assets. If you would like help, I haveincluded recommended benchmarks for each of the asset classes in Teaching Tool &( Expected $eturn )imulations and Benchmar%s. 3elect the asset classes in thespreadsheet, and it will give you three recommendations for asset class benchmarks.Include these benchmarks in 3ection III.5.!. and III.5.'. 1ou will not include theallocations yet, but you should add the benchmarks.

Investments ,: Bond Basics ! Financial Plan Assignments

1our assignment is to review the history of both short0term and long0term bonds over the pastfive, ten, twenty0five, fifty, and seventy0five years. *ow have bonds performed overall# "hat do

bonds add to a portfolio# "hat disadvantages do bonds have# *ow can you minimi, and @? year returns for Treasury bonds %long0term governmentbonds with maturity of more than ten years& and Treasury bills %short0term government bondswith maturities less than one year&. *ow have these assets performed compared with equity orstock returns#

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Investments 5: )toc% Basics ! Financial Plan Assignments

1our assignment is to review the history of stocks over the past five, ten, twenty0five, fifty, andseventy0five years. *ow have stocks performed overall# "hat do stocks add to a portfolio# "hatdisadvantages do stocks have# *ow can you minimi


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2irst, to get your asset allocation targets, start with your stocks, bond, and other assetclass allocation determined earlier in 3ection III.7.!. and III.7.'. 2or most individuals,your initial Emergency 2und allocation will be to Treasury 5onds and your bondallocation is completed. The harder allocation is to divide up your equity or stockallocations. It is important to recogni


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less %@0JC&. I also recommend that your e+pected return for 3tage ' or retirement be lessthan your e+pected return on 3tage !. /etermine your E+pected eturn and put these inyour Plan in 3ections I.$.!. and I.$.'. Print off E+hibit ! from Teaching Tool &(.

To calculate risk, instead of using standard deviation, beta, or other measure of risk, wehave simplified the plan to state that we accept the risk of our weighted benchmarks. I

hope you can accept that assumption. 7opy your allocations from 3ection III.5.!. andII.5.' to the sections on isk in 3ection I.5.!. and I.5.'.

Investments #: +utual Fund Basics ! Financial Plan Assignment

1our assignment now is to gain an understanding of how mutual funds can give you e+posure tothe ma(or asset classes. *ow have mutual funds performed versus the individual securities thatmutual funds comprise# "hat do mutual funds add to a portfolio# "hat disadvantages do mutualfunds have# *ow can you minimi


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goal. 1ou can then multiply each of your asset allocation targets by their respectivepercentages to come up with the amounts you need in each asset class and in each of theretirement and ta+able accounts.

2inally, transfer this data to Teaching Tool 1*: Investment Process )preadsheet. 1oucan put in your data for your Emergency 2und and your asset allocation percentages, and

it will calculate your Initial Target Portfolio 3i


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1our third and fourth assets should be funds which broaden and deepen your portfolio.5roaden your portfolio by adding new asset classes to your portfolio these assets couldinclude international stocks or bonds, emerging market stocks or bonds, or real estateinvestment trusts %EIT3&.

To deepen your portfolio, add more companies to your core allocation or your main asset

class. To further deepen your portfolio, you might include a .3. small0capitali


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Investments 2: Portfolio $e-alancing and $eporting ! Financial Plan

Assignments

ebalancing your portfolio is an important part of managing your investment portfolio. 1oushould decide how often you will rebalance your portfolio. 4enerally, rebalancing too oftenresults in high transaction costs and ta+es. Aot rebalancing enough generally results in portfolios

that violate the investment principles of diversification and risk management.

2irst, determine how often you will rebalance your portfolio and include that goal in yourinvestment plan. 3elect your portfolio rebalancing method and include this in 3ectionIF.5. 4enerally, the easiest method of rebalancing is the periodic0based rebalancing.

3econd, I encourage you to use the new moneyKdonations addendum to minimi


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lessons closely, you should have a well written Plan. Aow the challenge is to follow this Plan toachieve your goals.

3isclaimer

The purpose of this material and this class is to help you get your financial house inorder and to help you on your road to financial self0reliance. If there are mistakes in thismaterial, please bring them to our attention, and we will correct them in upcomingversions. The teacher, and 51, specifically disclaim any liability or responsibility forclaims, loss, or risk incurred, directly or indirectly, by using this material.

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TT05B - Investment Plan Example Instructions