Investment Basics and SIP Investment Funds

1. Investment Basics and SIP Investment Funds SRNS Summer 2012 Presented by Benefits and Payroll Accounting

2. Build A Sound Financial Plan

3. Financial Planning: Lifetime Phases Phase Two: Accumulation Maximize Contributions to Your SIP in a Customized Investment Strategy, and Develop Long Term Financial Goals Phase Three: Deccumulation Live Off Your Assets During Retirement Phase One: Cash Management SAVE, Balance Budget, Manage Debt, and Build a Cash reserve (3 to 6 months) Your SIP is the Most Important Investment Vehicle to Achieve Your Investment, Retirement, and Financial Planning Goals.

4. Phase One: Cash Management & Budgeting Basics

5. Phase 1 - Cash Management & Budgeting Basics Step 1 - Develop a Long Term Plan Set goals and create a written plan Step 2 - Learn to Save! Spend Less Than You Earn Learn to be content and develop self control spending habits. People can always see what you spend, but not what you Save Step 3 - Build and Maintain Emergency Savings An emergency fund will help you survive the difficult times Step 4 - Minimize the Use of Debt Utilize a debt repayment schedule Debt will increase risk and potential financial problems, as well as, potential stress

6. Step 1 – Develop A Long Term Plan 1. Summarize Present Financial Situation: Calculate your cash flow margin by adding income less expenses. Then, add the cash flow margin to your appreciation of assets to determine your growth in net worth. 2. Develop Financial Goals: Financial Independence Pay Off Debts Lifestyle Desires (home, vacation, car) Giving to Charities 3. Find Ways To Increase Your Cash Flow Margin 4. Control Your Cash Flow

7. Step 2 - Learn to Save! Spend Less Than You Earn You Can See What People Spend But Not What They Save! Use Ebates or other discount/ rebate sites for shopping online Compare rates for utilities & other services Get rid of your landline Save money with the library Buy used items will always save money Simplify your wardrobe Make money with your clutter Maintain items Save energy = save money Save money on exercise Regularly shop insurance rates Use cash back debit cards Live in a smaller home Buy a used car Shop after the season Shop when no else wants to Save money on your home entertainment Buy jewelry from a discounter Save money at hospital Go out to dinner half price

8. Step 3: Build and Maintain Emergency Savings Design a roadmap to achieve you goals.

9. Step 4 - Minimize and Pay Off Debt 1 - Use a Debt Repayment Schedule to List All Your Debts: 2 – Select An Appropriate Debt Repayment Approach: Debt Snowball Approach – ranks and pays off the smallest debts first. As each debt balance is paid off, the same amount is applied to the next balance. Dave Ramsey and other personal finance experts recommend this approach because it is easy and provides motivation as number the of debts are paid off quicker. Debt Avalanche Method – ranks and pays off the highest interest rates first. As each debt balance is paid off, the same amount is applied to the next balance. This approach is mathematically superior because you will pay less interest over time. Additional Support Strategies: Debt Snowflake Method – is in addition to the other strategies. You find ways to save and then, apply the savings to debt repayment. Debt Calving Method – is applying additional money received to your debts.

10. Phase Two & Three: Investment Basics

11. Investing Basics: Timeless Common Sense Wisdom Compound Interest – Albert Einstein stated Compound Interest was the greatest discovery in the 20th century. Compound Interest is when interest is added to the principal from that moment into the future. Basically, the interest will be added to itself and earn interest. This addition of interest to the principal is called compounding. Dollar Cost Averaging - Invest equal monetary amounts on a regular and periodic basis over specific time periods (such as $1,000 monthly) in a particular investment or portfolio. As a result, more shares are purchased when prices are low and fewer shares are purchased when prices are high. The point of this is to lower the total average cost per share of the investment, giving the investor a lower overall cost for the shares purchased over time. (Wikipedia) Diversification – Invest across a variety of asset classes to reducing risks. Diversification is recognized as one of the most important investment techniques to reduce investment risk in a portfolio. Asset Allocation – Asset allocation applies diversification. Asset allocation is the process to choose among asset classes to determine the appropriate mix of asset classes to best meet the needs and objectives of the investor. A large part of the investment side of financial planning focuses on asset allocation. Rebalance - A disciplined rebalance of your asset allocation on a periodic basis to your established percentages in order to stay the course with your goals will avoid misallocations over time.

12. 1 - Compound Interest: Example Question: If you were to invest $1,000 over a four year period, which market return scenario would return the highest amount?

13. 1. Compound Interest – Example Answer: Scenario D provides the greatest return by investing in a less volatile scenario.

14. 1. Compound Interest – Old Plan SIP Participant Example Footnote: The illustration hypothetically assumes the market returns is 8% annually; and $17,000 is the 401K maximum limit. Also, the employee earns $95,000 annually; and makes a $14,150 annual contribution to their 401K. A SIP Participant under the Old Plan, can earn close to $500,000 over a 15 year period by maximizing your 401K contribution limit of $17,000

15. 1. Compound Interest – New Plan SIP Participant Example Footnote: The illustration hypothetically assumes the market returns is 8% annually; and $17,000 is the 401K maximum limit. Also, the employee earns $75,000 annually; and makes a $10,250 annual contribution to their 401K. A SIP Participant under the New Plan, can build a significant amount of retirement assets over a 35 year period by maximizing your 401K contribution limit of $17,000

16. 2. Dollar Cost Averaging The famous Warren Buffet example about Dollar Cost Averaging… A short quiz: If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices on beef? Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices? These questions, of course, answer themselves. But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the “hamburgers” they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.

17. 2. Dollar Cost Averaging Illustration is from Vanguard Investments material Dollar Cost Averaging protects you from making the mistake of “timing the market” and thus providing you the opportunity to make more money over longer period of time.

18. 3. Diversification - Steps to Diversify Identify your investment goals (ideal asset amount to retire, estimated annual retire income) 2. Determine your investor profile ( investment experience, risk tolerance, time horizon) Choose your asset allocation Select your investments within your asset allocation mix Review you plan on an annual basis

19. 3. Diversification - Overall Risk Return Analysis Illustration is from Vanguard Investments material Diversification is recognized as one of the most important investment techniques to reduce investment risk in a portfolio.

20. 4. Asset Allocation – Overview of Main Asset Classes 1. Cash: Advantage is liquidity Disadvantage is the loss in future purchase power due to inflation 2. Fixed Income or Bonds: Definition is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest (the coupon) to use and/or to repay the principal at a later date, termed maturity Advantages is the steady stream of income and stability in value Disadvantage is the exposure to interest rates risks and credit risks Equities or Stocks: Definition is direct ownership of a business entity represents the original capital paid into or invested in the business by its founders Advantage and disadvantage to owning a stock is the potential volatility in market value

21. 4. Asset Allocation – Risk Return Profile Return % Risk (Standard Deviation)

22. 5. Disciplined Rebalancing – Generates Balanced Returns Greater returns are generated using diversification and rebalancing!

23. The SIP Investment Fund Line Up Tier 1 – Target Date Funds Tier 2 – Index Funds (Passive Management) Tier 3 – Active Funds (Active Management) Vanguard Target Retirement Income Vanguard Target Retirement 2010 Vanguard Target Retirement 2015 Vanguard Target Retirement 2020 Vanguard Target Retirement 2025 Vanguard Target Retirement 2030 Vanguard Target Retirement 2035 Vanguard Target Retirement 2040 Vanguard Target Retirement 2045 Vanguard Target Retirement 2050 Vanguard Target Retirement 2055Vanguard Target Retirement 2060 Equity or Stock FundFixed Income or Bond Fund Real Estate Fund Vanguard Total Stock Market Index SSgA Passive Bond Market Index Vanguard REIT Index MSCI U.S. Broad Market Index Barclays Aggregate Bond Index MSCI REIT Index SSgA S&P 500 Flagship S&P 500 Index SSgA Russell 1000 Value Russell 1000 Value Index Vanguard Small Cap Value Index Performance Benchmark Blackrock All Country World Ex-U.S. Index MSCI All Country World ex-U.S. Index Equity or Stock FundFixed Income or Bond Fund Blend or Asset Allocation FundStable Value Funds T. Rowe Price Inst. Large Cap Growth PIMCO Total Return Fund Fidelity Puritan Vanguard REIT Index MSCI U.S. Broad Market Index Barclays Aggregate Bond Index 60% = S&P 500 Index $ 40% Aggregate Bond Index Citigroup 90-Day T-Bill Index & Hueler Stable Value Index Vanguard Selected Value Fund Russell MidCap Value Index Rainier Small/Mid Equity Inst. Fund Russell 1000 Value Index Jennison Small Cap Equity Fund Russell 2500 Index Dodge and Cox Global Stock Fund MSCI All Country World ex-U.S. Index

24. Risk Profile: Tier 1 – All Target Date Funds Source Hewitt EnnisKnupp

25. Risk Profile: Tier 2 – Index Funds (Passive Management) Source Hewitt EnnisKnupp

26. Risk Profile: Tier 3 – Actively Managed Funds Source Hewitt EnnisKnupp

27. Questions Discuss the different options for life insurance (term, universal, whole, etc.). What are some of the best ways to save for a son/daughter's college fund? What do you think of the Gerber College Fund? How much accessible cash should I have in Savings? 1 month, 2 month, 3 month? What are your personal experiences with needing to pull from savings? What are the pros and cons in rental homes as investment properties? Most interested in home buying information. What are some ways to save when you have children? Where do I find the best deal on a refinancing?