financial planning (not rocket science)

HASSAN & ASSOCIATESpersonal financial advisers © 2009

Financial planning(not rocket science)

August 2009

Simon Hassan CFPCM, CLU

HASSAN & ASSOCIATESpersonal financial advisers © 2009

Preface

• Simon Hassan– Professional, fee‐based financial 

– planner for 20 years

– Certified Financial PlannerCM

– Fellow and Past President 

Institute of Financial Advisers www.ifa.org.nz

• Disclosure Statement: www.hassan.co.nz

• Questions: simon@hasssan.co.nz

HASSAN & ASSOCIATESpersonal financial advisers © 2009

What, why, how

• What is a personal financial plan?

• Why financial planning is important

• How to get started 

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WHAT is financial planning?

• Making the financial arrangements required to achieve your life goals

• A pyramid 

• A graph

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A pyramid

TaxEstateRetirement

InsurancesDebtFinancial management

Investments

• The top brick draws the most attention

• But the foundations are essential

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20 26 32 38 44 50 56 62 68 74 80 86 92 98

Age

Wealth

A graph

• Changing net worth/wealth …

• … over a lifetime

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WHY? Protect what you can

• Wasted resources (budget, tax planning)• Lost breadwinner (life, TPD cover)• Lost ability to earn (income, trauma cover)• Big medical costs (health, trauma cover)• Lost assets (insurance cover, estate planning)• Retirement lifestyle (KiwiSaver, planning)• Lost investment value (diversification, asset allocation)

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HOW: Financial management

• Not enough income…

• …or too much of it spent?

• Understand debt, structure and use it wisely

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Insurance, a necessary evil

• Before you take insurance, consider the alternatives

• Don’t keep insurance you no longer need (Would you wear a parachute on the ground?)

• Good insurance can be money well spent

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How much life insurance?

• Immediate cash– Final expenses, pay bills & tax, and clear debt

– Adjustment sum for survivors

• Lump sums for future needs– Education and care

– Now to retirement for surviving spouse

– After retirement for surviving spouse

• Less available assets and insurance

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Retirement planning

• Every Kiwi who can should join KiwiSaver

• $1,000, plus (if over 18) $for$ subsidy up to $20 per week from the government (taxpayer)

• Plus (if employed) $for$ employer subsidy

• Eg: join at 20, earn $30k pa from 25, rising to $46k pa over 5 years, and retire at 67

• You save $38k, others add $76k: $362k by 67

• $309 per week for 33 yrs (NZ Super: $239)

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Investment planning basics

• Time frame

• Diversification

• Asset allocation

• Risk profile

• Look for hidden costs (commissions, fees, transaction and funds costs can add up)

• Allow for inflation by using “real” returns

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Inflation and real returns

• What do you have to do to turn $100  into $78?Nothing (just wait 10 years with 2.5% inflation)

• Gross, net and real returns – eg, invest $100Gross return 6.0% $106.00Less tax and costs ‐2.0% ‐$2.00Net return 4.0% $104.00Less inflation ‐2.5% ‐$2.50Real return 1.5% $101.50

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RF

IR

Risk and return• All investments involve risk

• Each investment has risk‐return characteristics

• Can’t beat the “Efficient Frontier” (EF)

• There is also a “Risk Free”option (RF) to consider

• A tangent from RF hits EF at the “Ideal Risky Mix” (IR)

• Portfolio design is all about the right RF‐IR mix

Ret

urn

Risk, volatility

EF

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Time lowers risk

• Growth assets are unpredictable over short periods

• But – Black Swans aside – uncertainty levels lessen over time (mean reversion)

Time

Expected return

30%

15%

0%

-15%

High end of likely range

Low end of likely range

Ret

urn

sinc

e in

cept

ion Actual return

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But investing is like a car ...

… without a  windscreen

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And there are Black Swans

Just because something hasn’t happened,….

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And optimistic bias

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Global share marketsDown 40%, up 40%

$0

$20

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$120

$140

Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09

AORD CAC 40 DAXFTSE 100 NIKKEI 225 NZX50S&P 500

40% fall

40% rise

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Make room for China(extend left hand scale from $140 to $250)

$0

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Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09

$250

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Global share marketsShanghai: down 70%, up 100%

$0

$50

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$150

$200

$250

Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09

70% fall

100% rise

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But shares usually do wellover very long periods

$0

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Jan 50 Jan 60 Jan 70 Jan 80 Jan 90 Jan 00 Jan 10

US shares since 195

0

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Log scale easier to make sense ofover very long periods

$1

$10

$100

Jan 50 Jan 60 Jan 70 Jan 80 Jan 90 Jan 00 Jan 10

US shares since 195

0 (lo

g scale)

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It can pay to get good advice

• Over the 20 years 1986 and 2005:– US shares gained 11.9% pa

– But the average investor in US share funds made just 3.9% pa, and stayed invested for less than 3 years*

• The main reason investors do badly?  

• Reacting to the news (“noise”), they went in and out for wrong reasons at wrong times

* DALBAR’s ongoing Quantitative Analysis of Investor Behaviour compares investment flows with changes in asset levels to determine returns earned by investors. DALBAR Inc is an independent North American firm specialising in financial services research.

HASSAN & ASSOCIATESpersonal financial advisers © 2009

Choosing a financial adviser

• Adviser’s qualifications, experience?

• Professional body membership, credentials?

• Feel okay? (likely long‐term relationship)

• Commission can lead to problems

• Fees can help you be sure your adviser works for you – they can also be less than commissions

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The process

• Initial discussion (typically no charge)

• Collect and analyse data (situation, goals, issues, strategies), draft a plan integrating and interrelating the issues (financial management, tax, insurance, estate, retirement, investments)

• Discuss, revise, agree and implement

• Periodic review and adjustment 

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Action points

1. Situation audit

2. Review your budget (get tool from www.hassan.co.nz), collate your financial details, think about your goals, priorities and values

3. Identify, prioritise and plan future actions

4. There is a great satisfaction in taking that first step…

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Thank you

• Questions – you can also email these  simon@hassan.co.nz