Brigham Young University

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• Brigham Young University
• The Meaningful Life Club
• Investment Basics and More
• March 27, 2009
• Bryan Sudweeks
• From the BYU MSM web site
• Personal Finance Another Perspective
• at http//personalfinance.byu.net

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Abstract

• Many think investing is an activity similar to
  gambling in that the odds are stacked against the
  investor. I believe that is not the case. If
  investors will a. Remember and follow key
  principles, b. Understand the markets and what
  they can control, and c. Develop a good
  investment plan and follow it, they can reap the
  rewards of their wise planning and investing.
  Please note that this PowerPoint was put together
  by students who have taken my entire Financial
  Planning course. They have included
  significantly more information than we can
  possibly cover in an hour, but these were the
  points they considered most important. I hope
  they will be important to you as well.

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Objectives

• A. Understand the Key Principles of Finance
• B. Understand questions to ask before you invest
• C. Understand the 10 principles of successful
  investing
• D. Understand the factors with control returns
• E. Understand the elements of a successful
  investment portfolio
• F. Understand the priority of money
• G. Understand another source of personal finance
  information

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A. Understand Key Principles of Finance

• Principle 1 Ownership
• 1. Ownership Everything we have is the Lords
• The Psalmist wrote
• The earth is the Lords, and the fullness
  thereof the world, and they that dwell therein.
  (Psalms 241)
• The Lord is the creator of the earth (Mosiah
  221), the supplier of our breath (2 Nephi 926),
  the giver of our knowledge (Moses 732) and our
  life (Mosiah 222), and all we have and are
  (Mosiah 221).
• Nothing we have is our ownits all Gods

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Principle 2 Stewardship

• 2. Stewardship We are stewards over all that the
  Lord has, is giving, or will share with us
• The Lord through the Prophet Joseph Smith stated
  
• It is expedient that I, the Lord, should make
  every man accountable, as a steward over earthly
  blessings, which I have made and prepared for my
  creatures. (DC 10413)
• The Lord through the prophet Brigham Young said
• Thou shalt be diligent in preserving what thou
  hast, that thou mayest be a wise steward for it
  is the free gift of the Lord thy God, and thou
  art his steward. (DC 13627)

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Principle 3 Agency

• 3. Agency The gift of choice is mans most
  precious inheritance
• President Marion G. Romney said
• Agency means the freedom and power to choose and
  act. Next to life itself, it is mans most
  precious inheritance. (Ensign, May 1976, p. 120.)
  
• President David O. McKay
• Next to the bestowal of life itself, the right
  to direct that life is Gods greatest gift to
  man. Freedom of choice is more to be treasured
  than any possession earth can give (italics
  added, in Conference Report, Apr. 1950, p. 32
  italics added).

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Principle 4 Accountability

• 4. Accountability We are accountable for every
  choice we make
• The Lord through the prophet Joseph stated
• For it is required of the Lord, at the hand of
  every steward, to render an account of his
  stewardship, both in time and in eternity. (DC
  723)
• Elder Todd Christofferson recently stated
• We control the disposition of our means and
  resources, but we account to God for this
  stewardship over earthly things. (D. Todd
  Christofferson, Come to Zion, Ensign, November
  2008, p. )

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What is Really Ours?

• Elder Neal A. Maxwell stated
• The submission of ones will is really the only
  uniquely personal thing we have to place on Gods
  altar. The many other things we give, brothers
  and sisters, are actually the things He has
  already given or loaned to us. However, when you
  and I finally submit ourselves, by letting our
  individual wills be swallowed up in Gods will,
  then we are really giving something to Him! It is
  the only possession which is truly ours to give!
  (italics added, Swallowed Up in the Will of the
  Father, Ensign, Nov. 1995, 22.)

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B. Questions to Ask Before you Invest

• What should you do before you start investing?
• Is there a priority to paying bills?
• Who/which bills should we pay first?
• Are there certain things you should never do
  without?
• What about health and life insurance?
• Are their other bills more important than
  investing?
• What about high-interest items such as credit
  cards and consumer loans?
• Is there a purpose to investing?
• What are your personal goals and budget?

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Before You Invest The Hourglass Top

• 1. Are your priorities in order and are you
  square with the Lord?

2. Do you have adequate health and life insurance?
3. Are you out of high-interest rate credit card
and consumer debt?
4. Have you written down your personal goals, do
you live on a budget, and do you have a
well-written investment plan?

• If you can answer these affirmatively, you are
  ready to invest!

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Before you Invest (continued)

• What does the top of the hourglass do?
• It helps you keep your priorities in order
• And what should those priorities be?
• God
• Family
• Personal responsibility
• This includes your personal goals, budget, and a
  well-written Investment Plan

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C. Understand the 10 Principles of Successful
Investing

• Is there one right way to invest?
• No. There are multiple ways and multiple methods
  depending on your personal goals and budget
• The key is for you to know yourself and what you
  are trying to accomplish
• Is there one right way to teach investing?
• No. But while there are many different ways, the
  principles should be the same.

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Principles for Successful Investing (continued)

• Elder Dallin H. Oaks commented
• We live in a complex society, where even the
  simplest principle can be exquisitely difficult
  to apply. I admire investors who are determined
  not to obtain income or investment profits from
  transactions that add to the sum total of sin and
  misery in the world. But they will have
  difficulty finding investments that meet this
  high standard. Such complexities make it
  difficult to prescribe firm rules. We must rely
  on teaching correct principles, which each member
  should personally apply to govern his or her own
  circumstances. (Dallin H. Oaks, Brothers
  Keeper, Ensign, Nov. 1986, 20.)

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Principles for Successful Investing (continued)

• Whatever you invest in, and at whatever phase of
  your investment you are in, these principles are
  critical.
• While there may be discussion as to the number of
  principles, the importance of the principles are
  not disputed!
• If you build your portfolio in line with these
  principles, you will have a successful portfolio

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Principles for Successful Investing (continued)

• 1. Know yourself
• Know your goals
• Have well-written and thought-out goals
• Know your budget
• Live within your means, and save and invest
• Know your ability to tolerate risk
• Know what kind of investor you are
• Invest accordingly
• Develop a sleep-well portfolio based on
  principles you can depend on for a lifetime so
  that you can sleep well at night

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Principles for Successful Investing (continued)

• Watch overconfidence
• Men trade 45 more than women
• Their annualized returns were 2.7 less
• Single men trade 67 more than single women
• Their annualized returns were 1.4 less
• Most investors have underperformed the market
  over the last 20 years
• (DALBARs Annual Quantitative Analysis of
  Investor Behavior 2007)
• Watch on-line trading
• Before on-line, investors beat the market by 1.9
• Afterwards, they underperformed by 3.6
• Carla Fried, The Problem with your Investment
  Approach, Business 2.0, November 2003, p. 146

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Principles for Successful Investing (continued)

• 2. Understand Risk
• Risk is inherent in all investing activities
• There are lots of different types of risk
• Inflation, business, interest rate, financial,
  market, political and regulatory, exchange rate,
  call, and liquidity risk
• Invest at a risk level you are comfortable with
• Find that risk level
• Taking a risk tolerance test may help. Take TT16
  A Risk Tolerance Test to get a sense on how
  much risk you can tolerate

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Principles for Successful Investing (continued)

• 3. Stay diversified
• Always invest in different asset classes and
  assets
• Diversification is your key defense against risk
• Make sure you understand the risks of each and
  every asset class you invest in
• Its a risky place out there. Be prepared!
• Remember that the numbers you see for specific
  asset class performance are from diversified
  portfolios, not single assets!
• Use TT23 Return Simulation Worksheet to see the
  effects of diversification

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Principles for Successful Investing (continued)

• 4. Invest low cost and tax-efficiently
• Control what you can.
• You cannot control returns, but you can control
  your costs, fees, and taxes
• A 1 saved is more than a 1 earned because
• You pay taxes on every new dollar earned, and a
  dollar saved can earn income and income on income
  (compound interest)
• Realize that frequent trading incurs significant
  costs, both in terms of transactions costs and
  taxes

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Principles for Successful Investing (continued)

• 5. Invest long-term
• Avoid short-term trading
• Its expensive and generates transactions costs
  and taxes
• Invest wisely
• There are no get-rich-quick schemes that work.
• Stay at least partly in the market
• Taking money out of the market or not continuing
  to save and invest stops your progress

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Principles for Successful Investing (continued)

• 6. If you must invest in individual assets, know
  what you invest in and who you invest with
• When investing in individual assets, do your
  homework
• Know what you are investing in
• Know who you are investing with
• Be aware of the environment in which the company
  operates
• Be very careful and invest wisely

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Principles for Successful Investing (continued)

• 7. Monitor portfolio performance
• Measure performance. President Thomas S. Monson
  stated
• When performance is measured, performance
  improves. Where performance is measured and
  reported, the rate of improvement accelerates.
  (General Conference reports, 1970)
• How can you know how you are doing if you dont
  check your performance against some benchmark?
• Interestingly, most investors have underperformed
  the market benchmarks over the last 20 years
• (DALBARs Annual Quantitative Analysis of
  Investor Behavior 2007)

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Principles for Successful Investing (continued)

• 8. Dont waste too much time, money, and energy
  trying to beat the market, unless you have a lot
  of time, money, and energy
• It is very difficult, expensive, and time
  consuming to try and beat the market
• If you want to trade, trade tax-efficiently and
  in tax-deferred accounts
• If your actively managed funds under-perform,
  look to index funds as inexpensive, tax efficient
  and very viable alternatives to actively managed
  funds

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Principles for Successful Investing (continued)

• 9. Invest only with high quality, licensed, and
  reputable people and institutions
• When help is needed, dont be afraid to get help.
  
• But get good help from good people consistent
  with the principles discussed
• And compare the performance of that help to your
  benchmarks after taxes (and to a passive
  portfolio)
• Use the best resources available
• Know how those resources are compensated
• Work only with licensed and registered advisors
• Get references for any resources

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Principles for Successful Investing (continued)

• 10. Know your goals, your budget, and have a well
  written investment plan
• You cannot invest without money
• Make sure you are living within your income and
  that you are saving a portion of every dollar you
  earn
• I recommend saving 20 of every dollar past
  college
• You must not invest without a plan
• Develop a logical and well-written Investment
  Plan and follow it
• Examples are on the Personal Finance website

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D. Factors Which Control Returns

• Six factors affect your investment returns
• Factors you control
• 1. How much you save
• 2. How long your investments grow
• 3. Your mix of investments, i.e., your asset
  allocation
• 4. How much you pay in expenses
• 5. How much you pay in taxes
• Factors you do not control
• 6. Your investment returns

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Factors Which Control Returns (continued)

• Want to do well on your investing?
• Focus on saving money each week or month
• Reduce your spending
• Focus on time investments are working for you
• Keep your money in the market
• Focus on the math that controls returns
• Watch your asset allocation mix, compounding, and
  diversification
• Focus on reducing your expenses
• Reduce taxes, fees, and trading costs

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Factors Which Control Returns (continued)

• Successful investors spend their time on those
  areas that are within their personal control
• They work on areas under their personal control
  and minimize time spent on areas outside their
  personal control
• Some use passive management or indexing as a
  viable investment strategy to minimize risk or
  give some control over the area of investment
  returns
• Novice investors spend their time on areas they
  cannot control and fail to be concerned over
  areas they can control, i.e., savings, time, and
  expenses

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E. Understand the Elements of a Successful
Investment Portfolio

• Portfolio selection strategies will differ by
  individual, portfolio manager, institution and
  view of the market
• It is impossible to discuss how every portfolio
  manager builds every portfolio
• But general concepts and principles are
  applicable to everyone
• As I review the principles of successful
  investing and the successful portfolios of the
  past, there appears to be a pattern. I call it
  the bottom of the Investment Hourglass

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Investing The Hourglass Bottom
Taxable Assets
Retirement Assets
4. Opportunistic Individual Stocks and Sector
Funds
3. Diversify Broaden and Deepen your Asset
Classes
2. Core Broad Market Index Fund/ETF, or Core
Mutual Funds
1. Basics Emergency Fund and Food Storage

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The Investment Hourglass (continued)

• The hourglass bottom teaches 3 important lessons
• 1. It helps keep risk in perspective
• It starts from lowest risk to highest risk
• 2. It teaches the how to about investing?
• You invest first in lower-risk assets, and then
  move up to more risk as your assets (and
  investment experience) increase
• 3. It separates out taxable and retirement assets
• Retirement and taxable assets should be managed
  differently due to taxes and time horizon

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F. Understand the Priority of Money

• What is the priority of money?
• The priority of money is a process of
  understanding which types of investment vehicles
  will help you achieve your goals the fastest
• Why should we learn it?
• Investment vehicles have different benefits,
  i.e., due to matching (free money), tax
  avoidance, tax deferral, or just tax-efficient
  and wise investing.
• The wise use of correct investment vehicles will
  help you save more money to help you reach your
  financial goals faster

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Priority of Money (continued)

• What is the difference between investment
  vehicles and financial or investment assets?
• The investment vehicle is the tax-law defined
  framework that has specific tax advantages, i.e.,
  401k, 403b, Individual Retirement Account (IRA),
  SEP IRA, Roth IRA, Roth 401k, etc.
• The financial assets are the securities that are
  invested in by the vehicles, i.e., stocks, bonds,
  mutual funds, REITs, MMMFs, CDs, etc.

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Priority of Money (continued)

• Select Investment Vehicles for 2008 (before
  catch-up)
• Tax- Tax- Maximum
• Plan deferred eliminated Amount
  For Employees of
• 401-k Y
  15,500 Businesses w/plans
• Roth 401-k Y 15,500
  Businesses w/plans
• 403-b Y
  15,500 Non-profit, tax-exempt
• Roth 403-b Y 15,500
  Non-profit, tax-exempt
• 457 Y
  15,500 State/municipalities
• SEP IRA Y 46,000
  Small businesses
• SIMPLE IRA Y 13,000
  Small businesses
• IRA Y
  5,000 Individuals
• Roth IRA Y
  5,000 Individuals
• Education IRA Y 2,000
  Individual Education
• 529 Plan Y gt330,000
  p.c. Individual Education

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Priority of Money (continued)

• What is the priority of money?
• 1. Free money
• Money that is made available by your company,
  generally on a matching basis, to encourage
  greater participation in company sponsored
  retirement plans, i.e., 401k, Roth 403b, Keogh,
  etc.
• Money made available through tax benefits, i.e.
  529 plan contributions which are deductible from
  state taxes
• What are the risks?
• You must stay at the company a certain number of
  years to become fully vested, i.e., to be able to
  take full ownership of these funds, or use the
  funds for education expenses for 529 plans

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Priority of Money (continued)

• 2. Tax-advantaged money
• a. Elimination of all future taxes
• This money can be used at retirement (or for
  education) without penalty and without taxes,
  i.e., Roth IRA or Roth 410k/403b for retirement,
  and 529 Funds and Education IRA for education
• In addition, with the Roth, you can take the
  principle out without penalty at any time
• What are the risks?
• You must be 59½ to receive earnings
• Money from 529 Funds, Education IRA, and EE/I
  bonds must be for qualified educational expenses
  to be tax-free

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Priority of Money (continued)

• b. Tax-deferred money
• This money has the ability to be invested
  before-tax, with principle and earnings taxed
  only at retirement (IRA, SEP IRA, etc.)
• What are the risks?
• You must be 59½ to take distributions. If you
  take the funds out before retirement, there is a
  10 penalty and funds are taxed at your ordinary
  income tax rate for both federal and state
• This money converts long-term capital gains into
  short-term income for tax purposes

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Priority of Money (continued)

• 3. Tax-efficient and wise investments
• This is money that is invested tax-efficiently
  and wisely, consistent with the investment
  principles discussed earlier
• What are the risks?
• Earnings are taxed consistent with the assets
  invested in
• You need to take into account the tax and
  transaction cost implications of whatever you
  invest in

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Priority of Money (continued)

• How do you invest tax efficiently?
• 1. Know the impact of taxes
• After-tax return Before-Tax (1 Marginal Tax
  Rate).
• Your marginal rate includes both your federal,
  state and local (if any) taxes
• Remember, investment earnings from assets not in
  retirement vehicles are not all created equal.
• You are taxed differently on capital gains,
  distributions, dividends, and interest.
• How do you do this?
• Know your tax rate on each type of earnings

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Priority of Money (continued)

• 2. Look to Capital Gainsdefer earnings and
  taxes to the future
• Capital gains are taxed at 15 (Federal), whereas
  earnings from interest and short-term capital
  gains (from assets held one year or less) are
  taxed at ordinary income rates, up to 35
• How do you do this?
• Get earnings in the form of long-term capital
  gains.
• Invest with a buy and hold strategy, dont trade
  in taxable accounts, and hold assets for a long
  time.

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Priority of Money (continued)

• 3. Minimize Turnover and Taxable Distributions
• Minimize turnover. Turnover leads to higher
  transactions costs and taxes
• Minimize distributions from mutual funds. Mutual
  funds are required by law to distribute most of
  their realized capital gains and interest
  annually to the shareholders in the fund, which
  are taxed
• How do you do this?
• Utilize a buy and hold strategy
• Do your research and invest in mutual funds that
  limit trading and minimize distributions

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Priority of Money (continued)

• What is the impact of taxes on these two bond
  funds
• Mutual Funds Fund A Fund B
• Beginning Net Asset Value 10.00 10.00
• Short-term distributions .10 .90
• Ending NAV 10.90 10.10
• YTD Nominal returns 10 (.10.90)/10 10
  (.90.10)/10
• Turnover 10 (estimate) 90
  (estimate)
• Fed tax rate on ST distributions 35
  35
• Taxes paid (without selling) .035 (.10
  35) .315 (.90 35)
• After-tax return 9.65
  (.90.065)/10 6.85 (.10.585)/10
• Loss from return due to taxes .35
  3.15
• Although both have the same nominal return, fund
  B had a 29 lower return due to taxes, even
  though both had the same before-tax return. And
  this doesnt include state taxes!

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Priority of Money (continued)

• 4. Replace interest income with stock dividends
• If you can handle the increased risk, you can
  replace interest income, which is taxed at your
  ordinary income tax rate (which is usually
  higher), with stock dividend income, which is
  taxed at a preferred rate of 15
• How do you do this?
• Invest a slightly higher percentage of your
  assets in stocks

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Priority of Money (continued)

• 5. Invest tax-free
• If you are in a high marginal tax bracket, you
  can invest tax-free by investing in assets which
  require you to pay no or minimal taxes on
  earnings or capital gains
• How do you do this?
• Invest in municipal bonds from your state which
  may be both federal and state tax-free
• Invest in treasury bonds which are state tax-free
• Invest in government EE/I savings bonds and use
  the proceeds for your childrens tuition
  expenses, and hence these investments are federal
  and state tax free

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Priority of Money (continued)

• How do you prioritize investment vehicle choice?
• Some investment vehicles are higher on the
  priority list than others, but they also have
  lower contribution amounts (i.e., 5,000 for the
  Roth in 2008). What should you do?
• Use the highest priority money first, and then
  next highest, etc. until you have utilized all
  your available investment funds

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Priority of Money (continued)

• Where should you put different types of financial
  assets?
• Retirement Accounts 401k, IRAs, 529 Funds, etc.
• Financial assets in which you trade actively
• Taxable bonds, and high turnover funds
• You do not pay taxes until you take out funds
• Taxable Accounts investment portfolios
• Stocks and mutual funds with a buy and hold
  strategy
• Tax-free bonds and tax-efficient index funds
• You pay taxes on fund distributions yearly

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H. Sources of Personal Finance Information

• Introduction to the MSM Website
• There are many sources of good information
• It just takes time to sort them out
• Let me add another source to your list
• The BYU Marriott School of Managements Personal
  Finance website at
• http//personalfinance.byu.net

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Home Page
49
Individual Lessons
50
Courses of Study
51
8 Basic Lessons (with lessons, readings,
spreadsheets, handouts, FHE lessons, etc.)
52
Personal Finance Manuals
53
Tools and Resources
54
Thank You

• I leave you with my excitement, my testimony of
  the gospel, and one of my favorite scriptures,
  DC 4562
• For verily I say unto you, that great things
  await you.
• Reality They truly do!

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Thank You
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Key Principles of Family Finance

1. Its not what you earn, but what you save, that
   helps you acquire wealth. Its not what you save,
   but what you become, that makes you more like
   your Savior Jesus Christ
2. Nothing you have is your ownit is all Gods.
   Live by the principles of ownership, stewardship,
   agency, and accountability and you will feel the
   Lords guidance in your life
3. Your priorities are critical, so keep them in
   order. Pay the Lord first, yourself second, and
   then pay your other bills.

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Key Principles (continued)

• 4. Money cannot buy you happiness, but it can buy
  you security for you and your family. Be secure
  in you family, then find happiness in them and
  the gospel.
• 5. You make a living by what you earn, but a life
  by what you give. Learn to give more, for giving
  is what life is all about
• 6. Use marginal and opportunity costs and time
  value of money calculations when making financial
  decisions, then overlay those decisions with the
  gospel of Jesus Christ. Both parts are critical
  to the correct decision making process

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Key Principles (continued)

• 7. Plan your financial future early then live
  your plan. Prayerfully establish goals and plans
  to achieve them, and then work on achieving them
  with Gods help
• 8. Develop expertise in your financial
  stewardship then heed your own advice. Remember
  you are responsible for your spiritual and
  financial success