Investment Policy

1
Investment Policy

• Define Purpose
• Long-term wealth creation
• Retirement
• Education
• Acquire an asset
• Charitable Giving
• Fund cash outflows over time

2
Investment Policy - Return

• Define Return Objectives
• Determine minimal acceptable returns
• Annual cash outflow needs
• Maintenance of purchasing power
• TVM Analysis

3
Investment Policy - Risk

• Determine risk tollerance
• Capital preservation vs. appreciation
• How much volatility is acceptable
• Temporary loss magnitude time
• Funds subject to permanent loss

4
Constraints

• Time Horizon
• Equities best for gt 10 yr. CF reg.
• Liquidity Needs
• Fixed-income securities lt 5 yr. CF req.
• Taxes Exempt or timing of payments
• Legal Regulatory
• Unique Needs Circumstances

5
Asset Allocation

• Cash Equivalents
• Equities
• Fixed-Income
• Real Estate
• Alternative Investments

6
Cash Equivalents

• Money market securities
• 1 Year or less in maturity
• Govt. T-Bills
• Agencies
• Govt. backed mortgage obligations
• Commercial Paper
• Corp. short-term borrowing notes

7
Equities

• Publicly traded stocks
• NYSE, NASDAQ, AMEX
• Large-Cap
• 10 billion market capitalization
• Mid-Cap
• 5 to 10 billion market cap.
• Small-Cap
• Under 5 billion market cap.

8
Fixed-Income

• Greater than 1-year in maturity
• Govt. bonds notes (Rf)
• Govt. backed agencies (mortgage oblig)
• Municipal Bonds
• Tax-exempt characteristics
• Backed by state or local taxes, rev. sources
• Not appropriate for tax-deferred plans (IRAs)
• Corp. Bonds (Rd) -- taxable

9
Real Estate

• Land
• Structures
• Commercial vs. Residential
• Real Estate Investment Trusts (REITS)
• Different varieties Cash flow through
• Publicly Traded
• Closed-end fund dynamics

10
Alternative Investments

• Private Equity
• Venture Capital
• Hedge Funds
• Absolute return strategies
• Volatility reduction emphasis
• International
• Introduces active currency risks
• Passive US companies with Inter. Ops.

11
Asset Allocation Profile
Alts
RE
SC
MC
LC
Balanced
Corps
Munis
Govs
Balanced
CE
Return
Risk
12
Key Text Concepts

• Diversification
• Among asset classes securities
• Frictional Costs
• Trading Commissions
• Taxes
• Dollar-Cost Averaging
• Periodic investments over a time period