Adding to Your Advantage Portion System for Retirement

Presentation Transcript

Building up Your Asset Allocation Strategy for Retirement Developed by Barbara O'Neill, Ph.D., CFP, Rutgers Cooperative Extension Adapted by Jean Lown, Ph.D. Family, Consumer & Human Development Lown@cc.usu.edu

Overview Asset Allocation Principles Risk-Return Relationship Application to TIAA-CREF Retirement Investment Options 9 new venture decisions (starting 2003)

What Is Asset Allocation? Procedure of differentiating portfolio speculations among a few venture classifications to diminish speculation chance Example: half stock, 30% securities, 10% land, 10% money resources Objective: bring down speculation hazard by lessening portfolio instability Loss in one speculation might be balanced by increases in another

The Callan Periodic Table of Investment Returns http://www.callan.com/asset/periodic_table/pertbl.pdf Illustrates the requirement for resource allotment Shows how different resource classes performed amid the most recent 20 years Best performing resource class transforms One year's "champ" can be one year from now's "washout," so put resources into an assortment of benefits

Why Asset Allocation? Since Market Timing is Futile Value of $100 put resources into substantial organization stocks (S&P 500 list) from June 1980 to June 2000: $2,456 stayed contributed whole time $613 on the off chance that you missed the best 15 months Biggest market additions are frequently moved in brief periods (can't stand to miss)

Second Example: The Futility of Market Timing Based on S&P 500 securities exchange list If financial specialist remained completely contributed, return was 41.4% If speculator missed main 10 exchanging days of 1998, 1999, and 2000: - 41.7% return Moral: stay put resources into both bull & bear markets

Determinants of Portfolio Performance Source : "Determinants of Portfolio Performance II, An Update" by Gary Brinston, Brian D. Vocalist and Gilbert L. Beebower, Financial Analysts Journal May-June 1991 For illustrative purposes as it were. Not demonstrative of a particular speculation.

The Importance of Asset Allocation Asset designation is the MOST essential choice a financial specialist makes (i.e., getting some stock, NOT Coke versus Pepsi) Asset assignment decides around 90% of the arrival variety between portfolios This study has been rehashed various times, by various scientists, with comparable results.

Downside of Asset Allocation An enhanced portfolio MAY create a lower rate of return when contrasted with a solitary "hot" resource class (e.g., development stocks from 1995-99) BUT You never know the "hot" resource class ahead of time (i.e., Callan table) Asset distribution diminishes instability to give a focused rate of return

Factors To Consider Investment objective (e.g., retirement) Time skyline for an objective (e.g., future for retirement) Amount of cash you need to contribute Your hazard resistance and experience Caution about hazard tests Your age and total assets

Stocks Large organization development & esteem Mid top development & esteem Small development & esteem International Bonds Domestic International Corporate Municipal Real bequest (e.g., REITs) Cash (CDs, I-securities, MMMFs, Treasury charges) Major Asset Classes

Historical Average Annual Rates of Return Small Co. U.S. stocks = 12.6% Large Co. U.S. stocks = 10.4% Government Bonds = 5.1% Treasury Bills = 3.8% Inflation = 3.1%

Stock Capitalization Large Cap organizations: esteemed at >$5 billion ExxonMobil, General Electric, Microsoft Mid-Cap: $1-5 billion Bath & Beyond, Monsanto, Hilton Hotels Small-Cap: <$1 billion Earthlink, FirstFed Financial, Vintage Petroleum

Why Invest Internationally? Relationships among world markets are low (e.g., U.S. what's more, outside stocks) World markets (particularly little organizations) are driven by neighborhood flow Investing in U.S. multinationals does not convey a similar level of expansion The advantages of enhancement exceed money, showcase, & political dangers U.S. represents under 1/3 of the world's value (stock) markets

Other Things to Know About Asset Allocation Portfolio chance declines as the # of advantage classes expands Best results are accomplished after some time Diversify property inside every benefit classification Stock: distinctive industry areas Bonds: distinctive sorts and developments

RISK Is a 4 letter word Remember 2000-2003? S&P 500 lost 40% of its esteem

Risk-Return Relationship Low hazard = low return High hazard = plausibility of exceptional yield Risk: shot of loss of chief in the short run 2000-2003 generally U.S. stocks lost esteem (after unfathomable keep running up in costs in 1990s)

Relationship Between Risk and Return High Int'l Stocks U.S. Stocks Real Estate Expected Return Int'l Bonds U.S. Bonds Cash Equivalents Low Risk High For illustrative purposes as it were. Not characteristic of a particular venture.

Diversification From Combining Investments No Diversification Complete Diversification Portfolio 1 Portfolio 2 Investment An Investment C Investment D Investment B Some Diversification Portfolio 3 Investment E Investment F For illustrative purposes as it were. Not characteristic of a particular speculation

Stocks are Risky in Short Run Very unstable in sort run (1-5 years) yearly returns - half to +50%!! Keep in mind 2000-2003? 2003 was an incredible year to purchase stocks when all news was agony & fate Large Co. U.S. stocks = 10.7% (avg. returns since 1926)

Time Horizon for Retirement? Until the day you resign? Until the day you pass on?

Invest for Growth There is no such thing as a hazard free venture! Retirement $ must become quicker than swelling to give money related security Average expansion = 3.1% Risk is relative Short term volatility=long term development Invest in stocks for development

Recent Example 2000-2003 was a gut check Thank goodness some of my portfolio was in securities & land! Stocks failed Bonds held consistent Real home spared the day

"Safe" Investments are Risky over the long haul Inflation = 3.1% Government Bonds = 5.1% - 3.1% = 2% Treasury Bills = 3.8% - 3.1% = 0.7% Subtract the effect of charges and "safe" speculations yield negative returns You won't achieve your objective with generally safe ventures

Understand Risk Tolerance Beware of going for broke tests and settling for a moderate portfolio Conservative financial specialists chance outlasting their advantages Life anticipation number crunchers http://www.ces.purdue.edu/retirement/Module1/module1b.html

The Asset Allocation Process Define objectives and time skyline Assess your hazard resilience Identify resource blend of current portfolio Create target portfolio (resource show) Select particular ventures Review and rebalance portfolio yearly

Tips For Funding a Tax-Deferred Employer Plan Diversify crosswise over resource classes Avoid advertise timing Choose speculations with great verifiable execution Past returns are NO assurance for what's to come!! <10 year track record is too short! Pick reserves with low expenses

The Big Picture Same standards can be connected to 401(k) plans Individual retirement accounts (IRAs) Other retirement arranges

Questions?

5 TIAA-CREF Asset Classes Guaranteed (okay; low return) Fixed-Income (securities) Equities (stocks) High return; unpredictable in the short run Real Estate Inflation assurance; diminish instability Money Market (safe yet low return)

Global versus Universal Global: U.S. also, remote speculations International: "all" outside

TIAA Traditional TIAA Real Estate CREF Money Market CREF Social Choice (security & stock) CREF Stock Global Equities Growth Equity Index LOTS of cover! TIAA-CREF Options (pre-2003)

Real Estate Securities Growth & Income S&P 500 Index Large Cap Value Social Choice Equity Mid-Cap Value Mid-Cap Growth Small-Cap Equity International Equity 9 New Fund Choices (2003)

Murky Mixture Few of the CREF assets are "immaculate" CREF Stock 80% Large-, 15% Mid-, 5% Small-Cap Some remote stocks Mid-Cap Growth 59% Large-! 39% Mid-, 2% Small-Cap Read Prospectus (or possibly the outline)

Growth Portfolio: 3 resource classes STOCKS for development Large-top Domestic 10-15% Mid-Cap 10-15% Small-top 10-15% International 10-15% Real Estate (to beat expansion) 10-15% Bonds (to hose instability)

New Funds Offer Diversity Lots of various stock records DO NOT mean enhancement (covering) International Equity Small-top Equity Real Estate Securities (to supplement TIAA Real Estate)

Your "Activity" List Review your present resource designation Consider your other retirement accounts Use the TIAA-CREF site Understand hazard return relationship Talk with a TIAA-CREF rep (at USU) Sign up for programmed rebalancing Limits on moving $ out of TIAA Re-visit, Reallocate, Rebalance

Key Considerations For Successful Investing Educate yourself to settle on educated choices Establish strategies and destinations Monitor venture execution Stick to your arrangement and remain centered If you require, look for expert guidance

Financial Planning for Women Second Wednesday of the month 12:30-1:30 in Family Life 318 bring your lunch 7-8:30 p.m. at Family Life Center (500 N & 700 E – base of Old Main Hill) February 8 FPW: Investment Basics For mo. email news & update: Sign up sheet or send email to Lown@cc.usu.edu

Questions? Remarks? Encounters? February 8 FPW: Investment Basics Baby Boomer Women Retirement Study USU IRB affirmed examine Step 1: Survey-return by Feb 3 for prize drawing Step 2: Focus Group ($25 pay)