FIN1 FTU - Stage 13

F1 – Project-Stage 13: Personal Investing TCHE322 Lawrence et al (2011). Chapters 11, 12, 13 CFA Level III Volume 1, 4 Tillery & Tillery (2017). Chapter 10, 18 1 Personal finance planning Personal finance planning process 1. Define financial goals. 2. Develop financial plans and strategies to achieve goals. 3. Implement financial plans and strategies. 4. Periodically develop and implement budgets to monitor and control process toward goals. 5. Use financial statement to evaluate results of plans and budgets, taking corrective action as required. 6. Redefine goals and revise plans and strategies as personal circumstances change. Essential Information of personal financial plans * 1. A summary of the goals 2. Significant assumptions and justification 3. Estimates 4. Recommendations 5. A description of limitations on the work performed • • • • • • Asset acquisition Liability and insurance Savings and investment Employee benefit Tax Retirement and estate 6. The recommendations in the engagement should contain qualifications to the recommendations if the effects of certain planning areas on the client’s overall financial picture were not considered. * Adapted from Paragraph .35, Statement on Standards in Personal Financial Planning Services No. 1 3 Schedule of lectures Project topic covered • Investment planning process • Asset allocation Groupwork project activities • Stock/bond/other financial assets and real estate analysis • Managing risk 4 Investment planning process The planning phase The implementation phase The monitoring engagement phase Determine and prioritize client’s specific financial goals Refer to stage 4 Client’s financial condition Refer to stage 6 Assessing risk tolerance Identify unique needs Identify potential client investment constraints and requirements investment policy statement 5 Investment Policy Statement 6 Assessing risk tolerance Two common methods: A risk tolerance questionnaire or a psychometric test • A risk tolerance questionnaire is the norm for most personal financial planners. E.g.: Investor Profile Questionnaire from Schwab https://www.schwab.com/resource/investment-questionnaire • Another type of risk tolerance assessment tool is a psychometric test. Refer to Financial risk tolerance: A Psychometric Review Some determinants of risk tolerance E.g.: Thanki & Baser (2021) (https://www.pm-research.com/content/iijwealthmgmt/24/2/48) 7 Assessing risk tolerance • There are several methods to assess a client’s risk tolerance. No one method is mandated. Many personal financial planners determine their client’s risk tolerance through conversation. These planners are adamant that their knowledge and experience creates a better asset allocation model than the computerized tools that have been created to assess the client’s attitude toward risk. • A risk tolerance questionnaire is the norm for most personal financial planners. The typical questionnaire has between 5 and 10 questions. Basic questions address time horizon and basic knowledge of investments. Each of the questions generates a type of numeric score. The sum of the values is tabulated, and a hypothetical asset allocation is proposed. • Another type of risk tolerance assessment tool is a psychometric test. These tests are extensive and usually require 30–40 minutes to complete. The client is measured against a demographic pool of respondents. The result is often an asset allocation model based on the efficient frontier and the client’s indifference curve. 8