ASSET ALLOCATION THROUGHOUT LIFE
As an investor passes through life, goals change, time horizons diminish, economic conditions fluctuate,
risk tolerance tightens, and priorities shift from selfish to selfless and back again. As a result, the
investment portfolio should reflect this passage. It is always wise to diversify one’s investments to a
variety of asset classes and types. But it is not wise to invest as if you have time on your side when you
don’t. The balance between stocks, bonds and cash should evolve as one transitions from youth to
middle age and beyond. Historically, in the short-term stocks have proven the most risky followed by
bonds and then cash. In the long-term, stocks have provided the greatest return followed by bonds and
then cash.
Planning for the future by saving money is a smart and essential thing to do. A disciplined saver realizes
the obligation to oneself first before other priorities are addressed. Always pay yourself first, and the
earlier you start the greater the reward will be. The miracle of compounding will disclose itself for those
who have time on their side. When you save or invest, your money earns interest or appreciates. The
next year, you earn interest on your original money and the interest from the first year. In the third year,
you earn interest on your original money and the interest from the first two years. And so on. It's like a
snowball -- roll it down a snowy hill and it'll build on itself to get bigger and bigger. Before you know it ...
avalanche! The key is to start young, realize that a little can go a long way, and leave your savings alone
to work the magic. Behold!
The formula for calculating compound interest is:
FV = PV (1 + r)n
Suppose you have been able to save up $5000 (Present Value) at age 22. You are told by your friend,
who was just hired as a financial consultant, that if you invest this money in the stock market, you can
expect to receive an average return of 9% (r) on these funds. The trick is, however, that you can’t
touch the money until you reach age 67…….or for 45 years (n). How much will you have by the time
you retire (Future Value)?
FV = PV (1 + r)n
FV = 5000 (1 + .09) 45
FV= 5000 (1.09 45)
$241,636.43 (Future Value)
Here is a link to a convenient compound interest calculator:
http://www.econedlink.org/interactives/EconEdLink-interactive-tool-player.php?iid=2
Mary and John graduate from college in the same year. Starting at age 22, Mary invests $2000 per
year for 7 years and stops. John sees that Mary has saved a lot of money and begins investing $2000
per year at age 29 and continues for the next 33 years. Who will have the most money with which to
retire at age 62? The average annual rate of return is 10% in this model.
ASSET ALLOCATION THROUGHOUT LIFE
The 'Rule of 72' is a simplified way to determine how long an investment will take to double,
given a fixed annual rate of interest. By dividing 72 by the annual rate of return, investors can
get a rough estimate of how many years it will take for the initial investment to duplicate itself.
For example, the rule of 72 states that $1 invested at 10% would take 7.2 years ((72/10) = 7.2)
to turn into $2.
ASSET ALLOCATION THROUGHOUT LIFE
The Rule of 72 states that 72 divided by the interest rate will result in the number of years it will take
your investment to double…..
The High Cost of
Waiting
Begin Saving
Now
In One Year
In Five Years
Total in 40 Years
$637,680
$576,090
$382,830
Don’t Procrastinate!
Cost to Wait
$61,590
$254,850
ASSET ALLOCATION THROUGHOUT LIFE
Any financial paper has stock quotes that will look something like the image below:
Columns 1 & 2: 52-Week High and Low - These are the highest and lowest prices at which a stock has traded over
the previous 52 weeks (one year). This typically does not include the previous day's trading.
Column 3: Company Name & Type of Stock - This column lists the name of the company. If there are no special
symbols or letters following the name, it is common stock. Different symbols imply different classes of shares. For
example, "pf" means the shares are preferred stock.
Column 4: Ticker Symbol - This is the unique alphabetic name which identifies the stock. If you watch financial TV,
you have seen the ticker tape move across the screen, quoting the latest prices alongside this symbol. If you are
looking for stock quotes online, you always search for a company by the ticker symbol.
Column 5: Dividend Per Share - This indicates the annual dividend payment per share. If this space is blank, the
company does not currently pay out dividends.
Column 6: Dividend Yield - The percentage return on the dividend. Calculated as annual dividends per share
divided by price per share.
Column 7: Price/Earnings Ratio - This is calculated by dividing the current stock price by earnings per share from
the last four quarters. The PE helps to evaluate whether a stock is priced correctly or not in comparison to other
companies in the same industry. Legendary Wall St. investor Benjamin Graham has suggested that any company
with a PE greater than 16 should make a conservative investor cautious.
Column 8: Trading Volume - This figure shows the total number of shares traded for the day, listed in hundreds. To
get the actual number traded, add "00" to the end of the number listed.
Column 9 & 10: Day High and Low - This indicates the price range at which the stock has traded at throughout the
day. In other words, these are the maximum and the minimum prices that people have paid for the stock.
Column 11: Close - The close is the last trading price recorded when the market closed on the day. If the closing
price is up or down more than 5% than the previous day's close, the entire listing for that stock is bold-faced. Keep in
mind, you are not guaranteed to get this price if you buy the stock the next day because the price is constantly
changing (even after the exchange is closed for the day). The close is merely an indicator of past performance and
except in extreme circumstances serves as a ballpark of what you should expect to pay.
Column 12: Net Change - This is the dollar value change in the stock price from the previous day's closing price.
When you hear about a stock being "up for the day," it means the net change was positive.
ASSET ALLOCATION THROUGHOUT LIFE
Quotes on the Internet
Nowadays, it's far more convenient for most to get stock quotes off the Internet. This method is superior because
most sites update throughout the day and give you more information, news, charting, research, etc.
As an investor ages, less and
less of the investment
portfolio should be dedicated
to high risk assets which tend
to have greater short-term
volatility.
As you age, less of your
investments should be in high risk
assets because they are subject
to short-term volatility.
ASSET ALLOCATION THROUGHOUT LIFE
RETIREMENT? PARENTHOOD? YOU’RE KIDDING ME, RIGHT?
Yes, I know, you haven’t even gone to the prom yet. But as you can tell from these lessons, early
planning brings great rewards. On top of that, many of the safety nets that have been there to protect
your parents and grandparents may not be there for you (Social Security, Medicare, defined-benefit
pensions, real estate booms). So what are some of the options if you caught the savings fever from
what you’ve learned so far? If you start early, you can start small and build some impressive results.
Along the way the magic of compounding will reward you. Here are some options in connection with
the mutual funds and ETFs we’ve already spoken about.

An IRA, individual retirement account, is a savings device meant to keep you from your savings
until you’re 59 ½ years old. There are two types: Traditional and a ROTH.

A 401k is a retirement plan allowing employees to contribute a certain percentage of wages
earned into a tax-deferred account to save and invest for retirement. Some employers offer
participants matching funds as part of a benefits package or company incentive. The money is
traditionally invested in mutual funds of a diversified nature.
ASSET ALLOCATION THROUGHOUT LIFE
The chart above illustrates that you have to save more in a 401K than a ROTH IRA in order to have the
same disposable income in retirement. That being said, the 401K allows you to contribute far more
toward your goals and your employer may offer you a matching contribution. The typical match is 50
cents on the dollar up to 6% of your salary. Never turn down “free” money. The ideal strategy is to maxout your 401K and then save more in a ROTH or Traditional IRA. The maximum contribution in 2010 was
$16,500 or $22,000 if the employee is over 50 years old.

A 529 Plan is an education savings plan operated by a state or educational institution designed
to help families set aside funds for future college costs. It is named after Section 529 of the
Internal Revenue Code which created these types of savings plans in 1996.
BENEFITS OF THE 529 PLAN
Federal tax benefits
529 plans offer unsurpassed income tax breaks. Although your contributions are not deductible on your
federal tax return, your investment grows tax-deferred, and distributions to pay for the beneficiary's
college costs come out federally tax-free.
Donor retains control of funds
You, the donor, stay in control of the account. With few exceptions, the named beneficiary has no rights
to the funds. You are the one who calls the shots; you decide when withdrawals are taken and for what
purpose. Most plans even allow you to reclaim the funds for yourself any time you desire, no questions
asked. (However, the earnings portion of the "non-qualified" withdrawal will be subject to income tax
and an additional 10% penalty tax).
Low maintenance
A 529 plan can provide a very easy hands-off way to save for college. Once you decide which 529 plan to
use, you complete a simple enrollment form and make your contribution (or sign up for automatic
ASSET ALLOCATION THROUGHOUT LIFE
deposits). The ongoing investment of your account is handled by the plan, not by you. Plan assets are
professionally managed either by the state treasurer's office or by an outside investment company
hired as the program manager.
Simplified tax reporting
You won't receive a Form 1099 to report taxable or nontaxable earnings until the year you make
withdrawals.
Flexible
If you want to move your investment around you may change to a different option in a 529 savings
program every year (program permitting) or you may rollover your account to a different state's
program provided no such rollover for your beneficiary has occurred in the prior 12 months.
Substantial deposits allowed
Everyone is eligible to take advantage of a 529 plan, and the amounts you can put in are substantial
(over $300,000 per beneficiary in many state plans). Generally, there are no income limitations or age
restrictions. Thinking about going back to college or graduate school in the future? Then set up a plan
for yourself!
Go to the following link and take the “Money 101” quiz on retirement information and options
http://cgi.money.cnn.com/tools/cgiquiz/cgiquiz_101.jsp?id=13
ASSET ALLOCATION THROUGHOUT LIFE
ACTIVITY 1
STOCK
DIV
P/E RATIO
VOL. 100s
HIGH
LOW
CLOSE
CHANGE
AMOCO
ATT
Coca Cola
DELTA s
DISNEY
KELLOGG
MCDONL
PENNEY
REEBOK
MACYS
2.20
2.32
1.56
1.20
0.25
1.25
1.40
0.64
0.30
1.12
35
21
29
-28
21
19
21
14
--
10274
20361
14951
4844
13520
5664
13128
2174
3782
3869
53.75
53.75
42.38
51.50
46.13
62.25
49.25
73.88
37.25
29.38
52.38
52
41
50.50
44.88
61.75
48.63
72.63
35.50
29
53.38
53.13
41.25
51
46
62.13
48.75
72.63
35.50
29.38
+.88
-.13
-.25
-.13
+.50
+.38
+.88
-1.00
-1.38
+.25
1.
2.
3.
4.
5.
6.
What is the % Yield for Kellogg’s based on today’s close price?
What was McDonald’s close price for the day before this one?
What are Disney’s earnings per share for the year?
How many shares of Coca Cola sold on this day?
What was the high price paid for one share of Delta Airlines?
The small “s” next to Delta indicates a stock split. If you had 100 shares prior to the split, how
many shares do you have now? If the total value of your Delta shares was $10,000 before the
split, what is their total value after?
7. You love Kellogg’s Corn Flakes. You bought 210 shares of Kellogg’s six months ago for 49.00 per
share and are selling them today at the close price on the chart above. During that time, you
earned .63 per share in dividends. Calculate your total gain from this investment.
8. You own 720 shares of Amoco stock for the entire year. How much did you earn in dividends?
What is the percentage yield based on today’s close price?
ASSET ALLOCATION THROUGHOUT LIFE
ACTIVITY 2
The equation for compound interest is:
Total = Principal x (1 + rate)years
For example, suppose you deposit $1500 in a savings account paying 4.3% interest. What will
be your balance after 6 years?
1500 x (1 + .043)6 = $1931.07
EXERCISE:
1. If you put $500 in a savings account that paid 6.5% simple interest each year, how much
interest would you earn in two years?
2. If you put $1500 in a savings account that paid 4.5% compounded yearly, how much interest
would you earn in ten years?
3. If you put $100 each month into a savings account that paid a compound interest rate of
5.5% each year, how much would you have in your account at the end of five years?
4. If you put $2600 into a savings account that paid 5% interest compounded quarterly, how
much money would you have in your account after five years?
Total Amount = P (1+(R/4))4n
5. If you put $5000 into a savings account that pays 2.5% interest compounded quarterly, how
much would you have in your account after 17 years?
ASSET ALLOCATION THROUGHOUT LIFE
ACTIVITY 3
Rule of 72
Directions: Use the “Rule of 72” to answer the following questions.
1. How long will it take the following investments to double?
Round your answers to the nearest one-hundredth.
Investment
Money Market Mutual Fund
Small Company Stock
3 year Certificate of Deposit
5 year Certificate of Deposit
Large Company Stock
Government Bond
Treasury Bills
Money Market Account
Savings Account
Interest Rate
3.1%
12.6%
2.8%
5.1%
11.3%
5.3%
3.8%
2.6%
2.3%
Years to Double
2. Jenny has a $3,000 balance on her credit card with an 18% interest rate. If she makes no payments on
her card and no late fees were charged, how long will it take for her debt to double?
3. What if Jenny’s APR was 22% and she makes no payments on her card and no late fees were charged?
4. Tanner has invested $500 for college. What rate of return must Tanner earn for his investment to
double in 4 years?
5. Kari would like to make a down payment on a house. She currently has $7000. What rate of return
must Kari receive for her investment to double in 7 years?
6. Mark has invested $300 at age 16 into a money market account earning 6%. How many times will
Mark’s investment double before age 52? What will his investment be worth? What would Mark’s
investment be if he had invested at age 28?
7. Jackie’s parents invested $3000 into a common stock earning 10% when she was born. How many
times will Jackie’s investment double before age 36? What will her investment be worth? What would
Jackie’s investment be worth if her parent’s had waited to invest until she was age 7?
8. Provide a reason why is it valuable to invest early.
ASSET ALLOCATION THROUGHOUT LIFE
ACTIVITY 4
YOU BE THE INVESTMENT COUNSELOR
Directions: You are a member of the investment advisor team of Moe, Larry, Curly, and Shep. You’ve
had a number of clients approach you recently all seeking your insight on their financial planning. With
your three partners, consider the knowledge you’ve gathered relating to types of investment,
risk/reward, time horizons, compounding and goals in providing advice. In the space below express the
type of investments you would suggest for this individual and the rationale you used to make the
decision. Your teacher will call on a representative from each group in the class to report on the
partner’s conclusions.
1. Hello. My name is Erick! I'm looking for some advice on what type of investments to look at. I'm 53,
my kids are through college and out on their own, and I have what I feel is a pretty healthy, diversified
portfolio of stocks, bonds, mutual funds, and real estate. I'm earning more on dividends and interest
payments than I need to support my family right now, so I'd like to find something to do with this money
to make it grow. What should I consider?
2. Hi, I'm Monique! I'm a high school senior and I've been saving money from my landscaping job for a
couple of years now in a savings account. I've got enough in the account to not have to worry about
running out of money at the end of the month, and my parents say that I have enough money to
consider investing it in order to earn a greater return. (I'm earning .8% interest on my checking account
now THAT'S not going to make me a millionaire any time soon.) What should I do?
3. My name is Felicia McMillian, and I was referred to you by a friend. I have a question about what I
should do with my money. I've been working as a pharmaceutical sales representative for just two years
now, but I've already started investing a little bit of my money. Right now, I have a checking account, a
money market account, and I've started buying small bonds. I am beginning to earn a little more money,
and I'm starting to think about future goals, like buying a house, helping my kids pay for college,
retirement. . . all things that are more than 10 years down the road. What would you advise me to do at
this point?
4. Hi! This is James Cook. We spoke on the phone yesterday; you asked me to e-mail you some specifics
on my present financial situation so you could give me appropriate advice on what investments I should
consider. Right now, I'm 34 years old and I own a local cooking specialty store. Through my credit union,
I have a share account (this is the account I write checks out of to pay for day-to-day necessities). I've
also dabbled in mutual funds and am currently investing 5% of my monthly income in Tyson stock. I'm
starting to have some leftover money from my paycheck and from Tyson dividends; what should I do
with it? Thank you!
5. Hello, I’m Karen. I saw an advertisement for your financial advisement firm in the paper and I need
some help getting my money in order. I'm a 30 year-old nurse, and I have a checking account, but I
usually end up running out of money at the end of the pay period. I'm trying to invest in things that will
make my money grow, but it seems like I've been picking the wrong ones. I find a stock that has gone up
a lot recently, and I buy some, but then it usually goes down pretty quickly and I sell it to get rid of it.
What am I doing wrong? How can I really make my money grow?
ASSET ALLOCATION THROUGHOUT LIFE
6. Good afternoon, my name is Frank. I’m a 67 year old, semi-retired individual who has a small
clientele of private art students I tutor periodically. When I retired five years ago from my career as a
middle-manager in an art supply distributor, I thought I had enough money to live on comfortably. I put
most of my savings into certificates of deposit and U.S. Treasuries to protect my principal. They were
paying a decent rate of return to provide me with a steady monthly income. But now I find the yields on
this class of investment have dwindled to near nothing and I have to work more hours just to keep up
with my bills. What do you suggest I do to relieve the pressure on my savings?
Erick’s advice and rationale
Monique’s advice and rationale
Felicia’s advice and rationale
James’ advice and rationale
Karen’s advice and rationale
Frank’s advice and rationale
ASSET ALLOCATION THROUGHOUT LIFE
ANSWERS FOR ACTIVITIES 1-4
ACTIVITY 1
1. 2.01%
2. $47.87
3. $1.64/share
4. 1495100
5. $51.50
6. 200, $10,000
7. $2757.30 + $132.30 = $2889.60
8. $1584, 4.12%
ACTIVITY 2
1. $67.11
2. $2329.44
3. $6920.00
4. $3333.29
5. $7637.84
ACTIVITY 3
1.
2.
3.
4.
5.
6.
7.
8.
23.22, 5.71, 25.71, 14.11, 6.37, 13.58, 18.95, 27.69, 31.30
4 years
3.27 years
18%
10.29%
3 times, $900, $600
5 times, $15,000, $12,000
Correct answers could include: The magic of compounding is more powerful over extended
periods of time, you don’t have to save as much if you start early instead of trying to catch up,
historically the average long-term trends on yield have been very profitable but short-term
investing can be impacted by volatility.
ACTIVITY 4
1. Since this appears to be money that he can afford to lose, he can take a greater risk with it than
you would normally want 53 year old to take. You might suggest growth stocks in emerging
companies or emerging countries. His portfolio seems solid so he can afford a greater risk.
2. She has a long time horizon, doesn’t have a lot of money but can’t afford to lose the principle. A
good suggestion would be an index ETF of a diversified growth oriented mutual fund.
3. She has a specific time-frame in mind and would like to grow her money without jeopardizing the
principal. For her kids she should invest in a 529 plan which is specifically meant for college
savings. There are great tax advantages, low maintenance fees and it can be used to pay for any
college. For her other goals, a group of mutual funds that invest in global and domestic growth
stocks should work well.
4. He’s young and that’s a good thing but is apparently not heavily committed to saving. 5% seems
to be a meager amount of savings, he’s dabbled which doesn’t convey discipline, and he seems
to have all of his saving in one stock. A good suggestion would be to start a Roth IRA, recommit
to a strong global mutual fund, and if he likes to dabble in income stocks, pick out five high
achieving dividend paying stocks like KO, T, PG, MO, and INTC for further diversification.
ASSET ALLOCATION THROUGHOUT LIFE
5. Some good advice here would be to set up a payroll deduction plan into an IRA or 401 k so that
the money will go out to pay her first. She has thirty years until she’ll need the money, so
growth and emerging market investments would be good long-term bets. Pick a reputable
family of mutual funds and investigate the portfolio manager’s track records.
6. This gentleman should consider strong dividend paying companies and high grade municipal
bonds to boost his yield.