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Fidelity Retirement Funds Making the Right Investments

Fidelity Retirement Funds Making the Right Investments. Dr. Eskandar Tooma. Outline. Introduction and Objective of Lecture Fidelity Retirement Plan Investor lifecycle Risk Tolerance :Questionnaire Risk-return relationship Table of returns How to choose funds? Benchmarking-investment funds

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Fidelity Retirement Funds Making the Right Investments

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  1. Fidelity Retirement FundsMaking the Right Investments Dr. Eskandar Tooma

  2. Outline • Introduction and Objective of Lecture • Fidelity Retirement Plan • Investor lifecycle • Risk Tolerance :Questionnaire • Risk-return relationship • Table of returns • How to choose funds? Benchmarking-investment funds • Using the software

  3. Selection of the new Fidelity Funds • A range of fund options covering all asset classes, e.g. equities, bonds and cash • A range of fund options covering the entire risk reward spectrum, low risk and high risk alternatives • ‘Self select’ fund options • ‘Lifestyle’ options

  4. Objective of Lecture Assist Faculty and Staff in allocating their funds among 10 Fidelity Investment Funds

  5. Things to look for before investing in funds • Investor Lifecycle: Where am i? • Risk Tolerance: How risky can I get? • Portfolio Mix: How much in each asset class?

  6. Investor Life-Cycle: Where am I?

  7. Networth Accumulation phase Long-term: Retirement Children College Needs Short-term: House Car Consolidation phase Long-term: Retirement Short-term: Vacations Children College Needs Spending phase Gifting phase Long-term: Estate planning Short-term: Lifestyle needs gifts Age 25 35 45 55 65 75 Investor Life-Cycle

  8. Risk Tolerance: How risky can I get?

  9. Risk Tolerance • The degree of uncertainty that an investor can handle in regards to a negative change in the value of their portfolio. • An investor's risk tolerance varies according to age, income requirements, financial goals, etc. • For example, a 70-year-old retired widow would generally have a lower risk tolerance than a single 30-year-old executive.

  10. Risk ToleranceQuestionnaire

  11. Risk Preferences for Investors

  12. Risk and Return Fundamentals • We don’t know how much a stock will be worth in the future. • It is difficult to make such predictions with any degree of certainty. • As a result, investors often use history as a basis for predicting the future.

  13. Risk Defined • Risk is variability of returns associated with a given asset • Assets (real or financial) which have a greater chance of loss are considered more risky than those with a lower chance of loss.

  14. Return Defined • Return represents the total gain or loss on an investment. • The most basic way to calculate return is as follows: kt = Pt - Pt-1 + Ct Pt-1 kt is the actual, required or expected return during period t, Ptis the current price, Pt-1 is the price during the previous time period, Ct is any cash flow accruing from the investment

  15. Return Defined

  16. Risk-Reward Concept • Most Investors are risk averse • In theory the higher the risk, the more you should receive for holding the investment, and the lower the risk, the less you should receive • For investment securities, we can create a chart with the different types of securities and their associated risk/reward profile.

  17. Investment Risk Pyramid

  18. Portfolio Construction: Fidelity Retirement Funds

  19. A Guide To Portfolio Construction • Step 1: Determining the Appropriate Asset Allocation for You • Step 2: Achieving the Portfolio Designed in Step 1you simply need to divide your capital between the appropriate asset classes. • Step 3: Re-assessing Portfolio Weightings • Step 4: Rebalancing Strategically Always remember the importance of diversification

  20. pick your mix Aggressive Growth Portfolio GrowthPortfolio BalancedPortfolio ConservativePortfolio

  21. find the model Aggressive Growth Portfolio Balanced Portfolio ConservativePortfolio GrowthPortfolio 10% 5% 15% 20% 30% 25% 50% 40% 70% 85% 50% 11.85 % 44.08 % -22.02 % 39 13 9.49 % 25.52 % -10.92 % 42 10 10.81 % 35.80 % -17.35 % 40 12 Average Annual Return (1951–2002) Best Annual Return Worst Annual Return # of Up Years # of Down Years 7.38 % 22.04 % -1.15 % 49 3 Source: Ibbotson Associates 12/1951-12/2002

  22. Choosing your investment funds – Self-Select Options

  23. Fidelity Funds – risk reward spectrum INFLATION RISK INVESTMENT RISK • US Dollar Cash Very Low Low Low-Medium Medium Medium-High High V High • European Growth • Pacific • Emerging Markets • America • FPS Global Growth • Euros Stoxx 50 • US Dollar Bond • FPS Defensive • International Bond

  24. Understanding Funds Terminology • Benchmark Index • Funds Growth % • Fund annualized growth • Index annualized growth

  25. Choosing your investment funds – Self-Select Options

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