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1、BM410:Investments,Personal Investing I,Objectives,A.Understand the ten principles of successful investingB.Understand the Investment HourglassC.Understand the Importance of Your Investment Policy Statement,3,Understand the 10 Principles of Successful Investing,Is there one right way to invest?No.The
2、re are multiple ways and multiple methods depending on your personal goals and budgetThe key is for you to know yourself and what you are trying to accomplishIs there one right way to teach investing?No.But while there are many different ways,the principles should be the same.,4,Principles for Succe
3、ssful Investing(continued),Elder Dallin H.Oaks commented:We live in a complex society,where even the simplest principle can be exquisitely difficult to apply.I admire investors who are determined not to obtain income or investment profits from transactions that add to the sum total of sin and misery
4、 in the world.But they will have difficulty finding investments that meet this high standard.Such complexities make it difficult to prescribe firm rules.We must rely on teaching correct principles,which each member should personally apply to govern his or her own circumstances.(Dallin H.Oaks,“Brothe
5、rs Keeper,”Ensign,Nov.1986,20),5,Principles for Successful Investing(continued),Whatever you invest in,and at whatever phase of your investment you are in,these principles are critical.While there may be discussion as to the number of principles,the importance of the principles are not disputed!If y
6、ou build your portfolio in line with these principles,you will have a successful portfolio,6,Principles for Successful Investing(continued),1.Know yourselfKnow your goalsHave well-written and thought-out goalsKnow your budgetLive within your means,and save and investKnow your ability to tolerate ris
7、kKnow what kind of investor you areInvest accordinglyDevelop a sleep-well portfolio based on principles you can depend on for a lifetime so that you can“sleep well”at night,7,Principles for Successful Investing(continued),Watch overconfidenceMen trade 45%more than womenTheir annualized returns were
8、2.7%lessSingle men trade 67%more than single womenTheir annualized returns were 1.4%lessWatch on-line tradingBefore on-line,investors beat the market by 1.9%Afterwards,they underperformed by 3.6%Carla Fried,“The Problem with your Investment Approach,”Business 2.0,November 2003,p.146,8,Principles for
9、 Successful Investing(continued),2.Understand RiskRisk is inherent in all investing activitiesThere are lots of different types of riskInflation,business,interest rate,financial,market,political and regulatory,exchange rate,call,and liquidity riskInvest at a risk level you are comfortable withFind t
10、hat risk levelTaking a risk tolerance test may help.Take TT16 A Risk Tolerance Test to get a sense on how much risk you can tolerate,9,Principles for Successful Investing(continued),3.Stay diversifiedAlways invest in different asset classes and assetsDiversification is your key defense against riskM
11、ake sure you understand the risks of each and every asset class you invest inIts a risky place out there.Be prepared!Remember that the numbers you see for specific asset class performance are from diversified portfolios,not single assets!Use TT23 Return Simulation Worksheet to see the effects of div
12、ersification,10,Principles for Successful Investing(continued),4.Invest low cost and tax-efficientlyWatch all your costs very carefully:taxes,transaction costs,management fees,etc.A$1 saved is more than a$1 earned because:You must pay taxes on every new dollar earnedThe dollar saved can earn income
13、and income on income(compound interest)Realize that frequent trading incurs significant costs,both in terms of taxes and transaction costs,11,Source:Jason Karceski,Miles Livingston,Edward ONeal,“Mutual Fund Brokerage Commissions,January 2004,p.12.,Source:Jason Karceski,Miles Livingston,Edward ONeal,
14、“Mutual Fund Brokerage Commissions,January 2004,p.12.,12,Source:Jason Karceski,Miles Livingston,Edward ONeal,“Mutual Fund Brokerage Commissions,January 2004,p.12.,13,Principles for Successful Investing(continued),Defer or eliminate taxes as much as possibleRemember,mutual funds distribute 90%of all
15、capital gains and dividends each year that you must pay taxes onInvest tax-efficiently so you dont have to pay more taxes each AprilIts not what you make,but what you keep after taxes and inflation that makes you wealthy,14,Principles for Successful Investing(continued),5.Invest long-termAvoid short
16、-term tradingIts expensive and generates transactions costs and taxesInvest wiselyThere are no get-rich-quick schemes that work.Stay at least partly in the market Taking money out of the market or not continuing to save and invest stops your progress,15,Trading Costs and Returns,16,Principles for Su
17、ccessful Investing(continued),6.If you invest in individual assets,know what you invest in and who you invest withWhen investing in individual assets,do your homeworkKnow what you are investing inBe aware of the environment in which the company operatesBe very careful and invest wisely,17,Principles
18、 for Successful Investing(continued),7.Monitor portfolio performancePresident Thomas S.Monson stated:Where performance is measured,performance improves.Where performance is measured and reported,the rate of improvement accelerates.How can you know how you are doing if you dont check your performance
19、 against some standard?Set portfolio benchmarks and then monitor performance monthly,18,Principles for Successful Investing(continued),8.Dont waste too much time and energy trying to beat the market unless you have the time and energyIt is very difficult,expensive,and time consuming to try and beat
20、the marketIf you want to trade,trade tax-efficiently and in tax-deferred accountsIf your actively managed funds under-perform,look to index funds as inexpensive,tax efficient and very viable alternatives to actively managed funds,19,Principles for Successful Investing(continued),9.Invest only with h
21、igh quality,licensed,and reputable people and institutionsWhen help is needed,dont be afraid to get help.But get good help from good licensed people consistent with the principles discussedUse the best resources availableKnow how those resources are compensatedWork only with licensed and registered
22、advisorsGet references for any resources,20,Principles for Successful Investing(continued),10.Develop a good investment plan consistent with your goals,budget,and these principles,and follow it closelyThink it through and write it wisely Its your roadmap to successIf you write it wisely and invest a
23、ccordingly,it will save you much heartache in the futureAnd you will likely achieve your personal goals,21,Questions:,Do you understand the ten principles of successful investing and why they are important?,22,B.Understand the Investment Hourglass,What should you do before you start investing?Is the
24、re a priority to paying bills?Who/which bills should we pay first?Are there certain things you should never do without?What about health and life insurance?Are their other bills more important than investing?What about high-interest items such as credit cards and consumer loans?Is there a purpose to
25、 investing?What are your personal goals?,23,Before You Invest:The Hourglass Top,4.Know your personal goals,budget,and have an investment plan,If you can answer these affirmatively,you are ready to invest!,3.Be out of credit card and consumer debt,2.Have adequate life and health insurance,1.Have your
26、 priorities in order and are“square”with the Lord,24,Before you Invest(continued),What does the top of the hourglass do?It helps you keep your priorities in orderAnd what should those priorities be?GodFamilyPersonal responsibilityYour goals,budget,and a well-written Investment Plan,25,The Hourglass(
27、continued),What does the hourglass top do?It helps keep your priorities in orderAnd what should those priorities be?GodFamilyPersonal responsibility,26,Taxable Assets,Retirement Assets,1.Basics:Emergency Fund and Food Storage,2.Core:Broad Market Exposure:Core Mutual Funds,3.Diversify:Broaden and Dee
28、pen your Asset Classes,4.Opportunistic:Individual Stocks and Sector Funds,The Investment Hourglass(continued),27,The Investment Hourglass(continued),The hourglass bottom teaches 3 important lessons:1.It helps keep risk in perspectiveIt starts from lowest risk to highest risk2.It teaches the“how to”a
29、bout investing?You invest first in lower-risk assets,and then move up to more risk as your assets increase3.It separates out taxable and retirement assetsRetirement and taxable assets should be managed differently,28,Question,Do you know what you should do before you invest?,29,C.Understand the Impo
30、rtance of your Investment Policy Statement,What is the most important document you will prepare in regards to your investing activities?Your Investment Plan(also called an Investment Policy Statement)Why is it so important?Your Investment Plan sets the framework on every investing activity.It states
31、:What you will invest in,how you will invest,why you will invest,what percentages you will invest,etc.,30,Your Investment Plan,What will it help you do?It is a detailed description of all the key areas of your investment framework.It will help you:1.Represent yourself,your risk tolerance,and your pe
32、rsonal constraints2.Articulate what you will and will not invest in,how you will invest,and any investment guidelines to help you invest wisely 3.Keep you from making rash or poor investment choices which could have a major impact on future financial goals and retirement,31,Your Investment Plan(cont
33、inued),I.Risk and Return ObjectivesA.What are your expectations for returns?Your return expectations will drive your asset allocation decisions.A return of:4-6%:a diversified,low-risk portfolio7-8%:a diversified,moderate-risk portfolio9-10%:a diversified,high-risk portfolio11+%:an undiversified,very
34、 high-risk portfolio heavily involved in high-risk assetsLook to the long-term history of your asset classes as rough estimates of future performance(see TT 23 Historical Return Simulation),32,Your Investment Plan(continued),B.What are your expectations for risk?What is your risk tolerance?Where you
35、 are in the life cycle will have an impact on how much risk you can takeBalance your risk and return requirementsWhere are you in the life-cycle process?Younger:may be willing to take more riskOlder:may be willing to bear less riskAre you a conservative,a moderate,or an aggressive investor?This shou
36、ld show in your asset allocation.,33,Your Investment Plan(continued),How do you define risk?Instead of stating“an annual standard deviation of 18%,”stating your risk in terms of your chosen benchmark risk may be easier.For example,I am willing to accept the risk of a portfolio that is:50%US stocks,a
37、s measured by the S&P 500 Index20%international stocks,as measured by MSCI EAFE Index25%bonds,as measured by the Lehman Aggregate Index,and5%real estate,as measure by the S&P REIT Index,34,Your Investment Plan(continued),II.Investment Guidelines and ConstraintsA.What are Your Investment Guidelines?W
38、hat are the different phases in your life in regards to investing?e.g.,Accumulation,Growth,Capital Preservation,Income Generation,etc.Your Investment Guidelines are the general road map on how you will be investing your assets over your life cycleIt integrates your personal goals and your financial
39、goals into a complete financial perspective,35,Your Investment Plan(continued),B.What are your Investment Constraints?Liquidity The speed and ease with which an asset can be converted into cashHow much money will you need and when?Examples:Graduate school,vacationInvestment Horizon When will you sel
40、l the investment?How soon will you need money?Example:Down payment on a house in 3 years?,36,Your Investment Plan(continued),Tax ConsiderationsWhat is your tax position,your marginal tax rate?Are tax-free investments more advantageous than taxable?Example:Government bonds versus corporate bondsUniqu
41、e NeedsWhat are your special needs?Do you have diversification requirements related to employment?Do you have special family needs?Examples:Employee Stock Ownership Plans,37,Your Investment Plan(continued),III.Investment PolicyWhat will you and will you not invest in,how will those investments will
42、be evaluated,how will the assets be invested,how will your portfolio will be funded,and any guidelines for new investmentsa.Acceptable and Unacceptable Asset Classesb.Investment Benchmarksc.Asset Allocationd.Investment Strategye.Funding Strategyf.New Investment Strategy,38,Your Investment Plan(conti
43、nued),a.Acceptable/Unacceptable Asset ClassesWhich asset classes will you invest in?Invest where you have a favorable risk-return tradeoff,i.e.,mutual funds and stocks(large cap,small cap,mid cap,value,growth,mixed,international,emerging market,regional);bonds(short-term,long-term,government);and mo
44、ney market(CDs,commercial paper,government paper,etc.)Which assets will you not invest in?Do not invest where you do not have a favorable risk-return tradeoff,i.e.,foreign currencies,commodities,precious metals,art,etc.,39,Your Investment Plan(continued),b.Investment BenchmarksHow will you know if y
45、ou are doing well?Unless you have an investment benchmark(or standard by which to judge your performance),you cannot know how you are doingPick appropriate benchmarks for each asset class,i.e.,the S&P500 for equities,Lehman Aggregate for bonds,etc.Measure your performance regularly(e.g.,monthly,quar
46、terly,or annually)Measure it on an after-fees after-taxes basis!,40,Your Investment Plan(continued),c.Asset AllocationHow much will you invest in each asset class?Percentages should include your minimum,maximum and targetThe first decision is between bonds and stocksA good starting point is to inves
47、t your age as your percentage in bondsThe logic is the older you are,the less willing you are to accept riskNext,you can add other asset classes(broaden),or separate the stocks or bonds components into deeper asset classes(deepen),41,Your Investment Plan(continued),Set up a minimum,maximum and targe
48、t allocationMinimum:the minimum invested in an asset classMaximum:the maximum invested in an asset classTarget:Your ideal allocation based on current conditions Min Target MaxYounger Higher risk assets/equities 50%75%95%Lower safe assets/bonds 0%25%50%Older Lower risk assets/equities 20%40%60%Higher
49、 safe assets/bonds 50%60%80%Plan for your entire life,which will necessitate different allocations based on different periods,42,Your Investment Plan(continued)Major Asset Classes,Equities:Large CapitalizationMid CapitalizationSmall CapitalizationInternationalEmerging MarketsHedge FundsReal EstateRE
50、ITs(Real Estate Investment Trusts)CurrenciesCommodities,Fixed Income:Low RiskCashMoney MarketGovernment BondsShort,medium,and long-term Corporate BondsShort,medium,and long-term,internationalJunk Bonds High Risk,43,Your Investment Plan(continued),d.Investment StrategyHow will you invest your assets,
