Fun.4.PPT.9 - Michael A Dalton | James F Dalton | Joseph M...

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Michael A. Dalton | James F. Dalton | Joseph M. Gillice | Thomas P. Langdon
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Fundamentals of Financial Planning © 2014 Money Education Chapter CHAPTER 9: INVESTMENTS
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Fundamentals of Financial Planning © 2014 Money Education Chapter INTRODUCTION Investing is the process whereby capital resources are allocated and committed by investors with the expectation of earning a future positive economic return. The overall return investors expect is primarily a function of the riskiness of the investment. Returns can be in the form of current income (interest or dividends) and/or capital appreciation. To achieve the investment goals, the client is expected to invest at a risk level consistent with an assessment of his risk tolerance. 3 9
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Fundamentals of Financial Planning © 2014 Money Education Chapter RISK TOLERANCE (ABILITY) One’s ability to take on investment risk is a function of objective measures such as: Investment goals Time horizon for each goal Need for liquidity Client’s tax situation Unique circumstances 4 9
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Fundamentals of Financial Planning © 2014 Money Education Chapter RISK TOLERANCE QUESTIONNAIRE (WILLINGNESS) The risk tolerance questionnaire evaluates a client’s willingness to take on risk by inquiring about risk issues. The questionnaire can help the planner determine whether the client is physiologically risk averse or risk tolerant. A risk averse investor requires significantly more return in order to consider investing in a higher risk investment. A risk tolerant investor is more willing to accept risk, for a small increase in return. 5 9
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Fundamentals of Financial Planning © 2014 Money Education Chapter RISK TOLERANCE QUESTIONNAIRE (1 OF 2) 6 9
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Fundamentals of Financial Planning © 2014 Money Education Chapter RISK TOLERANCE QUESTIONNAIRE (2 OF 2) 7 9
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Fundamentals of Financial Planning © 2014 Money Education Chapter RISK TOLERANCE QUESTIONNAIRE (WILLINGNESS) If the client’s ability to take on investment risk is higher than the client’s willingness: If the client’s ability to take on investment risk is lower than the client’s willingness: Only when the client’s willingness and ability are equal does the financial planner proceed to develop an investment strategy. 8 9 Ability Willingness Low Medium High Ability Willingness Low Medium High
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Fundamentals of Financial Planning © 2014 Money Education Chapter EXPECTED RETURN – cant find this Expected return is the compound annual rate of return expected for an asset or investment portfolio. It is primarily a function of the riskiness of the investment(s). 9 9 Historical Risk and Return Relationship Between Equities, Bonds, and Treasury Bills 1900 – 2008 Return Risk* (Standard Deviation) Range of Expected Annual Returns Equities 11.2% 20.2% -29.2 to 51.6 Government Bonds 5.5% 8.3% -11.1 to 22.1 Government Bills 4.0% 2.8% -1.6 to 9.6 Inflation 3.1% 4.9% -6.7 to 12.9 *Expected return in a normal market in a year range by 2 standard deviations + / -.
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Fundamentals of Financial Planning © 2014 Money Education
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