90 aoe Wealth Management - (T. Y.BMS}1Sy UNIT ~y Investment Planning LEARNING OBJECTIVES Upon completion of this chapter the reader should be able to & Understand the concept of Investment Planning Enumerate the types of risk & Categorize investor based on their ri profiles S Analyse the different Asset Allocation Strategies S Deliberate Active and Passive Investment Strategy Ss Key Words : Investment Planning, Risk, Asset Allocation, Active & Passi Investment of Strategy SYNOPSIS 1 Investment planning 4.2’ Steps in investment planning K S Types of investment tisk ¥A Risk profiling of inv tors (atch ollncal ay, strode wea) sock ers Risk pr seek eceeiTS strates \ 4.5 Active v/s Passive investmeht management ! Questions PAdvaclages of active wowed shobe ques | eAdy dasady of a cive iwst mogl : | Adeline nekrere 91 4 e placing of funds j { ae future goals, time hort’ Proper investment vehicles based on the inv" afety of the investments aa and priorities. This also takes into account Sper investment planning will pity as liquidity and level of return. Ideally, Pvards over time. the investor's funds to produce financial ‘ajor planning areas that falls under the Investment planning is the six mi: planning umbrella. The six maj ancial i : a : jor area along with other specialized ar akeup financial planning. The six major areas are. ee 1, Insurance Planning and Risk Mae 2. Employee Benefit Planning 3. Investment Planning . 4, Income Tax Planning ; 5 6. Retirement Planning . Estate Panning Together these six major areas form th. ‘ mprehensive plans are developed, @ nucleus around which the .2 STEPS IN INVESTMENT PLANNING STEPS IN INVESTMENT PLANNING 4 . Determining Financial Goals * 4 Data ‘ Analysis en Strategy Ve Implement 4 Follow up Determining Financial Goals The first step in financial planning is determining financial goals like child’s “ication, buying a new home, 2 Data Gather current information to determine your financial picture. Assess your tty to meet financial objectives. Include: : * Statement of assets and liabilities * Previous three years’ tax returns * Projected monthly money flow (income and expenses) * Recent payroll stubsWealth Management - (T.Y. BUS) (Sep or : id booklets ‘ t employee benefit statements an Sonaments a f wills, trust or estate-planning docu: Copies of , Gift tax returns Insurance policies . Analysis 3. have excess money flow? Or are you Projecting 2 shortfall? a s income sources? Review education or retirement individual in eee future adjustments are needed. et What expenses ty Do you have excess money flow? Or are you Projecting a shortfali> Wha e ae individual income sources? Review education or Tetiremey ee to determine if future adjustments are needed. h +. Strategy Develop a budget to meet lon; g-term, high-priority ‘hild's education or investing. Co! sider tax deferral Develop a budget to meet etirement, a child's educati ayroll reduction. 3. Implement goals such as retirem, and payroll reduction: long-term, high-priority Beals such as ion or investing. Consider tax deferral and ent, a Choose specific investment options to match your ‘uitable portfolio based on asset categories and classes, Choose specific investment options to match a Suitable portfolio based on asset categories and 5. Follow up Tisk tolerance.. Select a your risk tolerance, Select classes, ( 4.3 TYPES OF INVESTMENT RISK - \"tanning spestment Pl rer 93 qypet of investment risk ; v : When you invest, you're exp ; ' afferent risks can affect your in sed to different types of risk. Learn how vestment returns, 9 types of investment risk 2 1.) Market risk j The poe declining in value because of economic developments or.other evel fect the entire market. The main types of market risk are equity risk, interest rate risk and currency risk. j ¢ Equity risk — applies to an investment in shares. The market price of i on demand and supply. Equity risk is the risk of loss because of a drop in the market price of shares " le Interest rate risk - applies to debt investments such as bonds. It is the risk of losing money because of a change in the interest rate. For example, if the interest rate goes up, the market value of bonds will drop. 1 ¢ Currency risk ~ applies when you own foreign investments. It is the risk of losing money because of a movement in the exchange rate. For example, if the US. dollar becomes less valuable relative to the Indian Rupee, your U.S. stocks will be worth less in Indian Rupees. PF Uquidity risk a | The risk of being unable to sell your investment at a fair price and get your money out when you want to. To sell the investhfeSt, Sif tHay HEEU to accept a lower price. In some Cases, such as exempt market4nvestments, it may not be possible to sell the investment at all. Concentration risk The risk of loss because_your money is concentrated in gne investment or type of investment. When you “diversify your investments, you spread the risk over different types of investments, industries and geographic locations. Credit risk ; 4 The risk that the government entity or company that issued the bond will run into financial difficulties and won't be able to pay the interest or repay the Principal at maturity. Credit risk applies to debt investments such as bonds. You can evaluate credit risk by looking at the credit rating of the bond. For example, long-term Canadian government bonds have a credit rating of AAA, which indicates the lowest possible credit risk. 5. Reinvestment risk , «vier uneea nee it inci i a lower int 5 The riske of loss from reinvesting principal or income ai re Pose you buy a bond paying 5%. enna ee eee poem interest Tales to reinvest the regular interes! t 4%. Reinvest eae apply if the bond matures and you have to reinvest Princi mal at less than 5%. Reinvestment risk will not apply if you intend to ‘Pend the regular interest payments or the principal at maturity. Tnfla Th ee sn your purchasing power because the value of your ¢ risk of a loss in yol™ © | inflation. Inflation erodes the purchasing amount of money will buy fewer goods and ive oe you own cash or debt e same 7 articularly relevant if of money over time ~ th “ices, Inflation risk is Pges’ 4 Wealth Management - (T-Y.BMS)gq, | 94 i inst inflation beg, jome protection agains " i ts like bonds. Shares ae . arge to their customers, g) investments lil increase the prices they charg | ete = a ise in line with inflation. Real estate also offers Son es should therefore ri: z ee ic because landlords can increase rents 7. Horizon risk ; The risk that your investment horizon may be shortened because of fe eee event, for example, the loss of your job. This may force You to re ere that you were expecting to hold for the long term. If you must sel] ‘ a time when the markets are down, you may lose money. &. Longevity risk The risk of outliving your savings. This risk is who are retired, or are nearing retirement. 9. Foreign investment risk particularly relevant for Peop} foreign panies in emerging markets, you fac. 10. Broad Market Risk Broad market Individual markets, whether equities, bonds or ev exposed to a variety of factors that can lead whole markets, markets, to decline together. We have seen this over the last markedly during the recent global financial crisis, . J. Manager risk The chance th: decisions of the fu A2. Sector risk en cash, are or even most decade, most ‘at a pooled fund will underperform due to poor investment ind manager. is the risk associ i 7 : Policies or political parties, Seciated with potential change E.g.: Make in India campai , ; . f ‘89 Of Modi govern; doors © the economy for all foreign players to m, a India ana opened bend ce in the rest of the world. The Policy measures and sell their produ: i the World Bank Ease of Di : taken have j ia’s position i cing Business in the World Rene =e 15. Regulation Risk ° Some investme: nt can be relatively attract; fe laws and regulations and vice versa Sateen ety bone E.g.: Your investment in Property near a . oe “ect nas is i i Promi: it project the risk of being reclaimed as the governm nent government Pp! to reclaim the land to ‘use it of * Ob ; Fat Tegulations would permit the™ public benefit at a Cost below market value. Wa in government] nt Planning peso Monitor your plan annually, them? Document each review and rrr 95 Have your goals changed? Are you mecting Performance for key financial areas. 1, RISK PROFILING OF INVESTORS 44.1 Wh is a ‘Risk Profile?’ [4 nt ’ ea i canoe an individual of organization's willingness to eee : reats to which i . bee identifies + an organization exposed, A risk The acceptable level of risk an’ individual or corporation is prepared to accept. A (Corporation's risk profile attempts to determine how the corporation's willingness to take tisk (or aversion to risk) will affect its overall decision-making strategy, : The risks and threats faced by an organization. The risk profile may include the probability of resulting negative effects, and an outline of the potential costs and level of disruption for each risk, ‘ The Financial Services Authority (FSA) in the UK has studied the way client isk tolerance has traditionally been profiled by the industry and found it ting. As a result, it issued new guidance consultation in January 2011: sessing suitability » Establishing the risk a customer is willing and able to take d making a suitable investment selection. Any consideration of risk or risk ‘ofiling must take careful account of the FSA’s findings and guidance. The dance provides sobering reading for any adviser that has come to rely on ingle-dimension measurements of risk profiles. - . 4.2 Three key components comprise an individual’s true risk profile: . Ability to take risk relates ‘risk Capacity’ to financial circumstances and investment goals. Generally speaking, the higher the level of wealth relative to liabilities, and the longer the investment horizon, then the greater the ability to take risk. The financial planning process should consider all of these issues carefully. Wa lina A Willingness, or ‘risk attitude’, on the other hand, relates to psychology, rather than to financial circumstances. Some individuals find the prospect of investment volatility and the chance of losses distressing. Others are more ii . Financial advisers should try to fully understand ‘elaxed about those issues ch client to take risk, This is what risk the psychological, willingness of ea Profiling questiorifidires foctis oh: J : prom ‘i is fent ri : . The need to take risk is the third component of a true cl a ae [pretles Willingness and ability need to be evaluated in the context of an in It heed to take risk to achieve @ goal. If they have a very low risk profile with a very demanding investment objective, something will have to give. ntradictions in the risk profile s to take risk can sometimes clash with their if has a high risk tolerance, but example, if someone j t r ly balanced fi nancial situation. When such a conflict exists, fae 4 aa ae : to counsel the client and explain the consequences oO ieee aa explain the consequences of low or negative returns Yrs wach: Your ee ith less liquid wealth. Ultimately, a client might w isk attitude and the adviser egy that matches their riWealth Management - (T.Y.BMS)-, , wae (Sem 96 7 " But having had the conversation, the client/ady, this. ‘i i fant may need to accept the context of a thorough review of the investor’, Ny, decision will at least be in titude and need. ; / ee tore eee profiles in couples Sometimes couples that deal with 4 | 7 act . i Differen together have conflicting risk attitudes. In this case, you'll neeg’ te consequences of different strategies and Poa It may possible i itis ter explaining the issues, possible to negotiate a compromise aman after exp! ig but : some cases the views of one spouse will prevail. The investment objectives and the client risk profile People can sometimes have different risk profiles with different Pools yy assets. They might be willing to. take on considerable risk with assets th earmark for a particular goal, but not with others. The simplest way to think a this is to think of the INR 10 some people spend each week on lottery tickets, They're willing to take the highest risk possible with that INR 10 but Not With the money they set aside for their children’s education. While this kind of ‘Separation might not make sense from a purely financial theory Point of view, many investors rely on separate ‘mental accounts’ when thinking about their investments. For more information on ‘mental accounting’. i 4.4.3 Factors Affecting Risk Profile of a Client . ‘i, Knowledge Individuals with more findncial and investment knowledge are generally more willing to accept investment risk. Knowledgeable individuals often know that they will need to take at least some risk to generate higher] returns. Short-term fluctuations in the values of investments need not matter for investors with longer term horizons.” er 2. Comfort with risk some individuals have psychological traits that allow them to accept taking risk. These individuals typically see risk as involving a ‘hril! or ‘opportunity’ rather than as a ‘danger’ or a ‘loss’. Questions addressing . isk comfort levels often involve individuals choosing among alternative . COUFSES of action relating to saving decisions, or simply stating their comfort devel with risk.) ch ee yilet] Leyes « 3. Investment choice Preferences for different kinds of investments can also help to gauge risk attitude, for es ‘xample, the safety of a bank account versus the risk/return potential of the stock market. However nature need to avoid using financi understand the questions asked, . Regret This negative emotion aris gad (es prexprstons Used by a Ss fre Individuals who are particulark terhal Ones, 1. om ‘naling tthe wrong decision mppe, to regret tend to texto make decision’ that are less likely to cause. F example, they might engage in regret avoidance. v5 Propensity This takes in to account the hietbrical fanciat Géeisione tke? by the client — sf ® Ratio of high risk to low risk investments - Ratio of Liabilities to Assets (o> Ratio of Liabilities to Income Attitude This determines the clients willingness to take risk] A risk prose vould typically attempt to evaluate a client’s reaction to various risk- situation.t puestment Planning . | gaample : If thi la ae © Stock market had a sharpe decline of 20% what would you 0? | 4) Remain invested | p) Sell everything 1 4 ¢) Invest more to average out | 4) Sel few of the under dogs. (non performing stock) Capacity capacity is the clients financial abili is i Sremeia eaiild be financial ability to take risk, Typical measure i | @) Income : amount & ability~ 444 Different Risk Profiles ) vanguard a leading UK Financial's various risk group customers based on are the various risk aa categories. yf Low risk ‘ervices Firm classified their investor in to a Risk Profiling questionnaire. Following ‘ | In general,(low risk investors pref knowing that their capital is safe and they're not comborspple investing in ques They would rather keep their money the bank.(LoW’risk investors are uilikely to have much experience of avestment beyond bank accounts.)They will usually suffer from severe regret if heir decisions turn out badly. Low risk investors with time horizons of ten years more typically have portfolios with a majority of bonds and cash, with little mposure to equities or other higher risk investments. Low risk investors need to inderstand that their caution can mean that their investments may not keep ace with inflation, or that may fall short of their investment goal. . Low-mid O sk In-general,(low-mid risk investors would prefer not to take =i other cir investments, but they can be persuaded to do so to a limited extent ould prefer to keep their money in the bank, they may realise th: vestments might be better)over longer term. id risk investors may have me limited experience of investment products, but will be more familiar with nk accounts than other types of investment9, Low-mid risk investors can often fer regret when decisions turn out badly. | Low-mid risk investors with time horizons of ten or more years typically have rtfolios with a majority of bonds and cash, but with some exposure to equities 4 other higher risk investments. ‘Mid tisk 7 In general, ‘nid He investors understand that they have to take investment to meet their long-te joals, nee often more willing to take risk with at they also tend to Provide the lowest returns and that’s why they a; generally used for short term Saving. Pooled fund An investment vehicle in which investors combine their money in a fund in a range of securities. Each investor shares Proportionally ir - €.g. Mutual Funds, 4.4.9 Strategic Asset Allocation Asset allocation is as much an art as a Science, However, of techniques, Supported by exten: there are a number sive academic research, adviser can use wi cess, and it plays a ‘turn, As such, your Stor will have a different asset ‘ange over time. But how should you go about the location? Fortunateh » there are a number of models you can follow. However, it is important to point out solution, and you could settle on hundreds of di investments depending ©n your situation and goals. Asset Allocation’ A Portfolio strategy that involves Setting target allocations for various asset classes, and periodically rebalancing the portfolie back to the original allocations when they deviate Significantly from the initial settings due to differing returns from various assets, In Strategic asset allocation, the target allocations depend on ‘S$ — such as the investor’s risk tolerance, time jorizon and and may change over time as these Par strat ee: Strategic asset allocation is compatice with a “buy and hold’ tne ati opposed to tactical asset allocation Which is more suited to 0 Otn Portfolio approach. Strategic and tactical asset allocation are based mechanics of asset all that there is no standard ifferent ways of combining _—‘Planning | . rrr 103 eorys which emphasizes diversification in ord i i rtfolio returns. ler to reduce risk and improve strategic asset allocation call periodically rebalancing the portfoli skew the original asset allocation p, The concept is akin to a "b trading approach. » th is i Of course, the strategic asset allocation targets may change over time as the client's goals and needs change and as the time hori s retirement and college funding, grows shorter. ¢ horizon for major events, such as oliowing are the four broad Asset Allocation Strategies (tsith exon ples). /1, Using a traditional asset based approach. 2. Defining your asset allocation by age: 3, Determining your asset allocation by risk profile. 4. Selecting investments by style type, industry and geographical diversification. Is for setting target allocations and then io back to those targets as investment returns ercentages, ‘uy and hold” strategy, rather than an active SSET ALLOCATION STRATEG! I [ ee a traditional Defining your etermining your asset | Selecting investments based approach} [asset allocation by aga [allocation by risk profile py style type, industry] \d geographical iversification L_ Using a traditional asset based approach. You can begin by combining the key asset classes. The charts below provide hypothetical asset allocation splits which an investor may consider. These illustrate how your asset allocation mix may vary depending on your goals and your attitude to risk and are categorised into three portfolio types, including: 1, Adventurous } The adventurous portfolio, with a high proportion of equity-based investments, may suit investors with high risk tolerance, and/or those with a long investment time frame. Example of Adventurous Portfolio 80% Equities 20% Bonds 0% Cash 2. Moderate | The moderate portfolio has a lower percentage of equities compared to bonds, and may suit investors with medium risk tolerance and/or a medium investment time frame Example of moderate Risk Portfolio 50% Equities 45% Bonds 5% Cash 3, Conservative _ The conservative portfolio has a low proportion of equities, and may suit those with low risk tolerance and/or a short time to invest. | Example of Conservative portfolio 20% Equities 70% Bonds 10% Cash three asset allocation strategies are hypothetical These examples of all n purposes only. They are not a Portfolios, and are provided for illustratio replacement for financial advice.Wealth Management - (T.Y.BMgy, Sey vor Asset allocation td “ ting is to save for your retirement, the Proport; se for ea may vary with your age. At the simplest leva," Beth ece are, the more likely you are to have a hi ‘ : yk investments, such as equities, in your Port" 104 IL. If your purpo: Pm t equities to bonds ad that the younger you i igh ris! : proportion eee re icely to want to hold a smaller proportion of egy; As you get older, ortion of less volatile assets Such - bonds. The foll, 5 and a larger ae allocation according to an investor’s age. It is import, F ae Sais is just an example and only you can decide whether \ eee a Saiabie for you. As ever, please consult your financial adviser, “ oe age = your bonds with this approach arrange your eet that percentage of your assets you hold in bonds is the See ace 7 at’ it, if you're 40, your portfolio should have 40 per cent bonds. If you're 69 ¥ portfolio should have 60 per cent bonds, and so on. The other Asset Allocation Tool with regards to age the 100 minus yoy; % rule What is the 100 minus age allocation rule? When you invest your money, the decision you make that will have the mos impact on your results is the decision as to how much you keep in stock bonds. Over the years many rules of thumb have developed in an attempt ;, provide guidance on this decision. One such popular rule is the “100 minus age tule, which says you should take 100 minus your age, and that’s the amount t; allocate to stocks, Practical Problems with the 100 Minus Age Rule The problem with this rule is it is not coordinated with your financial oals i any way. Investing decisions should be based on the job your money needs to & for you. If you are currently 55, and not planning on taking withdrawals fron your retirement accounts until you are required to do so at age 70 %, then you money has many more years to work for you before you'll need to touch it. If you want your money to have the highest probability of earning a return in excess ¢ 5% a year then having only 50% of those funds allocated to stocks may be to: conservative based on your goals and time frame. On the other hand, you might be 62, and about to retire. In this situatio: many retirees will benefit from delaying the start date of their Social Securit benefits and using retirement account withdrawals to fund living expenses unt they reach age 70. In this case you may need to use a significant amount of you investment money in the next eight years, and perhaps a 38% allocation © stocks would be too high * Ill. Asset allocation over time | Nothing in the investment world is fixed forever. This applies both to J” Personal situation, and to the assets you invest in. | This strategy is called as Rebalancing. : | ; } A portfolio is rebalanced when the Percentage holdings of each asset class! {contains are increased or d rf ntain lecreased to return the portfolio to its oF | weighting, or to reflect new goals. & Once you have defined your asset allocation strategy, the temptation m% to leave it untouched. However, markets seldom stay still for long and therPlanning yestment a rrr 105 aa With your financial adviser. This will help to whether your asset allocation n, : 7 goals oF current situation, eeds to be revised to reflect a change in your . Whether your asset allocation n a eareracas aren an market men be Tebalanced because it has drifted Jecting investme; ie Siversification nts by style type, sector and geographical Selecting equities by style type. Bro, ie Fates _alue (or Income) and growth Pe PTOadly equities can be divided into two types e (income) shi a aerated by the marine tend to be perceived ‘bargains’, ~ perceived as being un i ae and trade at a lower price than seems justified by the ee Aine pe pied makes. They tend to pay an above market average dividend (they ane income shares for this Treason), and typically have a comparatively low price-earnings ratio. Growth shares are bought because investors expect the companies they represent to grow their profits faster than the market or sector average. Review Asset Allocation to attain investment objectives Fund managers and investment professionals use various methods and tools to identify the most appropriate asset allocation mix, to suit different investment objectives. If you need to change your asset allocation, you may need to sell some investments and buy others, to ensure the mix suits your goals and your attitude torisk. You can rebalance your investment portfolio in three ways: 1, Reinvest dividends. Direct dividends from the asset sector that has exceeded its target into one that has fallen short. 2. Top up. Add money to the asset sector that has fallen below its target percentage. ’ 3., Transfer. Move funds between asset classes. Shift nioney out of the asset sector that has exceeds its allocation target into the other investments. _ 4.4.10 Tactical Asset Allocation Tactical asset allocation (TAA) is a dynamic investment strategy that actively adjusts a portfolio's asset allocation. The goal of a TAA strategy is to improve the risk-adjusted returns of passive management investing. 44.11 Strategic v/s Tactical Asset Allocation Strategy * Strategic asset allocation calls for setting target allocations and then periodically rebalancing the portfolio back to those targets as investment returns skew the original asset allocation percentages. ® The concept is akin to a "buy and hold" strategy, rather than an active trading approach. * Ofcourse, the strategic asset allocation targets may change hie’ time as the client's goals and needs change and as the time horizon for major events, such as retirement and college funding, grows shorter. “Y.BMs, Wealth Management (Sem. V)a oi on Wealth Management - (T-Y.BMS) (50, Tactical asset allocation allows for a range of percentages in each ag class (such as stocks = 40-50%). These are minimum and maximum acceptable percentages that the IA to take advantage of market conditions within these parameters @ Thus, a minor form of market timing is possible, since the IA can Move the higher end of the range when stocks are expected to do better ang the lower end when the economic outlook is bleak. 4.4.12 Goal Based Financial Planning Goals-based planning is the process of helping clients prioritize the financial goals and determine the optimal plan to fund them. Goals. gi bas planning expands your focus into all aspects of your clients financial life a eliminates the retirement-only focus. 5 sos a 2? ee "rey tin, BE 7 oe 4 : . ee use 2 waste Goals - on y2P based csonaetl lanai pions ees Planning / Sey, yes 06 \ at ty 2 | % &, big On g G, feo, SO 8 4% a, GF EE eA ° &e gs & BG s as ¥ 8 What is the advantage of goals-based Planning? 1. is new report from David Blanchett, head of retirement research fo! a ae eee finds that goals-based planning caf ti " increase in utility-adjusted traditional approach to financial pe oe oo 2, Avoid under-saving : Cedars wealth management forces you to think about and enumerate a nee Is, often far in advance. This Prevents you from underestimating ho money you'll need at any point in the future—or misaligning you expectations with your savings ability. I you have more common ground. ty. It means that present-day you and futur 3. Pian ahead, save less, achieve more . Using goal-based wealth management, you'll likely see future liabilitie? coming down the road. And the further in advance you start saving for a goal, uyF ment Planning b use a data-driven target When you set up an j, a 000 for a home down pa stment Boal at Betterment—for example, saving ‘ yment in 10 years—we give you several pieces of . The first is a su, ice: u 88ested allocati seond is advice on how much yoy nernct ased on your time horizon and the | We also Suggest an initioy eee it Save on a monthly basis to reach that ,itmeans YOU Are more likely 0 hit your xo Me SUCHEWOrK oUt of your save for a tangible outcome a ake it fi i rien you ean attach «reheat ane achieve vr one of your ; outcome to i p gore likely to actually work toward that goal eee Ble In behavioral psychology, . : this is called aff ore motivated by real things than abseaer ea ae the concept that we are Guilt-free spending While some might find it surprising, there are people who actually feel guilty nd are uncomfortable with spending large amounts of money. This is true even en it’s for a planned, known expenditure. When it comes time to spend your savings, if it comes from an account specifically earmarked for that purpose, re not overspending. Goals also make it more likely you only spend the jount saved in the goal, rather than scooping out a lump sum from a general wings account. Benefits to an automated plan For most people, it’s much easier and more practical to invest $125 a week, $500 a month, than summon up a one-time deposit of $6,000 each year. tomating your saving makes it effortless to do the right thing—save the right lount every month. This kind of drip-system is not only useful for budgeting id saving on an ongoing basis—it’s also great investment strategy. First, it ensures your money has maximal time in the market. Second, it is a mm of dollar-cost averaging, which diversifies your cost-basis entry points over ie compared to a lump-sum purchase. With Betterment, regular auto-deposits iso provide an opportunity for rebalancing and tax-loss harvesting, which are vesting practices that can improve returns and lower your tax bill over time. Turn a bias into a strength Goal-based wealth management makes use of ‘partitioning’ and leverages fntal accounting to improve your savings behavior. Mental accounting means at you make decisions based on the red or black of each individual account, ther than view them in the aggregate. While this could lead to unwise decisions it may limit a holistic view of your finances, you can also use mental counting as a strength. By creating many different mental ee you ‘Sure that you are saving optimally for each of them—and do not rely on one “ount to cover all your required future ae aw ' ' Better match assets and Habilities, avoid de! Goals makes it easier to close the gap between the money y you bem pation ite d. In investing, we “ ‘nd and the money you want to spenvo Wealth Management - (T. Y.BMS)-( \ w oo ed 7 ” ies. By clearly earmarking the assets of today to the. liabilitieg jabilities. assets to li aren't going to go into debt or fail at those oalg, tomorrow, we ensure ae cee if you're in danger of paying interegt 7 This can also help ane example, if you fall short of target or goal, lik something you panne vacation, you have to decide whether to make up the pats eee cut back on what you can afford. . a u use credit or unexpectedly downsize, you are using a form of det, The fain and the second is psychological. Goals help you Manifey your intentions without incurring debt of any kind. 10. Achieve optimal returns. : Goal-based wealth management matches your time horizon to YOur aage, allocation, which means you take on the optimum amount of risk. When You misallocate, it can mean saving too much or too little, missing out on Teturny with too conservative a setting, or missing your goal if you take on too much Tisk, Occasionally, critics of goal-based investing claim that it causes ‘Users ty deviate from an optimal allocation because they don’t look at their Portfolig holistically. In fact, it has been shown through a series of papers (see below) that when done correctly, goal-based investing is just as efficient as holistic Portfolio management. There are two basic approaches to investment management: 4.5 ACTIVE V/S PASSIVE INVESTMENT MANAGEMENT 4.5.1 Active asset management Active asset management is based on a belief management or analysis can produce returns that bea‘ approach seeks to take advantage of inefficiencies in th accompanied by higher-than-average costs (for analysts spend time to seek out these inefficiencies). Market timing is an extreme exa: that a specific style of it the market. The active ¢ market and is typically and managers who must imple of active asset management. It is based on the belief that it's Possible to anticipate the movement of markets based on factors such as economic conditions, interest rate trends or technical indicators. Many investors, particularly academics, believe it is impossible to correctly time the market on a consistent basis. S32 Advantages of Active Investment Strategies (Nov., 2016) Advantages of Active Investment Strategies till, many financial advisers recommend actively managed investments for significant portions of their clients’ Portfolios. Active management includes mutual funds and exchange-traded funds, as well ae portfolios of stocks, bonds and other holdings managed by financial advisers. Among the benefits they see: 1. Flexibility Since active managers, stocks or bonds. In short or asset class can become 2. Hedging . Active management allows the flexibility to choose stocks and other asst class so active management permits fi e the fund manager to use his ability to U8 short sales, put options, and other Strategies to insure against losses unlike passive ones, the fund Manager has Part of the portfolio, are not required to hold specie flexibility to choose which sto1 poco Planning | pisk management rrr 109 ctive Management helps in +; a to get out of specific folding cm as the fund manager has the ; ax management ctors when risks get too large qhe fund manager can ys, sating money-losing investme Wharton finance profess a , but he recogni ‘ Beers with stronger ea eat igh-net worth investors do have access to burdensome. S: In that case, a management fee is not as ie strategies nts to offer (lores to the individual investor, like taxes on winners, e ly, th rye i aa pas you have the more elite personal-finance ,” Siegel says, tre going to get better people,” a “You get more for your 1% because you ea Goes the investor find a top-quality adviser? That’s one of the issues explored in Investment Strategies and Portfolio Management, which also covers ue_such AEE Gin tnt adulig apgeeinis peteeenes as a rule of thumb, says Siegel, a manager must produce 10 years of market- beating performance to make a convincing case for skill over luck. 4.5.3 Passive asset management Passive asset management is based on the belief that: Markets are efficient. jarket returns cannot be surpassed regularly over time, Low-cost investments held for the long-term will provide the best returns. The efficient market hypothesis (EMH) is an investment theory that states it is impossible to "beat the market” because stock market efficiency causes existing share prices to aways incorporate and reflect all relevant information. So the Passive Investment trategy is based on the above premise of Efficient Market Hypotheses. Example : Many investors believe that the market is smarter than individual id managers so they prefer to invest in index funds. This investment strategy called as passive investment strategy 5.4 Advantages of Passive Investment strategy Even for wealthy investors, passive holdings have a strong appeal, says hristopher C. Geczy, Wharton adjunct professor of finance and academic lector of the Wharton Wealth Management Initiative. “The big issue still plies,” he says. “That's the issue of whether you believe in trying to beat the harket or whether you believe in [minimizing] costs. Some of the most successful éntrepreneurs I know think about costs.” ponds i Pesive, or indenceyle investments, iy Oe ry of indeed sal fads Market index such as the Sensex or Nifty. A vas y ae and exchange-traded funds track the broad market as well as narrower secto Such ag ati a stocks, foreign stocks and bonds, and stocks in specific i small-compan’ o dustries, pany Among the benefits of passive investing, say Geczy and others: Ly, os poo ities in the | ive i ince’ there is no need to analyse securities : Sar eect h lower as compared to an actively Ie the fund management fee is muc /ws's’ Wealth Management ~ (T.Y. BMS) 5 hi i Nh ve rges a higher am y ment team charge: . managed fund. Usually the fund manag ta his/her extensive research. c: ae 2. Good transparency the fund manager invests in index inveg,, investment strategy : ‘ + In passive inv ‘hat stocks or bonds an indexed investment contains. gy th know at all times what ‘i a investment becomes very transparent. . Tax efficiency . 7 ° In passive investment strategy since the allocation i pan to the inde, fund’s buy-and-hold style, it does not trigger large annual capital gains tax), contract to active management style where there could be more buying ang selling of shares which attract capital gains. Actively managed investments charge larger fees to pay for the extensi, research and analysis required to beat index returns. But although Many managers succeed in this goal each year, few are able to beat the Markets consistently, Wharton faculty members say. Over a recent 10-year period, active mutual fund managers’ returns traije; passive funds consistently, says Kent Smetters, professor of business economic, at Wharton. On an after-tax basis, managers of stock funds for large- and mid-size companies produced lower returns than their index-style competitors 97% of the time, while managers of small-cap stocks trailed 77% of the time. “In case you are curious, those very few investment managers that outperformed the passive index were still likely to underperform in the future’ Smetters says. “In fact, outperformers had only a 20% chance of repeating the following year, and ... just a 10% chance of outperforming three years in a row.” Most experts and experienced investors know the reason: It’s just too hard for an asset manager to pick a portfolio that outperforms the market by enough to make up for the 1, 2 or 3% fee that must be charged to support the stock and Nira picking operation. Many index-style mutual funds and exchange-traded ds charge less than 0.2%, some less than 0.1%, giving them a huge cot advantage. QUESTIONS I. Answer in brief : 1. Explain the types of Investment Risk 2. What are the factors affecting the risk Profile of a client? What factors to be considered wile buying your asset allocation? 4. Enumerate Goal based financial planning 5. What are the advantages of active investment Strategies (Nov., 2016) (Ref. Pg. No. 108) 6. What is insurance planning and explain its importance in Wealth management? 7. Explain the 3 components that determine an individual’s true: 1 performance. 8. Enumerate the Life Cycle Model. sswoestment Planning 9. what are the different Tisk profiles? in the steps i fe 30. Explain PS involved in as, , . 11. Explain the types of asset clase. Socation? Give Suitable examples. 12. Explain asset allocation by age 13, What are i Problems faced with 100 minus age rule? 4, Explain the difference . f MO erategies between Strategic v/s tactical asset allocation 11 Explain the following term ; Insurance Planning Liquidity risk Asset Allocation Strategic Asset Allocation Rebalancing Passive asset allocation Se rerre OBJECTIVE QUESTIONS I Fillin the Blanks ; 1, Gather current information to determine your__. a) Financial plan b) Personal plan ¢) executionary plan 2. The ____ of shares varies all the time depending on demand and supply. a) Market Value b) Face value ¢) Resale value 3, When you ___, you spread the risk over different types of investments, industries and geographic locations. a) Diversify your investments b) nuclear investment c) plan your investments : 4. applies to debt investments such as bonds. a) Credit Risk 1» b) Debit risk ¢) planned risk 5. Reinvestment risk will not apply if you intend to spend the regular interest payments or the at maturity. a) principal _ b) principle ¢) amount d) interest 6. The chance that a pooled fund will underperform due to poor investment decisions of the fund manager is called . a) manager risk b) sector risk ¢) political risk 7A is an evaluation of an individual or organization's willingness to take risks, as well as the threats to which an organization is exposed. a) Risk profile b) level of risk ¢) individual risk 8 Clients’ ____ willingness to take risk can sometimes clash with their financial ability to do so. a) Psychological b) physiological ©) personal 9. \____ represent ownership in a company. a) Equities 'b) Bonds c) Cash investmentsWealth Management — (T-Y.BMS) wae 112 has a lower percentage of equities compared to bonds, io has 10. The portfolio with medium risk tolerance and/or a medium invest, may suit investor: time frame. a) Moderate b) conservative : enturous , ' :. wore to be considered while building your allocation are all except: 11. Fact a) investment time frame b) Taxation ; c) Return Expectation / Perception d) value of allocation Il. State whether the following statements are true or false : 1. Broad market Individual markets, whether equities, bonds or even cash, a, : exposed to a variety of factors that can lead whole markets, or even mo, markets, to decline together. 2. Individuals with less financial and investment knowledge are generally mo, willing to accept investment risk 3. High risk investors prefer knowing that their capital is safe and they're n, comfortable investing in equities. 4. According to Vanguard, spread your money 5. Across the different asset classes (including equities, bonds, Property an cash) and how much you want to hold in each.” Lifestyling cannot be carried out manually, by selling risky assets an holding the proceeds as cash or in government bonds. — Bonds are sometimes called fixed saving investments. 8. The adventurous Portfolio, with a high proportion of equity-base investments, may suit investors with high risk tolerance, and/or those with long investment time frame. T 9. Asset allocation over time is called as Rebalancing 10. Asset Allocation is a pure science F ‘Asset allocation simply means deciding how { 6. T Til. Match the following : an Types of investment risk 42 | Equity risk Currency risk Longevity risk applies to an investment in shares Market risk The risk of outliving your savings applies when you own _ foreid investments 5 | Factors Affecting Ri i ing objective Factor sting Risk Profile of a | Set your financial planning objective A — 6 | Steps in Asset Allocation Propensity 7 | Types of Asset Class Using a traditional asset base __| @Pproach A1 nent Planning 7 rrr a ASSET ALLOCATION STRATHOING ng based planning Global equities | Goals - ANSWERS 7 a) Financial plan x a) Market Value a) Diversify your investments a) Credit Risk a) principal a) manager risk a) Risk profile a) Psychological a) Equities . a) Moderate ‘ . d) value of allocation € & Pacer a a Pore eee Pe Ds Pie cee True or False : [True : 01; 04; 06; 07 False : 02; 03; 05; 08; 09] : . Match the following wo we tena aha illest BN MDHNKAwae 5 a »