Presentation Transcript

1. T-Fit: Financially FitTaking Control of your Retirement

   Bruce Haslem
2. Why do people not take control of their portfolio? Bad Reasons: They feel unqualified to do so. They don’t know how to start. They believe it is “gambling”, and their efforts will have no impact. Good Reasons: The opportunity cost of your time. Rational not to, as you efforts might not have any impact.
3. Goals of this presentation Show you one thing everyone should do to immediately improve their portfolio. If you want to manage your portfolio more actively, give you some ideas to consider when you do. If you choose to not manage your portfolio actively, reduce the guilt you might be feeling because you aren’t.
4. Where do I start? First, learn how to log into your account. As part of their benefits, all SUU employees invest a portion of their salary into a fund family such as URS, Fidelity or TIAA-CREF. Even if you are in the URS defined benefit plan, you can still set up an additional tax-free plan through payroll deduction. Travis Rosenberg is your friend on this. Any of these options allow you to access and manage your account online. Even if you prefer to call and talk to a real person when making changes, this will allow you to manage your account at your convenience.
5. Understanding what you will see First off, click on your account: Don’t worry about 401, 403, 457; those are the sections of the tax code that allows you to contribute pre-tax dollars and accumulate earnings tax-free.
6. Select one of your investment choices You have the ability to choose the funds in which you place your money. That table will show you the funds you have selected. If you did not choose your own funds, your contributions will be dumped into a default option. For URS, this is their “Medium Horizon Fund”. For Fidelity or TIAA-CREF, this will be what they consider to be an age-appropriate fund. But if you do choose your own, how do you decide where to put your money? Finally some finance!!!!
7. The Fund’s Details Page When you click on any fund, you will get a page similar to this, which is what Fidelity offers.
8. What you should understand about mutual funds Every mutual fund must register with the SEC, much like a publicly traded company does. They have to define their objectives, strategies, and fees. They also are then given a ticker symbol. Using this ticker, you can look up information on that fund from many sources, such as Yahoo, Morningstar or soon to be on campus, Telemet. You don’t have to log into your provider each time to follow them. Mutual funds are defined by their objectives, management style and asset types. Active vs. Passive Stocks vs. Bonds Long-term appreciation vs. Income generation The fund’s fees, risks and potential returns will be affected by these choices. How?
9. The three guiding principles of finance! There is an opportunity cost to everything: money, time, labor. Diversification can significantly lower the risk you face from investing. Markets are at least semi-strong form efficient.
10. Opportunity Cost As we learn in Economics, the opportunity cost of any decision is the value of what you gave up instead. If you spend time managing your portfolio, is it worth the extra time spent? What are you giving up instead? When you buy a pizza, what are you giving up instead? A movie? Two gallons of gas? Having an extra 50$ in retirement? Most importantly, does the return you earn compensate you for the risk you are taking? Are there safer investments that could give you a similar return? This leads to the risk and reward tradeoffs that we must consider when investing.
11. Diversification When investing, we want to get the highest possible return we can, while minimizing risk to a point where we can sleep at night. When we mix investments in our portfolio, our return is simply the weighted average of the returns on the stocks in our portfolio. However, the standard deviation of the portfolio is much less than the weighted average. How much less depends on the correlation between the assets. Thus, as we add non-correlated assets into our portfolio, our risk declines quickly, and our return to risk ratio improves. Mutual funds offer the cheapest source of diversification, as they already hold a mix of assets within broad classes. You simply need to mix your asset classes and types.
12. The Efficient Market Hypothesis Many researchers have thought about how efficiently the market processes information. There are generally three views on this. Weak form: Market prices only incorporates past trading information. Semi-strong form: The market incorporates all past trading information, and all currently available economic and firm specific information. Strong form: The market incorporates all past, public and current privately known information. The key question for you as an investor is how efficient do you think the market it. If it is perfectly efficient, then there is no reason for you to pay a manager higher fees to actively select stocks. If it is weakly efficient, then there is opportunity out there for someone with the ability and time to find it.
13. Deciding how to invest your money So with these three principles, we can figure out how you should invest your money. First, figure out how much return you will need to earn on your investments. Use these handy calculators to see where you stand with your retirement. This one assumes that you will spend down your retirement balance to zero, and then die the next day. http://www.calcxml.com/calculators/retirement-calculator This assumes that you will earn interest on the balance at retirement, and you won’t spend the principal. http://www.schwab.com/public/schwab/investing/retirement_and_planning/retirement/retirement_calculator
14. How do I get that required return? Using that return assumption, what type of asset do you need to invest in to earn that level of return? Your return objective will tell you how much risk you will need to take, and thus which assets you should choose. These values were pre-crash!
15. So back to our fund options… Do you need a higher return? There is more risk involved, but if you have more time until retirement, you should be willing to accept that risk. Remember that each fund is diversified within a class, but you might want to balance across classes to further diversify. “Growth” or “Value” stocks are riskier than “Income” stocks. Their value depends on the value of the stock increasing, while income stocks have a value based more on dividends. And companies rarely miss paying dividends. Any asset that is based on income generating assets (bond funds or income funds) are safer than funds that depend on capital appreciation (mid-cap or small-cap funds, value funds, real estate) However, income based funds are more sensitive to changes in interest rates. Specialty funds (transportation, foreign stock, energy, etc.) are always less diversified than other funds.
16. Should I pay someone else to manage my fund? You will see that even within these broad classes, there are often several options. For instance, I have about 20 or so mid-cap funds from which I can choose, 6 real estate funds, or several dozen bond funds. How do I decide which to select? This is where your view of market efficiency matters. There are two types of funds: Actively Managed funds are ones in which the manager tries to find assets that are undervalued, or exhibit some special criteria. They charge higher fees to compensate them for their efforts. Passively Managed funds simply attempt to mimic the composition of a broad index. If Microsoft is 3% of the index, they will hold 3% of their money in Microsoft. These funds always have the lowest fees, because you aren’t paying a manager to do anything special. ETFs are a special type of passive fund.
17. Is paying for the actively managed fund worth it? It all depends on whether you think someone can outperform what a passive index can do (FYI- Nearly 80% of finance faculty index the majority of their portfolio). Here is a great article on this: http://online.wsj.com/news/articles/SB10001424127887324059704578471154109438438 Empirical evidence suggests that it is unlikely anyone can beat a market benchmark consistently. A trader that is above the index this year has less than a 50% chance of repeating the feat. A trader that was below the market last year, has a high probability of stinking it up again. Never bet on losers improving! Over time, the evidence suggest that the number of traders who beat the market regularly was less than what would be expected were the odds 50-50 of success.
18. Minimize Fees!!!!!!!!! The best thing anyone can do in managing their portfolio is to make sure they are selecting the option which minimizes fees. These management fees can range from .05% (five basis points) to 2% (200 basis points). Even though the fund might say they earned 20% last year, if you paid a 2% fee, you only earned 18%. Even funds with similar investment strategies can have different fees. For example the Spartan Mid-Cap Index fund has a fee of .07%, while the Fidelity Mid-Cap Index fund charges .62% with the same strategy. People refinance their houses for a .75% decrease in rates, or get furious with their mortgage officer when their closing rate ends up a quarter percent higher than what they expected. Yet, they will happily pay a full percent higher in management fees on their retirement. Don’t do it.
19. How big an impact do fees have? This assumes a 10% return, and the difference between 2% and .10 is over $500,000. At 15%, it is $1.5 million.
20. Conclusions The main thing I hope you got out of this presentation is that you need to take at least a little control of your portfolio. Analyze where you are at with your retirement. What return do you need to earn and how much do you need to invest to be able to be comfortable in the future. Make sure your portfolio has an expected return high enough to get you there. Don’t pretend you can lock any rate in, but at least put yourself in the right ballpark. Make sure you are minimizing your fees. Don’t feel bad if you don’t want to manage your own portfolio. I don’t myself, and only change it when some huge macroeconomic event causes me stress. We all have better things to do, so just index and forget about it.