Real Financial Strategies for Young Lawyers

Thomas A. Haunty is a CERTIFIED FINANCIAL PLANNER™ professional who has developed a ti b i lt idi fi i l i f tt th i l fi d th i li t Tpractice sub-specialty providing financial services for attorneys, their law firms and their clients. Tom

has co-authored and been quoted in numerous articles on attorney finances many of which were published in The ABA Journal, MN Lawyer, The Wall Street Journal online and most recently in the October issue of The Young Lawyer magazine. He has also speaks nationally motivating lawyers on how to maximize their finances at numerous bar association meetings, conventions and law firms. In addition, he serves as the volunteer financial advisor for the American Bar Endowment (ABE), a not-for-profit arm of the American Bar Association, in its efforts to support ABA Young Lawyer Division members.

For over 28 years, Tom has practiced with the financial services firm of North Star Resource Group --one of the oldest independent financial services firms in the Midwest and now one of the largest in the country. He is a Senior Partner in the firm’s Madison, WI branch office and manages in excess of $163 million (as of 12/31/2009) for clients across the country.

In addition to receiving his undergraduate business degree as an Evans Scholar from the University of Wisconsin – Madison and his CERTIFIED FINANCIAL PLANNER™ certification, Tom is also accredited as a Registered Health Underwriter (RHU), a Registered Employee Benefits Consultant (REBC), and a Chartered Financial Consultant (ChFC). Tom is also an Associate member of the American Bar Association, a member of the Financial Planning Association; the Financial Counseling, investment Management and Employee Benefits Sections of the Society of Financial Services Professionals™; and is a Life and Qualifying Member of the Million Dollar Round Table, The Premier Association of Financial Professionals®.

His book, titled Real Life Financial Planning for Young Lawyers is available directly from Tom.

Thomas A. Haunty – Financial Strategies for Attorneys. Copyright 2009.All rights reserved. Further reproduction, adaptation or distribution prohibited.

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CFP® and CERTIFIED FINANCIAL PLANNERTM are certification marks owned by the Certified Financial Planner Board of Standards, Inc. These marks are awarded to individuals who successfully complete the CFP Board’s initial and ongoing certification requirements.

We offer a balanced approach to wealth management with access to products and servicesf t t b t ffili t d i h ith i ti i th fi i lfrom two separate, but affiliated companies, each with a unique expertise in the financialmarketplace.

This diversity gives the North Star associate an excellent perspective in recommendingstrategies designed to help meet your financial goals and objectives.

THOMAS A. HAUNTY, CFP©, RHU, REBC, ChFC, , , ,

SENIOR PARTNER

NORTH STAR RESOURCE GROUP

Helping to create, find and protect money

for individuals, families & businesses since 1982™

Email: [email protected]

Toll Free: (888)655-8091, ext. 216

Phone: (608)271-9100, ext. 216 Fax: (608)271-3564

2945 Triverton Pike Drive, Suite 200, Madison, WI 53711

http://www.northstarfinancial.com/ecard.cfm?ID=63487

My Administrative Assistant Stacey Koch


can also help you at (608)271-9100 ext. 220 or [email protected]


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Attorneys spend so much of their time protecting, allocating, litigating over and negotiating about other peoples money YET many attorneys treat their own finances with a lack of care bordering on negligencemoney, YET, many attorneys treat their own finances with a lack of care bordering on negligence.

Here are some of the reasons I see:

Lack of time: attorneys today are pressed for time more than ever, billable hours come at the expense of personal time and their own needs. Do more, do it faster and deliver it for less is the new pace. So much time spent IN your practice, never taking the time to work ON your finances leading to more of a product vs. planning focus.

Procrastination: Lawyers to often make compelling arguments about putting off considering financial strategies that only robs them of developing key financial habits early in their careers and losing valuable time to invest

d t t it di i t lthmoney and start it compounding sooner into wealth .

Not Seeking Help: Do it yourself financial planning is fraught with the same problems lawyers can encounter when representing themselves in legal matters.

Deficit Spending: you can’t build wealth if you keep borrowing and spending more than you make.

Disorganization: since you are constantly facing challenges and deadlines for your clients, organizing materials relating to your own financial matters is rarely a priority. Yet knowing where you are at is the very first step in being able to develop your strategy.

Speculation vs. Diversification: To many attorney’s net worth are too often dominated by one or two largeSpeculation vs. Diversification: To many attorney s net worth are too often dominated by one or two large assets like their practices, real estate, their home, etc.. Because attorneys can understand complex details (master the minutiae) they often take unnecessary risks instead of being more diversified, they become more myopic in their focus and lose track of that the overall picture is what is important to controlling their finances.

Lack of an overall strategy or Direction: To many attorneys do financial planning by crisis, reacting, go from product to product that do not integrate with one another, make decisions based on convenience and one at a time without incorporating all of their resources/goals in the decision process. Financial products always look good in and of themselves but their merits should be weighed against your overall objectives and finances. Your planning should always dictate the products you invest in, not vice versa.


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First develop a system for organizing all of your financial papers at home.

Draft a net worth statement – assets less liabilities – to mark a starting point for where you are at financially. Then each year, redo it, as a motivation to chart your progress.

Al d ft “ d l” b d t h i h h fl h ld k h thAlso draft a “model” budget showing how your cash flow should work each month so you can spend, invest, reduce debt and save (SIRS). This is your target for what a typical month should look like.


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When I mention your “financial house” many of you feel yours looks like this picture:

• you are “under water”

• more debt than assets

• drowning financially and not sure how to begin to dig out


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Due to these prominent problems, I came up with the simple concept to remember: that your finances (your wealth, net worth, your financial strategies) are something you need to build, like a house with various levels.wealth, net worth, your financial strategies) are something you need to build, like a house with various levels.

So where/how do I start building my “Financial House”? With me as your financial architect, I would ask “Do you build the roof first??” No, so -you build from the bottom up – laying a protection foundation first being DEFENSIVE in your strategies- without a foundation that is solid and firm, you have a false sense of security -If the lower levels are built first with the appropriate financial instruments and strategies, then you can more safely proceed to complete the higher levels. Many of these insurances or savings accounts are NECESSARY to protect what you are ACCUMULATING from potential losses. t l b ild th i fi /N t W th f th t d l ti fi t ith th t-too many people build their finances/Net Worth from the top down – speculating first with money they cannot

afford to lose, and when they lose it all they have to start over, falling further behind and have nothing to fall back on. -Think of the insurances, investments and strategies inside the levels of the house as building blocks that if properly arranged and designed, could strengthen the entire structure. If improperly set up, they would leave leaks and cracks that would allow money to flow out of your financial house to others instead of accumulating in your house for you to enjoy.-In order for your financial house to properly support you and your family, it has to be able to withstand anything / no matter what. Your house has to have proper structure, organization, integration of its parts or it will crumble when “bad weather” comes against it. Or there may be opportunities that you cannot participate in. -many of us do not realize the future needs/desires we have/will have for the layout/rooms/decorating in our financial houses and that the size of our financial houses (of your net worth) needs to be bigger tan we think –i.e. due the amount of money we will need in retirement because we are living longer, the amount we will need to finance children’s college because of soaring college cost inflation, etc..-There are so many different “weather patterns” coming against your ability to build a strong financial house that you must prepare for these “weather changes” so your house can handle them – for example, winds of change such as job changes, changes in family life, market changes, taxation changes, inflation, interest rates, etc. Your house must weather these or it will topple over – if you build a shanty or a shack, it will not weather the storms of life and your finances could be wiped out. Lets go through these levels/floors and cover some of (a couple on each level due to time) the more important b ildi t t i t k fi i l h f tifi d


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building strategies to make your financial house fortified.

Level 1 is then the Basement / The protection foundation level where you try to maximize the protection of the assets you have at the lowest cost.assets you have at the lowest cost.

You first start out being defensive in your strategies by reducing or shifting the risk of loss of your assets to insurance companies, the government (in the case of social security) or through legal documents (wills, trusts, asset title/ownership/beneficiaries).

The principal of using insurance is to pay small premiums thereby shifting the risk of potentially large catastrophic losses for an insurer to pay them so that you can be more free to accumulate and growth your assets more aggressively. So we insure for what we cannot self-insure for ourselves (or choose not to handle) with our own assets so we can use and invest those assets for growth accumulation. What we can self insure for, we h dl ith lf i hi h t ll f d ( i t) L ihandle with our own self insurance which most call an emergency fund (savings account). Large companies with billions of dollars do not self insure for many potential risks they face so that they can be free to use the capital to invest elsewhere.

To “maximize” your coverage you have to consider what coverage amount you would want after each event would have occurred. i.e. if you were in an auto accident that was your fault, what amount of auto coverage would you want? If you were disabled, what amount of your income would you want replaced? If you were to die today, what would your family lose if they no longer received your income?

To much insurance is bought with the hope and the bet that catastrophic events will never occur to people but o uc su a ce s boug t t t e ope a d t e bet t at catast op c e e ts e e occu to peop e buthope is not what you should rest the security of your family or your finances (your house) on. You need to see these policies and strategies, if properly structured, as permission slips for you to be more focused on accumulating assets (building the other levels for a bigger house).

So what you can handle is a high deductible (which saves you on premium cost) but you could not handle a catastrophic loss so secure the maximum protection you can.

Let look at two of these building blocks that are very important to address for young attorneys – Income Protection Strategies (using disability income insurance) and


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g ( g y )-- Life Protection Strategies (using life insurance).

MOST VALUABLE ASSET

• Many of you might answer - your home.

• Others might say -- your car.

• If you own a business or are a partner in a law practice, you might think of your business/practice as your most valuable asset.

• Perhaps you are thinking of the money you use to pay for all your assets.

Think about it. Your most valuable asset isn’t your house, your car, your business or even your money. It’s YOU! Your ability to earn an income is your most valuable asset.

The reality is, if you were to lose your home or car and it wasn’t insured, sooner or later you’d be able to replace it — if you could still earn a living.


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What happens if you lose your ability to earn an income? You could lose a lot more than 3 or 36 months of income. Consider the total amount of income you can expect to earn between now and the time you reach age 65 -- A severe, long term disability could cause you to lose all of your potential earnings.

If your client was a professional football player whose careers barely last 5 years – wouldn’t you negotiate the payout of his contract if he got hurt his second year? Why wouldn’t you advocate like that for yourself?

The chances of a disability are also VERY REAL:

-The probability of at least a 90 day disability VS death (prior to age 65) is almost 5 to 1 for a male age 35 AND over 9 to 1 for females age 35!

Advances in medicine have extended life expectancies which has resulted in dramatic-Advances in medicine have extended life expectancies which has resulted in dramatic increases in disabilities.

-As we age, disabilities last longer and hit you harder because our bodies do not recover as quickly as the use to.

-The average DURATION of disabilities (that initially lasted over 90 days) for people under age 40 (this group) is 4 years. That is a long time without a paycheck!


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What many of you may be thinking now is I have this coverage, my firm provides me with Group Long Term Disability coverage Yet for many reasons few of you have ever analyzed/verified what that contract actuallyDisability coverage. Yet, for many reasons few of you have ever analyzed/verified what that contract actually covers like you would for a client.

Group disability insurance policies have limitations

-benefits only cover 50-70% income, are income taxable to firm employees, and have cap limits

-less liberal definition of disability

-payments offset/integrated with other income sources

-policy is cancelable and can be changed by the firm and/or the carrier and is not portable between jobs

-other contract limitations because group underwriting is often done on a guaranteed issue basis (no health ti ) li i d itt t l i tiquestions), group policies are more underwritten at claim time

How can you live on 40-60% of your income as group provides above?

Supplement Group with Private disability policies to cover the gaps

-flat dollar amount per month benefits payable after a waiting period and payable to at least 65 that adds onto group and is tax free (if paid by the insured from personal funds)

-more liberal “own occupation” definition of disability that even covers partial disabilities

-no payment offsets

-private is portable between jobs

-choose non-cancelable, guaranteed renewable features

-Include cost of living and future insurability purchase riders

-costs more than group but offer stronger contractual guarantees since underwritten with full health question at time of application

-offset costs with buying at younger ages, using a longer wait period, and utilizing association discounts

Secure the maximum amount of private disability coverage you can

Select private disability insurance from a quality insurance carrier with a contract that favors attorneys

For example ABE offers a long term (to age 65) and a mid term disability policy (2 5 years) that covers up to


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For example, ABE offers a long term (to age 65) and a mid term disability policy (2-5 years) that covers up to $9500/mo benefits after several waiting period choices that pays even for partial disabilities.

The amount of life insurance coverage desired can vary from person to person. But the question with your money should not just be what do you need but what to you/your loved ones WANT when youyour money should not just be what do you need but what to you/your loved ones WANT when you are no longer providing them your income?

When you look only at what you “need”, it forces you to make assumptions about when you are going to die, how you will die, what it will cost, what rate to invest the proceeds at, what taxes will be, etc., etc. The fact is, there are so many assumptions, that it is very hard to calculate them with any accuracy. Often, need is used to just determine what we can get away with buying for life insurance as if death may or may not happen. The fact is though, we all will face death, we just don’t know when. Death is a certainty unlike other events in life we insure for (i.e. car accidents, car insurance) where they may or may not happen. The younger you are, the higher probability that death will occur a long time from now so make sure your coverage lasts long enough. You do not want to outlive your policy. y g g g y p yIf you do die at a young age, the greatest income loss will occur so the coverage amount should be high enough to reflect that.

We can more accurately calculate what you family would LOSE if you were to die than what they might need. To look at what your family would lose economically if you were to die, take your income and benefit costs from work and multiply them by the number of years remaining until you would stop working (say age 65). See slide 9 for an example. Also, you can go online and see the same methodology used to pay death benefits out to victims of the Twin Towers on 9/11/01.

Solomon Huebner a veteran of the life insurance industry said that a person should be insured forSolomon Huebner, a veteran of the life insurance industry, said that a person should be insured for their human life value. This concept of a human life/economic value is used extensively by economists and lawyers in determining how much a surviving family should get if a family member should die due to negligence. I believe that it shouldn’t matter if you die due to someone else’s negligence or not…your family should have a way to recover what the “economic value” of your life is.

Most insurance companies will insure you up to 25-30 times your annual income. You should buy the maximum life coverage you can at a younger age to secure it at an affordable cost. Buying life insurance now also protects your future insurability in case upcoming health changes prevent you from obtaining coverage in the future.


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Life insurance, if properly structured, can be the cornerstone in the building of your financial house.

Term, Whole Life, Adjustable Life, Variable Adjustable Life – each has advantages and disadvantages

Term is temporary coverage, life insurance that lasts for a specific period of time-easy to understand since it covers the pure risk of you dying-cheaper to start but costs escalate with age-it is static in design-offers little or no living benefits -can be bought as annual premium term or level premium termFor example: ABE offers competitive 10 and 20 year level term plans because of group buying power. You also receive policy dividends that you can chose to make a tax deductible charitable contribution with back to ABEreceive policy dividends that you can chose to make a tax deductible charitable contribution with back to ABE who uses them to fund grants to the ABA Foundation and ABA’s Fund for Justice and Education.

Whole Life is permanent insurance and as a result offer living benefits such as-cash value savings invested by the insurance carrier-tax deferred buildup of cash value-loans of the cash value are available-loans and withdrawals will reduce the cash value and death benefits.The premium cost is level but starts out higher than term and is fixed along with the death benefit (static)Adjustable/Universal Life is a hybrid plan combining the advantages of term and whole life with the ability to change/adjust the policy features at anytime when you want. Premiums can be increased to or decreased at anytime, death benefits can be increased or decreased at anytime, and the cash value can be accessed through not only through policy loans but via straight withdrawals at no interest cost. Adjustable life programs can save you the extra cost when buying multiple policies and their minimum premiums can be an affordable way to secure coverage that can be made permanent.

Variable Adjustable/Universal Life combine the features of Adjustable/Universal Life above and add the ability to invest the premiums and cash value across various stock and bond based sub-accounts of your choosing. The potential then is to accumulate more future cash value inside the policy which grows tax deferred. The


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p p y gpolicies cash value and death benefits can increase if the investments do well but the opposite may also occur. Since premiums are adjustable, increased premiums can be added to the policy at anytime to increase the potential long term cash value savings buildup. Investments in securities, such as variable insurance products, will fluctuate and when redeemed may be worth more or less than when originally invested.


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As a result of the economic recession and market down turn we are in, for the protection / insuring level of your “financial house”, you should be considering:

1. Purchasing additional personally-owned private disability income and life insurance programs that are separate from your firms group insurance program.

You add to and maintain greater financial security and control if you own your own private disability and life insurance plans. That is because they are portable – you can take them to your next job or not miss being protected if you are downsized You cantake them to your next job or not miss being protected if you are downsized . You can not longer rely solely on your firms benefits package for your security since those benefits may also be reduced during tighter economic times as firm looks for areas to cut costs.

2. When buying the coverage, realize that your future earning potential is large. You cannot only look at your concerns for coverage in your life situation just today, you y y g y j y yshould be buying large enough disability income benefits that would replace those future earnings. In addition, securing large life benefits now, costs less long term and protects you if you cannot obtain coverage in the future due to changes in your health.

The cost is cheapest now for these plans because the younger you are, the lower the rates. Skimping on the benefits design may be tempting to lower the premium but actually can undermine the security you want during these uncertain times.


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The vast majority of you will be accumulating assets mainly by earning an income, living under that income, and saving and investing some of it. So it is vital than that you SECURE your spending which is done via some formsaving and investing some of it. So it is vital than that you SECURE your spending which is done via some form of monthly budgeting/cash flow plan. The purpose of the monthly budget or cash flow plan is to save money. Remember, its not how much you make, its how much you keep that accumulates wealth. Consider saving in:

SHORT TERM ( 0 to 2 years) areas (i.e. savings accounts, money market mutual funds)MEDIUM TERM (3 years until age 60) vehicles ( i.e. mutual funds)LONG TERM (age 60+) areas like 401(k) plans and IRAs

M thi di t th b t h fl d b d t l Th t f hi h i th tMany things can disrupt the best cash flow and budget plans. The most common of which are emergencies that you cannot anticipate such as car repairs. We can and should self insure for these losses by opening up a WORKING CAPITAL savings account that we add to monthly. The money is secure since it is in a bank. The return is low because of the low risk of the account but it is liquid (accessible as cash right away). The WORKING CAPITAL savings or money market mutual fund account can also be cash to be used for opportunities that arise like an investment opportunity or a timely purchase from your WISH LIST. If you are self employed, you also may use this account to pay yourself a salary every month to address your often fluctuating earnings. Another budget destroyer are intermittent expenses that arise throughout the year such as quarterly car insurance, Christmas expenses or vacation funds. To address this you should establish a “SAVINGS TO SPEND” savings account at the same bank you have your checking at for convenience Regularly deposit intoSPEND” savings account at the same bank you have your checking at for convenience. Regularly deposit into this savings account the monthly average of all these intermittent expenses to escrow for their payment.Mastering your cash flow is critical to the GENERATION of regular monthly savings that can be transferred into the accumulation of wealth (to floors 2 and 3, the accumulation levels) over time. Always be looking for the ability to move money from less productive areas like expenses or debt payments that are completed to accumulation products.

Note: Investments in a Money Market Mutual Fund are neither insured nor 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.


Certificates of Deposit (CDs), which are insured by the FDIC for up to $100,000, are short-term investments that pay fixed principal and interest but are subject to fluctuating rates and early withdrawal penalties.Government Bonds offer a fixed rate of return if held to maturity, and are insured by the US Government.

As this slide shows, the cost of waiting, even a few years, has a dramatic effect on your ability to accumulate assets.

Starting early spreads the accumulation task over a longer period of time and enables your money to benefit from compounding.

Why?

The dynamic power of compound interest.

The money that you invest makes money.

That money makes money!That money makes money!



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As a result of the economic recession and market down turn we are in, for the securing level of your “financial house”, you should be considering:

1. You cannot control the economy but you can control your spending. Take a hard look at what you can do without to prepare for no raise, no bonus or even a loss of your job. Also, that extra money can actually be saved up in your emergency funds for an unexpected expense.

2 Take stock of how you are living and look at how much you could save and invest if you2. Take stock of how you are living and look at how much you could save and invest if you were to avoid spending as much on impulses purchases (“desires”). Your goal should be to save and invest 15 to 20% of you gross income per year. Use this time to change your spending habits so you can build up more potential wealth in accumulation vehicles.

3. To many young lawyers overpay the income taxes on their paychecks. Over withholding produces annual tax refunds that could be better used to make savings a monthly habit, d i d bt d i ti l l B t t h bdecreasing debt sooner and investing more regularly. Boost your tax home pay by completing a tax projection to calculate how much per paycheck you should withhold. Then, increase the exemptions on your W-4 form and re-file it with your payroll department. One reason to do this now is that some states facing budget crises of their won are holding back on paying out those refunds this year (2008).


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We just got done talking about level 2 where you do SAVINGS which I wanted to define for you as ’t ff d t l Thi t l t b l it i l i kmoney you can’t afford to lose. This means you accept lower returns because you place it in low risk

vehicles but they also provide easy access.

ACCUMULATING is the opposite of saving where you do take risks that may involve a loss of principal but you are looking for potentially higher returns for that risk.

This and the next level is what everyone wants to talk to me about. Accumulation products are much y pmore glamorous and interesting to own but before you can attain maximum potential, you have to use these products as designed and not for things they were not intended to be used for.

For example, traditional deductible IRA’s have tax penalties for taking money out of them before age 59 ½. They may provide you with an income tax deduction for contributing to them and they grow tax deferred, however, the tax penalties makes them less attractive as an emergency/opportunity fund. To maximize the potential for long term wealth accumulation of traditional deductible IRA accounts,

½plan on not touching the money until at least age 59 ½.

We will cover a few strategies that may help you accumulate more assets in this next section.


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The above are some general considerations that may help you accumulate funds h h i di id l' it ti i diff t d th t t i th t b thowever, each individual's situation is different and the strategies that may best meet their needs may vary from those listed above.

If you treat the purchase of your personal residence like an expense, you will spend less, have lower mortgage payments and lower home repairs associated with owning a smaller home that will free up more cash flow to build yourself a bigger “financial house”. Many lawyers justify the purchase of homes larger than they can ff d b lli th “i t t” If h d i t i lafford by calling them an “investment”. If your home does appreciate in value

significantly, that is good for your net worth. If it does not, the cost of your home represents trapped capital that could have been growing at a potentially greater rate of return in alternative investments.

Remember, its not about the most you can borrow or buy in a house, its more about the most you can save and invest. You do not want to be “house poor” - owning a large home mortgage that th arts o r abilit to in est in other asset areaslarge home mortgage that thwarts your ability to invest in other asset areas. Diversifying across multiple financial assets and strategies (not just your home) increases your chances of building long term wealth.

Your personal home affordability index is the after-tax mortgage payment that is equal to your rent. Any amount higher than that has to come from what you save or spend each month. How much are you willing to cut back on spending (i.e. fun) or investing (net worth building) for the sake of a mortgage payment?


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investing (net worth building) for the sake of a mortgage payment?

A 529 college savings program is a tax-advantaged investment program designed to help pay for qualified higher education expenses. Participation in 529 plan does not guarantee that the contributions and investment returns will be adequate to cover higher education expenses. Contributors to the plan assume all investment risk , including the potential for loss of principal, and any penalties for non-educational withdrawals.

Your state of residence may offer state tax advantages to residents who participate in the in-state-plan. You may miss out on certain state tax advantages should you choose another state’s 529 plan. Any state based benefits should be one of many appropriately weighted factors to be considered in making an investment decision. You should consult with your financial, tax or other advisor to learn more about how state based benefits (including any limitations) would apply to your specific circumstances You may also wish to contact your home state’s 529 plan Programcircumstances. You may also wish to contact your home state s 529 plan Program Administrator to learn more about the benefits that might be available to you by investing in the in-state plan.

The above are some general considerations that may help you accumulate funds however, each individual's situation is different and the strategies that may best meet their needs may vary from those listed above


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meet their needs may vary from those listed above.

Let’s now look at different types of investment asset classes, returns and a few important strategies for accumulation.


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Investments will fluctuate and when redeemed may be worth more or less than when originally invested. Diversification does not guarantee against loss. It is a method used to manage risk. Dollar Cost Averaging does not assure a profit and does not protect against loss in declining markets. Also, since such a program involves regular investment purchases regardless of fluctuating price levels of the investment, consider your financial ability to continue purchases through periods of low price levels.


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As a result of the economic recession and market down turn we are in, for the accumulation level of your “financial house” , you should be considering:

1. Diversify – your approach to accumulating money should never rely on one strategy, method, approach or asset class. The idea is to have asset classes that rise to offset others that may be falling to provide a smoother accumulation ride.

2. Focus on the long term when investing. Over longer periods, returns on stocks provide more consistent returns than over shorter periods. To rewarded with higher returns, you need to be patient for stocks to recover.

3. Do not be tempted to stop investing when the markets and the economy decline as this environment allows you to accumulate more shares at lower prices (buying lower). Investing only when times look good and stocks for example are rising means you endInvesting only when times look good and stocks for example, are rising, means you end up paying a higher price for those shares. Would you rather pay a high price or a low price for your shares?


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This slide emphasizes that the returns experienced over shorter time periods tend to be different than long term historic averages.

•Over long (10+ years) periods, stocks tend to out perform bonds and tend to out perform cash like investments.•The longer the time period, the more likely returns are to approach long term averages.•This occurs through bear markets recessions wars bad news good news•This occurs through bear markets, recessions, wars, bad news, good news, periods of growth and global crises.

Performance evens out over the long term.

*The S&P 500 index is a value-weighted index of 500 widely held stocks often used as a proxy for the US stock market. It measures the movement of the largest US issues. Investors cannot directly invest in an index.


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If investors in stocks hold on to their investments for long periods of time, some of the fluctuation or risk is taken out of this type of investment.

If we look at the S&P 500, a general indicator of the stock market, for a series of one-year periods between 1928 and 2008, the market has been down for three out of every ten years. If we look at a ten-year period, however, 96% of the time the market has been up over any given ten-year period The longer the period the higher the chance that the investment mayperiod. The longer the period, the higher the chance that the investment may be up.



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Asset allocation serves two very important roles:

- It is the major determinant of performance; and

- It limits the short term swings in the value of your portfolio.

What’s more, Modern Portfolio Theory is the underpinning for the portfolio design of virtually every pension plan in the United States.

Modern Portfolio Theory is an approach to investing that allows investors to quantify and control the t f i k th t d t th t ti ll hi i th i tf li It hift h iamount of risk they accept and return they potentially achieve in their portfolios. It shifts emphasis

away from specific securities in a portfolio to the relationship between risk and reward in the total portfolio.

Studies have proven that asset allocation is the primary factor in performance variability over time. A well known study, by industry experts of pension plans, revealed that long-term portfolio success is really driven by the asset allocation decision, not by market timing or which securities are selected to be bought or sold. It found that the success or failure of an investment strategy depended not on which securities or mutual funds were bought or sold or when The key was how the assets werewhich securities or mutual funds were bought or sold, or when. The key was how the assets were divided among the various asset classes (stocks, bonds, cash equivalents).

(Brinson, B. Gary, Brian D. Singer and Gil L. Beebower; Financial Analysts Journal; May-June 1991.)

And how your assets are allocated is directly related to your investment objectives – your time horizon to invest, your ability to handle risk, and the overall goals you want to reach.

So the most important steps in the investment process are those in which an investor’s objectives are carefully defined, then implemented with an appropriate asset allocation strategy.


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Asset Allocation may be used as a strategy to help minimize risk . . . and enhance potential return. As this slide shows, allocation of investments may provide for an overall return which is greater than a single investment.


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Some investments have a low correlation to each other. Simply put, correlation is a measure of how a particular asset will react to certain market conditions in relation to another investment.

As this slide shows, stocks and bonds tend to react differently to market events By utilizing both assets which are not closely correlated an investorevents. By utilizing both assets, which are not closely correlated, an investor can reduce risk.


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How do you know what asset class is going to offer the best performance.

Changes in market leadership are inevitable – refer to chart.

Market leadership is volatile.

Best performers tend to “wind down” over time.

Worst performing indices work their way up.

Chasing market leaders is no guarantee of success.

There is NO pattern for when one asset class or style will over/under-perform,

SO investing is not as much about PREDICTING the future market moves or which style will do better/worse as much as it is POSITIONING your money currently across various asset classes and styles.


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•Eight main asset classes.

•Best defense against market volatility is diversifying between these / many asset classes.

•See description of categories.

•Don’t be tempted to overweight in any one asset class.


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Some investors are tempted to time the market through guessing when to be in and when to be out of the market. Historically, the stock market has had a large portion of its superior returns over the other asset classes during short upward bursts.

Have any of your ever wondered if NOW is the right time to BUY? Or, to SELL? Well, if you can identify with this thinking, you need to understand a thing or two about market timing. As this graph shows, some investors are t t d t ti th k t th h thi i i Wh ttempted to time the market as though this is a guessing game. What happens when you guess wrong? By looking at this graph you can see what would have happened if you had missed some of the best days in the market.

The message is clear. Invest for the long term and be patient in order to t ti ll b fit th t f t k i tipotentially benefit the most from stock investing.


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What is the “right” portfolio?

The answer to this question is highly individual. The “right” portfolio for your could cause someone else to lose sleep at night. This process should take into account your personal goals and preferences as well as an assessmentinto account your personal goals and preferences, as well as an assessment of your time horizon and your individual tolerance for risk.


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Once portfolio assets are allocated, you need to make sure they stay that way. That's where portfolio b l i i t lrebalancing comes into play.

As you monitor your portfolio, you should make sure that it remains close to the portfolio objective (stock/bond mix) you have chosen. This is in order to control risk and to stay within your goals and risk comfort level. If, for example, stocks have a tremendous run-up and outperform bonds, you should sell off some of the stock portion and invest the proceeds in bonds. This brings the portfolio back into line with the original portfolio objective or asset allocation strategy. It also allows you to sell the type of assets that are high-priced and purchase investments that are relatively lower priced.

Rebalancing –1. Reduces volatility by trying to keep your risk/reward mix the same 2. Helps you to stay on track with your objectives


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Dollar Cost Averaging enables you to potentially lower the average cost per share.

When you invest fixed sums of money at set intervals (monthly, quarterly, etc.), you are able to buy shares at an average cost less than the average price.

The two scenarios help to see the concept behind dollar cost averaging.

Dollar cost averaging does not guarantee a profit or insure against loss in a declining market. Also, since such a program involves regular investment purchases regardless of fluctuation price levels of the investment, consider your financial ability to continue purchases through periods of low price levels.


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After you have built/insured/invested the other levels of your financial house plan, should you SEPCULATE d t k i th i kSEPCULATE and take aggressive growth risk.

You should only invest aggressively if you are willing to take on significant risk and if can afford to lose the money invested! If you do lose it, you still have the rest of the levels of your house to fall back on and all is not lost, your financial house still stands.

There is potential for very high returns for investing here since risk of loss is very high. p y g g y g

You do not have to try to SPECULATE here to accumulate wealth.


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Real Financial Strategies for Young Lawyers

Economy & Finance

Transcript of Real Financial Strategies for Young Lawyers