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What’s Investing?What’s Investing?
• Investing makes your money grow
• Investing capitalizes on economic growth
• Investing involves some level of risk
• Investing rewards patience
• Investing outpaces inflation
Investment ObjectivesInvestment Objectives
• Safety of principalYou don't want to lose your initial investment
• IncomeThe regular payment of money that is earned from the investment
• GrowthAn increase in the value of your investment
• LiquidityThe ability to turn your investment into cash very quickly
Characteristics of an InvestmentCharacteristics of an Investment
• RiskThe uncertainty about the rate of return that you’ll earn from an investment
• ReturnThe money made from an investment, including the income and capital gain
• LiquidityThe ease and ability of selling your investment in the marketplace without losing money
• TermHow long you are planning to hold onto your investment
Risk FactorsRisk Factors
• Inflation risk
• Interest rate risk
• Default risk or business risk
• Liquidity risk
• Reinvestment risk
Risk-Return SpectrumRisk-Return Spectrum
• Common stock
• Blue Chip common stock
• Preferred stock
• Corporate bonds
• Government bonds
• Short-term government T-bills
Risk
Safety
Risk and Stages of Life: A Typical ScaleRisk and Stages of Life: A Typical Scale
Life StageLife Stage Risk ToleranceRisk Tolerance
Early careerEarly career HighHigh
Middle careerMiddle career HighHigh
Late careerLate career ModerateModerate
Early RetirementEarly Retirement ModerateModerate
Late RetirementLate Retirement LowLow
The Capital MarketsThe Capital Markets
CapitalMarkets
Banks,Investment
Dealers,etc.
Company needs money to expand
People have money to invest
People get return on investment through capital
appreciation and from interest or dividendsMoney raised through
capital markets. Company grows, creates new jobs
Company pays interestor dividends out of profits
A Typical Business CycleA Typical Business Cycle
Rising stock prices Rising interest rates
EX
PA
NS
ION
Stock prices highInterest rates high
PEAK
CO
NT
RA
CT
ION
CO
NT
RA
CT
ION
EX
PA
NS
ION
TROUGH
Stock prices are lowInterest rates low
Falling stock pricesFalling interest rates
SEMINAR 8
1. Risk
2. Return
3. Time horizon
4. Inflation
5. Liquidity
6. Taxation
7. Market timing
8-5
SEVEN THINGS TO CONSIDERWHEN SETTING YOUR INVESTMENT OBJECTIVES
Treasury Bill CalculationTreasury Bill CalculationAssume that you buy a 30 day Treasury bill at $99.672. It matures to $100 in 30 days. The difference is your interest.
Yield calculation
100 - 99.672 x 365 = __________ or __________%
99.672 30
What is the cost of this T-Bill if it is denominated in $10,000? $__________
BondsBonds
Bonds• Secured by assets
(Except for government)
Debentures• No fixed assets
pledged• Based on
creditworthiness• Mostly corporate
issuers
An Example of a BondAn Example of a Bond
Last interest payment and repayment of principal
Last interest payment and repayment of principal
BOND PRICESGo Up
INTEREST RATESGo Down
WHEN INTEREST RATES FALL BOND PRICES RISE
BOND PRICESGo Down
INTEREST RATESGo Up
WHEN INTEREST RATES RISE BOND PRICES FALL
TYPICAL BOND YIELD CURVE
0
1
2
3
4
5
6
7
8
9
Short and long term Government bonds
%
Years to Maturity
Maturity
Bond PriceFluctuation $ $ $
$ $ $
$
$$
THE FURTHER AWAY A BOND’S MATURITY DATE, THE
MORE VOLATILE ITS PRICE
Time
Bond price fluctuations let you make money beyond fixed interest - by selling your bonds
for more than you paid for them.
PICKING YOUR BONDS ANDPREFERRED SHARES
Gov’t orcorporationoffering debt
The interestthe bondpays
Date bondcomes dueandprincipalrepaid
What itcosts tobuy thebond now
This is yield tomaturity: thecombination ofinterest andcapital gain (orloss) you willget assumingyou keep bondto maturity
Dollarchangefrom thepreviousday
Issuer Coupon Maturity Price Yield $ Chg
Saskatchewan 7.50 19 DEC 05 111.784 5.639 + 0.610
A BOND QUOTE
$1,00010%
$96010%
$1,04010%
Interest Rate Interest Rate
WHAT HAPPENS TO YOUR $1000 BOND’S PRICE WHEN INTEREST RATES CHANGE
The yield assuming the bond will be called in before maturity.
YIELD TO CALL
Exercise #1:Exercise #1:From the bond table find the price of a 10% coupon, if rates are 8%: $________
The $10,000 bond would cost $________.
The yield to maturity (8% in this case) is a combination of the capital loss on the bond and the higher coupon rate. The capital loss results from the purchaser paying a premium of $________ for the bond and receiving back only the face value of $________ at maturity.
Rate of ReturnRate of ReturnThe total annual return for an investor buying the bond for $11,359 is:
Interest $ 1,000.00 per year
Less amortized capital loss $ 135.90 per year
Average annual net proceeds $ 864.10 per year on a $11,359investment
Approximate Yield to MaturityApproximate Yield to Maturityinterest per year +/- the capital gain or loss per year
purchase price + maturity value x 100
2
$1,000 - $135.90
$11,359 + $10,000 x 100
2
864.10
10,679.50
= .809 = 8.09%
Exercise #2:Exercise #2:
From the bond table find the price of a 10 year bond with a 10% coupon if market rates are 12%: $________
The $10,000 bond in our example would cost $________.
The yield to maturity is ________%.
The capital ________ (gain or loss) results from the purchaser paying a ________ (premium or discount) of $________ and receiving back the face value of $________ at maturity.
Approximate Yield to MaturityApproximate Yield to Maturity
• capital gain/year = $114.70
• interest/year = $1,000
• approximate yield to maturity (YTM) =
$1,000 + $114.70 = 1,114.70 = .1182 = 11.82%
$8,853 + $10,000 9,426.50
2
• Extendible
• Retractable
• Convertible
• Floating rate
• Callable
• Sinking fund feature
• Currency feature
BOND FEATURES
Benefits holder Benefits issuerExtendible CallableRetractable Sinking fund*Convertible
* to extent this helps ensure debt is repaid, it also benefits debt holder.
WHO BENEFITS FROM BOND FEATURES
Bond Ratings Moodys Standard and
Poors• Aaa Prime quality
• Aa High grade
• A Upper medium grade
• Baa Medium grade
• Ba Lower medium or speculative
• B Speculative
• Caa From very speculative
• Ca to near or in default
• C Lowest grade
• AAA Bank investment quality
• AA
• A
• BBB
• BB Speculative
• CCC
• CC
• C
• C In default
Risks of Bonds
• Interest rate risk
• reinvestment risk
• default risk (credit risk)
• purchasing power risk (inflation risk)
• maturity risk
• call risk
• liquidity risk
• call risk
• foreign exchange risk
• event risk
Buy: If interest rates high and you expect them to fall – to make a capital gain
Sell: If you believe interest rates are set to increase – to avoid a capital loss
Try to read and interpret the yield curve. Don’t buy bonds trading at a premium close to maturity date.
DECIDING WHEN TO BUY AND SELL BONDS/FIXED-INCOME SECURITIES
• Reading the yield curve
• Using strip bonds to lock in a set known interest rate when rates are attractive
• Building a bond ladder
• Buying high-yield or junk bonds
• Switching bonds
• Buying convertible bonds
• Buying bonds on margin
BOND TRADING STRATEGIES
• Buy a one year government bond in June 1999…When it matures in June 2000, use proceeds to buy a 5-year bond.
• Buy a 2-year bond in June 1999…When it comes due in June 2000, use proceeds to buy a 5-year bond.
• Do the same for the other three years of your ladder.
5 Year
4 Year
3 Year
2 Year
1 Year
YOUR BOND LADDER
Accrued InterestAccrued InterestYou buy a 10% $10,000 bond, maturing September 1, 1999. Interest payment dates are Sept. 1 and March 1, six months apart. You buy this bond on Sept. 20, and it is settled on Sept. 23. Next March 1, you will receive the entire six months of interest from Sept. 1 to March 1 because you only owned the bond as of Sept. 23. Therefore you would pay the seller the accrued interest from Sept. 1 to Sept. 22:
Sept. 1 to Sept. 22 is 22 days
10,000 x .10 x 22 = $60.27 365
• Cumulative feature
• Non cumulative
• Voting privileges
• Purchase fund
• Sinking fund
• Redemption feature
• Retractable
PREFERRED SHARE FEATURES
• Working capital maintenance clause
• Maintaining purchase or sinking fund requirements
• Right to vote in event of arrears
• Restrictions on further preferred issues
• Restriction on sale of assets
• Restrictions on change of terms
PREFERRED SHARE PROTECTIVE PROVISIONS
1. Preferred dividend coverage
2. Record of continuous dividend payments
3. Equity (or book value) per preferred share
4. An independent credit assessment
YOUR FOUR-STEP PREFERRED SHARE CHECK
LIST
Advantages of IncorporationAdvantages of Incorporation
• Limited liability of shareholders
• Continuity
• Transfer of ownership
• Ease of raising capital
• Legal entity
• Professional management
Rights and Privileges of a ShareholderRights and Privileges of a Shareholder
• The privilege to share in the company’s earnings through dividends
• The right to control through election of directors
• The right to information
Types of stocks
• Blue Chips (Income)
– safety: established, dominant company
– income from dividends is prime goal: large payout ratio
– steady growth in stock price
– liquidity
• Growth
– capital growth is main goal
– earnings expected to increase
– expect above-average returns
– reinvest most of their earnings
Types of stocks...
• Cyclicals– rapid growth in good economic conditions– falling price in poor economic conditions– example: commodities, mines, resources
• Defensive– largely unaffected by economy– lower-than average risk– retail food and utilities are examples
Types of Stocks
• Speculative– turnarounds– takeover candidates– new ventures
• Penny stocks– low probability of large profits– potential for large profits quickly, large
losses
How Mutual Funds WorkHow Mutual Funds Work
GoldGold
Stocks
Bonds
$$$$$$
$$$$$$
$$$$$$
$$$$$$
Mutual FundCompany
Fund manager uses pooled
money to buy securities
Successful investments make fund worth more
Investors get
distribution
Net Asset Value Per ShareNet Asset Value Per Share
As of today, a mutual fund has four million shares outstanding. The assets are common stocks with a market value of $102,000,000. The fund's liabilities amount to $2,000,000.
$102,000,000 minus $2,000,000
4,000,000
= $25 per share/unit
Open-end vs. Closed-endOpen-end vs. Closed-end
Open-end funds• Continuously sells to
public• Redeems units directly• Fund size fluctuates• Sells at NAVPs
Closed-end funds• Trades on exchange• Shares sold on
exchange• Liquidity varies• Stays stable
The Prospectus Should IncludeThe Prospectus Should Include
• the investment objectives of the fund• the name of the company issuing the fund and its
directors and managers• fees and expenses• how the fund is sold, as well as where and by whom• risks• how to purchase and redeem fund
units• the fund's audited financial statements
Advantages of Mutual FundsAdvantages of Mutual Funds
• Professional management• Diversification (including global
access)• Lower commission charges• Liquidity• Record keeping• Flexibility of amounts
Disadvantages of Mutual FundsDisadvantages of Mutual Funds
• High cost for short-term investment
• No guarantee of good performance
• Not usually covered by insurance
Money Market FundMoney Market Fund
Objective: Safety of principal with modest returns.Objective: Safety of principal with modest returns.
Corporate paper
T-bills and bondsmaturing in lessthan one year
Typical Income FundTypical Income Fund
Objective: Safety of principal and high income from bond interest and dividends from preferred and high-yield common stock.
Objective: Safety of principal and high income from bond interest and dividends from preferred and high-yield common stock.
Bonds
Blue chip stock
Preferred stock
Asset Allocation FundAsset Allocation Fund
Objective: Obtain higher returns by switching between asset classes as market changes.
Objective: Obtain higher returns by switching between asset classes as market changes.
BondsStocksMoney Market
BondsStocksMoney Market
Year 1Year 1 Year 2Year 2
Bond FundBond Fund
Objective: Varies. Stability and steady interest income and capital gains, or blend of both.
Objective: Varies. Stability and steady interest income and capital gains, or blend of both.
Government ofCanada BondsCorporateDebenturesProvincial Bonds
InternationalBonds
International Bond FundInternational Bond Fund
Objective: Capital gains and income by targeting bonds in high inflation/high interest-rate countries. Also aim to capitalize on weaker Canadian dollar.
Objective: Capital gains and income by targeting bonds in high inflation/high interest-rate countries. Also aim to capitalize on weaker Canadian dollar.
AustraliaMexicoU.S.CanadaFranceGermanyIndonesiaJapan
Example of a Equity FundExample of a Equity Fund
Objective: Capital appreciation through increases in stock values with some income from dividends.
Objective: Capital appreciation through increases in stock values with some income from dividends.
Consumer Goods
Capital Goods
Cash & other Short-term Securities
Energy
Financial Services
Industry &Manufacturing
Top Down and Bottom UpTop Down and Bottom UpTop Down• Look at economy first• Then for growth sectors• Then for growth
companies• Often in international
funds
Bottom Up• Look at company first• Use detailed
company analysis• Look for earnings
momentum• Will pay higher price if
growth potential warrants
EQUITY
• Growth managers
• Sector Rotator
• Value managers
FIXED-INCOME
• Short term
• Mid term
• Long term
• Interest rate anticipators
• Spread traders
MANAGER STYLES
Value vs. Growth vs. Sector RotatorsValue vs. Growth vs. Sector Rotators
Value
• Bottom-up
• Research intensive
• Out-of-favour stocks
• Longer-term holdings
• Low P/E
• Lower costs
• Higher dividend yield
Growth• Focused on
earnings• Growth stocks• Hold medium-
term• Higher P/E• Many holdings• Higher costs• Market timing
Sector Rotators• Top-down• Look for trends• Select growth
sectors• Large-cap stocks• Many holdings• High costs• Market timing
• Tend to buy stocks with high P/E ratios
GROWTH EQUITY MANAGERS
• They stress market timing
SECTOR ROTATOR EQUITY MANAGERS
Altamira Equity Fund*Canadian Imperial Bank of CommerceGovernment of Canada BondInco LimitedAlcan Aluminum LimitedPlacer Dome Inc.Wascana Energy Inc.Teck CorporationBrascan LimitedRogers Communications Inc.Anderson Exploration Ltd.
*At Dec. 31, 1996. Gold, precious minerals, oil and gas, metals and minerals represented 54.5% of total holdings.
TOP 10 HOLDINGS OF A TYPICAL SECTOR ROTATION EQUITY
MUTUAL FUND
• Tend to buy stock with low P/E ratios
VALUE EQUITY MANAGERS
• By asset type
• By manager’s style
• By capitalization
– large cap funds
– small cap funds
• By sector
• By geography
WAYS TO DIVERSIFY
Time
Ret
urn
The two mutual funds that move up and down together are correlated. The mutual fund with the dashed line is not correlated to the others.
MUTUAL FUND CORRELATION
• International equity fund mixed with a mortgage fund
Or.....
• An equity fund twinned with a fixed-income fund
* Based on historic returns
DIVERSIFIED MUTUAL FUND PORTFOLIOS*
• Index participation units
• Segregated funds
• Stock index-linked GICs
ALTERNATIVES TO MUTUAL FUNDS
Mutual Fund CostMutual Fund Cost
Direct• Sales Fees (front-end,
back-end, both or no load). 0% to 9%
• RRSP set-up fee• Switching fee• Transfer fee
Indirect• Management fee
1.5% to 3%• Operating
expenses ½%
Management Expense Ratio (MER)Management Expense Ratio (MER)
MER = fees plus expenses x 100average net assets
Shares purchased = gross investment = $10,000 = 960 shares or units
purchase price/share $10.42/share
Example of a Front-end LoadExample of a Front-end Load
Suppose you invest $10,000 in a fund with a 4% front-end sales charge, and assume the NAVPS is $10.00.
Purchase price/share = NAVPS = $10 = $10.42
1 - fee 1 - .04
Shares purchased = gross investment = $10,000 = 1,000 shares or units
purchase price/share $10.00/share
Example of a No-load FundExample of a No-load Fund
Suppose you invest $10,000 in a no-load fund with a NAVPS of $10.00.
Example of a Sliding scale on a Back-end LoadExample of a Sliding scale on a Back-end Load
The longer you hold the fund, the less you will be charged.
Percentage of selling price
sold in the first year 6%
second year 5%
third year 4%
fourth year 3%
fifth year 2%
sixth year 1%
seventh year etc. 0%
CALLS – let you BUY shares at a set price up to a certain date.
PUTS – allow you to SELL shares at a set price up to a certain date.
BULLISH STRATEGIES: BUY a CALL or SELL a PUT
BEARISH STRATEGIES: BUY a PUT or SELL a CALL
OPTION BASICS
Strategy Advantage Disadvantage
Buy a near-term call More leverage and less Limited time value; they money at risk expire quickly – referred
to as “rapid time decay”.
Buy a long-term call More time for rally to You have more money at
happen risk. All other things being equal, long-term call will cost more than the short-term call.
HOW TO PICK AN EXPIRATION MONTH -
CALLS
Strategy Advantage Disadvantage
Buy out-of-the-money* Cost less and more Need big move in stock calls leverage price
Buy in-the-money calls* Better chance of making You have more money at
a profit risk
DECIDING ON A STRIKE PRICE - CALLS
*You pay a charge called a premium when you buy an option. The premium reflects intrinsic and time values. In the case of a call option, if the market price of the stock is less than the strike or exercise price, the premium would be made up of just time value and referred to as “out-of-the-money”. But if the stock’s price rises to above the strike price before expiration, your call option would also have intrinsic value and would therefore be “in-the-money”.
PROFIT CHART FOR BUYING A CALL OPTION
-20
-15
-10
-5
0
5
10
15
20
25 30 35 40 45 50 55 60
-2 -2 -2 -2 3 8 13 18
$ Stock Price at Expiration
$ Profit per Share
Stock Price at Expiration
$ Net Profit Per Share
Current stock price at $40.00Buy October 40 call at $2.00
Break Even: $42.00
PROFIT CHART FOR WRITING A CALL OPTION
-20
-15
-10
-5
0
5
10
15
20
25 30 35 40 45 50 55 60
2 2 2 2 -3 -8 -13 -18
$ Stock Price at Expiration
$ Profit per Share
Stock Price at Expiration
$ Net Profit Per Share
Current stock price at $40.00Sell October 40 call option at $2.00
Break Even: $42.00
HOW TO PICK AN EXPIRATION MONTH - PUTS
Strategy Advantage Disadvantage
Buy a near-term put Leverage and less money Rapid time decayat risk
Buy a long-term put More time for decline to You have more money occur at risk
HOW TO CHOOSE A STRIKE PRICE - PUTS
Strategy Advantage Disadvantage
Buy out-of-the-money Lower cost and more Need big move in stock puts leverage price
Buy in-the-money-puts Better chance to make a You have more money at
profit risk
PROFIT CHART FOR WRITING A PUT OPTION
-20
-15
-10
-5
0
5
10
15
20
25 30 35 40 45 50 55 60
-12 -7 -2 3 3 3 3 3
$ Stock Price at Expiration
$ Profit per Share
Stock Price at Expiration
$ Net Profit Per Share
Current stock price at $40.00Write October 40 put at $3.00
Break Even: $37.00
PROFIT CHART FOR BUYING A PUT OPTION
-20
-15
-10
-5
0
5
10
15
20
25 30 35 40 45 50 55 60
12 7 2 -3 -3 -3 -3 -3
$ Stock Price at Expiration
$ Profit per Share
Stock Price at Expiration
$ Net Profit Per Share
Current stock price at $40.00Buy October 40 put option at $3.00
Break Even: $37.00
Calculation of stock returnsCalculation of stock returns
Annual return = dividend income + capital gain/loss for year
stock price at start of year
Real rate of return = annual return - inflation rate
The “Best” Time to InvestThe “Best” Time to InvestAverage Annual Rates of Return 1970 – 1994
Investments Made At:
Market high each year 17.5%Market low each year 18.3%
0.8%Difference
The best time to invest is……whenever you have the money
Source: Templeton International Fund Management
Average risk premium
= rate of return - the treasury bill rate
(called maturity risk for bonds)
Expected market return
= T-bill rate + normal risk premium
•The return investors expect they will earn over some future time period.
• It is subject to uncertainty. It may or may not occur.
Required rate of return
= risk-free rate + inflation premium
investor wants more than the risk-free rate for investing in a risky security
The risk of a portfolio is less than the risk of the individual securities it holds
BUILDING AND MANAGINGYOUR PORTFOLIO
ResourcesFinanceUtilitiesConsumerManufacturing
Most Volatile
Less Volatile
Manufacturing
and Resources
Consumer
Finance
and Utilities
When buying stocks, diversify among the sectors
CASH
BOND/FIXED INCOME
EQUITIES
Asset Mix
Case #1
A young, healthy single individual professional with medium investment knowledge and high risk tolerance, moderate tax rate and long time horizon:
Cash 5%Fixed Income 25%Equities 70%
100%
Case #2
A senior citizen in a low tax bracket with no income other than government pensions, a medium time horizon and low risk tolerance:
Cash 8%Fixed Income 62%Equities 30%
100%
Case #3
A middle-aged line factory worker, married with three teenaged children, who is a homeowner with great concerns about future employment and funding college education, and with low investment knowledge:
Cash 10%Fixed Income 40%Equities 50%
100%
Asset Mix Examples
CASH
EQUITIES
FIXED INCOME
CASH
EQUITIES
FIXED INCOME
10%
70%
20%
5%
80%
15%
• Sell 10% Equity $$$• Buy Fixed Income and CashThis brings you back to your original asset allocation.
Constant weighting asset allocation
CASH
EQUITIES
FIXED INCOME
10%
70%
20%
• Boost to 30% Fixed Income• Sell 10% of Fixed Income $$$This brings you back to your original asset allocation.
Interest Rate
Bond / Fixed-Income Price
Tactical Asset Allocation
0
2
4
6
8
10
12
14
16
18
1 3 5 10
Holding period for TSE 300 in years
Sta
nd
ard
de
via
tio
n o
f re
turn
sVolatility decreases with time
Average price = $10.45
Total amount invested is $1,000 to purchase 95.67 units. The average cost per unit is $10.45
Price $ Invested No. of units
$11.50 $200 17.39
$10.50 $200 19.05
$11.00 $200 18.18
$ 9.50 $200 21.05
$10.00 $200 20.00
95.67
Dollar Cost AveragingDollar Cost Averaging
Fundamental analysis – company driven
• You look at the Company
Technical analysis – Market driven
• You look at stock price and volume trends
FUNDAMENTAL VERSUS TECHNICAL ANALYSISFundamental vs technical analysis
• Sales
• Earnings
• Dividends
Three trends you want to see
• Net profit margin• Return on equity
• Earnings per share
• Price/cash flow
• Price/book value
• Price/sales
• Price/earnings
• Current
• Debt/equity
9 ratios to help you check a company’s financial health
The Debt/Equity RatioThe Debt/Equity Ratio
Tells you if firm is borrowing too much money
Debt/equity ratio =
short-term debt + long-term debt x 100 = %
shareholder’s equity
Rule: Debt should not be more than 50% of equity.
Return on EquityReturn on Equity
Tells you how profitably firm has used shareholder’ funds
Return on equity =
net earnings - preferred dividends x 100 = %
common equity
Rule: Compare with competitor companies
Earnings per ShareEarnings per Share
Tells you how profitable your share of the company is
Earnings per share =
net earnings (before extraordinary items) - preferred dividends
number of common shares
Rule: Should increase consistently year over year
Cash FlowCash Flow
Gives you a clearer picture of the firm’s earning power
Cash Flow = net earnings (before extraordinary items) - equity
income + minority interest in earnings of
subsidiary companies + deferred income taxes +
depreciation + any other deductions not paid out
in cash, e.g. depletion, amortization, etc.
Rule: Compare to competitor companies
The P/E RatioThe P/E Ratio
Might tell you if shares are under or overvalued
P/E = market price of stock
earnings per share
Rule: In general, the lower the P/E, the better
Calculation of a Five Week Moving Average for a Particular Stock
• Week One $17.50
• Week Two 18.00
• Week Three 18.75
• Week Four 18.35
• Week Five 19.25
• Total $91.85 / 5 = $18.37
Top Down and Bottom UpTop Down and Bottom Up
Top Down• Look at economy first• Then for growth sectors• Then for growth
companies• Often in international
funds
Bottom Up• Look at company first• Use detailed
company analysis• Look for earnings
momentum• Will pay higher price if
growth potential warrants
Economic Analysis
Industry Analysis
Company Analysis
Top-down approach
Six Steps Towards a Financial Plan(the investor)
Six Steps Towards a Financial Plan(the investor)
1. Financially, where are you?
2. What are your financial goals?
3. Are there any obstacles in your path?
4. What are your investment objectives?
5. What is your investment strategy?
6. Have you reviewed your financial
plan lately?
Your Net WorthYour Net WorthASSETSCash & Equivalents(bank accounts; CSBs)$_______________________________
Short-term Investments(T-bills, money market funds, etc.)
$_______________________________
Life Insurance cashable value$_______________________________
Longer-term Investments(stocks, bonds, RRSPs, Pension fund)$_______________________________
Other Assets(House (full value), car, art, jewelry etc.)$_______________________________
TOTAL ASSETS$_______________________________
LIABILITIESShort-term Debt(credit cards, personal loans, etc)$_______________________________
Longer-term Debt(mortgage, other)
$_______________________________
TOTAL LIABILITIES$_______________________________
NET WORTH(Total Assets - Total Liabilities)$_______________________________
BudgetingBudgetingIncome fromemployment
Income fromemployment
your net income(or take home pay)
your net income(or take home pay)
income taxes & other
company/government
deductions
income taxes & other
company/government
deductions
necessary fixed expenses such as
•rent or mortgage,food
•clothing, transportation
•insurance, entertainment
necessary fixed expenses such as
•rent or mortgage,food
•clothing, transportation
•insurance, entertainment
Your discretionary income which you can use to spend
and/or invest
Your discretionary income which you can use to spend
and/or invest
your net income(or take-home pay)
your net income(or take-home pay)
less
equals
less
equals
Setting Clear GoalsSetting Clear Goals
AIM & $ AMOUNT = FINANCIAL GOAL
Retire at Age 55 (Freedom 55)With Annual Income of $55,000
Sample Investment Strategy StatementSample Investment Strategy Statement
"My primary investment goal is to save for a comfortable retirement in 20 years through a portfolio that focuses on capital growth. I expect to outperform the stock market over time, understanding that occasional years of negative performance will be inevitable. Although income generation is not a concern, a portion of my portfolio will be maintained in conservative fixed-income securities to balance the riskier, growth-oriented stock portion."
Statement Reflects:Statement Reflects:
•• Goal – comfortable retirementGoal – comfortable retirement
•• Time horizon – 20 yearsTime horizon – 20 years
•• Objectives – capital growth through stocksObjectives – capital growth through stocks
•• Risk tolerance – occasional negative performance, Risk tolerance – occasional negative performance,
balanced by fixed-income securities.balanced by fixed-income securities.
Investment Policy StatementInvestment Policy Statement
I. I am a moderately risk tolerant investor who wants to have some involvement in a money management approach to building wealth.
II. My primary objective is to have my money grow until I retire at approximately age 60 when I will want to convert those assets to income.
III.To accomplish this, I will keep no more than 10% of my portfolio liquid; about 30% in debt type assets and 60% dedicated to growth.
IV.Specifically, I will use my bank account and a money market mutual fund for the liquid portion; my company pension and a term deposit for the income component and growth mutual funds to offset inflation. On average, this portfolio should yield about 12% annually, fluctuating between 0% and 20%.
Signed___________________ Date___________________
My Personal Investment StatementMy Personal Investment Statement
Level I ______________________________________________(Philosophy) ______________________________________________
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Level II ______________________________________________(Objectives) ______________________________________________
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Level III ______________________________________________(Asset Allocation) ______________________________________________
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Level IV ______________________________________________(Security Selection) ______________________________________________
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Date_________________________ Signed_________________________
What’s Investing?What’s Investing?
• Investing makes your money grow
• Investing capitalizes on economic growth
• Investing involves some level of risk
• Investing rewards patience
• Investing outpaces inflation
Investment ObjectivesInvestment Objectives
• Safety of principalYou don't want to lose your initial investment
• IncomeThe regular payment of money that is earned from the investment
• GrowthAn increase in the value of your investment
• LiquidityThe ability to turn your investment into cash very quickly
Life insurance defined...
• all insurance deals with risk
• insurance protects against financial loss
• life insurance protects against the loss of money that may occur as the result of someone’s death
3 risks that threaten income
• death
• disability
• old age
Human life value
• earnings = $50,000
• interest rate = 10%
• human life value = $50,000/10% X 100 =
• $500,000
Cash and income needs
• mortgage fund
• emergency fund
• dependency period income
• spouse’s income
• education fund
• last expenses
Six Step Planning Process(the advisor)
• interview the client
• data gathering
• financial analysis
• plan formulation and recommendations
• plan implementation
• monitoring and plan review
