Presentation on theme: "Investment Strategies for Women"— Presentation transcript:
1 Investment Strategies for Women
Speaker’s name is 24pt Speaker’s position is 24pt [IDEALLY, HAVE SOMEONE ELSE INTRODUCE YOU. IF YOU INTRODUCE YOURSELF, KEEP IT SHORT.] Hello. Welcome to our “Investment Strategies for Women” seminar. I tried to introduce myself to all of you when you came in, but in case I missed anyone, my name is _________ and I'm a _____________ in the __________ office of Prudential. I’ve worked in the financial industry for _____ years and I’ve been with Prudential for ____ years. Before we start, I'd like to get a feel for who you are and what you're interested in: A more comfortable retirement? Raise your hands, please. Thanks. Your children's or grandchildren's education? Buying a house or a second home? Starting a new business? Did I miss any other goals? [LISTEN TO ANY ANSWERS.] Thanks. This way I know a little about what you're interested in and what direction I should take with the seminar today. Date
2 Agenda Is Investing Really Different for Women?
Time-Proven Investment Strategies Developing Your Personal Investment Plan Making Your Financial Future a Priority During our time together, we will address the following: Is Investing Really Different for Women? This is a question I am asked quite often. You may have wondered about this yourself. How many of you think it is different? [SHOW OF HANDS] How many of you think it isn’t different? [SHOW OF HANDS] Interesting. Well, we’ll tackle this question right up front. And then we will explore: Time-Proven Investment Strategies; Developing Your Personal Investment Plan; and Making Your Financial Future a Priority And I’ll finish up by introducing you to three women—Marguerite, Paige, and Helena—who are learning to invest for success. Let’s get started.
3 Is Investing Really Different for Women?
Financial Tip #1: Pay Off Your Debt Prior to investing, pay down any consumer debt, specifically high interest-rate credit card balances. Unlike mortgage interest, interest and fees that you pay on consumer debt are not tax deductible. It is counterproductive to invest a sum of money in a 4% bond fund when you are paying 19% on your credit card balance. You lose15% a year instead of earning 4%!
4 Is Investing Really Different for Women?
Yes and no. The investment process is the same, but women have different financial needs. On average, women Live longer Earn less Work fewer years than men. Is Investing Really Different for Women? When I polled the room, about ____ of you believed it is different, and about ______ of you believed it isn’t. Well the answer is actually yes and no. No, the process of investing is not different for women and men. What’s different is that, on average, women have unique financial needs/circ*mstances that are often overlooked, misunderstood, or ignored. On average, women Live longer Earn less Work fewer years than men. Based on these specific circ*mstances, women may need to be investing differently. That’s why we thought it was important to speak with you today—to make you aware of these differences and help you identify investment strategies to address your needs and goals. Let’s take the first point—on average, women live longer than men.
5 Women Enjoy Longer Life Expectancies…
Average Life Expectancy at Birth Average Life Expectancy at Retirement 20 years or age 85 17 years or age 82 14 years or age 79 80 years 75 years 47 years It’s true—on average, women enjoy longer life expectancies. In the past century, average life expectancy has risen for both men and women, thanks to a number of factors—medical advancements, better standard of living, better understanding about health risks (e.g., smoking) and nutrition, etc. Despite this general rise, however, women continue to have longer life expectancies. According to the National Center for Health Statistics, a woman’s life expectancy at birth is 80 years versus 75 years for a man. And a woman’s life expectancy after reaching retirement age of 65 is even longer—reaching age 85 years versus 82 years for a man. As a result, most women will be retired for a longer period of time than most men because they'll live longer. So it's critical for women to have a good source of retirement income. Keep in mind that these figures are averages. That means that half of the population is projected to live even longer. Are you prepared to live in retirement on a fixed income for 20 to 30 years? The fact that women enjoy longer life expectancies means that . . . 1900 Today 1950 Today Source: National Center for Health Statistics, 2004
6 …Which Creates a Financial Need for Greater Retirement Reserves
Retirement reserves must stretch farther Likely to require more resources Medical Pharmaceutical Therapeutic Assisted living . . . women generally have a need for greater retirement reserves. It’s safe to assume that the longer you live, the more resources you’ll need—medical, pharmaceutical, therapeutic, assisted living, nursing home resources, etc. This type of care and support is expensive, all the more reason for women to take care of themselves and take control of their financial destiny. Let’s move on to my second point—women earn less than men.
7 Women’s Salaries Continue to Lag, and …
On average, women earn 72 cents to every dollar earned by men. Median Weekly Earnings Men: $1,059 Women: $ 758 On average, women’s salaries continue to lag men’s salaries. While these statistics have improved in the past decade, women still earn less than men. On average, women earn 72 cents to every dollar earned by men. It’s important to point out that the lower salary has far greater implications than simply a smaller paycheck at the end of the week. Salary levels also dictate: How much can be contributed to corporate retirement plans, which drives How much your employer will match your contributions These factors are critical in helping you prepare for retirement. And my third point was that women work fewer years. Source: Department of Labor, Median weekly earnings of full-time management, professional, and related workers.
8 …Women Have More Career Interruptions
On average, women take leave from the work force nearly twice as often as men. Absence Rate Men age 25+: Women age 25+: 4.4 On average, women have more career interruptions than men. Let’s see a show of hands—how many of you have taken a leave of absence from work, whether it be a maternity leave or a family leave to take care of an elder parent? [SHOW OF HANDS] Wow, about ______ of you have had a career interruption. Source: U.S. Department of Labor, Absences are defined as instances when persons who usually work full-time are not due to one or more of the following reasons: illness, injury, medical problems, child care problems, other family or personal obligations, civic or military duty, and maternity or paternity leave.
9 …Which Creates a Financial Need for More Independent Savings and Investment
Fewer years in the work force may mean: Less money earned and saved Fewer years contributing to a corporate retirement plan for yourself Fewer years possibly receiving matching contributions from your employer Compromised plan eligibility, vesting, and benefit payout schedules Fewer years paying into the Social Security system, which drives retirement benefits Having fewer years in the work force is important for several reasons: Fewer years working outside the home means less money earned and saved. It also means fewer years contributing to a corporate retirement plan for yourself. It may also mean fewer years receiving matching contributions from your employer. Additionally, the length of service an employee has with the employer determines when an employee can join a plan, when the individual becomes vested, and when benefits may be paid. Individuals taking time off for family or medical reasons may not meet a plan’s minimum tenure requirements. And finally, it also means fewer years paying into the Social Security system, which drives your Social Security payouts. So as you can see, on average, women’s investment needs are different.
10 Is Investing Really Different for Women?
The circ*mstances The needs Live longer Earn less Work fewer years Need for greater retirement reserves Need for more independent savings [REVIEW SUMMARY SLIDE] My goal is not to make you nervous about your financial future, but to enlighten you about the financial challenges most women face and to show you how to create an investment strategy to help you be prepared. With that said, let’s move on to our next topic—Time-Proven Investment Strategies. Need a disciplined investment strategy in place to guarantee financial security in the future
11 Time-Proven Investment Strategies
Financial Tip #2: Consider Dollar Cost Averaging Without a crystal ball, you cannot determine the price you will get when buying a security. By investing a certain amount of money on a regular basis, you avoid investing a lump sum at the security’s high (or low) price. Consider investing regularly on your own or setting up an automatic investment plan, whereby you specify an amount of money to be withdrawn from a designated account each month or quarter to buy shares in a specified investment. There is no guarantee that dollar cost averaging will ensure a profit or protect against a loss in declining markets. Since such a plan includes continuous investment clients should consider their financial ability to continue purchases through periods of low price levels. You do not have to be an investment guru to make your financial dreams come true. In fact, there are several simple investment strategies that can help maximize your investment efforts over time.
12 Time-Proven Investment Strategies
Invest for the long term Build in discipline Diversify Take advantage of compounding Take advantage of tax deferral In order to be a successful investor, one needs to know the five golden rules of investing: Invest for the long term Build in discipline Diversify Take advantage of compounding Take advantage of tax deferral We’ll begin with long-term investing.
13 Invest for the Long Term Slow and Steady Wins the Race
Investment risk lessens over time — S&P 500 Index 1926–2004 As the fable goes, slow and steady wins the race. This rings true with investing as well. Long-term, disciplined investing is the best approach to help you reach your investment goals—unless, of course, your goals are shorter term in nature. The effects of risk are less evident over the long term. Compare the market swings in year 1 to the long-term results in year 20. Maintaining a long-term investment perspective can help you manage market ups and downs. In fact, the chart illustrates that as the holding periods lengthens, the range between the highest and lowest performance lessens. Source: Ibbotson Associates. Based on performance of the S&P 500 Index. The S&P 500 Index is a market-weighted, unmanaged index of 500 stocks in a variety of industries. Investors cannot buy or invest directly in market indexes or averages. Past performance is not indicative of future results.
14 Build In Discipline Build discipline into your investment plan.
Pay yourself first. Use payroll deduction, on-line banking, or an automatic investment plan to set aside money regularly. Dollar cost averaging.* Invest a fixed dollar amount on a regular basis, regardless of what’s happening in the financial market, to even out the share price you pay over time. Strategy Comparison Share Price Dollar Cost Averaging $200 each month $200 $12.00 16.67 shares $13.00 15.39 shares $14.00 14.29 shares Total shares __ 46.35 shares Average share price Average share cost: $12.95 Build discipline into your investment plan by: Adopting the mindset of paying yourself first—designate a certain amount of money as savings each week/month. If you haven’t already signed up for your company’s retirement plan, do so as soon as possible. Consider setting up an automatic investment plan to help you achieve your other non-retirement goals. Taking advantage of convenient services to help you, such as: – Payroll deduction – Automatic investment plan – On-line banking (e.g., set up a regular transfer from your checking account to your investment plan) You may also build in discipline by Dollar cost averaging or investing a fixed dollar amount on a regular basis (e.g., monthly) regardless of what’s happening in the financial market. By investing on a regular basis, the share price you pay evens out over time—you’ll never pay only the highest or lowest price. A common concern with those new to investing is volatility and risk. Next, let’s talk about diversification. *There is no guarantee that dollar cost averaging will ensure a profit or protect against a loss in a declining markets. Since such a plan includes continuous investment, clients should consider their financial ability to continue purchases through period of low price levels.
15 Diversify Don’t put all of your eggs in one basket
Diversification is the process of spreading your money across a variety of investments (e.g., stocks, bonds, money markets) in order to: Reduce risk Reduce volatility An asset allocation strategy determines how much money should be invested in each asset class. Reduce Risk – A diversified portfolio helps reduce investment risk because your growth opportunity is not limited to the performance of one stock, but is open to the vast opportunities represented by a collection of securities investments. That way, if one security is doing poorly, it will not compromise your entire portfolio. Reduce Volatility – Investing in a selection of securities spread across different asset classes can provide your portfolio with the kind of diversification that can help shield you from volatility during turbulent times. The performance of the other securities in the portfolio will help to offset the drop in price of a poorly performing security. But how do you know how to diversify your money?
16 Managing Risk with Diversification
Since you can’t avoid risk, learn to manage it Asset allocation decisions must reflect your personal investment profile Cash Equivalents Bonds Bonds Bonds Stocks Different people need different portfolios. It all depends on your investment horizon, your investment attitudes, and your tax situation. The first portfolio on the upper left might be for a younger person who invests heavily in stocks for long-term growth. The middle portfolio might be for someone who wants a steadier income from bonds and blue chip stocks. The portfolio on the right, with all that cash, might belong to someone who is about to make a down payment on a house or who is entering retirement. What portfolio would be right for you? One of the things we try to do is come up with some specific objectives and goals that we want to achieve. Then we can make a judgment about what asset allocations are appropriate; which allocations fit your personal investment profile. Diversification not only helps reduce portfolio risk, but it also helps manage the volatility as security prices fluctuate up and down. Cash Equivalents Stocks Stocks Cash Equivalents This hypothetical example is provided for informational purposes only. It is not intended to represent any specific investment and is not indicative of past, present, or future performance.
17 Managing Risk with Diversification
Diversifying can help reduce risk and volatility Standard Deviation (Risk) Historical Returns 0.0 30.0 3.0 6.0 9.0 12.0 15.0 18.0 21.0 24.0 27.0 20.0 Stocks Cash Moderate Conservative Growth Fixed Income Equity Diversifying your investment portfolio can help enhance your opportunity and manage your risk. Diversifying can also reduce the level of volatility in your portfolio. Performance across different asset classes and types of stocks investments from year to year depends on factors and events that often cannot be predicted, like changes in the economy. By diversifying your investment, you can often offset losses in one asset class with gains in another. In this chart, we see three hypothetical diversified portfolios. The Conservative portfolio is predominantly invested in bonds, with a blend of stocks as well. The Moderate portfolio turns up the dial on stocks, while the Growth portfolio is predominantly invested in stocks. If we evaluate the risk and reward potential of these three portfolios compared to the all-cash portfolio, we see that by mixing stocks and bonds together, it increases the risk and return potential. When we compare them to the all-stock portfolio, we see that adding bonds to an all stock portfolio decreases risk and return potential. All investments have risk–some (stocks) more than others (bonds). The trick is to identify where you are comfortable in terms of accepting risk for a potential return. We will explore this process in more detail when we discuss “Implementing Your Investment Plan.” The next golden rule is compounding. Source: Ibbotson, January 2004 This chart, which presents three hypothetical diversified investment portfolios, is for illustrative purposes only and does not represent the performance of any specific investment. Standard deviation is a statistical measurement of how far a variable quantity, such as the price of a stock, moves above or below its average value. The wider the range, which means the greater the standard deviation, the riskier an investment is considered to be.
18 The Power of Compounding
Make your money work as hard as you do 25 35 45 55 65 Age No contributions $472,306 Anne $30,000 invested Bob $90,000 invested $3,000/yr $367,038 Compounded growth is what happens when your investment returns begin generating returns of their own, making your money work even harder for you. The sooner you start, the better, as your investment returns compound over time generating stronger returns. Compounded growth is what happens when your investment returns begin generating returns of their own, making your money work even harder for you. When you earn investment returns, your returns begin to gain returns as well, allowing you to accelerate the growth of your investment over the long term. Look at what happened with these two hypothetical investors. [REFERENCE CHART] Beginning at age 25, Anne invested $2,000 per year for 10 years and then stopped, for whatever reason. Anne’s $20,000 total contribution continued to earn, and then the earnings started to earn, and then the earnings on the earnings started to earn. At age 65, 30 years after she stopped contributions, Anne had over $300,000, assuming an 8% rate of return. That’s the power of compounding. Bob waited until he was 35 to begin, then invested $2,000 per year for 30 years through age 65. This example also assumes an 8% rate of return and is not meant to represent actual performance of any particular investment. Source: Prudential Investments. This hypothetical example is not meant to represent the actual performance of any particular investment. Assumes contributions are made to an IRA with an 8% annual rate of return. Withdrawals made prior to age 59 ½ may be subject to 10% federal income tax penalty.
19 The Power of Compounding
Take advantage of the power of compounding Reinvest dividends and capital gains Initiate an automatic investment program Make contributions to your retirement plan Take advantage of the power of compounding by: Reinvesting your dividends and capital gains distributions Initiating an automatic investment program so that a certain amount is invested on a monthly or quarterly basis Making contributions to your retirement plan. The tax-deferred growth helps boost long-term returns.
20 The Power of Tax Deferral
Take advantage of the power of tax deferral by making contributions to your retirement plans–both your individual and corporate plans. This chart is for illustrative purposes only and assumes an 8% annual compounded return and a combined federal, state, and local income tax rate of 28%. Actual returns will vary and may be greater or less than any assumed rate. There can be no guarantee that any particular return will be achieved. Non-qualified withdrawals from a Traditional IRA will be subject to taxation at then current income tax rates. Taxes on withdrawals and distributions will reduce accumulated amounts. Withdrawals made from a Traditional IRA prior to age 59 ½ may be subject to an additional 10% penalty tax if not made for qualified purposes. Please note that there have been recent changes in to the amount of tax payable on taxable income due to federal rate reductions on ordinary income, capital gains, and dividends. If the taxable amount is illustrated as an investment in mutual funds, which are generally taxed at 15% through 2008, the value at the end of 25 years would be $81,335. Qualified retirement plans permit investments to grow on a tax-deferred basis, meaning that taxes are not due on the growth until assets are taken out of the account. Putting off the taxes leaves more money in your account today, which compounds over time. Take advantage of the power of tax deferral by maximizing your contributions to your individual (IRA) and corporate-sponsored (401(k), 403(b)) retirement plans. As we see in the chart, the tax-deferred investment grew significantly greater over the 30-year period than the taxable investment. The tax-deferred growth helps boost long-term returns. Let’s summarize the golden rules.
21 Time-Proven Investment Strategies
The ideal investment approach incorporates all of these strategies Investing for the long term Built in discipline Diversification Compounded growth Tax-deferred growth Ideally, you want to incorporate each of these principles into your investment plan. While this may seem like a lot, today’s financial companies have made it much easier for us to employ these principles. Services, such as the automatic investment plan; payroll deduction; on-line banking and account access; and, of course, access to seasoned financial professionals like myself; can make putting these strategies into play much more manageable. Let’s move on to “Developing Your Investment Plan.”
22 Developing Your Personal Investment Plan
Financial Tip #3: Save for a Rainy Day It is advisable to have three to six months worth of expenses tucked away in an emergency account. That way, if you are caught with unexpected expenses or loss of income, you have a cushion to fall back on. Keep this money in a short-term investment that offers you stability and easy access, such as a money market fund. If you are in a pinch, you don’t want to have your reserves in a stock fund that has lost considerable value or locked away in a CD. *An investment in a Money Market Fund is not inured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund.
23 Developing Your Personal Investment Plan
Follow the Four-Step Planning Process 1 Define Your Goals 4 Monitor Your Progress and Revisit Your Goals At the heart of any careful investment plan is a process. We like to refer to it as a four-step process, during which we will work together to: Define your goals Develop your investment strategy Implement your investment plan Monitor your progress and periodically revisit your goals. Through the disciplined application of these four steps, together we can build a portfolio that suits your individual taste and financial expectations. 3 Implement the Investment Plan 2 Develop an Investment Strategy
24 Defining Your Financial Goals
Education Estate Planning Business What are some of your financial goals? At the start of the meeting, I asked you to share some of your financial goals with me. We have a good range: Help provide for your children's or grandchildren's education. Buy a house or a second home Start your own business Have a more comfortable retirement. This issue is especially relevant for women. Transfer wealth to future generations Defining your goals is the first step to developing your investment strategy. However, you must be specific about these goals. Home Retirement
25 Developing Your Investment Strategy
Your investment strategy should reflect your unique set of financial objectives, preferences, and needs Your financial goals Your time frame for each goal How much needed to fund each goal Your comfort level with risk Any specific preferences Your investment strategy should reflect your unique set of financial objectives, preferences, and needs. Your financial goals Your time frame for each goal How much money you will need to fund each goal Your comfort level with risk Any specific preferences, such as no to “international” investments or yes to “alternative” investments or “socially responsible” investments only This brings us to step 2: Developing Your Investment Strategy. A financial professional can help you develop your personal investor profile. This profile will help drive your investment decisions going forward.
26 Developing Your Investment Strategy
Major types of investments Cash Bonds Stocks A good way to begin developing your investment plan is becoming familiar with the major types of investments or asset classes. There are three basic investment groups: Cash, Bonds, and Stocks. Let’s take a closer look at each of the major types of investments.
27 Developing Your Investment Strategy
Major types of investments Cash Certificates of deposit Money market funds Treasury bills When investors refer to cash, it can mean more than the money in your wallet or checking account. The cash asset class can also mean short-term, flexible investments that are like cash—cash equivalents: Certificates of deposit or CDs offer a fixed rate of return and are insured by the FDIC up to $100,000 for each investor and issuing institution. A minimum deposit may be required, and CDs usually cannot be withdrawn prior to maturity. On money market funds, the yield is variable. An investment in the fund is not insured or guaranteed by the FDIC or any other government agency. Although the fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in the fund. The 30-dayTreasury bill will often be our standard cash equivalent today—a general obligation sold by the government to finance its short-term cash needs.
28 Developing Your Investment Strategy
Major types of investments Bonds U.S. Government bonds Corporate bonds Municipal bonds International bonds Next is bonds. [QUESTION:] What are BONDS, anyway? [DISCUSSION] [ANSWER SUMMARY:] When you buy a bond, you are lending money to the issuer of the bond. The U.S. Government sells bonds for long-term cash needs and so do corporations. Corporate bonds generally pay higher interest, or yield, than government bonds, depending on their level of credit risk, which is considered higher than that of government bonds. Municipal bonds are issued by state and local governments. The interest rates on them are ordinarily lower because income from those bonds is generally exempt from federal taxes, although for some investors and certain types of municipal bonds it may be subject to the alternative minimum tax (AMT). Also capital gains on the sale of these bonds are taxable. I’ll talk more about capital gains when I get to stocks. International bonds sometimes offer attractive returns, and they can be a good way to diversify a portfolio. While they are subject to unique risks like currency fluctuations and sociopolitical changes, many American investors have begun to look at them seriously again, now that so many world economies are turning up. Whenever we talk about bonds, we usually end up talking about interest rates because when interest rates change, they have a powerful effect on the price of bonds. Interest rates have an inverse relationship with bond prices. As rates go up, bond prices go down; as rates go down, bond prices go up.
29 Developing Your Investment Strategy
Major types of investments Stocks Blue chip or large company stocks Smaller company stocks International stocks Growth stocks Value stocks Preferred stocks [QUESTION:] Let's go on. Now what are stocks? Stocks are also called equities. [ANSWER SUMMARY:] Shares of stock represent ownership in a corporation. They offer the potential for long-term growth, but they provide less current income and the price may fluctuate more than some other investments. Blue chip stocks are issued by the largest, most stable corporations. Smaller company stocks historically offer even more potential for growth, and their market prices are generally more volatile than the prices of large company stocks. International stocks, like international bonds, are subject to risks from currency fluctuations and sociopolitical changes, but they too are becoming more popular among individual investors, as the U.S. economy becomes more closely connected to the rest of the world. You also hear about growth stocks and value stocks. You buy a growth stock because you expect that company to do very well in the future—grow. You buy a value stock because you think that company is already doing well, better than most people realize, and you think that stock is a bargain at its current price. These are all common stocks. When I talk about stocks today, I will be talking about common stocks. Holders of common stock can exercise control of the corporation through voting rights and the selection of the board of directors. Dividends are paid to common stockholders at the discretion of the directors of the company. Holders of preferred stock, on the other hand, usually have no voting rights, although they do have ownership in a company. In many ways preferred stock is more like a bond than common stock—its dividends are usually paid at a specified rate, for instance. It’s important to spend a minute on how stocks generate returns.
30 Understanding Total Return
$60 $10 $50 Capital Appreciation Dividend Income Total Return STOCK = = 20% $50 STOCK $2 $2 $50 = = 4% What is total return? Let’s take a look at a hypothetical example showing the different ways a stock can offer returns on its holders’ investment. Again, this is for informational purposes only, and has nothing to do with future results. I buy one share of Acme Construction at the market price of $50. Instead of lending money to Acme Construction as I do when I buy a bond, I now own a part of the company. My return on this investment has two parts: income from dividends and capital appreciation, or change in the price of the stock. I hold my stock for a year, and I get a dividend check for $2. As an owner, that is my part of the profits. Of course, not all stocks pay dividends. In the meantime, the price per share of Acme goes up a little one day, and down a little another day, but by the end of the year, the price has risen to $60. That's a $10 capital appreciation on my share, a nice return on my original investment. Adding capital appreciation and dividend income, I get a total return of 24% for the year, which means I wish I'd bought more than one share! Now other considerations. Dividends are income, and therefore are taxed as ordinary income. Capital appreciation does not count as taxable income until I sell my share, then it becomes a capital gain. And remember, the price of my share could drop. In that case if I sold my stock, I would have a capital loss instead of a gain. Keep in mind, however, that Prudential Financial is not a tax adviser. Consult your tax adviser before making any tax-related investment decisions. Some companies pay out most of their profits as dividends; their stocks are called income stocks. Other companies pay no dividends at all, preferring to reinvest any profits in the business; their stocks are called growth stocks, and these companies often have the potential for capital appreciation. April 1, 1997 Order of Pay to the Janet Smith Two Dollars and 00/100 $2.00 Dividend Payment Jane Miller = % This is a hypothetical example provided for informational purposes only.
31 Don’t be too conservative— You could be left Behind
Compound Avg. Annual Returns – Small Company Stocks – Large Company Stocks – Long-Term Government Bonds – Treasury Bills – Inflation $12,968 $2,533 $66 $18 $11 1926 1946 1976 2004 As of 12/31/2004. Source: Data from Stocks, Bonds, Bills & Inflation 2003 YearbookTM Ibbotson Associates, Chicago (annually updated works by Roger G. Ibbotson and Rex Sinquefield). Used with permission. All rights reserved. These examples are used for illustrative purposes only and are not intended to represent the past, present, or future performance of any Prudential mutual fund. Stock prices are more volatile than bond prices over the long-term. Past performance is not indicative of future results. Small stock returns for are those of the stocks comprising the 5th quintile of the New York Stock Exchange. Thereafter, returns are those of the Dimensional Fund Advisors (DFA) Small Company Fund. The prices of small company stocks are generally more volatile than the prices of large company stocks. Common stock returns are based on the S&P 500 Index, a market-weighted, unmanaged index of 500 stocks (currently) in a variety of industries. It is often used as a broad measure of stock market performance. Long-term government bond returns are measured using a constant one-bond portfolio with a maturity of roughly 20 years. Treasury-bill returns are for a one-month bill. Treasurys are guaranteed by the government as to the timely payment of principal and interest; stocks are not. Inflation is measured by the Consumer Price Index (CPI). Investors cannot buy or invest directly in market indexes or averages. Not all investments are suitable for all investors. If your time frame for your investment plan is five or more years, then you should consider adopting a longer-term perspective that would include some exposure to stocks. If you have a long-term time horizon for your financial goals—say retirement or college planning—don’t be overly conservative. Putting all of your money in CDs and Treasury bills may feel comfortable, but over time your returns will barely beat inflation. This chart shows that over time, stocks have outperformed the other financial investments and inflation. It also shows how stocks have provided a higher return than other financial products over a 78-year period from 1925 through It also shows why you should be a long-term investor. Keep in mind that past performance is not indicative of future results.
32 Developing Your Investment Strategy
Try to minimize the tax bite Your Nest Egg Taxes Consider tax-free or tax-advantaged investments for non-retirement accounts: Municipal bonds Tax-managed mutual funds Variable annuities Maintain tax deferral on retirement plans as long as possible Handle retirement rollovers with care Many investors underestimate the impact taxes can have on their investment plans. For those investing in non-retirement accounts, consider tax-free or tax-advantaged investments, such as: Municipal bonds Tax-managed mutual funds Variable annuities For those planning for retirement, taxes continue to present a challenge. While you are busy accumulating assets, your retirement plans—through work or your personal IRA—are protected from taxes by the “tax deferral” status. When you take money out of the plan, however, it is taxable. Taxes can really take a bite out of your retirement nest egg. The good news is that your withdrawal is taxed at your new “retired” tax bracket, which is generally much lower than your tax bracket as an employee. Other things to keep in mind It’s a generally a good idea to maintain tax deferral and consider rolling employer plans into IRAs, which keep your money sheltered until you need it. Handle retirement rollovers with care. There could be tax implications if you don’t. Speak with a financial professional if you are unsure about this. That brings us to Implementing Your Investment Plan.
33 Implementing Your Investment Plan
General Investment Vehicles Mutual funds Annuities Goal-Based Investment Vehicles Retirement savings plans Individual: IRA, Roth IRA Corporate: 401(k), 403(b), SEP IRA, SIMPLEs,ESOP College Savings Plans UGMA/UTMA Section 529 plans Coverdell Education Savings Accounts Now that we’ve discussed the different types of investment securities available, let’s take a look at investment vehicles. There is a wide range of investment vehicles designed to help you pursue your financial goals. [REVIEW SLIDE] Mutual funds are a very popular investment vehicle. Not only can they be used as a general investment, but they can also be used in a goal-based vehicle. [ASK FOR A SHOW OF HANDS] For instance, how many of you have some of your retirement plan assets invested in a mutual fund? How many of you have your children’s college savings in a mutual fund? Just as I expected. Let’s take a closer look at this popular vehicle.
34 The Benefits of Mutual Funds
Professional management Diversification Liquidity Convenience Variety Low minimum investment Low costs Regulated Mutual Funds come in all styles: Money market funds Short- and intermediate-term bond funds Long-term bond funds Balanced funds Growth and income stock funds Stock funds International/global funds Investing in mutual funds is an easy and affordable way for an investor to build a portfolio. Let’s review the benefits of mutual funds. Professional Management. Mutual funds are managed by experienced investment professionals who use the pool of money to buy securities that, in their judgment, will help the fund achieve its objectives. There is no guarantee that the fund’s objectives will be achieved. Diversification. Money is often invested in a wide variety of securities. A diverse mix of holdings helps reduce volatility because poor performance in one investment will likely be offset by better results from other investments in the portfolio. Liquidity. Generally, fund shareholders can sell shares at any time at that day’s closing net asset value. Convenience. Most mutual fund companies offer shareholders a range of services, including automatic investing and withdrawal programs, reinvestment of fund distributions, and exchanges between funds. Variety. Mutual funds are available in a wide variety of styles—ranging in type of asset class (stock, bond); style (small cap, high yield); objective (growth, income); etc. Low minimum investment. Mutual funds are available to investors for a modest initial investment, typically $1,000. Low costs. Mutual funds charge an annual fee for investment management services. For most investors, mutual funds provide professional management and diversification at a fraction of the cost of making such investments independently. Regulated. Not only are mutual fund companies subject to internal standards, but they are also highly regulated by the federal government through the U.S. Securities and Exchange Commission (SEC). Financial Tip #4: Mutual Funds Mutual funds offer an easy and affordable way for an investor to build a diversified portfolio. With very little capital, an investor can achieve diversification by purchasing a single mutual fund that invests in the broad market, including equity and fixed income investments. Alternatively, you may purchase several mutual funds representing a variety of asset classes. Simply combining an equity fund and a bond fund, for example, can achieve the most basic form of asset allocation.
35 Monitoring Your Progress
Quarterly, semiannual, or annual reviews Regular rebalancing Bring your asset allocation back in line with original strategy Revisit your goals Life-changing events The final step in the four-step investment process is crucial. You must monitor your progress on a regular basis to make sure you are still on track with your original plan and, more important that your original plan still reflects where you want to go. This doesn’t mean checking every day. In fact, I don’t advise that. However, reviewing your investment plan quarterly, semiannually, or at least annually will help keep you in touch with how you are progressing toward your goal. [REVIEW SLIDE] Now here’s the challenge—how to put all this good information to use. Next, let’s discuss making your financial future a priority.
36 Making Your Financial Future a Priority
Financial Tip #5: Managing Inflation and Taxes Take advantage of every tax strategy available to you—individual and corporate retirement plans, municipal investments, estate-planning strategies, etc. Always factor inflation into your financial projections.
37 Making Your Financial Future a Priority
Assess your financial picture Understand your benefits Take advantage of what is available to you Develop a personal investment strategy and stick with it You’ve already taken the important first step in making your financial future a priority by attending this seminar. I know I’ve given you a lot to think about. However, the easiest way to get started is to take a good hard look at your financial situation and identify strengths and weaknesses. Assess your finances Make a list of your assets and liabilities so you get a clear picture of your net worth Evaluate how your investments are doing Establish a budget Allocate specific amounts for spending and for saving Consider setting up an automatic investment plan Understand your benefits Pension, insurance retiree, healthcare Take advantage of what is available to you Maximize your contributions to corporate and individual retirement plans Stock option programs Matches College planning programs Develop a personal investment strategy Your asset allocation should reflect your financial needs, goals, and preferences Review investment options carefully—do they fit? If not, make changes Don’t invest too conservatively
38 Why Start Now? Tax reform has worked in your favor
Increased contribution limits Catch-up provisions (age 50+) The retirement landscape is changing Increased life expectancy Rising healthcare costs Questionable Social Security benefits Time is your friend Here are three good reasons why you shouldn’t put off this financial assessment any longer. 1. Tax reform has worked in your favor. Thanks to the 2001 tax reform, we have seen increased contribution limits in both retirement and college savings plans. What’s more, the IRS has established special IRA “catch up” provisions for people age Take advantage of these new opportunities to tuck away additional savings. 2. The retirement landscape is changing. There are a number of factors that are affecting the way we look at retirement. As we discussed earlier, life expectancy projections have increased. Also, healthcare costs are on the rise. As we grow older, it’s very likely that a significant part of our fixed income will be spent on healthcare. We must be sure to budget for this. Additionally, Social Security benefits have been called into question. Will we be able to rely on them in the future? Generally, it is expected that there will be some change down the road—perhaps delayed or reduced benefits—which makes your retirement plan all the more important. 3. Time is your friend. As we discussed earlier, the power of compounding and the power of tax deferral can help boost your investment plan over time. When it comes to planning your financial future, it’s better late than never!
39 You Don’t Have to Go It Alone
The value of professional guidance A financial consultant can help: Define your financial goals—short and long term Formulate financial estimates and projections Develop a financial plan to meet your specific needs Implement your asset allocation strategy Monitor the progress toward the end goal I realize that we’ve covered a lot of important topics today. The good news is that you don’t have to have all the answers and you don’t have to handle this all on your own. [REVIEW SLIDE] Finally, let’s meet three women who are investing for success.
40 Investing for Success Marguerite Age 25 Single Current situation:
Living paycheck to paycheck Student loan payments Saving for next year’s trip to Europe Action plan Carefully prioritize financial goals Create a budget to help control spending Pay down credit card debt Establish an emergency fund Maximize retirement plan contributions Diversify investments for the long term Marguerite Age 25 Single [INTRODUCE MARGUERITE’S PROFILE AND CURRENT SITUATION AND THEN DISCUSS ACTION PLAN IN GREATER DETAIL.] Action plan Carefully prioritize financial goals—Marguerite hasn’t even given a thought to retirement. A financial planner could help guide Marguerite in establishing priorities and setting realistic goals. Create a budget to help control spending. After years of being a poor college student, Marguerite is enjoying her regular paycheck. Creating a budget will help control spending and instill discipline. Pay down credit card debt. High-interest credit cards will hold Marguerite back from achieving her goals. She should pay them off first before establishing other savings initiatives Establish an emergency fund. In order to maintain her independence, Marguerite needs to tuck away 3 to 6 months worth of expenses for a rainy day. Maximize retirement plan contributions. Even though retirement seems like centuries away, it’s important to start saving early to: Take advantage of the power of compounding Take advantage of tax benefits of contributing to retirement plan Take advantage of potential company match – which is free money Diversify investments for the long term. As Marguerite begins to develop an investment plan, she should diversify it carefully according to a customized asset allocation plan based on her needs and investor profile.
41 Investing for Success Paige Age 45 Divorced 3 Children
Current situation Human resources manager for Fortune 500 firm Recently divorced Husband was the financial decision maker Adjusting to being a single mom Adjusting to a reduced standard of living Action plan Embrace the role of financial decision maker Take a new look at new financial landscape Take advantage of company resources and benefits Consider college-savings strategies for the children Paige Age 45 Divorced 3 Children [INTRODUCE PAIGE’S PROFILE AND CURRENT SITUATION AND THEN DISCUSS HER ACTION PLAN IN GREATER DETAIL.] Action plan Embrace the role of financial decision maker. To facilitate this, Paige may want to partner with a financial professional. Take a new look at new financial landscape. To do this, Paige should draft an income statement showing assets and liabilities. She should also create a new “single mom” budget, trimming back where possible and building-in savings. Take advantage of ALL resources and benefits available through firm. Paige works for a large firm with excellent benefits. She should take advantage of all available resources and benefits: Maximize retirement plan contributions Company match Emergency day care Financial planning resources and education Tuition reimbursem*nt Consider college-savings strategies for the children. This may require Paige to be proactive and discuss this important topic with her ex-husband.
42 Investing for Success Helena Age 65 Married 2 Adult Children
Current situation Entering retirement Very conservative Concerned about running out of money in retirement Plans to move all retirement reserves to a mix of bond funds and CDs to protect her nest egg Action plan Revisit allocation, but keep equities in mix for longer-term growth potential Maintain a long term perspective Consider developing an estate plan to strategically transfer wealth to future generations Helena Age 65 Married 2 Adult Children [INTRODUCE HELENA’S PROFILE AND CURRENT SITUATION AND THEN DISCUSS HER ACTION PLAN IN GREATER DETAIL.] Action plan Helena has worked hard for many years to build her retirement nest egg. However, protecting it by being overly conservative could snuff out future growth potential. Given that Helena is projected to live another 20 years in retirement draws down her reserves. With a 20-year time horizon, Helena should maintain a long-term perspective with at least a portion of her retirement assets. She should revisit allocation now that she’s entering retirement, but she should keep equities in the mix for longer-term growth potential. Maintain a long-term perspective. Helena’s asset allocation strategy should reflect her 20-year time horizon. After decades of accumulation, Helena should now consider developing an estate plan to strategically transfer wealth to future generations.
43 How Will You Invest for Success?
Current situation My financial goals are:__________________________________ My present challenges are:______________________________ My greatest concerns are: ______________________________ My current financial plan consists of:______________________ I have a question/s about:______________________________ Action plan Yes, I’d like to speak with a financial professional to help me develop my personal investment strategy. Your Personal Profile Name: ______________ Age: _______________ Marital Status: _______ Number of Children: __ Telephone: __________ How will you invest for success? Well, let’s find out! This last slide will help you reflect on your own investment strategy. Please take a moment to fill out this worksheet. Doing so can help you outline some of your most important goals and concerns. [OFFER PENCILS OR EXTRA COPIES TO ENCOURAGE THIS ACTIVITY.] I would welcome the opportunity to review your worksheet with you and provide you with some guidance for taking the next steps. I want to thank you for taking time out of your busy lives to attend the “Investment Strategies for Women” seminar. I hope you feel that it was a worthwhile investment. For the next ____ (time), I will make my way around the room to answer any questions you may have and to review your worksheets.
44 Thank You! For more information about our mutual funds, call your financial professional for a prospectus. You should consider the fund's investment objectives, risks, and charges and expenses carefully before investing. The prospectus will contain this and other information about the investment company. Please read the prospectus carefully before investing. Not all financial professionals are tax or legal advisors. The tax information is general in nature and not intended to provide tax or legal advice. You should consult your own tax or legal advisor regarding your particular situation. Securities products and services are distributed by Prudential Investment Management Services LLC (PIMS), Three Gateway Center, 14th Floor, Newark, NJ and is a Prudential Financial company. Investment products: JennisonDryden is a service mark of The Prudential Insurance Company of America. [LEAVE SLIDE ON PROJECTOR WHILE YOU WORK THE ROOM ANSWERING QUESTIONS AND REVIEWING WORKSHEETS.] Are not insured by the FDIC or any federal government agency May lose value Are not a deposit of or guaranteed by any bank or any bank affiliate
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