Financial Planning (Not Rocket Science)

HASSAN & ASSOCIATES
personal financial advisers © 2009
Financial planning
(not rocket science)
August 2009
Simon Hassan CFPCM
, CLU

HASSAN & ASSOCIATES
personal financial advisers
© 2009
Preface
• Simon Hassan
– Professional, fee‐based financial
– planner for 20 years
– Certified Financial PlannerCM
– Fellow and Past President
Institute of Financial Advisers www.ifa.org.nz
• Disclosure Statement: www.hassan.co.nz
• Questions: simon@hasssan.co.nz

HASSAN & ASSOCIATES
© 2009
What, why, how
• What is a personal financial plan?
• Why financial planning is important
• How to get started

HASSAN & ASSOCIATES
© 2009
WHAT is financial planning?
• Making the financial arrangements required
to achieve your life goals
• A pyramid
• A graph

HASSAN & ASSOCIATES
© 2009
A pyramid
Tax
Estate
Retirement
Insurances
Debt
Financial management
Investments
• The top brick draws the most attention
• But the foundations are essential

HASSAN & ASSOCIATES
© 2009
20 26 32 38 44 50 56 62 68 74 80 86 92 98
Age
Wealth
A graph
• Changing net worth/wealth …
• … over a lifetime

HASSAN & ASSOCIATES
© 2009
WHY? Protect what you can
• Wasted resources (budget, tax planning)
• Lost breadwinner (life, TPD cover)
• Lost ability to earn (income, trauma cover)
• Big medical costs (health, trauma cover)
• Lost assets (insurance cover, estate planning)
• Retirement lifestyle (KiwiSaver, planning)
• Lost investment value (diversification, asset
allocation)

HASSAN & ASSOCIATES
© 2009
HOW: Financial management
• Not enough income…
• …or too much of it spent?
• Understand debt, structure and use it wisely

HASSAN & ASSOCIATES
© 2009
Insurance, a necessary evil
• Before you take insurance, consider the
alternatives
• Don’t keep insurance you no longer need
(Would you wear a parachute on the ground?)
• Good insurance can be money well spent

HASSAN & ASSOCIATES
© 2009
How much life insurance?
• Immediate cash
– Final expenses, pay bills & tax, and clear debt
– Adjustment sum for survivors
• Lump sums for future needs
– Education and care
– Now to retirement for surviving spouse
– After retirement for surviving spouse
• Less available assets and insurance

HASSAN & ASSOCIATES
© 2009
Retirement planning
• Every Kiwi who can should join KiwiSaver
• $1,000, plus (if over 18) $for$ subsidy up to $20
per week from the government (taxpayer)
• Plus (if employed) $for$ employer subsidy
• Eg: join at 20, earn $30k pa from 25, rising to
$46k pa over 5 years, and retire at 67
• You save $38k, others add $76k: $362k by 67
• $309 per week for 33 yrs (NZ Super: $239)

HASSAN & ASSOCIATES
© 2009
Investment planning basics
• Time frame
• Diversification
• Asset allocation
• Risk profile
• Look for hidden costs (commissions, fees,
transaction and funds costs can add up)
• Allow for inflation by using “real” returns

HASSAN & ASSOCIATES
© 2009
Inflation and real returns
• What do you have to do to turn $100 into $78?
Nothing (just wait 10 years with 2.5% inflation)
• Gross, net and real returns – eg, invest $100
Gross return 6.0% $106.00
Less tax and costs ‐2.0% ‐$2.00
Net return 4.0% $104.00
Less inflation ‐2.5% ‐$2.50
Real return 1.5% $101.50

HASSAN & ASSOCIATES
© 2009
RF
IR
Risk and return
• All investments involve risk
• Each investment has risk‐
return characteristics
• Can’t beat the “Efficient
Frontier” (EF)
• There is also a “Risk Free”
option (RF) to consider
• A tangent from RF hits EF at
the “Ideal Risky Mix” (IR)
• Portfolio design is all about
the right RF‐IR mix
Return
Risk, volatility
EF

HASSAN & ASSOCIATES
© 2009
Time lowers risk
• Growth assets are unpredictable over short periods
• But – Black Swans aside – uncertainty levels lessen
over time (mean reversion)
Time
Expected return
30%
15%
0%
-15%
High end of likely range
Low end of likely range
Return
since
inception
Actual return

HASSAN & ASSOCIATES
© 2009
But investing is like a car ...
… without a windscreen

HASSAN & ASSOCIATES
© 2009
And there are Black Swans
Just because
something hasn’t
happened,….

HASSAN & ASSOCIATES
© 2009
And optimistic bias

HASSAN & ASSOCIATES
© 2009
Global share markets
Down 40%, up 40%
$0
$20
$40
$60
$80
$100
$120
$140
Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09
AORD CAC 40 DAX
FTSE 100 NIKKEI 225 NZX50
S&P 500
40% fall
40% rise

HASSAN & ASSOCIATES
© 2009
Make room for China
(extend left hand scale from $140 to $250)
$0
$50
$100
$150
$200
$250
$250

HASSAN & ASSOCIATES
© 2009
Global share markets
Shanghai: down 70%, up 100%
$0
$50
$100
$150
$200
$250
70% fall
100% rise

HASSAN & ASSOCIATES
© 2009
But shares usually do well
over very long periods
$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
$100
Jan 50 Jan 60 Jan 70 Jan 80 Jan 90 Jan 00 Jan 10
US shares since 1950

HASSAN & ASSOCIATES
© 2009
Log scale easier to make sense of
over very long periods
$1
$10
$100
Jan 50 Jan 60 Jan 70 Jan 80 Jan 90 Jan 00 Jan 10
US shares since 1950 (log scale)

HASSAN & ASSOCIATES
© 2009
It can pay to get good advice
• Over the 20 years 1986 and 2005:
– US shares gained 11.9% pa
– But the average investor in US share funds made just 3.9%
pa, and stayed invested for less than 3 years*
• The main reason investors do badly?
• Reacting to the news (“noise”), they went in
and out for wrong reasons at wrong times
* DALBAR’s ongoing Quantitative Analysis of Investor Behaviour compares investment flows
with changes in asset levels to determine returns earned by investors. DALBAR Inc is an
independent North American firm specialising in financial services research.

HASSAN & ASSOCIATES
© 2009
Choosing a financial adviser
• Adviser’s qualifications, experience?
• Professional body membership, credentials?
• Feel okay? (likely long‐term relationship)
• Commission can lead to problems
• Fees can help you be sure your adviser works
for you – they can also be less than
commissions

HASSAN & ASSOCIATES
© 2009
The process
• Initial discussion (typically no charge)
• Collect and analyse data (situation, goals,
issues, strategies), draft a plan integrating and
interrelating the issues (financial
management, tax, insurance, estate,
retirement, investments)
• Discuss, revise, agree and implement
• Periodic review and adjustment

HASSAN & ASSOCIATES
© 2009
Action points
1. Situation audit
2. Review your budget (get tool from
www.hassan.co.nz), collate your financial
details, think about your goals, priorities and
values
3. Identify, prioritise and plan future actions
4. There is a great satisfaction in taking that
first step…

Financial Planning (Not Rocket Science)

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