BUSI 538 Week 7 Investment Project: PPT Presentation and Kaltura Video Example

My Investment Management Process and Investment Policy Statement for Retirement

Slide 1: My Investment Plan for Retirement

• Client: me, age 34, operations analyst
• Salary $68,000; saving through a 401(k) and a Roth IRA
• Goal: retire at 67 with $60,000 a year in today's dollars

Speaker notes: Hello, I'm presenting my own investment management process and investment policy statement, built on chapter 22 of our textbook. For this project I am both the adviser and the client. I'm 34, I work as an operations analyst earning $68,000 a year, and I have about $42,000 in my 401(k), $9,000 in a Roth IRA and a $15,000 emergency fund. My goal is to retire at 67 with income of $60,000 a year in today's dollars. The presentation follows the three tables in chapter 22.

Slide 2: The Investment Management Process

• Planning: objectives, IPS, expectations, allocation
• Execution: selection and implementation
• Feedback: monitoring, rebalancing, evaluation

Speaker notes: Table 22.1 divides the investment management process into planning, execution and feedback (Bodie et al., 2017). Planning sets the destination and the rules, execution builds the portfolio and feedback keeps it on course. I used to treat investing as picking funds once and forgetting them; seeing it as a continuing loop changed how I think about my accounts.

Slide 3: Planning, Step 1: Objectives and Constraints

• Return needed: about 4% a year after inflation
• Risk: can tolerate a 25% decline in a bad year
• Constraints: 33-year horizon, taxes, liquidity

Speaker notes: The first planning step is identifying my objectives and constraints. I'll show the calculations later, but in short I need about a 4 percent real return, I can stay invested through a decline of roughly a quarter of my portfolio, and my main constraints are a long horizon, the tax rules of my accounts and the need to keep cash available for emergencies.

Slide 4: Planning, Step 2: Sizing the Goal

• Need from savings: $36,000 a year (after $24,000 Social Security estimate)
• At a 4% withdrawal rate: about $900,000 in today's dollars
• Saving 18% of pay including the match, a 3.5% real return gets me close; 4% gets me there

Speaker notes: I estimated Social Security at $24,000 a year in today's dollars from my statement, which leaves $36,000 to come from my savings. If I draw 4 percent a year, a rule of thumb many planners use, that means about $900,000 in today's dollars. If I save 18 percent of pay including my employer's 3 percent match, my current $51,000 grows to about $897,000 at a 3.5 percent real return and about $996,000 at 4 percent. So my return requirement is roughly 3.5 to 4 percent above inflation.

Slide 5: Planning, Step 3: Writing the IPS

• A written policy I can hold myself to
• Covers goals, allocation, review and rebalancing
• Signed and dated; reviewed every January

Speaker notes: The second planning component is creating the investment policy statement itself. The textbook treats the IPS as the governing document for the relationship between an investor and the people managing the money. In my case the people are both me, which is exactly why I need it in writing. When markets fall, the version of me who wrote the IPS calmly will be wiser than the version of me watching the news.

Slide 6: Planning, Step 4: Capital Market Expectations

• U.S. and international stocks: about 5% real expected
• Investment-grade bonds: about 2% real expected
• These are my assumptions, deliberately conservative

Speaker notes: Forming capital market expectations means estimating the returns and risks of each asset class. My expectations are deliberately modest: about 5 percent above inflation for stocks and 2 percent for bonds. Our textbook's historical data show higher past stock returns, but I prefer to plan on less and be pleasantly surprised. I also expect stocks to be far more volatile, with occasional declines of 30 percent or more.

Slide 7: Planning, Step 5: Strategic Asset Allocation

• 80% stocks (55% U.S., 25% international), 20% bonds
• Ranges: stocks 75% to 85%
• Expected real return about 4.4%

Speaker notes: The strategic asset allocation is the long-term mix that best balances my return requirement and my risk tolerance. With my assumptions, 80 percent stocks and 20 percent bonds gives an expected real return of about 4.4 percent, slightly above my requirement, which leaves a margin for error. Diversifying across U.S. and international stocks moves me closer to the efficient frontier we studied in chapter 6, more return for each unit of risk.

Slide 8: Execution: Portfolio Selection

• Total U.S. stock index fund
• Total international stock index fund
• U.S. aggregate bond index fund

Speaker notes: In the execution stage, portfolio selection means choosing the specific investments that carry out the allocation. I chose three broad index funds available in my 401(k) and IRA. Index funds suit my belief, supported by our chapter on market efficiency, that it is difficult for active managers to beat the market after fees, and they give me thousands of companies in each fund.

Slide 9: Execution: Implementation

• Expense ratios under 0.10%
• Bonds held in the 401(k), stocks split across accounts
• Inflation-protected bonds as part of the bond share
• Contributions every paycheck: no market timing

Speaker notes: Implementation is about how the portfolio is put in place and at what cost. I minimize costs by choosing funds with expense ratios below a tenth of a percent. I place bonds in my 401(k), where their interest is tax-deferred, and favor stocks in my Roth IRA, where decades of growth will be tax-free. I invest with every paycheck rather than trying to time purchases. Part of my bond allocation goes to Treasury Inflation-Protected Securities; Campbell and Viceira (2001) showed that for a cautious long-horizon investor, long-term inflation-indexed bonds, not cash, are the truly safe asset.

Slide 10: Feedback: Monitoring

• Investor factors: income, family, health, goals
• Market factors: returns, inflation, interest rates
• Quarterly check, annual full review

Speaker notes: The feedback stage starts with monitoring. The textbook distinguishes monitoring changes in the investor's circumstances from monitoring changes in markets. For me, a marriage, children, a job change or an inheritance would change my objectives, while large changes in inflation or interest rates would change my expectations. I glance at my accounts quarterly and do a full review each January.

Slide 11: Feedback: Rebalancing and Evaluation

• Rebalance when stocks leave the 75% to 85% band, or every January
• Evaluate against a blended benchmark
• Ask: am I on track for $900,000?

Speaker notes: Rebalancing restores the target mix after markets move. If stocks rise above 85 percent or fall below 75 percent, I rebalance; otherwise I rebalance once a year using new contributions first. Performance evaluation compares my results with a benchmark made of the same index mix and, more importantly, with the path my plan requires. The question that matters is whether I'm on track for my goal, not whether I beat a neighbor.

Slide 12: IPS Component 1: Client Description

• Age 34, single, no dependents, stable salaried job
• Assets: $51,000 retirement, $15,000 emergency fund
• No debt except a car loan with 18 months left

Speaker notes: Now I turn to Table 22.2, the nine components of the investment policy statement. The first is a brief client description. I am 34, single with no dependents, and employed in a stable salaried role. My human capital, my future earnings, is my largest asset, and because it behaves somewhat like a bond, I can afford to hold more stocks in my financial portfolio now.

Slide 13: IPS Component 2: Purpose of the Policy

• Guide decisions for 33 years of saving
• Prevent emotional reactions to markets
• Provide a standard for judging progress

Speaker notes: The second component states the purpose of the policies and guidelines. My IPS exists to guide decisions over a long period, to protect me from my own reactions during market swings and to give me a standard against which to judge whether my plan is working. Research discussed in our behavioral finance chapter shows how easily investors trade on emotion; in the brokerage data of Barber and Odean (2000), the busiest traders ended up with the weakest returns. This document is my defense.

Slide 14: IPS Component 3: Duties and Responsibilities

• Me: contributions, reviews, rebalancing
• Plan sponsor: fund menu and recordkeeping
• Fee-only adviser: second opinion every three years

Speaker notes: The third component sets out the duties of each party. I am responsible for contributing, reviewing and rebalancing. My employer, as plan sponsor, is responsible for offering a reasonable fund menu and keeping accurate records. Every three years, or after a major life change, I will pay a fee-only adviser for a second opinion, so that someone without a commission at stake checks my thinking.

Slide 15: IPS Component 4: Goals, Objectives and Constraints

• Goal: $900,000 in today's dollars by 67
• Objectives: 4% real return, tolerate a 25% decline
• Constraints summarized on Slides 21 to 23

Speaker notes: The fourth component is the statement of goals, objectives and constraints. My primary goal is retirement income; a secondary goal is leaving a modest estate and giving generously along the way. I'll present the objectives and constraints in detail at the end, following Table 22.3.

Slide 16: IPS Component 5: Review Schedule

• Annual review every January
• Immediate review after major life events
• Rewrite the IPS every five years

Speaker notes: The fifth component is the schedule for reviewing performance and the IPS itself. I review my progress and allocation every January, and I will review immediately after events such as marriage, children or a job loss. Every five years I'll rewrite the document from scratch, because my circumstances will change more than I can predict.

Slide 17: IPS Component 6: Performance Measures and Benchmarks

• Benchmark: 55% U.S. total market, 25% international, 20% U.S. aggregate bonds
• Measure: return net of fees vs. benchmark
• Goal check: projected balance vs. required path

Speaker notes: The sixth component sets performance measures and benchmarks. Because my funds are index funds, my portfolio should track a blended benchmark of the same indexes closely, and any gap should be roughly the fees. The more important measure is my projected balance at 67 compared with the path I need, which I recalculate each year with the same time value methods we used in class.

Slide 18: IPS Component 7: Allocation Considerations

• Human capital supports a high stock share now
• Glide path: reduce stocks to 50% by age 67
• Stock allocation falls about one point a year after 40

Speaker notes: The seventh component covers considerations in developing the strategic asset allocation. My long horizon and stable income support a high stock share now. As I near retirement, my human capital shrinks and the cost of a large loss rises, so I will reduce stocks by about one percentage point a year from age 40, reaching about 50 percent at retirement.

Slide 19: IPS Component 8: Strategies and Styles

• Passive, indexed, globally diversified
• No individual stocks above 5% of the portfolio
• No options or margin-based funds in retirement accounts

Speaker notes: The eighth component describes investment strategies and styles. My strategy is passive and indexed, with global diversification. I limit any single stock to 5 percent of my portfolio. As we learned in chapters 15 and 16, options can be used for hedging, but I don't need them in a simple indexed portfolio, so I exclude them from my retirement accounts.

Slide 20: IPS Component 9: Rebalancing Guidelines

• Bands: stocks 75% to 85% of the portfolio
• Use new contributions first, then exchanges
• Rebalance inside tax-advantaged accounts to avoid taxes

Speaker notes: The ninth component sets guidelines for rebalancing. I rebalance when stocks move outside the 75 to 85 percent band or at my January review. I direct new contributions toward whichever asset is underweight before selling anything, and I rebalance inside my 401(k) and IRA, where exchanges don't trigger taxes.

Slide 21: Objectives: Return Requirement and Risk Tolerance

• Required return: 3.5% to 4% real
• Ability to bear risk: high (long horizon, stable job)
• Willingness: moderate; cap stocks at 85%

Speaker notes: Table 22.3 divides portfolio policies into objectives and constraints. My return requirement is 3.5 to 4 percent above inflation. The textbook separates the ability to take risk from the willingness to take it. My ability is high because of my long horizon and stable income. My willingness is moderate; I sold some stocks in a past decline and regretted it. That's why I cap stocks at 85 percent rather than going higher.

Slide 22: Constraints: Liquidity, Horizon and Taxes

• Liquidity: $15,000 emergency fund outside investments
• Horizon: 33 years to retirement, about 25 in retirement
• Taxes: 401(k) pretax, Roth IRA tax-free growth

Speaker notes: My liquidity constraint is met by a $15,000 emergency fund held in a high-yield savings account, so I never need to sell investments in a downturn. My time horizon is long and has two stages, saving and spending. For taxes, I use the pretax 401(k) to lower my current tax bill and the Roth IRA for tax-free growth, which diversifies my future tax exposure.

Slide 23: Constraints: Legal, Regulatory and Unique

• Contribution limits and early withdrawal penalties
• Beneficiaries named; simple will in place
• Unique: commitment to give 10% of income

Speaker notes: Legal and regulatory constraints include annual contribution limits and penalties on early withdrawals, which I treat as helpful barriers. For estate planning I have named beneficiaries on every account and have a simple will. My unique circumstance is a commitment to give 10 percent of my income, which I include in my budget before saving.

Slide 24: Summary and Stewardship

• Plan: 18% saving, 80/20 allocation, annual rebalancing
• On track for about $900,000 to $1,000,000 in today's dollars
• Purpose: provide, give and finish well

Speaker notes: To summarize, my plan saves 18 percent of pay, holds a diversified 80/20 portfolio of low-cost index funds, rebalances by rule and reviews every year. A written plan turns good intentions into habits that survive bad markets. I see this as stewardship: managing what I have been given so I can provide for my future, give generously now and finish well. Thank you for watching.

References

Barber, B. M., & Odean, T. (2000). Trading is hazardous to your wealth: The common stock investment performance of individual investors. The Journal of Finance, 55(2), 773-806. https://doi.org/10.1111/0022-1082.00226

Bodie, Z., Kane, A., & Marcus, A. J. (2017). Essentials of investments (10th ed.). McGraw-Hill Education.

Campbell, J. Y., & Viceira, L. M. (2001). Who should buy long-term bonds? American Economic Review, 91(1), 99-127. https://doi.org/10.1257/aer.91.1.99