Fundamentals of Investing for Retirement Income Understanding Investment Risk and Return
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 www.federaltimes.com
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
SEA Member Benefits Free Hour of Consulting / Analysis $250 Vantage Discount Email Questions to me at mmiles@variplan.com
Portfolio Value The Game Changes as You Approach Retirement Retirement Time
Same Plan Many Possible Outcomes
Portfolio Value The Effect of Investment Risk Portfolio Balance Time
Portfolio Value Optimal Solution Portfolio Balance Time
Portfolio Value Optimal Long Life Time
Portfolio Value Too Conservative Portfolio Balance Time
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
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
Lesson 3 Understanding Investment Risk and Return
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
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)
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
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.
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.
Quantifying Risk and Return Return is expressed as a percentage of the amount invested. Risk is usually expressed as Standard Deviation.
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
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%
Value Standard Deviation Time
Asset Value Components Time
Large Cap U.S. Stocks C Fund +50% +31% +12% 84% 98% -7% -26%
Small Cap U.S. Stocks S Fund +71% +43% +15% 84% 98% -13% -41%
Cash and Equivalents G Fund +10% +7% +4% 84% 98% +1% -2%
Diversified U.S. Bonds F Fund +15% +10% +5% 84% 98% +0% -5%
Expected Return The Efficient Frontier Unavailable Inefficient Risk
Expected Return Designing Efficient Portfolios Unavailable Inefficient Risk
Conservative +23% +15% 20% 7% 3% 10% 60% C Fund S Fund I Fund G Fund F Fund +7% 84% 98% -1% -9%
Balanced +32% +21% 40% 15% 5% 3% 37% C Fund S Fund I Fund G Fund F Fund +10% 84% 98% -1% -12%
Aggressive +46% +29% 55% 26% 9% 1% 9% C Fund S Fund I Fund G Fund F Fund +12% 84% 98% -5% -22%
Portfolio Value Balanced Time
Market Value Mean Regression A B Time
Average Rate of Return Mean Regression Expected Rate of Return Time
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
SEA Member Benefits Free Hour of Consulting / Analysis $250 Vantage Discount Email Questions to me at mmiles@variplan.com
www.variplan.com