Financial Planning and Investing for New Grads. Roger Pine, CFA, CFP 5/19/2015 Texas A&M

Transcription

1 Financial Planning and Investing for New Grads Roger Pine, CFA, CFP 5/19/2015 Texas A&M

2 What does finance really mean?

3 What does finance really mean?

4 What does finance really mean? Capital Markets Finance represents all of the services that make capital markets work.

5 What does finance really mean? Bank Investment Bank Traders Stock Market Dark Pools Insurer Hedge Fund Mutual Fund Broker / Dealer Regulator Consultant Press Most of the jobs in this ecosystem are Sell Side. Who works for the client?

6 What does finance really mean? Bank Investment Bank Traders Stock Market Dark Pools Insurer Hedge Fund Mutual Fund Broker / Dealer Regulator Consultant Press Private Wealth Management!

7 What does finance really mean? Bank Investment Bank Traders Stock Market Dark Pools Insurer Hedge Fund Mutual Fund Broker / Dealer Regulator Consultant Press Private Wealth Management!

8 Investing for New Grads

9 Investing is the process of navigating this turbulent ocean Capital Markets

10 Investing Consider the following investment: 90% chance of going up this year 10% chance of going down this year What would you do? Buy? Sell? Not sure?

11 Investing isn t just bullish or bearish Congrats, you got hired to build this building!

12 Investing isn t just bullish or bearish Congrats, you got hired to build this building! 90% chance of it standing 10% of it falling Would you take the job?

13 Investing isn t just bullish or bearish Congrats, you got hired to build this building! 90% chance all shingles staying on 10% chance of one shingle falling

14 Investing Consider the following investment: 90% chance of going up this year by 5% 10% chance of going down this year by 50% Expected return = 0.9 x 5% x -50% = -0.5% What would you do? Buy? Sell? Not sure?

15 Investing Optional Reading Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets Nassim Taleb All investing is an exercise in applied probability!

16 There are two schools of thought on investing They are based on opposite assumptions Yet both are correct!

17 Passive Investing You can t beat the market Assumption Everybody has the same information you do Conclusions Since you can t beat the market, buy it Diversify, diversify, diversify Stocks, bonds, international, real estate, art Focus on fees Vanguard, Fidelity, Schwab

18 A functioning economy requires reward (on average) for risking capital Capital Markets Remember Them?

19 A functioning economy requires reward (on average) for risking capital

20 In practice, the market portfolio is hard impossible to own Rebalancing Trading Costs Benchmark Composition Real estate International stocks Bonds

21 Passive Investing Required Reading A Random Walk Down Wall Street by Burton Malkiel

22 Active Investing You can beat the market Assumption Investors are irrational Conclusions Don t diversify Concentrate positions Homework pays off Fee minimization still important

23 The market return is the average return but not the only return! # of outcomes 0 r return

24 There is no definitive active strategy Growth investing Invest in the story. You are betting on price appreciation (e.g. Amazon) Value investing Lifelong discipline. Only buy when assets and expected cash flows easily cover the price (e.g. Berkshire Hathaway) Trading Technical analysis Day trading / charting Active asset allocation

25 Active Investing Required Reading Any Berkshire Hathaway annual report you can find. (They re online) The Intelligent Investor by Benjamin Graham

26 Investing Reality Most people don t Common symptoms have a system Hopping from manager to manager Selling when scared of losing more and buying when scared of missing out on gains

27 Financial Planning for New Grads

28 Taxes for New Grads Do your own taxes Learn the first two pages of form 1040 Learn Schedule A Get someone to explain what above and below the line deductions are

29 Legal for New Grads Power of attorney Beneficiaries (You ll need a will soon enough )

30 Insurance for New Grads Renters / Homeowners Liability Contents Structure Auto Umbrella = more liability coverage Health Deductible H.S.A. eligibility (above the line deduction!) Life / Disability Income replacement You may not need this if you don t have many liabilities

31 Saving for New Grads Tax-advantaged Retirement Plans 401k / 403b / 457 / IRA Pre-tax Lowers taxable income Growth is tax deferred Withdrawals are taxable as income Required to take money out starting at 70.5 Roth Post-tax No impact on current taxable income Growth is tax free forever Withdrawals are tax free and not required at 70.5

32 Why the Roth wins in the long run Consider a surplus of $10,000 after taxes, not saved in any retirement account $10,000 from my paycheck $10,000 $10,000 to savings $10,000

33 Why the Roth wins in the long run Consider a non-roth 401k contribution Defer $10,000 from my paycheck $10,000 $10,000 goes into my 401k $10,000

34 Why the Roth wins in the long run Consider a non-roth 401k contribution Defer $10,000 from my paycheck $10,000 $10,000 goes into my 401k $10,000 $2,500 Plus I save on my taxes by reducing my income! (Assume 25% tax bracket)

35 Why the Roth wins in the long run But you don t own that entire 401k! Defer $10,000 from my paycheck $10,000 $10,000 goes into my 401k $2,500 $7,500 $2,500 Uncle Sam s Yours Yours + Uncle Sam s

36 Why the Roth wins in the long run The Roth buys out Uncle Sam on Day One Defer $10,000 from my paycheck $10,000 $10,000 goes into my 401k $10,000 Yours $2,500 $2,500

37 Why the Roth wins in the long run The Roth buys out Uncle Sam on Day One Defer $10,000 from my paycheck $10,000 $10,000 goes into my 401k $10,000 Yours Conclusion Do the Roth!

38 How much should I save? Academic literature suggests 16% Get the employer match at minimum Don t quit once you fill up retirement accounts

39 How to Get Rich

40 What is $100 worth?

41 Immediate delivery What is $100 worth?

42 What is $100 worth? Immediate delivery Delivery in 10 years

43 What is $100 worth? Immediate delivery Delivery in 10 years $10 per year for 10 years

44 What is the present value of all of your future earnings? Hint: You likely are already a millionaire $120, $100, $80, $60, $40, $20, $- Salary by Year $43,000 starting salary 2% raises annually 5% discount rate Semi-retirement at 66 Full retirement at 71 = $1,200, $1,000, $800, $600, $400, $200, $0.00 Present Value 22 $1,043,000!

45 For most college graduates just starting out, human capital is the most valuable asset. Asset Mix: Typical Graduating Senior Human Capital Financial Assets

46 At this stage in life, it pays to focus on earning power. Asset Mix: Typical Graduating Senior Which bar would you prefer to increase by 5%? Human Capital Financial Assets

47 Human capital is your biggest asset, so invest wisely. Invest in your earning power Earn your degree, consider graduate school Professional designations Technical skills Learn from others Find a mentor Find the right peer group (aka network) Take smart risks and avoid stupid ones

48 If you save wisely, your financial capital will eventually catch up with your human capital Asset Mix: Approaching Comfortable Retirement Human Capital Financial Assets

49 There is more to the story. Expenditures also have a present value. Human Capital Lifetime Expenses Financial Assets

50 This is how you get rich. Human Capital Lifetime Expenses Financial Assets

51 This is not how you get rich. Human Capital Lifetime Expenses Financial Assets

52 Expenses are the second lever that can make you rich. If you must splurge, do it on non-recurring expenses Recurring = cable bill, cell phone data plan, big house Non-recurring = travel, special occasions Learn from others Find the right peer group

53 To encourage the right behavior, set a bold goal. If you want motivation start jogging, sign up for a marathon Set a goal Make it big Find a training partner Think bigger than just retirement! Family/ Charity Rainy Day / Big Purchase Retirement

54 Behavior Required Reading The Millionaire Next Door: The Surprising Secrets of America s Wealthy Thomas J. Stanley and William D. Danko 1 Read it 2 Loan it to a friend and make them read it 3 Discuss it

55 Thank You for Inviting Me