Presented by
William H. Keffer
Certified Financial Planner™

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Your comfort with basics of asset types
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Your motivation to ‘control the controllable’
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Action in your self interest
April 16, 2009 www.KefferFinancialPlanning.com
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Bill Keffer
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Hourly, as-needed financial planner
Wheaton-based, sole proprietor
26-years AIG American General
Credentials
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Certified Financial Planner®
Registered investment advisor
MBA in finance
Contributor: Investing in an Uncertain Economy for Dummies
April 16, 2009 www.KefferFinancialPlanning.com
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Today’s focus: Asset allocation
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Prerequisites:
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Goals have been carefully quantified
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Adequate savings are systematized
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Most time on why & how to allocate
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Briefly:
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Distribution planning
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Where & how to invest
April 16, 2009 www.KefferFinancialPlanning.com
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How you divide your money among the different classes of investment assets, such as stocks, bonds, and cash
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Critical: Finding the right mix for your risk tolerance, time horizon, and required returns
April 16, 2009 www.KefferFinancialPlanning.com
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Preface
IMPORTANCE OF ASSET ALLOCATION
100%
80%
60%
91.5%
40%
20%
2%
4.6%
2.1%
0%
Drivers of Returns
Market Timing Stock Selection Other Asset Allocation
April 16, 2009 www.KefferFinancialPlanning.com
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Basic concept: Impossible to predict which type of asset will do best year-to-year
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Goal: A mix formulated for unique risk profile and required return
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How: Different asset classes’ returns noncorrelated reducing overall risk
April 16, 2009 www.KefferFinancialPlanning.com
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Portfolio
Allocation
0% Stocks
100% Bonds
100% Stocks
0% Bonds
50% Stocks
50% Bonds
5-Year Return 3.8% 8.6% 6.3%
10-Year Return
Risk
% Increase
Return/Risk
(over 100% bonds)
5.4%
2.9%
N/A
3.5%
10.4%
Ret: 126%
Risk: 259%
4.8%
5.0%
Ret: 66%
Risk: 72%
April 16, 2009 www.KefferFinancialPlanning.com
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2
3
Year
1
4
5
Arithmetic
Average
Which Would You Choose?
(based on annual returns shown)
A
10%
10%
10%
10%
10%
B
50%
10%
-20%
20%
-10%
C
30%
30%
30%
-20%
-20%
D
-30%
50%
-10%
50%
-10%
10% 10% 10% 10%
April 16, 2009 www.KefferFinancialPlanning.com
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3
4
Year
1
2
5
Arithmetic
Average
Value of $1,000
After 5 Years
Geometric
Average
Which Would You Choose?
(based on annual returns shown)
A B C
10%
10%
10%
10%
10%
10%
$1,810
10.0%
50%
10%
-20%
20%
-10%
10%
$1,425
7.4%
30%
30%
30%
-20%
-20%
10%
$1,406
7.1%
D
-30%
50%
-10%
50%
-10%
10%
$1,275
5.0%
April 16, 2009 www.KefferFinancialPlanning.com
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Importance of asset allocation, as opposed to stock selection, helps explain rise of index funds.
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With no active stock selection going on, expenses decrease
April 16, 2009 www.KefferFinancialPlanning.com
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The Two Major Asset Classes
Stocks: A share of ownership, grows through share of profits (dividends) and appreciation in market value
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Bonds: A loan to a firm or government in return for fixed interest payments and promise to return principal
April 16, 2009 www.KefferFinancialPlanning.com
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Stocks
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By size of company
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Large cap
Small cap
By style
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Value
Growth
By location
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Domestic U.S.
Developed international
Emerging markets
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Bonds
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By length of term
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Short
Intermediate
Long
By riskiness of issuer
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Government
Investment grade
“Junk”
By frequency of payments
April 16, 2009 www.KefferFinancialPlanning.com
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Cash (money markets, CDs, savings)
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Real estate (REITs)
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Commodities
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Currencies
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Precious metals
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Natural resources
April 16, 2009 www.KefferFinancialPlanning.com
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April 16, 2009
Asset Class Return Risk
Cash Equivalent
Short Term Bonds
Intermediate Term Bonds
Long Term Bonds
Large Cap Value Stocks
Large Cap Growth Stocks
Mid Cap Stocks
Small Cap Stocks
International Developed Stocks
International Emerging Stocks
5.95%
7.43%
8.20%
8.94%
10.65%
10.17%
12.05%
13.41%
11.56%
11.42%
2.82%
4.09%
6.49%
10.36%
15.01%
17.66%
16.03%
22.26%
21.35%
27.72% www.KefferFinancialPlanning.com
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Sample Portfolios*
(+historical returns & risk)
Portfolio
Name
Conservativ e (38%
A
Retu rn ard
S ta nd
Dev iati on
Cas
E q h ui val e nt
S h or t
T erm
B o nd s i d
Int e rme ate
B on ds
La rge
Cap
V al u e rge
La
Cap
G rowth
S m al l Cap
Dev el op e d
Int e rna tio nal
E m er g ing rk e ts
Ma
Stocks) 9.01% 6.93% 8% 24% 30% 10% 10% 5% 13% 0%
Moderate
(61%
Stocks) 9.92% 10.04% 4% 15% 20% 17% 14% 9% 18% 3%
Aggressive
(82%
Stocks) 10.76% 13.20% 2% 6% 10% 23% 20% 15% 20% 4%
*Model portfolios created by Harold Evensky, CFA, for Money Guide Pro financial planning software, a product of PIE Technologies
.
April 16, 2009 www.KefferFinancialPlanning.com
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Risk Tolerance
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Willingness to take risk
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Risk Capacity
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Ability to take risk
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Required Return
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Need to take risk
April 16, 2009 www.KefferFinancialPlanning.com
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Risk Tolerance: Willingness to Take Risk
Questionnaire & Scoring System
April 16, 2009 www.KefferFinancialPlanning.com
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1.
2.
3.
4.
5.
6.
Questionnaire
Answers*
Preserving capital6
Growth6
Low volatility4
Inflation protection- 5
Current cash flow4
How much risk?5
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Indicated Portfolio
Allocation
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Stocks:
Bonds:
Cash:
61%
35%
4%
*Scale: 1 to 9, with 1=Not Important and 9=Very Important
April 16, 2009 www.KefferFinancialPlanning.com
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Risk Tolerance: Willingness to Take Risk
Stomach Acid Test*
Maximum Tolerable Loss (%)
5%
10%
15%
20%
25%
30%
35%
40%
50%
Maximum Stock Exposure
20%
30%
40%
50%
60%
70%
80%
90%
100%
*Larry Swedroe, The Only Guide to a Winning Investment Strategy You’ll Ever Need, St. Martin’s Press, New York, NY, 2005
April 16, 2009 www.KefferFinancialPlanning.com
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Risk Capacity: Ability to Take Risk
The Liquidity Test*
Years Until Money Will
Be Needed
0-3
4
5
8
9
6
7
10
11-14
15-19
20+
Maximum Stock Exposure
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
*Larry Swedroe, The Only Guide to a Winning Investment Strategy You’ll Ever Need, St. Martin’s Press, New York, NY, 2005
April 16, 2009 www.KefferFinancialPlanning.com
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Years Until
Money
Needed
5
10
15
20
25
Current
Balance
$ 115,000
$ 68,000
$ 43,000
$ 25,000
$ 12,000
Amount
Needed
$ 150,000
$ 157,500
$ 165,375
$ 173,644
$ 182,326
Required
Return
5.5%
8.8%
9.4%
10.2%
11.5%
Minimum
Stock
Exposure
0%
38%
55%
72%
100%
April 16, 2009 www.KefferFinancialPlanning.com
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When risk tolerance, capacity and need indicate different levels of stock/risk:
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Objectively re-examine tolerance
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Review answers to questions
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Recall what you’ve done in past bear markets
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Choose level you know you can stick with
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Save more
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Lower or delay the goal
April 16, 2009 www.KefferFinancialPlanning.com
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Online tools
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Investment books & journals
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Financial planner
April 16, 2009 www.KefferFinancialPlanning.com
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Step 1: Determine retirement needs
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Variables: after-tax living expenses, vehicles, travel, large gifts, etc.
Step 2: Project the results
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Variables: sources of retirement income, the portfolio, expected returns, and life expectancy
Step 3: Test different options
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Options: lower goals, delay goals, find new sources of income, alter the portfolio allocation, opt for a lump sum rather than a pension, use of different tools, such as immediate annuities
Step 4: Implement the best strategy
Step 5: Monitor spending & returns carefully
April 16, 2009 www.KefferFinancialPlanning.com
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Accounts
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Basic emergency fund in savings
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Fundamental risk management (insurance)
Pre-tax retirement plans to extent of match
Roth IRA, if qualified
Additional employer plan contributions to max
Taxable investment account
Investment Vehicles
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Mutual funds for most
In taxable accounts
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Exchange traded funds (if amounts justify)
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Municipal bonds (based on after-tax yield)
Generally, minimize holdings of individual securities
April 16, 2009 www.KefferFinancialPlanning.com
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Fits allocation need
Broadly diversified
Low expense ratio
Low turnover
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No-load
Large, established investment company
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Keep it simple!
Target allocation / lifestyle funds excellent (in most cases)
April 16, 2009 www.KefferFinancialPlanning.com
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1. Know your goals
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2. Put enough $ in: top priority!
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3. Allocate appropriately (91.5% solution)
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4. Diversify with broad-based funds
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5. Maintain discipline in rough times
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6. Be mindful of costs
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7. Get help if you need it
April 16, 2009 www.KefferFinancialPlanning.com
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April 16, 2009 www.KefferFinancialPlanning.com
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