Financial Planning & YOU

2. Financial Planning & YOU

3. What is Financial Planning? Financial Planning is the process of setting, planning, achieving and reviewing your life goals in different stages through the proper management of your finances. Source from IFPHK

4. What is Financial Planning? (cont’d) • It also helps people to accumulate assets, to grow assets and ensure their assets are underprotection • A comprehensive Financial Planning helps people to prepare for the unexpected life events e.g. illness or disability

5. Scope of Services • The comprehensive approach to financial planning provides for an initial analysis of the client’s total financial well-being – both now and into the future.

6. Scope of Services • The comprehensive financial planning approach addresses the areas of investment, estate planning, insurance risk management, income and expenditure, wealth accumulation and taxation.

7. The Work of Financial Planner • Financial Planners help people achieve their financial goals, whether it be buying a home, saving for their children’s education, investing their hard earned money, managing debt, or planning for retirement.

8. The Work of Financial Planner Financial Planners help clients to: • Make informed decisions about their money and how it can be used to best advantage • Develop a sound financial plan covering all aspects of their financial well-being • Choose products that meet their specific needs • Review their financial situation on a regular basis and revise their financial plans as necessary

9. Purpose for conducting Financial Planning • Fulfilling Dreams – plan to make dreams come true: • For example: Purchasing property, cars, reducing liability, travel etc • When and how to make it becomes true:“Plan early, enjoy life later”

10. Benefits of conducting Financial Planning • Prepare for the unexpected • Fulfill the goals in different stages • Improve financial situation

11. At birth Retirement As Student Wealth Accumulation & Parenthood Working Marriage/Mortgage Financial Needs in Life-stage Life Cycle

12. Life Goals • Include buying a home, getting married, raising children and planning for their education, insuring yourself and your family, setting aside money for retirement and investing it, estate and tax planning, etc • Are not limited to personal matters; they may involve starting a business or joining a partnership, etc

13. Time Horizon of Financial Planning • Short-term • Less than 5 years • E.g. house deposit, buy a car, plan for holiday, reduce personal / family expense by 10% • Medium-term • 5 – 10 years • E.g. mortgage reduction, savings for children’s education • Long-term • Over 10 years • E.g. retirement, financial independence, estate planning

14. Key Scopes of Financial Planning Investment Planning Insurance Planning Cash & Credit Management

15. Cash & Credit Management

16. Most common ways of using credit:Loans and Credit Cards

17. Types of Loan Clean Loan: • Personal Installment Loan • Personal Overdraft Secured Loan: • Home Mortgage Loan • Car Loan • Secured Overdraft

18. What is a loan? Loan principal Borrower Lender Repayments + interest

19. Credit card Credit Card with a revolving credit limit Card issuer Cardholder Monthly payments

20. Cash & Credit Management • Keep planning your Spending vs. Income • Understand Needs & Wants before Spending • Proper use of Credit Card or Loan Product

21. Insurance Planning

22. Insurance Planning • Purpose • Ensure the existing standard of living if income discontinues • Protect the things you own • Achieving your financial goals even in the worse scenario • Cover you liability

23. Types of Insurance • Life Insurance • Death & Disability; personal & family income • Assets • Your property, household contents, personal belongings. • Liability • Any harm, loss, or damage to other people or their property that you are legally liable for their losses. • Accident • Medical & hospital expenses and loss of earnings resulted from accidental injury. • Medical and Hospital Insurance • Medical expenses and hospital expenses in the event of hospitalization or prolonged critical sickness • Out-patient expenses

24. Different Types of Life Insurance • Term Life Insurance • No saving element • Traditional Life insurance • Guarantee Cash Value + Non guarantee dividend • Investment Link Life Insurance • Cash Value depends on investment performance

25. Life insurance is not a luxury. • It’s as basic as food, clothing or shelter…

26. But your family needs it. “I don’t need insurance!”

27. Forms of General Insurance (covering assets, liability, and accident) • Home • Travel • Motor Vehicle • Accident • Domestic Helper

28. Forms of Medical and Hospital Insurance • Hospital Expenses • Hospital Cash • Out-patient

29. Investment Planning

30. $0.1-$0.5 $1-$1.5 $2-3 2005 1985 1995 Important Concepts • Inflation (通貨膨脹)

31. Power of Compounding: HK$5,000 / Monthstarting at age 35 with 0%, 5%, 10%, 15% return p.a. HK$1.8M HK$4M HK$11M HK$30M

32. Cost of Delay: HK$5,000 / MonthStarting at age 35, 45, vs 55 at 5% return p.a. HK$4M HK$2M HK$900K

33. Important Concepts • Risk & Return (投資風險及回報) – What is your Risk Tolerance Level (風險承受程度) Will you sleep well?

34. Important Concepts • Factors in accessing Risk Tolerance level • Age • Education background • Personal characters • Financial situation • Investment objectives • Investment experiences

35. High Risk = High Return ????

36. HSI Performance (1987-2006)

37. HSI 1-Year Return Distribution (1987-2006) • Mean Return: 17.5% • Probability of positive Return: 65%

38. 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 EM Bond EM Bond EM Bond HK HK Govt Bond Govt Bond Japan Emg Mkt Emg Mkt Emg Mkt Japan U.S. U.S. U.S. Emg Mkt Emg Mkt Emg Mkt Emg Mkt Europe 43% 40.4% 65% 12% 59.9% 32.1% 116.8% 21.8% 38.2% 37.8% 34.1% 30.7% 66.2% 12.7% 9.7% 17.2% 56.3% 25.9% 34.5% 34.3% Govt High Yld EM Bond High Yld EM Bond HK HK HK HK Bond Japan U.S. Emg Mkt Europe Europe Europe Japan Govt Bond Europe Japan Emg Mkt 18.4% 35.2% 31.2% 9.2% 49.6% 18% 74.9% 2.66% 20.5% 33.1% 24.2% 28.9% 63.1% 1.8% 2.3% 13.7% 39.2% 25.1% 25.7% 32.6% High Yld High Yld High Yld High Yld EM Bond HK HK HK HK Europe HK Europe U.S. Emg Mkt Europe U.S. U.S. Govt Bond Govt Bond Europe 4.1% 27.9% 29% -2.1% 49.2% 11.4% 29.8% 2% 22.5% 24.1% 12.8% 14.5% 59.1% 1.1% -1.4% 4.1% 38.1% 21.4% 10.3% 30.3% EM Bond U.S. Europe HK Europe U.S. U.S. Japan Govt Bond Europe Europe Japan U.S. Europe Emg Mkt Emg Mkt Japan Japan Europe U.S. 3.9% 16.4% 8.5% -3.4% 31.3% 7.4% 25.7% 1.8% 22.1% 21.6% 10.8% 5.1% 22.4% -8.1% -2.4% -6% 36% 16.3% 9.9% 15.3% High Yld High Yld High Yld High Yld High Yld EM Bond High Yld High Yld High Yld HK HK Govt Bond Govt Bond Govt Bond Govt Bond HK U.S. U.S. U.S. Japan -4% 15.9% 4.3% -8.3% 15.8% 6.4% 24.7% -6.2% 20.5% 17.8% 1.2% -2.9% 19.6% -12.5% -12% -9.8% 32.4% 13.2% 8.3% 13.7% EM Bond EM Bond High Yld HK HK HK Govt Bond Govt Bond Govt Bond U.S. U.S. Japan Emg Mkt Europe Europe Emg Mkt Emg Mkt Emg Mkt Europe -17.8% 29.1% 11.6% 5.7% 9.8% 4.4% 1.8% -10.6% 13.7% -4.3% 14.1% 7.3% 18.3% 6.0% -11.6% -4.8% 16.2% -14.8% -18.6% - EM Bond EM Bond High Yld EM Bond High Yld HK Govt Bond Japan Japan Japan U.S. Japan Japan Europe Europe U.S. Japan -36% 9.1% -21.4% 10% -19.3% 0.42% 1.7% -23.3% -8.1% 10.4% -28.3% -19.6% -18.1% 22.2% 10.7% 3.6% 6.4% HK Govt Bond Govt Bond Govt Bond Govt Bond Govt Bond Emg Mkt Japan Japan Emg Mkt Emg Mkt Japan U.S. -28.9% -5.2% -15% -24% -25.3% 1.5% -30.6% -29.5% -22.7% 12.4% 8.7% -6.5% 4.6% - Data Source: Ibbotson Benefit of Diversification

39. Efficient Frontier and Optimisation Source: Ibbotson

40. Optimal Asset Allocation

41. Historical Performance of Optimised Portfolio Source: Ibbotson Stable Balanced Growth Aggressive Growth Standard Deviation 6% 11% 17% 21%

42. High Risk≠ High Return

43. Important Concepts • Time Horizon (投資期)

44. Important Concepts • Time Horizon (投資期) Index Time

45. Important Concepts • The longer the time horizon, the more options an investor will have to reduce or manage risk • Time Horizon (投資期)

46. To keep your learning continue, please visit our HSBC Living Finance Website 滙豐理財小百科 www.hsbc.com.hk/livingfinance

47. Thank You