financial planning 101 presented by the arkansas financial group, inc

Financial Planning 101Financial Planning 101

Presented by

The Arkansas Financial Group, Inc.

©2002 The Arkansas Financial Group, Inc.

Decisions, Decisions, Decisions, Decisions, Decisions!Decisions!

Need to look at financial decisions from a holistic point of view

How does each decision affect the overall picture


Planning IssuesPlanning Issues

Goal SettingCompany BenefitsRisk ManagementTax IssuesInvestment Issues


Goal SettingGoal Setting

Short Term Goals:– Take into account “Pent Up Demand”– Pay off debt– Buy a House/Car/Furniture– Take a vacation


Goal SettingGoal Setting

Long Term Goals– Take care of family in event of death/disability

How much life insurance do you need? How much disability income insurance do you

need? Do you have a will? What other legal documents should you have?

– College funds for children– Retirement


Where are you now?Where are you now?

Do you have health and dental insurance?How much life insurance do you currently

have?Do you have disability income insurance?Do you have adequate coverage on your

home/auto?Do you have adequate professional/personal

liability coverage?


What company benefits are What company benefits are available?available?

Health/DentalShort/Long term disability incomeLife insuranceRetirement – 401k or 403bOther miscellaneous

– Child care


How do you plan to achieve How do you plan to achieve goals?goals?

Maximize company benefits first– Company may be paying portion, so it costs

you little or nothing!– Payroll deduction is painless – what you don’t

see in your checking account, you never miss!– Generally cost efficient


What Next?What Next?

Life Insurance – if you have a family that depends on your income– NOT an investment– Buy Term – more important to have enough

coverage– If you have no dependants, you probably don’t

need life insurance



Disability Income– Need to cover 60% of of your gross income– Most important if you are responsible for your

self– Important to have benefits to age 65 – increase

waiting period to reduce premium



Legal Documents– Will

lets you determine where your assets will go If you have children, a must to be sure the children

will go to whom you would want

– Durable Power of Attorney– Health Powers


How to avoid How to avoid “Credit Card Hell”“Credit Card Hell”

Key is to separate money for short term goals from your regular checking account

“Savings to Spend Account” – makes savings unconscious, and spending conscious



Determine how much you will spend annually on non-routine expenses– Clothing– Gifts– Vacations/Travel– Life/Disability insurance



Total non-routine expensesDivide by 12Have that amount automatically transferred

to a separate account (money market or savings account)



The key is the enforced discipline – automatic draft means you decide only once to save for your short term goals

The money is still available to pay for these expenses

Extra step of going to separate account makes you think a little longer before you spend the money


Basics of InvestingBasics of Investing


Money MagazineMoney Magazine The creator of unrealistic expectations:The creator of unrealistic expectations:

It is possible to make good financial decisions if you read our magazine for two hours a month

It is possible to predict which investments will outperform the others

It is possible to know before the rest of the market when to buy or when to sell

Past Performance does indicate future results


Fear is the Greatest Motivator Fear is the Greatest Motivator for Most Investorsfor Most Investors

Only 20% of the population feels comfortable with higher levels of risk¹

Investors tend to be more influenced by the prospect of loss than opportunity for gain¹

¹ Kathleen Gumey, Ph.D. Financial Psychology Corp.


How Bad Can It GetHow Bad Can It Get

Since 1956, the stock market has experienced 9 bear markets which fell by more than 20% each

Average bear market duration: 12 months Average bear market decline: -25.1% Between January 11, 1973 and December 6, 1974

the stock market dropped 45.1% Between early 2000 and October 9, 2002 the

DOW dropped 37.85%; the S&P 500 fell 49.15%; and the NASDAQ crashed 77.92%


Emotion-Based ExpectationsEmotion-Based Expectations

Fear of losses and greed brought by “great tips” are normal feelings.

Emotions from pride and regret can drive decisions – causing deviations from plan and risk of failure of achieving goals

Adhere to the policies and procedures set forth in the Investment Policy Statement

Avoid emotionally reacting to events, news and opinions


Mistakes & MisperceptionsMistakes & Misperceptions

Dow Jones Industrial Average: Average Total Returns thru June 30, 1999

0%

5%

10%

15%

20%

25%21.7%

12.5%

Bull Market10/1/90 – 6/30/99

30 Years7/1/69 – 6/30/99

Source: Towers, Dow Jones Industrial Average, which is comprised of 30 large (NYSE) stocks. Total return, calculated by Wilshire Associates, Inc., includes reinvested dividends. An individual cannot invest directly in an index. Past performance cannot guarantee future results.


Eliminate EmotionEliminate EmotionEstablish Objective ProceduresEstablish Objective Procedures

Risk Capacity and Risk ToleranceAsset AllocationInvestment Policy Statement

– Sets the policies and procedures to be followed– States the goals and the reasoning– Identifies criteria for evaluation


Know ThyselfKnow Thyself

What messages did you get about money when you were growing up?

What is your most memorable investment experience?

How is your money invested now? How do you feel about that?


Measuring RiskMeasuring Risk

Risk Tolerance– Willingness to tolerate risk (volatility/losses)

Risk Capacity– How much risk (volatility) is it prudent to have

in your portfolio based on your life circumstances?


Factors Determining Risk Factors Determining Risk Tolerance and CapacityTolerance and Capacity

Tolerance– Time Horizon– Investment Experience– Education– Personality– Values– Political Philosophy– Background

Capacity– Stage of Life– Lifestyle– Income Tax Bracket– Liquidity Needs– Other Assets– General Financial

Situation


Why Measure Risk Why Measure Risk Tolerance?Tolerance?

A key element in any planHelps determine which portfolio plan is

appropriateGives you a sound footing to refer back to

when your attitude or the market changes


Over/Under-estimating Your Over/Under-estimating Your Risk ToleranceRisk Tolerance

Many investors overestimate the amount of risk they can tolerate

Some investors sell themselves short by being too conservative


Measuring Risk Tolerance Measuring Risk Tolerance can be Difficultcan be Difficult

Most people generally do not know their own tolerance

Their experiences may have led them to irrational preferences or aversions

Responses are typically heavily weighted by recent experiences or actions in the investment markets


Risk CapacityRisk Capacity

Your measurable capacity to withstand annual low or negative returns.

Capacity may or may not be consistent with your emotional or subjective risk tolerance

The more conservative of the two is the “safe route”


Risk CapacityRisk Capacity

Life Expectancy -- 20%Income -- 20%Investment Assets -- 20%Debt -- 15%Liquidity -- 15%Family Responsibilities -- 10%

Source: PPC’s Risk Capacity Index


Before you hire an advisor, Before you hire an advisor, what needs to be clarified?what needs to be clarified?

Your advisor’s role in the engagement Your role The advisor’s process; Practice Standards The education provided by the advisor The possibility of losses Degree and frequency of communication Compensation and how it is disclosed How the advisor ensures consistency between

financial plans and strategies with your goals and concerns