Fundamentals of Investing for Retirement Income. Understanding Investment Risk and Return

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1 Fundamentals of Investing for Retirement Income Understanding Investment Risk and Return

2 Mike Miles Founder and Principal Advisor, Variplan, LLC Certified Financial Planner Registered Investment Advisor SEA Benefit Provider Since 1999 Federal Times Money Matters Columnist Ask the Experts Panelist at

3 Course Content 1. Success and Failure in Retirement Investing 2. Defining Retirement Resources, Goals and Constraints 3. Understanding Investment Risk and Return 4. How Diversification Really Works 5. Asset Classes and Types Diversification and Concentration 6. Understanding Asset Allocation and Hedging 7. Setting Investment Performance Expectations 8. Managing Investment Costs 9. The Case for Index Investing 10. Accounting for Inflation in Retirement Planning 11. Managing Portfolio Liquidity 12. Organizing Your Portfolio

4 SEA Member Benefits Free Hour of Consulting / Analysis $250 Vantage Discount Questions to me at mmiles@variplan.com

5 Portfolio Value The Game Changes as You Approach Retirement Retirement Time

6 Same Plan Many Possible Outcomes

7 Portfolio Value The Effect of Investment Risk Portfolio Balance Time

8 Portfolio Value Optimal Solution Portfolio Balance Time

9 Portfolio Value Optimal Long Life Time

10 Portfolio Value Too Conservative Portfolio Balance Time

11 Dollars Impact on the Portfolio College Spending Allowance Need Total Annual Spending Needs Travel Spending Allowance Base Wants Spending Allowance Base Needs Spending Allowance Income Time

12 Impact on Planning and Management Resources must be clearly identified or estimated Goals must be translated into cash flow requirements Planning should recognize and accommodate constraints Management should seek to minimize the impact of constraints

13 Lesson 3 Understanding Investment Risk and Return

14 Financial Planning and Management Goals Resources Management Performance Success Wants Needs Guaranteed Annuities Insurance At Risk Liquid Assets Cash Marketable Securities Illiquid Assets Real Estate Business Interests Action Constraints Decisions Analysis Assumptions Experience Probabilities Estimates Risk Return Cash Flow Wealth Inflation & Taxes

15 Investment Risk Investment risk is the possibility that an investment will produce an unexpected return. Investment risk applies to: Average Rate of Return Periodic Returns (Sequence)

16 Investment Return Investment return is the change in value that an investment produces in exchange for taking risk. Investment return consists of: Yield Price Appreciation / Depreciation

17 Investment Risk and Return Risk and return are tied together. Risk is the means to an end. Risk and return can be quantified and managed. You should expect to be paid to take risk.

18 Investment Risk and Return When it comes to investing for retirement income, the primary objective is to realize the expected return in each and every period. Predictability is the most valuable commodity.

19 Quantifying Risk and Return Return is expressed as a percentage of the amount invested. Risk is usually expressed as Standard Deviation.

20 Frequency Standard Deviation Expected -1 SD +1 SD 34.1% 34.1% 2.1% -2 SD +2 SD 2.1% 13.6% 13.6% -3 SD +3 SD Rate of Return

21 Standard Deviation +2 SD +1 SD 2.3% 13.6% Expected 34.1% 84% 98% 34.1% -1 SD -2 SD 13.6% 2.3%

22 Value Standard Deviation Time

23 Asset Value Components Time

24 Large Cap U.S. Stocks C Fund +50% +31% +12% 84% 98% -7% -26%

25 Small Cap U.S. Stocks S Fund +71% +43% +15% 84% 98% -13% -41%

26 Cash and Equivalents G Fund +10% +7% +4% 84% 98% +1% -2%

27 Diversified U.S. Bonds F Fund +15% +10% +5% 84% 98% +0% -5%

28 Expected Return The Efficient Frontier Unavailable Inefficient Risk

29 Expected Return Designing Efficient Portfolios Unavailable Inefficient Risk

30 Conservative +23% +15% 20% 7% 3% 10% 60% C Fund S Fund I Fund G Fund F Fund +7% 84% 98% -1% -9%

31 Balanced +32% +21% 40% 15% 5% 3% 37% C Fund S Fund I Fund G Fund F Fund +10% 84% 98% -1% -12%

32 Aggressive +46% +29% 55% 26% 9% 1% 9% C Fund S Fund I Fund G Fund F Fund +12% 84% 98% -5% -22%

33 Portfolio Value Balanced Time

34 Market Value Mean Regression A B Time

35 Average Rate of Return Mean Regression Expected Rate of Return Time

36 Next Week s Webinar 1. Success and Failure in Retirement Investing 2. Defining Retirement Resources, Goals and Constraints 3. Understanding Investment Risk and Return 4. How Diversification Really Works 5. Asset Classes and Types Diversification and Concentration 6. Understanding Asset Allocation and Hedging 7. Setting Investment Performance Expectations 8. Managing Investment Costs 9. The Case for Index Investing 10. Accounting for Inflation in Retirement Planning 11. Managing Portfolio Liquidity 12. Organizing Your Portfolio

37 SEA Member Benefits Free Hour of Consulting / Analysis $250 Vantage Discount Questions to me at mmiles@variplan.com

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