What’s Investing?What’s Investing?

• Investing makes your money grow

• Investing capitalizes on economic growth

• Investing involves some level of risk

• Investing rewards patience

• Investing outpaces inflation

Investment ObjectivesInvestment Objectives

• Safety of principalYou don't want to lose your initial investment

• IncomeThe regular payment of money that is earned from the investment

• GrowthAn increase in the value of your investment

• LiquidityThe ability to turn your investment into cash very quickly

Characteristics of an InvestmentCharacteristics of an Investment

• RiskThe uncertainty about the rate of return that you’ll earn from an investment

• ReturnThe money made from an investment, including the income and capital gain

• LiquidityThe ease and ability of selling your investment in the marketplace without losing money

• TermHow long you are planning to hold onto your investment

Risk FactorsRisk Factors

• Inflation risk

• Interest rate risk

• Default risk or business risk

• Liquidity risk

• Reinvestment risk

Risk-Return SpectrumRisk-Return Spectrum

• Common stock

• Blue Chip common stock

• Preferred stock

• Corporate bonds

• Government bonds

• Short-term government T-bills

Risk

Safety

Risk and Stages of Life: A Typical ScaleRisk and Stages of Life: A Typical Scale

Life StageLife Stage Risk ToleranceRisk Tolerance

Early careerEarly career HighHigh

Middle careerMiddle career HighHigh

Late careerLate career ModerateModerate

Early RetirementEarly Retirement ModerateModerate

Late RetirementLate Retirement LowLow

The Capital MarketsThe Capital Markets

CapitalMarkets

Banks,Investment

Dealers,etc.

Company needs money to expand

People have money to invest

People get return on investment through capital

appreciation and from interest or dividendsMoney raised through

capital markets. Company grows, creates new jobs

Company pays interestor dividends out of profits

A Typical Business CycleA Typical Business Cycle

Rising stock prices Rising interest rates

EX

PA

NS

ION

Stock prices highInterest rates high

PEAK

CO

NT

RA

CT

ION

CO

NT

RA

CT

ION

EX

PA

NS

ION

TROUGH

Stock prices are lowInterest rates low

Falling stock pricesFalling interest rates

SEMINAR 8

1. Risk

2. Return

3. Time horizon

4. Inflation

5. Liquidity

6. Taxation

7. Market timing

8-5

SEVEN THINGS TO CONSIDERWHEN SETTING YOUR INVESTMENT OBJECTIVES

Treasury Bill CalculationTreasury Bill CalculationAssume that you buy a 30 day Treasury bill at $99.672. It matures to $100 in 30 days. The difference is your interest.

Yield calculation

100 - 99.672 x 365 = __________ or __________%

99.672 30

What is the cost of this T-Bill if it is denominated in $10,000? $__________

BondsBonds

Bonds• Secured by assets

(Except for government)

Debentures• No fixed assets

pledged• Based on

creditworthiness• Mostly corporate

issuers

An Example of a BondAn Example of a Bond

Last interest payment and repayment of principal

Last interest payment and repayment of principal

BOND PRICESGo Up

INTEREST RATESGo Down

WHEN INTEREST RATES FALL BOND PRICES RISE

BOND PRICESGo Down

INTEREST RATESGo Up

WHEN INTEREST RATES RISE BOND PRICES FALL

TYPICAL BOND YIELD CURVE

0

1

2

3

4

5

6

7

8

9

Short and long term Government bonds

%

Years to Maturity

Maturity

Bond PriceFluctuation $ $ $

$ $ $

$

$$

THE FURTHER AWAY A BOND’S MATURITY DATE, THE

MORE VOLATILE ITS PRICE

Time

Bond price fluctuations let you make money beyond fixed interest - by selling your bonds

for more than you paid for them.

PICKING YOUR BONDS ANDPREFERRED SHARES

Gov’t orcorporationoffering debt

The interestthe bondpays

Date bondcomes dueandprincipalrepaid

What itcosts tobuy thebond now

This is yield tomaturity: thecombination ofinterest andcapital gain (orloss) you willget assumingyou keep bondto maturity

Dollarchangefrom thepreviousday

Issuer Coupon Maturity Price Yield $ Chg

Saskatchewan 7.50 19 DEC 05 111.784 5.639 + 0.610

A BOND QUOTE

$1,00010%

$96010%

$1,04010%

Interest Rate Interest Rate

WHAT HAPPENS TO YOUR $1000 BOND’S PRICE WHEN INTEREST RATES CHANGE

The yield assuming the bond will be called in before maturity.

YIELD TO CALL

Exercise #1:Exercise #1:From the bond table find the price of a 10% coupon, if rates are 8%: $________

The $10,000 bond would cost $________.

The yield to maturity (8% in this case) is a combination of the capital loss on the bond and the higher coupon rate. The capital loss results from the purchaser paying a premium of $________ for the bond and receiving back only the face value of $________ at maturity.

Rate of ReturnRate of ReturnThe total annual return for an investor buying the bond for $11,359 is:

Interest $ 1,000.00 per year

Less amortized capital loss $ 135.90 per year

Average annual net proceeds $ 864.10 per year on a $11,359investment

Approximate Yield to MaturityApproximate Yield to Maturityinterest per year +/- the capital gain or loss per year

purchase price + maturity value x 100

2

$1,000 - $135.90

$11,359 + $10,000 x 100

2

864.10

10,679.50

= .809 = 8.09%

Exercise #2:Exercise #2:

From the bond table find the price of a 10 year bond with a 10% coupon if market rates are 12%: $________

The $10,000 bond in our example would cost $________.

The yield to maturity is ________%.

The capital ________ (gain or loss) results from the purchaser paying a ________ (premium or discount) of $________ and receiving back the face value of $________ at maturity.

Approximate Yield to MaturityApproximate Yield to Maturity

• capital gain/year = $114.70

• interest/year = $1,000

• approximate yield to maturity (YTM) =

$1,000 + $114.70 = 1,114.70 = .1182 = 11.82%

$8,853 + $10,000 9,426.50

2

• Extendible

• Retractable

• Convertible

• Floating rate

• Callable

• Sinking fund feature

• Currency feature

BOND FEATURES

Benefits holder Benefits issuerExtendible CallableRetractable Sinking fund*Convertible

* to extent this helps ensure debt is repaid, it also benefits debt holder.

WHO BENEFITS FROM BOND FEATURES

Bond Ratings Moodys Standard and

Poors• Aaa Prime quality

• Aa High grade

• A Upper medium grade

• Baa Medium grade

• Ba Lower medium or speculative

• B Speculative

• Caa From very speculative

• Ca to near or in default

• C Lowest grade

• AAA Bank investment quality

• AA

• A

• BBB

• BB Speculative

• CCC

• CC

• C

• C In default

Risks of Bonds

• Interest rate risk

• reinvestment risk

• default risk (credit risk)

• purchasing power risk (inflation risk)

• maturity risk

• call risk

• liquidity risk

• call risk

• foreign exchange risk

• event risk

Buy: If interest rates high and you expect them to fall – to make a capital gain

Sell: If you believe interest rates are set to increase – to avoid a capital loss

Try to read and interpret the yield curve. Don’t buy bonds trading at a premium close to maturity date.

DECIDING WHEN TO BUY AND SELL BONDS/FIXED-INCOME SECURITIES

• Reading the yield curve

• Using strip bonds to lock in a set known interest rate when rates are attractive

• Building a bond ladder

• Buying high-yield or junk bonds

• Switching bonds

• Buying convertible bonds

• Buying bonds on margin

BOND TRADING STRATEGIES

• Buy a one year government bond in June 1999…When it matures in June 2000, use proceeds to buy a 5-year bond.

• Buy a 2-year bond in June 1999…When it comes due in June 2000, use proceeds to buy a 5-year bond.

• Do the same for the other three years of your ladder.

5 Year

4 Year

3 Year

2 Year

1 Year

YOUR BOND LADDER

Accrued InterestAccrued InterestYou buy a 10% $10,000 bond, maturing September 1, 1999. Interest payment dates are Sept. 1 and March 1, six months apart. You buy this bond on Sept. 20, and it is settled on Sept. 23. Next March 1, you will receive the entire six months of interest from Sept. 1 to March 1 because you only owned the bond as of Sept. 23. Therefore you would pay the seller the accrued interest from Sept. 1 to Sept. 22:

Sept. 1 to Sept. 22 is 22 days

10,000 x .10 x 22 = $60.27 365

• Cumulative feature

• Non cumulative

• Voting privileges

• Purchase fund

• Sinking fund

• Redemption feature

• Retractable

PREFERRED SHARE FEATURES

• Working capital maintenance clause

• Maintaining purchase or sinking fund requirements

• Right to vote in event of arrears

• Restrictions on further preferred issues

• Restriction on sale of assets

• Restrictions on change of terms

PREFERRED SHARE PROTECTIVE PROVISIONS

1. Preferred dividend coverage

2. Record of continuous dividend payments

3. Equity (or book value) per preferred share

4. An independent credit assessment

YOUR FOUR-STEP PREFERRED SHARE CHECK

LIST

Advantages of IncorporationAdvantages of Incorporation

• Limited liability of shareholders

• Continuity

• Transfer of ownership

• Ease of raising capital

• Legal entity

• Professional management

Rights and Privileges of a ShareholderRights and Privileges of a Shareholder

• The privilege to share in the company’s earnings through dividends

• The right to control through election of directors

• The right to information

Types of stocks

• Blue Chips (Income)

– safety: established, dominant company

– income from dividends is prime goal: large payout ratio

– steady growth in stock price

– liquidity

• Growth

– capital growth is main goal

– earnings expected to increase

– expect above-average returns

– reinvest most of their earnings

Types of stocks...

• Cyclicals– rapid growth in good economic conditions– falling price in poor economic conditions– example: commodities, mines, resources

• Defensive– largely unaffected by economy– lower-than average risk– retail food and utilities are examples

Types of Stocks

• Speculative– turnarounds– takeover candidates– new ventures

• Penny stocks– low probability of large profits– potential for large profits quickly, large

losses

How Mutual Funds WorkHow Mutual Funds Work

GoldGold

Stocks

Bonds

$$$$$$

$$$$$$

$$$$$$

$$$$$$

Mutual FundCompany

Fund manager uses pooled

money to buy securities

Successful investments make fund worth more

Investors get

distribution

Net Asset Value Per ShareNet Asset Value Per Share

As of today, a mutual fund has four million shares outstanding. The assets are common stocks with a market value of $102,000,000. The fund's liabilities amount to $2,000,000.

$102,000,000 minus $2,000,000

4,000,000

= $25 per share/unit

Open-end vs. Closed-endOpen-end vs. Closed-end

Open-end funds• Continuously sells to

public• Redeems units directly• Fund size fluctuates• Sells at NAVPs

Closed-end funds• Trades on exchange• Shares sold on

exchange• Liquidity varies• Stays stable

The Prospectus Should IncludeThe Prospectus Should Include

• the investment objectives of the fund• the name of the company issuing the fund and its

directors and managers• fees and expenses• how the fund is sold, as well as where and by whom• risks• how to purchase and redeem fund

units• the fund's audited financial statements

Advantages of Mutual FundsAdvantages of Mutual Funds

• Professional management• Diversification (including global

access)• Lower commission charges• Liquidity• Record keeping• Flexibility of amounts

Disadvantages of Mutual FundsDisadvantages of Mutual Funds

• High cost for short-term investment

• No guarantee of good performance

• Not usually covered by insurance

Money Market FundMoney Market Fund

Objective: Safety of principal with modest returns.Objective: Safety of principal with modest returns.

Corporate paper

T-bills and bondsmaturing in lessthan one year

Typical Income FundTypical Income Fund

Objective: Safety of principal and high income from bond interest and dividends from preferred and high-yield common stock.

Objective: Safety of principal and high income from bond interest and dividends from preferred and high-yield common stock.

Bonds

Blue chip stock

Preferred stock

Asset Allocation FundAsset Allocation Fund

Objective: Obtain higher returns by switching between asset classes as market changes.

Objective: Obtain higher returns by switching between asset classes as market changes.

BondsStocksMoney Market

BondsStocksMoney Market

Year 1Year 1 Year 2Year 2

Bond FundBond Fund

Objective: Varies. Stability and steady interest income and capital gains, or blend of both.

Objective: Varies. Stability and steady interest income and capital gains, or blend of both.

Government ofCanada BondsCorporateDebenturesProvincial Bonds

InternationalBonds

International Bond FundInternational Bond Fund

Objective: Capital gains and income by targeting bonds in high inflation/high interest-rate countries. Also aim to capitalize on weaker Canadian dollar.

Objective: Capital gains and income by targeting bonds in high inflation/high interest-rate countries. Also aim to capitalize on weaker Canadian dollar.

AustraliaMexicoU.S.CanadaFranceGermanyIndonesiaJapan

Example of a Equity FundExample of a Equity Fund

Objective: Capital appreciation through increases in stock values with some income from dividends.

Objective: Capital appreciation through increases in stock values with some income from dividends.

Consumer Goods

Capital Goods

Cash & other Short-term Securities

Energy

Financial Services

Industry &Manufacturing

Top Down and Bottom UpTop Down and Bottom UpTop Down• Look at economy first• Then for growth sectors• Then for growth

companies• Often in international

funds

Bottom Up• Look at company first• Use detailed

company analysis• Look for earnings

momentum• Will pay higher price if

growth potential warrants

EQUITY

• Growth managers

• Sector Rotator

• Value managers

FIXED-INCOME

• Short term

• Mid term

• Long term

• Interest rate anticipators

• Spread traders

MANAGER STYLES

Value vs. Growth vs. Sector RotatorsValue vs. Growth vs. Sector Rotators

Value

• Bottom-up

• Research intensive

• Out-of-favour stocks

• Longer-term holdings

• Low P/E

• Lower costs

• Higher dividend yield

Growth• Focused on

earnings• Growth stocks• Hold medium-

term• Higher P/E• Many holdings• Higher costs• Market timing

Sector Rotators• Top-down• Look for trends• Select growth

sectors• Large-cap stocks• Many holdings• High costs• Market timing

• Tend to buy stocks with high P/E ratios

GROWTH EQUITY MANAGERS

• They stress market timing

SECTOR ROTATOR EQUITY MANAGERS

Altamira Equity Fund*Canadian Imperial Bank of CommerceGovernment of Canada BondInco LimitedAlcan Aluminum LimitedPlacer Dome Inc.Wascana Energy Inc.Teck CorporationBrascan LimitedRogers Communications Inc.Anderson Exploration Ltd.

*At Dec. 31, 1996. Gold, precious minerals, oil and gas, metals and minerals represented 54.5% of total holdings.

TOP 10 HOLDINGS OF A TYPICAL SECTOR ROTATION EQUITY

MUTUAL FUND

• Tend to buy stock with low P/E ratios

VALUE EQUITY MANAGERS

• By asset type

• By manager’s style

• By capitalization

– large cap funds

– small cap funds

• By sector

• By geography

WAYS TO DIVERSIFY

Time

Ret

urn

The two mutual funds that move up and down together are correlated. The mutual fund with the dashed line is not correlated to the others.

MUTUAL FUND CORRELATION

• International equity fund mixed with a mortgage fund

Or.....

• An equity fund twinned with a fixed-income fund

* Based on historic returns

DIVERSIFIED MUTUAL FUND PORTFOLIOS*

• Index participation units

• Segregated funds

• Stock index-linked GICs

ALTERNATIVES TO MUTUAL FUNDS

Mutual Fund CostMutual Fund Cost

Direct• Sales Fees (front-end,

back-end, both or no load). 0% to 9%

• RRSP set-up fee• Switching fee• Transfer fee

Indirect• Management fee

1.5% to 3%• Operating

expenses ½%

Management Expense Ratio (MER)Management Expense Ratio (MER)

MER = fees plus expenses x 100average net assets

Shares purchased = gross investment = $10,000 = 960 shares or units

purchase price/share $10.42/share

Example of a Front-end LoadExample of a Front-end Load

Suppose you invest $10,000 in a fund with a 4% front-end sales charge, and assume the NAVPS is $10.00.

Purchase price/share = NAVPS = $10 = $10.42

1 - fee 1 - .04

Shares purchased = gross investment = $10,000 = 1,000 shares or units

purchase price/share $10.00/share

Example of a No-load FundExample of a No-load Fund

Suppose you invest $10,000 in a no-load fund with a NAVPS of $10.00.

Example of a Sliding scale on a Back-end LoadExample of a Sliding scale on a Back-end Load

The longer you hold the fund, the less you will be charged.

Percentage of selling price

sold in the first year 6%

second year 5%

third year 4%

fourth year 3%

fifth year 2%

sixth year 1%

seventh year etc. 0%

CALLS – let you BUY shares at a set price up to a certain date.

PUTS – allow you to SELL shares at a set price up to a certain date.

BULLISH STRATEGIES: BUY a CALL or SELL a PUT

BEARISH STRATEGIES: BUY a PUT or SELL a CALL

OPTION BASICS

Strategy Advantage Disadvantage

Buy a near-term call More leverage and less Limited time value; they money at risk expire quickly – referred

to as “rapid time decay”.

Buy a long-term call More time for rally to You have more money at

happen risk. All other things being equal, long-term call will cost more than the short-term call.

HOW TO PICK AN EXPIRATION MONTH -

CALLS

Strategy Advantage Disadvantage

Buy out-of-the-money* Cost less and more Need big move in stock calls leverage price

Buy in-the-money calls* Better chance of making You have more money at

a profit risk

DECIDING ON A STRIKE PRICE - CALLS

*You pay a charge called a premium when you buy an option. The premium reflects intrinsic and time values. In the case of a call option, if the market price of the stock is less than the strike or exercise price, the premium would be made up of just time value and referred to as “out-of-the-money”. But if the stock’s price rises to above the strike price before expiration, your call option would also have intrinsic value and would therefore be “in-the-money”.

PROFIT CHART FOR BUYING A CALL OPTION

-20

-15

-10

-5

0

5

10

15

20

25 30 35 40 45 50 55 60

-2 -2 -2 -2 3 8 13 18

$ Stock Price at Expiration

$ Profit per Share

Stock Price at Expiration

$ Net Profit Per Share

Current stock price at $40.00Buy October 40 call at $2.00

Break Even: $42.00

PROFIT CHART FOR WRITING A CALL OPTION

-20

-15

-10

-5

0

5

10

15

20

25 30 35 40 45 50 55 60

2 2 2 2 -3 -8 -13 -18

$ Stock Price at Expiration

$ Profit per Share

Stock Price at Expiration

$ Net Profit Per Share

Current stock price at $40.00Sell October 40 call option at $2.00

Break Even: $42.00

HOW TO PICK AN EXPIRATION MONTH - PUTS

Strategy Advantage Disadvantage

Buy a near-term put Leverage and less money Rapid time decayat risk

Buy a long-term put More time for decline to You have more money occur at risk

HOW TO CHOOSE A STRIKE PRICE - PUTS

Strategy Advantage Disadvantage

Buy out-of-the-money Lower cost and more Need big move in stock puts leverage price

Buy in-the-money-puts Better chance to make a You have more money at

profit risk

PROFIT CHART FOR WRITING A PUT OPTION

-20

-15

-10

-5

0

5

10

15

20

25 30 35 40 45 50 55 60

-12 -7 -2 3 3 3 3 3

$ Stock Price at Expiration

$ Profit per Share

Stock Price at Expiration

$ Net Profit Per Share

Current stock price at $40.00Write October 40 put at $3.00

Break Even: $37.00

PROFIT CHART FOR BUYING A PUT OPTION

-20

-15

-10

-5

0

5

10

15

20

25 30 35 40 45 50 55 60

12 7 2 -3 -3 -3 -3 -3

$ Stock Price at Expiration

$ Profit per Share

Stock Price at Expiration

$ Net Profit Per Share

Current stock price at $40.00Buy October 40 put option at $3.00

Break Even: $37.00

Calculation of stock returnsCalculation of stock returns

Annual return = dividend income + capital gain/loss for year

stock price at start of year

Real rate of return = annual return - inflation rate

The “Best” Time to InvestThe “Best” Time to InvestAverage Annual Rates of Return 1970 – 1994

Investments Made At:

Market high each year 17.5%Market low each year 18.3%

0.8%Difference

The best time to invest is……whenever you have the money

Source: Templeton International Fund Management

Average risk premium

= rate of return - the treasury bill rate

(called maturity risk for bonds)

Expected market return

= T-bill rate + normal risk premium

•The return investors expect they will earn over some future time period.

• It is subject to uncertainty. It may or may not occur.

Required rate of return

= risk-free rate + inflation premium

investor wants more than the risk-free rate for investing in a risky security

The risk of a portfolio is less than the risk of the individual securities it holds

BUILDING AND MANAGINGYOUR PORTFOLIO

ResourcesFinanceUtilitiesConsumerManufacturing

Most Volatile

Less Volatile

Manufacturing

and Resources

Consumer

Finance

and Utilities

When buying stocks, diversify among the sectors

CASH

BOND/FIXED INCOME

EQUITIES

Asset Mix

Case #1

A young, healthy single individual professional with medium investment knowledge and high risk tolerance, moderate tax rate and long time horizon:

Cash 5%Fixed Income 25%Equities 70%

100%

Case #2

A senior citizen in a low tax bracket with no income other than government pensions, a medium time horizon and low risk tolerance:

Cash 8%Fixed Income 62%Equities 30%

100%

Case #3

A middle-aged line factory worker, married with three teenaged children, who is a homeowner with great concerns about future employment and funding college education, and with low investment knowledge:

Cash 10%Fixed Income 40%Equities 50%

100%

Asset Mix Examples

CASH

EQUITIES

FIXED INCOME

CASH

EQUITIES

FIXED INCOME

10%

70%

20%

5%

80%

15%

• Sell 10% Equity $$$• Buy Fixed Income and CashThis brings you back to your original asset allocation.

Constant weighting asset allocation

CASH

EQUITIES

FIXED INCOME

10%

70%

20%

• Boost to 30% Fixed Income• Sell 10% of Fixed Income $$$This brings you back to your original asset allocation.

Interest Rate

Bond / Fixed-Income Price

Tactical Asset Allocation

0

2

4

6

8

10

12

14

16

18

1 3 5 10

Holding period for TSE 300 in years

Sta

nd

ard

de

via

tio

n o

f re

turn

sVolatility decreases with time

Average price = $10.45

Total amount invested is $1,000 to purchase 95.67 units. The average cost per unit is $10.45

Price $ Invested No. of units

$11.50 $200 17.39

$10.50 $200 19.05

$11.00 $200 18.18

$ 9.50 $200 21.05

$10.00 $200 20.00

95.67

Dollar Cost AveragingDollar Cost Averaging

Fundamental analysis – company driven

• You look at the Company

Technical analysis – Market driven

• You look at stock price and volume trends

FUNDAMENTAL VERSUS TECHNICAL ANALYSISFundamental vs technical analysis

• Sales

• Earnings

• Dividends

Three trends you want to see

• Net profit margin• Return on equity

• Earnings per share

• Price/cash flow

• Price/book value

• Price/sales

• Price/earnings

• Current

• Debt/equity

9 ratios to help you check a company’s financial health

The Debt/Equity RatioThe Debt/Equity Ratio

Tells you if firm is borrowing too much money

Debt/equity ratio =

short-term debt + long-term debt x 100 = %

shareholder’s equity

Rule: Debt should not be more than 50% of equity.

Return on EquityReturn on Equity

Tells you how profitably firm has used shareholder’ funds

Return on equity =

net earnings - preferred dividends x 100 = %

common equity

Rule: Compare with competitor companies

Earnings per ShareEarnings per Share

Tells you how profitable your share of the company is

Earnings per share =

net earnings (before extraordinary items) - preferred dividends

number of common shares

Rule: Should increase consistently year over year

Cash FlowCash Flow

Gives you a clearer picture of the firm’s earning power

Cash Flow = net earnings (before extraordinary items) - equity

income + minority interest in earnings of

subsidiary companies + deferred income taxes +

depreciation + any other deductions not paid out

in cash, e.g. depletion, amortization, etc.

Rule: Compare to competitor companies

The P/E RatioThe P/E Ratio

Might tell you if shares are under or overvalued

P/E = market price of stock

earnings per share

Rule: In general, the lower the P/E, the better

Calculation of a Five Week Moving Average for a Particular Stock

• Week One $17.50

• Week Two 18.00

• Week Three 18.75

• Week Four 18.35

• Week Five 19.25

• Total $91.85 / 5 = $18.37

Top Down and Bottom UpTop Down and Bottom Up

Top Down• Look at economy first• Then for growth sectors• Then for growth

companies• Often in international

funds

Bottom Up• Look at company first• Use detailed

company analysis• Look for earnings

momentum• Will pay higher price if

growth potential warrants

Economic Analysis

Industry Analysis

Company Analysis

Top-down approach

Six Steps Towards a Financial Plan(the investor)

Six Steps Towards a Financial Plan(the investor)

1. Financially, where are you?

2. What are your financial goals?

3. Are there any obstacles in your path?

4. What are your investment objectives?

5. What is your investment strategy?

6. Have you reviewed your financial

plan lately?

Your Net WorthYour Net WorthASSETSCash & Equivalents(bank accounts; CSBs)$_______________________________

Short-term Investments(T-bills, money market funds, etc.)

$_______________________________

Life Insurance cashable value$_______________________________

Longer-term Investments(stocks, bonds, RRSPs, Pension fund)$_______________________________

Other Assets(House (full value), car, art, jewelry etc.)$_______________________________

TOTAL ASSETS$_______________________________

LIABILITIESShort-term Debt(credit cards, personal loans, etc)$_______________________________

Longer-term Debt(mortgage, other)

$_______________________________

TOTAL LIABILITIES$_______________________________

NET WORTH(Total Assets - Total Liabilities)$_______________________________

BudgetingBudgetingIncome fromemployment

Income fromemployment

your net income(or take home pay)

your net income(or take home pay)

income taxes & other

company/government

deductions

income taxes & other

company/government

deductions

necessary fixed expenses such as

•rent or mortgage,food

•clothing, transportation

•insurance, entertainment

necessary fixed expenses such as

•rent or mortgage,food

•clothing, transportation

•insurance, entertainment

Your discretionary income which you can use to spend

and/or invest

Your discretionary income which you can use to spend

and/or invest

your net income(or take-home pay)

your net income(or take-home pay)

less

equals

less

equals

Setting Clear GoalsSetting Clear Goals

AIM & $ AMOUNT = FINANCIAL GOAL

Retire at Age 55 (Freedom 55)With Annual Income of $55,000

Sample Investment Strategy StatementSample Investment Strategy Statement

"My primary investment goal is to save for a comfortable retirement in 20 years through a portfolio that focuses on capital growth. I expect to outperform the stock market over time, understanding that occasional years of negative performance will be inevitable. Although income generation is not a concern, a portion of my portfolio will be maintained in conservative fixed-income securities to balance the riskier, growth-oriented stock portion."

Statement Reflects:Statement Reflects:

•• Goal – comfortable retirementGoal – comfortable retirement

•• Time horizon – 20 yearsTime horizon – 20 years

•• Objectives – capital growth through stocksObjectives – capital growth through stocks

•• Risk tolerance – occasional negative performance, Risk tolerance – occasional negative performance,

balanced by fixed-income securities.balanced by fixed-income securities.

Investment Policy StatementInvestment Policy Statement

I. I am a moderately risk tolerant investor who wants to have some involvement in a money management approach to building wealth.

II. My primary objective is to have my money grow until I retire at approximately age 60 when I will want to convert those assets to income.

III.To accomplish this, I will keep no more than 10% of my portfolio liquid; about 30% in debt type assets and 60% dedicated to growth.

IV.Specifically, I will use my bank account and a money market mutual fund for the liquid portion; my company pension and a term deposit for the income component and growth mutual funds to offset inflation. On average, this portfolio should yield about 12% annually, fluctuating between 0% and 20%.

Signed___________________ Date___________________

My Personal Investment StatementMy Personal Investment Statement

Level I ______________________________________________(Philosophy) ______________________________________________

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Level II ______________________________________________(Objectives) ______________________________________________

____________________________________________________________________________________________

Level III ______________________________________________(Asset Allocation) ______________________________________________

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Level IV ______________________________________________(Security Selection) ______________________________________________

____________________________________________________________________________________________

Date_________________________ Signed_________________________

What’s Investing?What’s Investing?

• Investing makes your money grow

• Investing capitalizes on economic growth

• Investing involves some level of risk

• Investing rewards patience

• Investing outpaces inflation

Investment ObjectivesInvestment Objectives

• Safety of principalYou don't want to lose your initial investment

• IncomeThe regular payment of money that is earned from the investment

• GrowthAn increase in the value of your investment

• LiquidityThe ability to turn your investment into cash very quickly

Life insurance defined...

• all insurance deals with risk

• insurance protects against financial loss

• life insurance protects against the loss of money that may occur as the result of someone’s death

3 risks that threaten income

• death

• disability

• old age

Human life value

• earnings = $50,000

• interest rate = 10%

• human life value = $50,000/10% X 100 =

• $500,000

Cash and income needs

• mortgage fund

• emergency fund

• dependency period income

• spouse’s income

• education fund

• last expenses

Six Step Planning Process(the advisor)

• interview the client

• data gathering

• financial analysis

• plan formulation and recommendations

• plan implementation

• monitoring and plan review