1

Personal Financial Planning Guide

Chapter 3-6: Building Wealth through Investment Planning

2

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

3

Step 1: Financial Goals

Factors affecting financial goals:– __________________ horizon– __________________– Your _________________________ situation– Personal profile

4

Personal Profile

Your investment profile includes– _______________________– _______________________– _______________________ needs– _______________________ needs– _______________ rate– _______________ tolerance

5

Step 2: Investment Vehicles

Major categories of investments– Cash– Bonds– Stocks– Other (real estate, gold, etc.)

6

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

7

Categories of Investments: Bonds

• Bonds are debt instruments issued by corporations and governments.

• Advantages of bonds– Regular _________________– Diversify other investments

8

Categories of Investments: Bonds

Types of bonds– Corporate– US Government– Municipal– Mortgage-backed securities

9

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.

10

Categories of Investments: Stocks

• Common stock provides return through dividends and capital gains.

11

Step 3: Know Financial Markets and Concepts

Important financial concepts:– ________________– ________________– Portfolio structure/asset allocation

12

Financial Concepts: Return

• Historical returns can be observed and measured, but what is important to investors are ____________________ returns.

13

Financial Concepts: Risk

Investments, by risk (low to high)– Cash– US government securities– Investment grade bonds (corp., muni)– Stock and junk bonds

14

Financial Concepts: Portfolio Structure

Diversification by itself does not increase returns. However, by diversifying, you reduce ________________.

15

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

“_________________________________________.”

16

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.

17

18

Step 5: Implement Your Strategy

Implementing your financial plan includes:– Who to invest with (“how to buy”)– When to buy

19

Implement Your Strategy

Your financial plan can be implemented with:– A financial planner– A broker– Professional money manager– Mutual funds

20

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.

21

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.

22

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.

23

Mutual Funds

• Mutual funds offer:– Professional management– Record keeping– _______________________– Low _____________________ costs (in

some cases)

24

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

25

Types of Mutual Funds

• Mutual funds can also be classified as: – Domestic– Foreign– World

26

Mutual Funds

Cost of investing in mutual funds include:– Front-end and back-end loads– Annual management fees– 12 b-1 fees

27

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

28

How to Pick a Mutual fund

In comparing mutual funds, look for:– No _________________– Low _________________– Matches your objectives and ____________

tolerance– Tax efficiency– Good recent performance (3-5 years)– No recent change in management