The Financial Survival Guide to Retirement

William KlingerAssistant Professor

Raritan Valley Community College

The Financial Survival Guide to Retirement

Investment Basics

Introductions

• Me• Class

– Name– Occupation?– Years to retirement?– Favorite dessert

• What do you want from the course?

Course Objectives• Understand the basics of investing• Understand basic retirement strategies• Know the whys

– Why should one invest in something or not– Why retirement strategies work or don’t– Why investment strategies may or may not be good

• Be able to guide own retirement or interact intelligently with advisors

• Course will work with generic profile– Class is welcome to share information, may be

anonymous– No one will be required to share private information

Course Outline• Retirement Basics

– How to predict the future– Simple model

• Retirement Strategies• Investment Basics• Investments and Retirement• Applying What You’ve Learned

– Critique retirement seminars– Discuss articles– Analyze portfolios

DisclaimerWilliam Klinger is not a registered or certified investment advisor, financial planner, or broker/dealer. This material is solely for educational and informational purposes. William Klinger does not purport to tell or suggest which investment securities you should buy or sell for yourself and nothing in this talk should be construed as investment advice, either on behalf of particular investments or in regard to overall investment strategies. You should always conduct your own research and due diligence and obtain professional advice before making any investment decision. You are solely responsible for your own investment decisions.

William Klinger receives no compensation of any kind from any investment companies that may be mentioned in this talk but may hold positions in the securities mentioned. Any opinions expressed are subject to change without notice.

Securities investments are risky and past performance doesn't guarantee future results. All securities investments entail the risk of great and sudden financial loss. Returns vary and you may have a gain or loss when you sell your securities. No assurance is given that anything described here will be successful.

Investment Basics

Questions to be answered:– How should one invest? And why?– Invest in what? – How does one

invest? – What

are the mechanics?

What to Invest In – The Basics

Asset Classes• Stocks• Bonds• Cash

There are others but these are the fundamental asset classes. Start with these before getting fancy.

Asset Classes• Stocks

– Ownership in a corporation• Bonds

– Corporate and government debt – Must be repaid

• Cash– Checking, savings accounts– Money market accounts– CDs– US Treasury Bills

Stocks vs. Bonds

• How stocks work– Capital gain/loss– Optional dividends

• How bonds work– Maturity date, principle– Capital gain/loss– Interest rate

• How cash works– Interest rate (APR)

Types of Stock

• Common stock• Preferred stock

– Convertible

Types of Bonds

• Corporate– Debenture

• Federal Government– Treasury Bonds (T-Bonds, Treasuries)

• Municipal bonds– General obligation– Revenue

Risk

• In finance, typically defined as standard deviation of returns.

• What are the risks for:– Stocks– Bonds– Cash

Asset Allocation• What percent of your money should be in each asset

class?For example:

• 70% stock, 25% bonds, 5% cash, or• 30% stock, 65% bonds, 5% cash

• The answer depends upon:– Your investment objective– Your tolerance for risk

Common rule-of-thumb% stock = 100 - your age

Investment Objectives

Possible objectives:• Must you have the money without a loss?• Do you want to generate current income?• Do you want the money to grow over a long

time?

Which asset class is best for each?

Risk

• How much risk can you tolerate?– Can you stomach a 30% loss? A 50% loss?

• One of investors’ biggest risks is themselves.– Risk of “Greed and Fear”– End up buying high and

selling low – the worst possible strategy

Risk – By Asset Class

Worst Annual Return

Since 1925Average Annual Return

Since 1925

Stocks-43.4%

(-67.6% worst 12 mo.)9.6%

(162.9% best 12 mo.)

Bonds -7.8% 5.5%

Cash .1% 3.7%

Sources: personal.fidelity.com, Morgan Stanley, www.efficientfrontier.com, Federal Reserve – St. Louis

“Typical” Portfolio Allocations

Stocks Bonds Cash

Conservative 20% 55% 25%

Moderately Conservative

40% 50% 10%

Moderate 60% 35% 5%

Moderately Aggressive

70% 25% 5%

Aggressive 80% 15% 5%

Special Risk for Retirees

• Inflation• Insidious risk for those on fixed incomeInflation rateYears to halve purchasing power 2% 36 years 4% 18 years 6% 12 years

In Practice• Most common approach is stock/bond allocation

– Typically 60/40 split– Many advise using 100 – YourAge = percent stocks to own

• Can continue to get diversification and returns with other investments– Foreign stocks– Foreign bonds– TIPS

Summary

• Asset allocation is the single biggest determinate of portfolio results

• Major asset classes– Stocks– Bonds,– Cash

• How you allocate your investments depends upon the returns you need and risk you can take

• Rule-of-thumb: %stock = 100 - age

Homework

• Inventory your assets– What are your total investable assets?– What are they invested in? By percentages.

Sources of Information• Basics

– Money Magazine money.cnn.com • Tip: use your frequent flyer miles to subscribe

– personal.vanguard.com/us/planningeducation/education

– personal.fidelity.com/misc/gettingstarted/gs-fund-allocate.shtml.cvsr

– “William Gross on Investing”, William Gross

• Thought Provoking– “Fooled by Randomness”, Nassim Taleb