Index Wealth Building and Investing Page 2 Compounded Returns Page 3 Wealth Building January 2018 Investor Education Investor Education is Critical to reach your Financial Goals Wealth gives you Freedom and Control of your Life Setup an Auto-Investment Plan to Invest on a Regular Basis in Bull and Bear Markets Create a Diversified Portfolio with the Proper Asset Allocation Purchase Quality Investments Manage your Portfolio Properly PDM Investment Services, LLC A Registered Investment Advisor Wealth Building Plan Elements Page 4 Saving Plan Page 5 Debt Reduction Plan Sound Investment Plan Sound Financial Advisor and Strategy Wealth Building Mechanics Page 7 Investment Summary Page 9 Investment Action List Page 10 Investment Total Allocation Page 11 Investment Projection Table Page 12 Retirement Projection Graph Page 13 Portfolio Allocation & Analysis Page 14 Other Processional Services Page 16 Career Counselor Insurance Planning Tax Planning Estate Planning Private Health Advisory Service Investment Education Wealth Building Books Page 17 5131 Standish Drive, Troy, Michigan 48085 1-248-890-4696 * www.fginvestor.com * info@fginvestor.com For complete disclosure see our website 1
Wealth Building and Investing The chart below shows the process of creating a wealth plan and the investment process. Wealth Building Process Create and support a simple wealth plan to guide you to build wealth and meet your retirement Portfolio Design Asset Allocation Portfolio Design Security Selection Portfolio Management Performance Monitor Analysis Maintenance From the chart below you can see how your income feeds assets, liabilities and expenses. The goal is to grow your assets and reduce your liabilities until your assets can produce investment income greater than your job income. At this point, you have enough income so you are no longer dependent on your job and have achieved financial independence. 2
Compounded Returns Compounding returns can substantially grow your portfolio over time. With compounding, you earn on your initial investment and accumulated gains from each year. The chart below shows you how compounding can grow a portfolio. A portfolio with an 8% annual rate of return, a 3% annual inflation rate and a $1000 per month contribution would accumulate $1,000,000 in 30 years. 3
Wealth Building Plan Elements A Wealth Building Plan is a written long-term plans to guide you to meet your retirement goals and maintain income in retirement. A plan provides peace of mind to your family, defines goals, monitors progress and drives adjustments. Plans make you less likely to overreact to market volatility and increase one s confidence and effectiveness in managing income, spending, saving, debt and investing. The investment process is complicated and requires strict discipline without emotion. Without professional guidance, you will likely produce mediocre returns, and not meet your retirement goals. You should always seek professional advice unless you receive the proper training, invest in the proper tools, and are willing to put the time into managing your portfolio. Most people find investing complicated, difficult to find good advice and are worried about losing money. How do you envision your ideal retirement? What is most important to you about your financial future? Why should you follow your investment plan? Common answers include freedom, security, flexibility, reduced stress, peace of mind, travel, time with family and time with hobbies. Investment Goals & Risk Tolerance Document your goals, time horizon and risk tolerance. Retire in 25 years at 55 years old with $2,000,000 of investment worth. Define your risk tolerance: GROWTH strategy with a MODERATE-AGG risk. (Base Allocation: 80% Stocks and 20% Bonds & Cash) How much do you need to save for retirement to maintain your standard of living? The Wealth-to-Income Ratio says you should have saved 10 times your working average annual income by the time you retire. If your average annual income is $130,000, you can retire comfortably with $1,300,000. Career Income Maintain or increase your income level until retirement. Select a career in a field that is in demand and pays well. Increase your income by at least 5% annually by employing continued education, acquiring new skills, hard work and developing strong interpersonal skills. Seek out promotions into management to get bonus and stock option income. Spending Plan Document your monthly spend, create a budget and review it annually. What are your liquidity needs? Prioritize saving over spending, plan savings first then adjust your budget for what you have left. Live within your means with a modest home and car. Vacation homes and boats are not typically good investments. Do not buy more house than you need. The house you live in is more of a liability than an asset. A large home mean high interest payments and high taxes, insurance, utilities and maintenance. Your home is not a good investment. Over long periods of time, homes grow near the inflation rate of 3% to 4%. A diversified mutual fund portfolio historically saw returns of 7% to 8%. Bag a lunch and only purchase insurance you need. Buy a car, maintain it and keep it at least 8 years, stay in your house at least 15 years before you move. 4
Saving Plan Automate your savings to control your budget. Automate your paycheck to be distributed to your 401(k), stock purchase plan, savings account and IRA account by taking money out before you see it setting up the self-discipline to save. Target saving 20% of your wages annually. Your 401(k) should be your primary saving account for retirement. You should be contributing as much as you can from each paycheck in bull and bear markets. Do not try to time the market or your returns will likely suffer from poor emotional decisions. Contribute enough to your 401(k) to get at least the full match. Invest profit sharing into your 401(k). Once you reach the IRS max in your 401(k), contribute to your Roth or IRA and last your taxable account. Invest extra money in your taxable account for a home, home improvement or a car. A Health Savings Account (HSA) is an employer sponsored health insurance saving plan that allows you to accumulate pre-tax money to be used to pay medical bills like co-payments and deductibles. Typically offered by plans with higher deductibles. Money going in is pretax, grows tax free and the money is not taxable on the way out if used for qualified health-care expenditures. There is no limit on the amount of unused HSA funds that can roll over one year to the next. Once you build up the account with enough cash to use for the year, the extra can be invested for long-term. In 2017, IRS rules allow you to contribute $6,750 per family and $7,750 if 55 and older per year. For single s it is $3,400 or $4,400 per year. There are no wage restrictions. This is a great tax advantaged savings tool to help pay for your medical expenses in retirement. Not all health care plans and employees offer HSA s. These plans take some work to manage. You must manage your cash balance for withdrawal and the investment portion of the account. Most people cannot even manage their 401(k) let alone another HSA account. For many it may not be worth the effort unless you max out each year. Annual fees may eat away at the tax advantage. Debt Reduction Plan Document your debt level. Pay off high interest loans first. Pay off credit card balances each month. Maintain a good credit rating to get lower interest loans. Focus on reducing your debt to zero by age 55. Make double house payments. Use bonuses and the periodic sale of stock purchase plan shares and stock options to pay down debt, for needed major purchases and to increase investment accounts Should I Pay Off My House? There are a lot of variable to consider about your personal situation when deciding to pay off a mortgage. Case for keeping your mortgage If your mortgage is low below 4% and the expected return on your investment portfolio is higher than 5%, it may make sense to keep your mortgage. Also take into account the tax deduction on your mortgage in your calculations. Expected returns in the stock market going forward from today are 6.5% over the next 10 years. If expected returns were a lot higher like in 2009 and you used the cash to invest, this would produce better return on investment. If you have a pension in retirement and do not need income from your investment portfolio, a mortgage makes more sense. 5
Case for paying off your mortgage You should pay off your house if you have the cash sitting in a bank account returning 0% and not invested yielding more. You should pay off your house if you lack self-control in saving and investing. You should pay off your house if you have foreclosure risk. (Low income, lack of job security and small savings) If your house is paid off and the stock market crashes, you will still have your house. In normal times house prices go up, even in recessions. Zero debt removes a monthly payment reducing your monthly spend and gives you peace of mind you will not lose your house. Owning a house diversifies your total portfolio into real estate without leverage. My biggest concern about mortgages is that the front payments are weighted toward paying off interest, not principal. If you pay it off early, you wasted all that money on interest. Not a good feeling. Sound Investment Plan Document your investment plan. Start investing early to take full advantage of compounding returns. Contribute as much as you can to your 401(k), it is the most important vehicle for retirement savings. Contribute to your company stock purchase plan especially if you buy shares at a discount. Open a Roth IRA with a discount online broker and contribute the maximum each year. Open a taxable account with an online discount broker for any extra savings beyond the ones listed above. Practice saving and investing discipline, be patient, allow time and control your emotions. Do not mix investing and insurance. Your investment plan should be reviewed annually with your financial advisor and your portfolios should be measured for performance, performance consistency, risk, risk adjusted return, maximum drawdown and cost. Sound Financial Advisor and Investment Strategy The investment process is complicated and requires strict discipline without emotion. Without professional guidance, you will likely produce mediocre returns, and not meet your retirement goals. You should always seek professional advice unless you receive the proper training, invest in the proper tools, and are willing to put the time into managing your portfolio. Most people find investing complicated, have difficulty finding good advice and are worried about losing money. Select a financial advisor to create and support your wealth building plan, select the best investment strategies and design and manage your investment portfolios. Your wealth plan should be reviewed annually with your financial advisor and your portfolios should be measured for performance, performance consistency, risk, risk adjusted return, maximum drawdown and cost. 6
Wealth Building Mechanics Below is a simple model for a family of 4. Do your own calculation for your specific situation. If you want to retire by the age of 55, I would not recommend a cottage or a boat and only carry one car payment at a time. David Smith (Age 30) and Deborah Smith (Age 30) with two young children. Time Horizon Goal Risk Level 25 Years Both retire at 55 year s old Moderate-Aggressive Career Income $130,000 Combined salary and profit sharing -$20,000 Two 401(k) s + $5,200 from 4% match -$16,500 Federal withholding at 15% of $110,000 - $5,500 State withholding at 4% of $110,000 - $6,600 Social Security withholding at 6% of $110,000 - $1,650 Medicare withholding at 1.5% of $110,000 - $2,750 Healthcare insurance withholding at 2.5% of $110,000 Take home pay is $77,000 or $6,416 per month Spending $5,266 per month Bonuses and stock option sales will be used for major purchases. Assume raises will cover inflation, increased spending on children and college tuition. Assume house was purchased before 30 years old with a down payment prior saved. Annual Spend House (mortgage, property tax, maintenance and furniture) $12,000 Spending (clothes, gifts, services, contributions, taxes, other) $10,000 Car (Loan, maintenance, gasoline and license) $9,500 Entertainment (Vacations, restaurants, misc.) $8,000 Utilities (Gas, water, electric, cell phone, internet and cable) $6,000 Groceries $5,700 Major House Projects $5,000 Medical (Insurance, doctor visits and medications) $4,000 Insurance (Car, home, life, umbrella) $3,000 College Savings $0 Total $63,200 per year or $5,266 per month 7
Wealth Building Mechanics Below you can see how job income is invested pre-tax into 401 (k) s and the rest after tax into your primary bank account for spending and investing in taxable and IRA accounts. The investment accounts show the custodian, manager, risk level, and annual savings amount and rate. David s 401(k) Deborah s 401(k) PDM Design/Client Managed Moderate-Aggressive Risk Primary savings vehicle +$12,600 per year with match +$12,600 per year with match 19% Savings rate David s Roth IRA Or Rollover IRA Scottrade PDM Design & Managed Moderate-Aggressive Risk +$3000 per year 2% Savings rate Deborah s Roth IRA Or Rollover IRA Scottrade PDM Design & Managed Moderate-Aggressive Risk +$3000 per year 2% savings rate Job Income $130,000 Joint Taxable Bank of America Checking Client Managed, Conservative Risk Annual +$80,000 take home after tax and 401(k) - $60,000 spending ($5,000 per month) - $5,000 savings to Scottrade Taxable account - $6,000 saved for IRA s deposited annually - $9,000 extra to accumulate for major purchases Joint Taxable Scottrade PDM Design & Managed Moderate-Aggressive Risk Consolidate taxable accounts into one +$416 per month auto Invested, 5% savings rate 8
Investment Summary Fidelity, 401 (k), David PDM Investment Services design and client managed Moderate-Aggressive Risk (Base Allocation: 80% stocks / 20% bonds & cash) Contributions: 2015= $12,600 Performance: See full-page report. $200,000 Merrill Lynch, 401 (k), Deborah PDM Investment Services design and client managed Moderate-Aggressive Risk (Base Allocation: 80% stocks / 20% bonds & cash) Contributions: 2015= $12,600 Performance: 2014 = 5.7%, 2015 = 2%, 2016= 7.9%. $100,000 Scottrade, IRA, David PDM Investment Services design and managed Moderate-Aggressive Risk (Base Allocation: 80% stocks / 20% bonds & cash) Contributions: 2015= $3,000 Performance: See full-page report. $50,000 Scottrade, IRA, Deborah PDM Investment Services design and managed Moderate-Aggressive Risk (Base Allocation: 80% stocks / 20% bonds & cash) Contributions: 2015= $3,000 Performance: See full-page report. $50,000 Scottrade, Taxable, Joint PDM Investment Services design and managed Moderate-Aggressive Risk (Base Allocation: 80% stocks / 20% bonds & cash) $80,000 Bank of America, Taxable, Joint Client design and managed Conservative risk (Base Allocation: 0% stocks/100% cash) $5,000 2016: Fidelity Asset Manager 70% Moderate Risk Benchmark (FASGX) saw a 7.1% return. 2015: Fidelity Asset Manager 70% Moderate Risk Benchmark (FASGX) saw a -0.6% return. 2014: Fidelity Asset Manager 70% Moderate Risk Benchmark (FASGX) saw a 5.6% return. 2013: Fidelity Asset Manager 70% Moderate Risk Benchmark (FASGX) saw a 20.1% return. 9
Investment Action List Career Income, Spending, Saving and Debt Reduction Increase your income by at least 5% annually by employing continued education, acquiring new skills, hard work and developing strong interpersonal skills. Stick to your spending plan. Review your budget and spending for reductions annually. Focus on reducing your debt to zero by age 55. Make double house payments. Use bonuses and the periodic sale of stock purchase plan shares and stock options to pay down debt, for needed major purchases and to increase investment accounts. Fidelity, 401 (k), David Allocate mutual funds to the recommended allocation for the contribution and the balance. Setup your contribution rate to save $12,600 per year. The maximum contribution for 2018 is $18,500 under 50 years old and $24,500 over 50 years old plus match. Fidelity, 401 (k), Deborah Allocate mutual funds to the recommended allocation for the contribution and the balance. Setup your contribution rate to save $12,600 per year. The maximum contribution for 2018 is $18,500 under 50 years old and $24,500 over 50 years old plus match. Scottrade, IRA, David Contribute $3000 per year. The maximum contribution for 2018 is $5,500 for under 50 years old and $6,500 for over 50 years old. Scottrade, IRA, Deborah Contribute $3000 per year. The maximum contribution for 2018 is $5,500 for under 50 years old and $6,500 for over 50 years old. Scottrade, Taxable, Joint Setup an auto-investment plan to transfer $500 per month automatically from your primary bank checking account to your Scottrade Joint Taxable account. Insurance Planning, Tax Planning and Estate Planning Review your home, auto, health, life, disability, umbrella policy and long-term care insurance needs and rates annually. Make sure your accountant and investment advisor are working together. Make sure you keep your Will and Revocable Living Trust updated together with an estate attorney. Setup your online account with Social Security (www.socialsecurity.gov) and verify your earnings are recorded are correct. To correct earnings, gather your W2 s and call 800-772-1213. Beneficiaries Scottrade IRA accounts have spouse as primary and children as contingent. Scottrade taxable account is Joint so spouse is primary. To add contingent change to TOD or Trust. 10
Investment Total Allocation Combine the holdings of all your investment accounts so you can look at the total allocations. The total allocations will help identify deficiencies and areas of improvement. See the example below. Total Allocation Taxable / Tax Deferred Financial Advisor Asset Allocation Risk Allocation 11
Investment Projection Table The table below shows your accumulation of wealth created at various retirement dates. Future value calculations are calculated using the assumptions in the table and the excel FV formula. Retirement Income Spend in Retirement Goal (70%-80%-90% pre-retirement) $8,750 current x 80% $7,000 Per Month After 20% Tax Retirement (David @55 in 2029) 100% Moderate Risk Portfolio $1,840,462 5% return $6,100 0% Conservative Portfolio $0 3% return $0 0% Real Estate (Condo) $0 3% return $0 Total $3,074,796 $6,100 max + Part time job income (David @55 in 2029) $2,500 ($37.5k income) Total $8,600 max + Pension (David @55 in 2029) $1,600 Total 12 $10,200 max + Social Security (David @67 in 2041) $2,000 ($2,500 pre-tax) $12,200 max Total + Social Security (Deborah @67 in 2041) $1,000 ($1,250 pre-tax) Total $13,200 max
Retirement Projection Graph - Investment Portfolio (20% tax rate) The max you could withdraw from your Investment Portfolio with a 95%+ probability of not running out of money by 90 years old is $5,500 per month ($4,400 after tax spend) starting at 55 years old. There is a 92% probability if you take out $8,300 per month ($6,640 after tax spend). The projection uses your same Scottrade portfolios I manage. See parameters below. The dark line is the most probable and the shaded area is the possible extremes. 13
Portfolio Allocation & Analysis, Fidelity 401 (k), David Goal: Retirement Risk Tolerance: Moderate-Aggressive (Base Allocation: 80% stocks / 20% bonds & cash) Time Horizon: 25 years Contributions: $12,600 2016= $12,000 Amount: $200,000 The portfolio is designed to meet your goals, risk tolerance and time horizon. Grades are derived from technical charts, fundamentals and other rating services. Funds listed below may be like funds and not exactly the ones in the plan. Change the allocation of the Contribution Elections and the Current Balance to the new allocation below. TICKER ASSET ALLOCATION GRADE SYMBOL CLASS Fidelity Contrafund FCNTX LCG 15% B Columbia Diversified Equity Income ADECX LCV 10% C Artisan Mid Cap Value ARTQX MCV 15% A Neuberger Berman Genesis NBGIX M/SCG 15% B Fidelity Low Priced Stock FLPSX M/SCV 15% A Fidelity Diversified International FDIVX INT 15% B PIMCO Total Return PTTAX ITB 10% A Fidelity Cash Reserves MM 5% X Analysis The portfolio is moderate-aggressive risk, diversified and has a fund quality of a B average grade. 2015: Small Cap Value, Large Cap Value, International and High Yield Bonds hurt performance. 2016: Active managed funds, international, growth and sector funds underperformed, hurting performance. 2017: Benchmark outperformed due to large exposure to strong large cap growth and international. Asset Class Key LCG-Large Cap Growth, LCV-Large Cap Value, MCG-Mid Cap Growth, MCV-Mid Cap Value, SCG-Small Cap Growth, SCV-Small Cap Value, INT-International, INT EM MKT-International Emerging Market, INT BOND-International Bond, HY BOND-High Yield Bond, IT BOND-Intermediate Term Bond, ST BOND-Short Term Bond, MM- Money Market. 14
Portfolio Allocation & Analysis, Scottrade IRA s David & Deborah Goal: Retirement Risk Tolerance: Moderate (Base Allocation: 75% stocks / 25% bonds & cash) Time Horizon: 25 years Contributions: $12,600 2016= $12,600 Amount: $100,000 The portfolio is designed to meet your goals, risk tolerance and time horizon. Grades are derived from technical charts, fundamentals and other rating services. Your exact portfolio may vary from the allocation and funds below due to availability and fund minimums. TICKER ASSET ALLOCATION GRADE SYMBOL CLASS Mairs & Power Growth MPGFX LCG 15% A Price Value TRVLX LCV 8% B Akre Focus AKREX MCG 7% B Fidelity Low Priced Stock FLPSX MCV 8% A Broadview Opportunity BVAOX SCG 12% B Stratten Small Cap Opportunities STSCX SCV 12% A Harbor International HIINX INT LCG 5% A Oakmark International Small Cap OAKEX INT LCB 5% A Matthews Pacific Tiger MAPTX ASIA 3% B PIMCO High Yield Bond PHYDX HY BOND 5% B PowerShares Senior Loan Portfolio ETF BKLN BANK LOAN 7% B Vanguard Short Term Corporate Bond ETF VCSH ST BOND 8% B Money Market MM 5% NA Analysis The portfolio is moderate risk, diversified and has a fund quality of a B+ average grade. The cash came into the portfolio December 2012.This portfolio is medium size, has no sector funds and uses active managed mutual funds. Performance does not include the 0.8% (0.8% x 12/12) annual management fee of $500 in 2015. 2015: Small Cap Value, Large Cap Value, International and High Yield Bonds hurt performance. 2016: Active managed funds, international, growth and sector funds underperformed, hurting performance. 2017: Benchmark outperformed due to large exposure to strong large cap growth and international. 15
Other Professional Services Career Counselor How is your career going and do you have any concerns? A Career Counselor and Financial Planner can help align work, interests and lifestyles while staying on a healthy financial track. How much money do I need to quit my crappy job? How do I figure out a better way? It is a good idea to put a portion of your savings in a taxable account to be used for lifetime learning and cushion transition periods between jobs and careers. Phasing in a retirement schedule is often the best method to get to full retirement. Part time work will extend the life of your investment portfolio, offer job satisfaction and social interaction. Career financial assets are an important part of a financial plan. Insurance Planning Purchase insurance you really need. Do not mix investing with insurance. Review your home, auto, health, life, disability, umbrella policy and long-term care insurance needs and rates annually. Tax Planning Make sure your accountant and investment advisor are working together. Estate Planning Review your tax-deferred account beneficiary s each time accounts change and at least every 10 years. Make sure you keep your Will and Revocable Living Trust updated. A revocable living trust can help you avoid estate taxes and probate, define who receives your assets, distribute your assets to your children in predefined amounts over time, assign a guardian to your minor children, appoint a trustee to handle your estate and distribute the assets, avoid settlement costs, define financial and durable power of attorney and a patient advocate. A Will directs your assets through probate the way you want them. We can work together with an estate attorney. Estate Planning Attorney Investment Education Investment education is important so you understand your investments and strategies so you can better support your wealth plan. Sources of investor education are: Focused Growth Investor newsletter, investment books, the Wall Street Journal and Barron s. Private Health Advisory Services Private Health Advisory Services help navigate the complex and expensive health-care system. When a catastrophic illness strikes and quick access to the best possible care becomes a priority Save money by avoiding unnecessary procedures and treatments Expedited referrals Top specialists and groundbreaking treatments Medical advice 24/7 Medical record management Elder-Care services Pinnacle Care (3000 clients in 2015, $10,000 annual fee or by the service. Private Health Management 16
Wealth Building Books The Wealthy Barber David Chilton Millionaire Next Door Thomas Stanley Learn from the wealthy. Beginner s guide to financial planning. Learn from the wealthy. Ordinary people financial independence. I Will Teach you to be Rich Beginner s guide to financial planning. Easy read for ages 20-35. Ramit Sethi Rich Dad Poor Dad Robert Kiyosaki Simple Wealth Inevitable Wealth Nick Murray The Only Guide You ll Ever Need for the Right Financial Plan, Managing Your Wealth, Risk and Investments Larry Swedroe It s About More Than the Money Saly Glassman The Education of Millionaires Michael Ellsberg How to be Richer, Smarter and Better-Looking-Than Your Parents Zac Bissonnette Think and Grow Rich Napoleon Hill Learn from the experts by associating with smart people. Financial planning, investments and investment advisors. Financial planning, investments and investment advisors. Financial planning, investments and advisors. Self-education for career success. Financial planning and avoiding bad advice. A study of traits of great minds like determination and self-control. 17