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Personal Finance: Another Perspective


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Title: Personal Finance: Another Perspective

  • Personal Finance Another Perspective
  • Beginning Investing
  • A Principles- and Applications-based Approach
  • or
  • Ten Steps to Better Investing
  • August 18, 2014

AbstractA Principles and Applications-based
Approach or10 Steps to Better Investing
  • Personal finance is simply part of the gospel of
    Jesus Christ, and investing is part of personal
    finance. As such, investing, if done properly,
    should help bring us closer to Christ. I propose
    a 10 step plan to help you become better
    investors, that discusses doctrines, principles
    and applications. The purpose of this session is
    to give you some thoughts to help you become
    better and wiser investors so that you can leave
    with at least one new idea to help you be a
    better investor.

Key Terminology
  • Key terminology for this session
  • Cash short-term cash instruments (low risk, low
  • Bonds/fixed income short- and long-term
    borrowing by companies or governments (higher
    risk, slightly higher return)
  • Stocks/equities ownership (higher risk, higher
  • Risk volatility of returns (or standard
  • Asset classes types of securities (baskets of
    similar assets)
  • Asset allocation how you invest in different
    asset classes (or how you invest in the different
  • Investment vehicles tax law defined framework
    with tax advantages (shopping carts where you put
    your assets/groceries)
  • Financial assets stocks, bonds, cash, mutual
    funds (groceries)

Doctrines Step 1. Understand the Whys
  • We all have lists of what we could and should do
    in our priesthood responsibilities.
    The what is important in our work, and we need to
    attend to it. But it is in the why of priesthood
    service that we discover the fire, passion, and
    power. The what of priesthood service teaches
    us what to do. The why inspires our souls. The
    what informs, but the why transforms (italics,
    color and brackets added, Dieter Uchtdorf, The
    Why of Priesthood Service, Ensign, May 2012).

Step 1. Understand the Whys
  • We all have lists of what we could and should do
    in our personal finance responsibilities. The
    what is important in our work, and we need to
    attend to it. But it is in the why of personal
    finance that we discover the fire, passion, and
    power. The what of personal finance teaches us
    what to do. The why inspires our souls. The what
    informs, but the why transforms (italics, color
    and brackets added, Dieter Uchtdorf, The Why of
    Priesthood Service, Ensign, May 2012).

The Whys (continued)
  • What are the whys of personal finance that
    inspire and transform our souls?
  • If perspective is important, we can ask the
    whys in terms of our different perspectives
  • Spiritual
  • Temporal
  • Family
  • Individual

The Whys (continued)
  • 1. Spiritual To bring us to Christ
  • Whatever the problem may be in a persons
    lifefailure to pay tithing, breaking the Word of
    Wisdom, casual church attendance, or I add -
    poor financial habits, thereal issue is faith
    in Jesus Christ. If we can help people obtain the
    gift of faith in Christ, good works will follow.
    The end purpose of any law of God is to bring us
    to Christ. And how well will the law work? It
    depends on what we think of the Author of the law
    (C. Max Caldwell, What Think Ye of Christ?,
    Ensign, Feb 1984).

The Whys (continued)
  • 2. Temporal To become wiser stewards
  • Our resources are a stewardship, not our
    possessions. I am confident that we will
    literally be called upon to make an accounting
    before God concerning how we have used them to
    bless lives and build the kingdom (Joe J.
    Christensen, Greed, Selfishness, and
    Overindulgence, Ensign, May 1999).

The Whys (continued)
  • 3. Family To return with our families back to
    Heavenly Fathers presence
  • It helps us keep our priorities in order
  • Harold B. Lee said, The most important work you
    will do will be within the walls of your own
    home (Teachings of Presidents of the Church
    Harold B. Lee 2000, 134).
  • David O. McKay stated No other success can
    compensate for failure in the home (quoted from
    J. E. McCulloch, Home The Savior of Civilization
    (1924), 42 in Conference Report, Apr. 1935,

The Whys (continued)
  • 4. Individual To prepare for and accomplish our
    divine missions
  • I bear testimony of the fact that if you keep the
    commandments, He nourishes you, strengthens you,
    and provides you means for accomplishing all
    things necessary to faithfully finish your divine
    mission here on earth. May the Lord bless you in
    your decisions at this important time in your
    lives (Gene R. Cook, Trust in the Lord,
    Ensign, Mar. 1986).

Principles Step 2. Understand Investment Basics
  • Elder Richard G. Scott commented
  • Joseph Smiths inspired statement, I teach them
    correct principles, and they govern themselves,
    still applies. The Lord uses that pattern with
    us. . . Your consistent adherence to principle
    overcomes the alluring yet false life-styles that
    surround you. Your faithful compliance to correct
    principles will generate criticism and ridicule
    from others, yet the results are so eternally
    worthwhile that they warrant your every sacrifice
    (italics added, The Power of Correct
    Principles, Ensign, May 1993, 32).

Investment Basics (continued)
  • Basics 1 Everyone invests
  • What is investing?
  • The giving up of something important to us now in
    order to get something better in the future
  • What is sacrifice?
  • The giving up of something important to us now in
    order to get something better in the future

Investment Basics (continued)
  • Basics 2 There is a purpose to investing
  • From the Lords view
  • To bring us to Christ
  • To teach us to be wise stewards
  • To help us achieve our divine missions
  • To help us return with our families to Him
  • From our view
  • To accomplish our short- and long-term goals
  • To prove ourselves as wise stewards
  • To show by our choices what we really believe
  • To steward our resources to be able to serve and
    bless the lives of our families and others

Investment Basics (continued)
  • Basics 3 There is a priority of investments
  • What are your most important investments?
  • Here are mine (and they are not financial)

Investment Basics (continued)
  • Basics 4 Investing is not gambling
  • Investing The odds are in your favor
  • There is a favorable risk-return tradeoff
  • It is part of a long-term plan
  • You have done your homework
  • It involves the creation of wealth
  • Gambling The odds are in anothers favor
  • There is no favorable risk-return tradeoff
  • There is no long-term plan
  • There is only chance
  • It is a zero-sum gameno wealth is created

Step 3. Understand what to do before you invest
  • Are there things you should do before you start
  • Is there a priority to paying bills?
  • Are there certain things you should never do
  • Are their other bills more important than
  • Is there a purpose to investing?

Before You Invest The Hourglass Top
  • 1. Are your priorities in order and are you
    square with the Lord?

2. Do you have adequate health and life insurance?
3Are you out of high-interest rate credit card
and consumer debt?
4Have you written down your personal goals, do
you live on a budget, and do you have a
well-written Investment Plan?
  • If you can answer these affirmatively, you are
    ready to invest!

Before you Invest (continued)
  • What does the top of the hourglass do?
  • It helps you keep your priorities in order
  • And what should those priorities be?
  • God
  • Family
  • Personal responsibility

Step 4. Understand Factors Controlling
Investment Returns
Factors Controlling Returns (continued)
  • Work on the investment factors you control
  • There are five investing factors you control
  • 1. How much you save
  • 2. How long your investments grow, i.e., are
    invested in the market
  • 3. Your risk level or mix of investments, i.e.,
    your asset allocation
  • 4. How much you pay in expenses
  • 5. How much you pay in taxes
  • There is one investing factor you do not control
  • 6. Your investment returns

Factors Controlling Returns (continued)
  • What can you do
  • Focus on saving
  • Get on a budget and reduce your spending
  • Keep your investments working
  • Keep your money in the market
  • Focus on risk
  • Set your allocation for a sleep-well portfolio
  • Focus on reducing costs and fees
  • Invest in inexpensive mutual funds with low fees
  • Focus on minimizing taxes
  • Watch taxes in your investing and limit trading

Step 5. Know the Principles of Successful
  • David A. Bednar commented
  • Principles are doctrinally based guidelines for
    what we ought to do. Therefore if there is a
    doctrine of the Atonement, then the first
    principle of the gospel is faith in the Lord
    Jesus Christ. Brothers and sisters, doctrine
    answers the why questions of our lives.
    Principles provide us with direction about the
    what and the how (italics added, David A. Bednar
    Teach them to Understand, Ricks College campus
    Education Week Devotional, June 4, 1998, Rexburg,

Principles of Successful Investing (continued)
  • How have most equity investors done?
  • DALBAR puts out an annual book on Quantitative
    Analysis of Investor Behavior. It discusses how
    average equity fund investors have done versus
    the benchmark over the past 20 year period.
    Investor Index (benchmark)
  • Year Period Returns
    Returns Difference
  • 2008 1988-2007 4.5 11.8 -7.3
  • 2009 1989-2008 1.9 8.4 -6.5
  • 2010 1990-2009 3.2 8.2 -5.0
  • 2011 1991-2010 3.8 9.1 -5.3
  • 2012 1992-2011 3.5 7.8 -4.3
  • 2013 1993-2012 4.3 8.2 -4.1
  • 2014 1994-2013 3.7 11.1 -7.4
  • Dalbar 2008-2014

Principles of Successful Investing (continued)
  • How have most bond investors done?
  • According to DALBAR, bond investors have done
    equally poorly versus the bond benchmark over the
    past 20 year periods.

  • Investor Index
  • Year Period Returns
    Returns Difference
  • 2008 1988-2007 1.6 8.0 -6.4
  • 2009 1989-2008 0.8 7.4 -6.6
  • 2010 1990-2009 1.0 7.0 -6.0
  • 2011 1991-2010 1.0 6.9 -5.9
  • 2012 1992-2011 0.9 6.5 -5.6
  • 2013 1993-2012 1.0 6.3 -5.3
  • 2014 1994-2013 0.7 7.7 -7.0
  • Dalbar QAIB 2008-2014,,

Principles of Successful 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 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 (italics added, Brothers Keeper,
    Ensign, Nov. 1986, 20, italics added).

Principles of Successful Investing (continued)
  • Principle 1. Know yourself
  • Know your goals
  • Have well-written and thought-out goals
  • Know your budget
  • Live within your means, and save and invest
  • Know your ability to tolerate risk
  • Know what kind of investor you are
  • Invest accordingly
  • Develop a sleep-well portfolio based on
    principles you can depend on for a lifetime so
    that you can sleep well at night

Principles of Successful Investing (continued)
  • Watch overconfidence
  • Men trade 45 more than women
  • Their annualized returns were 2.7 less
  • Single men trade 67 more than single women
  • Their annualized returns were 1.4 less
  • Watch on-line trading
  • Before 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

Principles of Successful Investing (continued)
  • Principle 2. Understand Risk
  • Risk is inherent in all investing activities
  • There are lots of different types of risk
  • Inflation, business, interest rate, financial,
    market, political and regulatory, exchange rate,
    call, and liquidity risk
  • Invest at a risk level you are comfortable with
  • Find that risk level
  • Taking a risk tolerance test may help. Take TT16
    A Risk Tolerance Test to get a sense on how
    much risk you can tolerate

Principles of Successful Investing (continued)
  • Principle 3. Stay diversified
  • Always invest in different asset classes and
  • Diversification is your key defense against risk
  • Make sure you understand the risks of each and
    every asset class you invest in
  • Its 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!

Principles of Successful Investing (continued)
  • Principle 4. Invest low cost and tax-efficiently
  • Control what you can.
  • You cannot control returns, but you can control
    your costs, fees, and taxes
  • A 1 saved is more than a 1 earned because
  • You pay taxes on every new dollar earned, and a
    dollar saved can earn income and income on income
    (compound interest)
  • Realize that frequent trading incurs significant
    costs, both in terms of transactions costs and

Source Jason Karceski, Miles Livingston, Edward
ONeal, Mutual Fund Brokerage Commissions,
January 2004, p. 12.
Source Jason Karceski, Miles Livingston, Edward
ONeal, Mutual Fund Brokerage Commissions,
January 2004, p. 12.
Principles of Successful Investing (continued)
  • Defer or eliminate taxes as much as possible
  • This can be done through the proper use of
    retirement investment vehicles
  • Remember, mutual funds distribute 90 of all
    capital gains and dividends each year that you
    must pay taxes on
  • Invest tax-efficiently so you dont have to pay
    more taxes each April

Principles of Successful Investing (continued)
  • Principle 5. Invest long-term
  • Avoid short-term trading
  • Its expensive and generates transactions costs
    and taxes
  • Invest wisely
  • There 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

Trading Costs and Returns
Principles of Successful Investing (continued)
  • Principle 6. If you must invest in individual
    stock and bond assets (which is not required),
    know what you are investing in
  • When investing in individual assets, do your
  • Know the key financials and strategic position of
    the company and be aware of the many different
    environments in which the company operates
    (financial, operational, legal, etc.)
  • When investing in mutual funds
  • Stay diversified
  • Know what makes a good mutual fund

Principles of Successful Investing (continued)
  • Principle 7. Monitor portfolio performance
  • Measure performance. President Thomas S. Monson
  • When performance is measured, performance
    improves. Where performance is measured and
    reported, the rate of improvement accelerates
    (General Conference reports, 1970).
  • How can you know how you are doing if you dont
    check your performance against some benchmark?
  • Interestingly, most investors have underperformed
    the market benchmarks over the last 20 years
  • (DALBARs Annual Quantitative Analysis of
    Investor Behavior 2013)

Principles of Successful Investing (continued)
  • Principle 8. Dont waste too much time, money,
    and energy trying to beat the market, unless you
    have a lot of time, money, and energy
  • It is very difficult, expensive, and time
    consuming to try and beat the market
  • If you want to trade, trade tax-efficiently and
    in tax-deferred accounts

Principles of Successful Investing (continued)
  • Principle 9. Invest only with high quality,
    licensed, and reputable people and institutions
  • When help is needed, dont be afraid to get help.
  • But get good help from good people consistent
    with the principles discussed
  • And compare the performance of that help to your
    benchmarks after taxes (and to a passive
  • Use the best resources available
  • Know how those resources are licensed and
    compensated, and get references

Principles of Successful Investing (continued)
  • Principle 10. Develop a good investment plan
    consistent with your goals, budget, and these
    principles, and follow it closely
  • Think it through and write it wisely
  • Its your roadmap to success
  • If you write it wisely and invest accordingly, it
    will save you much heartache in the future
  • And you will likely achieve your personal goals

Step 6. Know What You Invest In
  • Principle Know what you invest in
  • What are asset classes?
  • They are broad categories/portfolios of
    investments with similar risk and return
  • How are they distinguished?
  • They are distinguished by characteristics, such
    as type, market capitalization, maturity,
    geographic location, etc.
  • What are the major asset classes?
  • They are cash and cash equivalents, fixed income,
    and equities

Asset Classes Cash and Cash Equivalents
  • Cash Major Goal
  • Liquidity and to preserve capital
  • Offers a fixed rate of return
  • Types of cash asset classes
  • CDs, savings and checking accounts
  • Money market funds and Money Market Deposit
  • Short-term interest-bearing investments including
    Treasury bills and Savings Bonds which are loans
    to the U.S. Government, and commercial paper,
    which is loans to corporations

Asset Classes Fixed Income (or Bonds)
  • Fixed Income/Bonds Major Goal
  • Provide income and to earn returns in excess of
  • Types of fixed income asset classes
  • Taxable bonds include U.S. Treasuries, corporate
    bonds and agency issues)
  • Tax-free bonds include revenue or general
    obligation bonds issued by local or state
    governments and agencies. Such bonds are
    generally free from federal and state taxes on

AC Fixed-income (continued)
  • Short-term bonds/bond funds are for bonds that
    mature in one to three years
  • Generally considered good investments for anyone
    needing a dependable stream of income
  • Intermediate-term bonds/bond funds are for bonds
    with a maturity of greater than three years
  • These are more susceptible to interest rate risk
    as they are longer term
  • Generally considered good investments for anyone
    needing a dependable stream of income

AC Fixed-income (continued)
  • Long-term bonds/junk bonds/bond funds are bonds
    with a maturity of 10 or more years
  • These have the highest yields, but are the most
    vulnerable to interest rate volatility
  • Inflation Protected securities are securities
    whose yield is linked to the rate of inflation as
    measured by a specific inflation index
  • They offer protection against inflation
  • U.S. Government Savings bonds are generally two
  • I Bonds Interest rate linked to inflation
  • EE Bonds Fixed interest rate

Asset Classes Equities (or Stocks)
  • Equities/stocks Major Goal
  • Provide growth and earn returns in excess of
    inflation. Over long periods of time, the stock
    market historically has been the only major asset
    class to consistently outpace inflation
  • A share is ownership in a businesses earnings
    and assets
  • Investors get a proportionate share of the
    profits by receiving dividends, and also benefit
    from possible increases in the companys share
  • Equity asset classes are delineated by

AC Equities (continued)
  • 1. Market Capitalization
  • Large-cap (capitalization) stocks/funds
  • Large caps are stocks with a market
    capitalization greater than 10 billion in the
    US, and smaller for international companies
  • These are the least risky of the equities
  • Small-cap or small capitalization stocks/funds
  • Small-cap stocks are companies with a market
    capitalization less than 2 billion and are
    smaller, sometimes newer, US and global
  • Smaller companies generally are higher risk

AC Equities (continued)
  • 2. Type of securities
  • Growth stocks/funds
  • These are fast-track, more risky companies whose
    earnings are expected to grow rapidly
  • Value stocks
  • These are cheaper (in terms of low PE and low
    P/BV ratios) companies that have potential for
    long-term return
  • Blend stocks
  • These are stocks that are neither value (cheap)
    or growth (higher growth) but are somewhere
    between the two

AC Equities (continued)
  • 3. Geography
  • International
  • These are stocks/funds of companies based
    entirely outside the U.S. These can be of any
    size (small-cap, large-cap), any type (value,
    growth) and from any part of the world
  • Global
  • Stocks/funds that contain a mixture of U.S. and
    international equity holdings
  • Emerging Markets
  • Stocks/funds of companies from the less developed
    countries of the world

AC Asset Class Performance
  • Understand asset class performance
  • Why study the past?
  • Different asset classes have performed
    differently over the past 85 years
  • President Gordon B. Hinckley stated
  • All of us need to be reminded of the past. It is
    from history that we gain knowledge which can
    save us from repeating mistakes and on which we
    can build for the future. (Reach with a Rescuing
    Hand, New Era, July 1997, p. 4).

Returns Asset Class Returns
  • This graph uses a log scale

Returns Historical Risk and Return
Returns Large Cap 1-Year
Returns Large Cap 5-Year
Returns Large Cap 10-Year
Asset Class Returns and Risk (through 2013)
Application Step 7. Consider Risk
  • Application Consider risk in portfolio
  • Portfolio selection strategies will differ by
    individual, portfolio manager, institution and
    view of the market
  • It is impossible to discuss how every portfolio
    manager builds every portfolio
  • But general concepts and principles are
    applicable to everyone

Successful Investing the Hourglass Bottom
Taxable Assets
Retirement Assets
4. Opportunistic Individual Stocks and Sector
Funds (this is totally optional)
3. Diversify Broaden and Deepen your Asset
2. Core Broad Market Equity Index Fund/ETF, or
Core Mutual Funds
1. Basics Emergency Fund and Food Storage

The Investment Hourglass (continued)
  • The investment hourglass bottom teaches 3
    important lessons
  • 1. It helps keep risk in perspective
  • It starts investing from lowest risk to highest
  • 2. It teaches the how to about investing?
  • You invest first in lower-risk assets, and then
    move up to more risk as your assets (and
    investment experience) increase
  • 3. It separates out taxable and retirement assets
  • Retirement and taxable assets should be managed
    differently due to taxes and time horizon

Step 8. Understand investment vehicles (for
investing and retirement)
  • Application Understand investment vehicles
  • The investment vehicle is the tax-law defined
    framework that has specific tax advantages, i.e.,
    401k, 403b, Individual Retirement Account (IRA),
    SEP IRA, Roth IRA, Roth 401k, etc.
  • The financial assets are the securities that are
    invested in by the vehicles, i.e., stocks, bonds,
    mutual funds, REITs, MMMFs, CDs, etc.

Investment Vehicles (continued)
Selecting Investment Vehicles (continued)
  • First priority Free money
  • Money that is made available by your company,
    generally on a matching basis, to encourage
    greater participation in company sponsored
    retirement plans, i.e., 401k, Roth 403b, Keogh,
  • Money made available through tax benefits, i.e.
    529 contributions which are deductible from state
  • What are the risks?
  • You must stay at the company a certain number of
    years to become fully vested, i.e., to be able to
    take full ownership of these funds, or use the
    funds for education expenses for 529 plans

Selecting Investment Vehicles (continued)
  • Second Priority Tax-advantaged money
  • a. Elimination of all future taxes
  • This money can be used at retirement (or for
    education) without penalty and without taxes,
    i.e., Roth IRA or Roth 410k/403b for retirement,
    and 529 Funds and Education IRA for education
  • In addition, with the Roth, you can take the
    principle out without penalty at any time
  • What are the risks?
  • You must be 59½ to receive earnings
  • Money from 529 Funds, Education IRA, and EE/I
    bonds must be for qualified educational expenses
    to be tax-free

Selecting Investment Vehicles (continued)
  • b. Tax-deferred money
  • This money has the ability to be invested
    before-tax, with principle and earnings taxed
    only at retirement (IRA, SEP IRA, etc.)
  • What are the risks?
  • You must be 59½ to take distributions. If you
    take the funds out before retirement, there is a
    10 penalty and funds are taxed at your ordinary
    income tax rate for both federal and state
  • This money converts long-term capital gains into
    short-term income for tax purposes

Selecting Investment Vehicles (continued)
  • Third Priority Tax-efficient and wise
  • This is money that is invested tax-efficiently
    and wisely, consistent with the investment
    principles discussed earlier
  • What are the risks?
  • Earnings are taxed consistent with the assets
    invested in
  • You need to take into account the tax and
    transaction cost implications of whatever you
    invest in

Selecting Investment Vehicles (continued)
  • How do you invest tax efficiently?
  • 1. Know the impact of taxes
  • Its what you earn after taxes that is critical
  • 2. Look to Capital Gainsdefer earnings and
    taxes to the future
  • Capital gains are taxed differently
  • 3. Minimize Turnover and Taxable Distributions
  • Turnover creates taxes on distributions
  • 4. Replace interest income with stock dividends
  • Stock dividends are taxed differently
  • 5. Invest tax-free

Step 9. Invest at Your Risk Level
  • Application Invest at your risk level, i.e.,
    select your asset allocation carefully
  • Risk tolerance is your willingness to accept risk
  • It is related to your current or expected
    holdings of your investment portfolio
  • A higher risk tolerance indicates a willingness
    to take on more risk as shown by holding more
    risky asset classes, i.e., more risk equities,
    REITs, international, etc.
  • A lower risk tolerance indicates a willingness to
    take on less risk as shown by holding less
    risky asset classes, i.e., more bonds, CDs,
    large capitalization equities

Risk Tolerance (continued)
  • How is risk tolerance determine?
  • Risk tolerance is determined in two main ways
  • 1. It can be derived from an investors age and
    their current portfolio holdings, i.e., an
    implied risk tolerance
  • 2. It can be estimated by an investor answering
    specific questions regarding investor
    demographics including age, characteristics,
    spending habits, history, and investment
    experience, i.e., a risk tolerance test

Risk Tolerance (continued)
  • Is risk tolerance an absolute number or a general
  • For the purposes of this presentation, risk
    tolerance is considered more a general category
  • I divide risk tolerance into five categories
  • Very conservative
  • Conservative
  • Moderate
  • Aggressive
  • Very aggressive

Risk Tolerance (continued)
  • What is the purpose of risk tolerance?
  • The purpose of risk tolerance is to enable that
    investor to determine an appropriate asset
    allocation or investment mix based on the
    investors willingness to accept risk
  • This allocation is critical because it determines
    the amount of risk an investor is willing to

Risk Tolerance (continued)
  • What is asset allocation?
  • It is the process of determining how the assets
    of a portfolio are divided, mainly into which
    asset classes (think of an asset class as a
    basket, and asset allocation is how much you put
    in each basket)
  • A well diversified portfolio should have broad
    diversification across many asset classes
    (baskets) to reduce overall portfolio risk
  • A broadly diversified portfolio (with investments
    in many baskets) is an investors key defense
    against risk, a key to a sleep-well portfolio

Risk Tolerance (continued)
  • Why is asset allocation so important?
  • Asset allocation is important for two reasons
  • 1. Research has shown that most of the returns
    from financial assets are mainly a function of
    returns from the specific asset class decision,
    and not from the individual stock selection
  • Asset class choice influences returns
  • 2. In the process of selecting your asset
    allocation, you are selecting your risk level for
    your overall portfolio
  • Selecting asset classes is selecting the risk or
    risk level for your portfolio

Risk Tolerance (continued)
  • What were the most risky asset classes over the
    past 85 years ending December 2013
  • Asset Class Return Standard Deviation
  • US Small Cap 12.0 29.1
  • US Large Cap 9.4 19.1
  • Treasury Bonds 5.5 8.5
  • Treasury Bills 3.5 0.9
  • Inflation 3.1 1.8
  • Source Calculated from Ibbotson
  • Note that these are portfolios of financial
    assets, not individual assets

Risk Tolerance (continued)
  • What were the most risky asset classes over the
    past 10 years ending December 2013
  • Asset Class Return Std. Deviation
  • Equity Emerging Markets 11.9 23.9
  • Equity US Small Cap 9.3 20.3
  • Other US REIT 9.0 29.2
  • Equity US Large Cap 7.4 14.6
  • Equity International 7.1 18.3
  • Government Treasury Bonds 6.3 11.6
  • Government Treasury Bills 1.5 0.5
  • Inflation 2.4 1.5
  • Source Calculated from Ibbotson and MSCI.
    These are portfolios of financial assets, not
    individual assets

Risk Tolerance (continued)
  • What is the process of determining your asset
    allocation, or where does risk tolerance come in?
  • Asset allocation is a three-step process
  • Step 1 Set your initial bonds and cash
    allocation to equal your age as a percent of your
    overall portfolio allocation
  • For example, if you are 40 years old, you should
    have 40 of your portfolio in bonds and cash, and
    60 in equities

Risk Tolerance (continued)
  • Step 2 Take a risk tolerance test
  • Based on your results, you will adjust that
    allocation to take into account your individual
    risk tolerance and come up with an
    risk-appropriate asset mix
  • If you are more conservative you will increase
    your bonds and cash allocation and decrease your
    equity allocation
  • If you are more aggressive, you will do the

Risk Tolerance (continued)
  • Step 3 Determine your preferred asset classes
    based on risk within your major asset classes
  • If you are a conservative investor, you will
    likely have many different bond asset classes
    (short-term, long-term corporates, governments,
    municipals, etc.), but likely only large cap
    equities, and perhaps a small amount of other
    equity asset classes
  • If you are more aggressive, you will do the
    opposite, have more small cap, international,
    emerging markets, REITs, etc.

Risk Tolerance (continued)
  • I recommend you take a risk tolerance test
    (Teaching Tool 16 from the website)
  • 1. Review each of the 8 questions
  • 2. Honestly answer each of the questions
  • 3. Then add up your points from each question
  • Please note that there are five potential
    responses to each question, worth 1 to 5 points
  • Add up the point next to the correct response and
    sum your total points from 8 questions
  • 4. From your total points, we will have
    recommended actions for your asset allocation
  • Now take the test!

RTT Risk and Demographics
  • 1. Age What is your age currently?
  • 1. 65 and over
  • 2. 45 to 64
  • 3. 35 to 44
  • 4. 25 to 34
  • 5. 24 and under

RTT Risk and Time Horizon
  • 2. Time Horizon What is your investment time
    horizon for this money?
  • 1. 1 year
  • 2. 2-5 years
  • 3. 5-10 years
  • 4. 10-20 years
  • 5. 20 years or longer

RTT Risk and Investment Goals
  • 3. Investment Goals What is your primary
    objective for this money?
  •  1. Preservation of Principal
  •  2. Current Income
  •  3. Growth and Income
  •  4. Conservative Growth
  •  5. Aggressive Growth

RTT Risk and Income
  • 4. Expected Personal Earnings Regarding your
    current income, do you expect it to
  •  1. Decrease dramatically in the future
  •  2. Decrease a slight amount in the future
  •  3. Stay about the same
  •  4. Increase with the pace of inflation
  •  5. Increase dramatically

RTT Risk and Emergency Funds
  • 5. Emergency Fund What amount of money do you
    have set aside for emergencies? (This does not
    include borrowings or credit lines, but does
    include money you can access quickly)
  • 1. None
  • 2. Enough to cover three months of expenses
  • 3. Enough to cover six months of expenses
  • 4. Enough to cover nine months of expenses
  • 5. Over twelve months of expenses

RTT Risk and Investment Experience
  • 6. Investment Experience What is your personal
    investment experience?
  •  1. I have never invested any money in any
    financial market or instrument.
  •  2. I am relatively new investor,--only a few
  •  3. I have invested in IRAs and employer
    sponsored retirement plans (401 (k)) for some
    time, but now I am ready to develop additional
    investment strategies outside of that plan.
  •  4. I have invested for quite some time and am
    fairly confident in my investment decisions.
  •  5. I have invested money for years and have a
    definite knowledge of how financial markets work.

RTT Risk and Investment Type
  • 7. Investment Risk Regarding your view of
    risk, which investment would you be more
    comfortable making?
  •  1. I am comfortable investing in savings
    accounts, CDs, and other short-term financial
  •  2. I invest in savings accounts/CDs, but I also
    own income-producing bonds and bond mutual funds.
  •  3. I have invested in a broad array of stock and
    bond mutual funds, but only the highest quality.
  • 4. I have invested primarily in growth stocks and
    growth stock mutual funds.
  • 5. I like to pick out new and emerging growth
    companies and aggressive stock mutual funds.

RTT Risk and Investment Preferences
  • 8. Investment Preferences Which investment
    would you be more likely to invest in? The
    investment has
  • 1. A 20-year average return of 0-2, with
    infrequent downturns and no years of negative
  • 2. A 20-year average return of 3-4 with mostly
    positive returns but less than a year of negative
  • 3.  A 20-year average return of 5-6 with a few
    downturns and more than one-year of negative
  • 4.  A 20-year average return of 7-8 with several
    periods of negative returns
  • 5.  A 20-year average return of 9 or greater
    with several periods of substantially negative

Risk Tolerance (continued)
  • You now have your total score
  • From your total score, it can help us understand
    what type of investor you are Very conservative,
    Conservative, Moderate, Aggressive, and Very
  • Each score will have a recommended action
    regarding increasing or reducing risky assets
  • Now match your beginning allocation, which is
    your age in bonds, with your recommended action.
  • Once you perform the recommended action, you will
    have your asset allocation or asset mix
    consistent with your preferred level of risk

Risk Tolerance (continued)
  • Very Conservative (8 to 12 points)
  • Cash 5Bonds 15Stocks -20
  • Conservative (13 to 20 points)
  • Cash 0Bonds 10Stocks -10
  • Moderate (21 to 28 points)
  • Cash 0Bonds 0Stocks 0

Risk Tolerance (continued)
  • Aggressive (29 to 36 points)
  • Cash -5Bonds -5Stocks 10
  • Very Aggressive (37 to 40 points)
  • Cash -5Bonds -15Stocks 20
  • Investors are free to shift between the cash and
    bond allocations without any change in
    effectiveness of the test. I personally prefer
    to always have, at minimum, a 5 allocation to

Risk Tolerance (continued)
  • How does this scoring work?
  • For example, if you scored 35 points, you would
    be considered a aggressive investor
  • This is your risk tolerance or type of investor
  • To get to your asset allocation or asset mix
  • Start with your age in bonds. For example, assume
    your are age 40 so assume 40 in bonds
  • Next, do what the results suggest. For an
    aggressive investor, you would add 10 to
    equities and subtract 10 to your bond and cash
    allocations from the above charts
  • Your asset allocation at age 40 would be 30
    bonds and cash, and 70 equities

Risk Tolerance (continued)
  • Can you have two individuals with similar asset
    allocations yet with different risk levels?
  • Yes. This is due to their different ages
  • For example, three investors each have a 60
    equity and 40 bond allocation
  • Investor A is age 50 and is Aggressive
  • Investor B is age 60 and is Moderate
  • Investor C is age 40 and is Very aggressive
  • Please note that their allocations within the
    equity and bond allocations will likely be very
  • Aggressive investors will have more small cap,
    international, and other risk equity asset

Step 10. Select Financial Assets Wisely
  • Application Choose financial assets carefully
  • When should you pick individual stocks and bonds?
  • I recommend you avoid picking individual stocks
    and bonds until your portfolio is sufficiently
    large (i.e., gt 500,000, if at all)
  • You can have a successful portfolio without ever
    purchasing individual stocks and bonds
  • Why is this the case?
  • There are five major reasons why I do not
    recommend picking individual stocks and bonds
    when your portfolio is small

Selecting Assets (continued)
  • 1. Principle 3 Stay Diversified
  • Picking single assets violates the principle of
  • With a small portfolio, it is difficult to
    achieve acceptable diversification with limited
    numbers of stocks
  • 2. Principle 4 Invest Low Cost
  • Investing in stocks when you have a small
    portfolio is very expensive
  • Transactions costs for purchasing stocks are
    among the highest of any major asset class

Selecting Assets (continued)
  • 3. Principle 6 Know What You Invest In
  • Picking stocks when you have not developed the
    knowledge base necessary to evaluate stocks is
    very risky, bordering on speculation or gambling
  • Most have not as yet put in the time to learn to
    evaluate stocks nor have developed the tools
  • 4. Principle 8 Dont spend too much time
    trying to Beat the Market
  • Picking stocks is very costly, difficult and
  • There is much more to be learned about valuation
    that cant be taught in a single presentation

Selecting Assets (continued)
  • 5. Stock selection is not required to have a
    successful investment portfolio
  • While it is intellectually challenging, you can
    improve returns and reduce risk more by properly
    selecting asset classes and buying low cost and
    no-load mutual and index funds
  • You never need to buy an individual stock or bond

Selecting Assets (continued)
  • What is the alternative to picking stocks and
  • I recommend no-load low-cost index funds
  • What are index funds?
  • Mutual funds or ETFs which hold specific shares
    in proportion to those held by an index
  • Their goal is to match the benchmark performance
  • Why have they come about?
  • Investors are concerned that most actively
    managed funds have not been able to beat their
    benchmarks after all fees

Selecting Assets (continued)
  • Jason Zweig, a senior writer for Money Magazine
  • With an index fund, you're on permanent
    auto-pilot you will always get what the market
    is willing to give, no more and no less. By
    enabling me to say "I don't know, and I don't
    care," my index fund has liberated me from the
    feeling that I need to forecast what the market
    is about to do. That gives me more time and
    mental energy for the important things in life,
    like playing with my kids and working in my
    garden (Jason Zweig, Indexing Lets You Say
    Those Magic Words, CNN Money, August 29, 2001).

Selecting Assets (continued)
  • Warren Buffet commented
  • By periodically investing in an index fund, the
    know-nothing investor can actually outperform
    most investment professionals. Paradoxically,
    when 'dumb' money acknowledges its limitations,
    it ceases to be dumb (Warren Buffett, Letter to
    Berkshire Hathaway Shareholders, 1993).

Selecting Assets (continued)
  • Some final thoughts on wisely selecting assets
  • Most actively managed funds will under-perform
    index funds in the long run after all fees and
  • The competition in stock-market research is
    intense, making markets more efficient and
    indexing even more attractive
  • Passive investing takes very little time and has
    generally outperformed most actively managed

Selecting Assets (continued)
  • You can also pick target date funds which
    change their allocation consistent with your age
  • These can be low cost, diversified, tax efficient
    mutual funds
  • As you get older, these funds increase their
    allocations to bonds and decrease their
    allocations to equities

Selecting Assets (continued)
  • Application
  • Always be diversified in your investingdont put
    all your financial assets or eggs in one basket
  • Invest in many different asset classes in your
    portfolio such as
  • Equities large cap, small cap, international,
    emerging markets, etc.
  • Bonds taxable, tax-free short-, med-, and
    long-term corporates short- and long-term
    governments, etc.
  • Cash money market, CDs, savings, MMMFs, etc.

Final Cautions
  • Final thoughts on investing
  • Do not go into debt to invest
  • This includes taking equity out of your home
  • Beware of self-serving financial advisors
  • Dont shift from a 401k and pay penalties to buy
    another financial asset (usually insurance)
  • Beware the agency problem
  • Some advisors sell products based on their
    commissions, not what is best for you
  • Listen to the Spirit
  • If it seems too good to be true, it probably is

Cautions (continued)
  • M. Russell Ballard said
  • There are no shortcuts to financial security.
    There are no get-rich-quick schemes that work. Do
    not trust your money to others without a thorough
    evaluation of any proposed investment. Our people
    have lost far too much money by trusting their
    assets to others. In my judgment, we never will
    have balance in our lives unless our finances are
    securely under control (Keeping Lifes Demands
    in Balance, Ensign, May 1987, 13.)

  • Doctrines
  • 1. Understand the whys of personal finance
  • Principles
  • 2. Understand investment basics
  • Everyone invests
  • There is a purpose to investing
  • There is a priority of investments
  • Investing and gambling are different
  • 3. There are things to do before you start
  • 4. Work on the investment factors you control

Review (continued)
  • Principles (continued)
  • 5. Understand the 10 principles of successful
  • 6. Understand what you invest in
  • Application
  • 7. Consider risk in portfolio construction
  • 8. Know investment vehicles
  • 9. Invest at your risk level
  • 10. Choose financial assets carefully