Investment Project (100 points)
Watch this video first about asset allocation:  https://www.youtube.com/watch?v=G1FH2IIi-oEUse this retirement calculator:  http://www.bankrate.com/calculators/retirement/403-b-calculator.aspx————————————Here it is.  You are a new employee of NSU and are given the chance to invest in the 401k (called a 403b when it offered at a non-profit institution).  What do you do, why do you do it and what will be your projected retirement outcome because of it?  Is this enough? Answer this, and write it up.  Finally, prepare an IPS (Investment Policy Statement) so that a stranger could manage your investments in your absence.  That’s it.  It’s worth 10% of your grade. 

I.  Your job will be to assume the role of the employee. You have three (3) major decisions to make:

1. First, should you participate? Yes or no and why?  Also, since this plan has a Roth option, will you do a Roth or a Traditional 401k?  

This is different than a Roth IRA.  It is a Roth 401k, formally a 401k with the Roth option.

Explanation of each:  http://www.irs.gov/Retirement-Plans/Roth-Comparison-Chart

2. Second, how much of your salary will you contribute in percent?  See IRS link above for limits.  Assume your employer will match 50% for every dollar contributed up to 6%  of your salary.

3. Third, how will you allocate your investment funds among the choices given (what percent in each fund)?

First, decide how much (as a percentage) you choose to put into stock vs. bond funds.

Why did you choose this ratio?  (Hint:  Use your risk tolerance as a guide & take the quiz.)    Hint:  Beware of being too cautious as inflation will certainly eat up your money over time.

Second, decide which funds you will use to put into each category (Hint:  You don’t need many funds.)

(CAUTION: Many students choose the wrong type of  funds thinking a bond fund is actually a stock fund and end up with 90% in bond/fixed income funds – if in doubt use equity index funds!  They also believe that a given fund will return some crazy high return in the future just because it did last year – don’t fall for this.  Use common sense.).

Note the following:

A. If you have a normal risk tolerance (see below for explanation), you should strongly consider a 60/40 split between a globally diversified stock portfolio andsbonds.

B. If you have less of a risk tolerance, then more bonds are in order, and vice versa.  In any case explain why you did what you did.

———————————————————————————————————————————————————————————

Concerning risk tolerance, let’s look back to class 3 discussion:

1.  What is risk tolerance?  (see Definition) http://www.investopedia.com/terms/r/risktolerance.asp#axzz2Ie8J17gv

2.   What is my risk tolerance? (see short Questionnaire) https://www.calcxml.com/calculators/inv08;jsessionid=6FA6F86E50FDFCC3136E45F53F1225A8?skn=#calcoutput

(additional information from the SEC – this also explains investing) http://www.sec.gov/investor/pubs/roadmap/risk.htm

3.  What is my Risk Tolerance vs. Risk Capacity?  i.e. how much risk am I willing to take vs. how much am I able to take.  You must balance out the two.

This important question not only applies to your emergency fund, but also to how much risk you are able to take with your investments.

Here is a link that explains this better.  http://www.fivecentnickel.com/2009/05/06/risk-tolerance-vs-risk-capacity/

——————————————————————————————————————————————————————————–

II.  Finally, what will be your estimated account balance at age 65 with your selections with equal annual contributions?   Is this enough to retire on if you can take out 4% of the ending value per year to live on (a standard?

(Assume you earn a $50,000 salary for life.)  -Use the longest period available returns for your stock investments and trailing 5 year returns for bond investments.

Final thought:  Details and insight matter. Originality is good but not necessary for full credit. I will award extra credit for superior work.

-If you have questions email your instructor or search online for additional info!!

=================================================================================

Here is what you actually turn in (turn in both or you will lose significant points)! 

1.  Write a two page,1.5 line spaced, 12 pt. font detailed explanation of these questions. Why did you do what you did?

(Make sure it is:  Professional, grammatically correct & very little fluff.  Bullet points are a good idea, but paragraph form is fine.)

For the write up, consider all of the portions of the questions.

e.g. Is it in your budget to contribute more to the 401k?  If so, would you rather invest here or a Roth IRA.  This depends on your age and tax rate, but you can certainly address it.

How much into stocks or bonds?  This depends on your risk tolerance.  What is it?  High, med. low or in-between.  What different things determined this?

Searchonlinefor “Risk tolerance” for more info. if you need to.

2. Create an IPS (Investment Policy Statement) of 1-2 pages for your portfolio going forward.  Include this on a separate page(s).

Please use this template:  https://www.bogleheads.org/wiki/Investment_policy_statement

“Real World IPS”

List the  following:

1. Your Portfolio Objectives (Growth, Income, Capital Preservation, a combination, etc.)

A. Your Return objective, per year (possibly relative to the index/benchmarks or to your needs such as “I need 5% income per year.”)

B. Your portfolio risk objective/tolerance – what is the most risk that you wish to have in the portfolio (“No more that a 10% drop in any one year, etc.”)  Also, state what your own risk tolerance is:  low, medium or high or a mix.

2. Constraints (most will apply, but some will not)

A. Time horizon (Are you retiring in 5 years or 45 years?  This is a big deal.)

B. Tax constraints (now or in the future – Are you in a high tax bracket now and want to save on taxes?)

C. Liquidity needs/wants in your portfolio (If near retirement, or you may need a loan from your 401k, then list that here.)

D. Regulatory constraints – (i.e. prohibited investments, etc.  See also ERISA and here http://en.wikipedia.org/wiki/Investment_Policy_Statements)

E. Unique needs (e.g. socially responsible funds, possible early retirement, trustee for special needs, etc.)

==========================================================

Load you answers on the 401k Project Upload link.  Thanks.

See also the 401k/403b investment choices in the “NSU 403b.pdf”.

Common mistakes:  

1.  You can only invest in either a Roth or Traditional 401k, not both, but you can also invest in a Roth or Traditional IRA in addition.  

2.  If you participate, don’t forget to add in the employer match to your return calculations.

3.  Limit any returns to the historical average on stocks (10%/year).  No fund is going to get 13%=/year for 40 years.  Sorry folks.

Assume that i make $50k salary and i have a moderate risk teleorence! it should look like the smaple homework!

 

Investment Project (100 points)
Watch this video first about asset allocation:  https://www.youtube.com/watch?v=G1FH2IIi-oEUse this retirement calculator:  http://www.bankrate.com/calculators/retirement/403-b-calculator.aspx————————————Here it is.  You are a new employee of NSU and are given the chance to invest in the 401k (called a 403b when it offered at a non-profit institution).  What do you do, why do you do it and what will be your projected retirement outcome because of it?  Is this enough? Answer this, and write it up.  Finally, prepare an IPS (Investment Policy Statement) so that a stranger could manage your investments in your absence.  That’s it.  It’s worth 10% of your grade. 

I.  Your job will be to assume the role of the employee. You have three (3) major decisions to make:

1. First, should you participate? Yes or no and why?  Also, since this plan has a Roth option, will you do a Roth or a Traditional 401k?  

This is different than a Roth IRA.  It is a Roth 401k, formally a 401k with the Roth option.

Explanation of each:  http://www.irs.gov/Retirement-Plans/Roth-Comparison-Chart

2. Second, how much of your salary will you contribute in percent?  See IRS link above for limits.  Assume your employer will match 50% for every dollar contributed up to 6%  of your salary.

3. Third, how will you allocate your investment funds among the choices given (what percent in each fund)?

First, decide how much (as a percentage) you choose to put into stock vs. bond funds.

Why did you choose this ratio?  (Hint:  Use your risk tolerance as a guide & take the quiz.)    Hint:  Beware of being too cautious as inflation will certainly eat up your money over time.

Second, decide which funds you will use to put into each category (Hint:  You don’t need many funds.)

(CAUTION: Many students choose the wrong type of  funds thinking a bond fund is actually a stock fund and end up with 90% in bond/fixed income funds – if in doubt use equity index funds!  They also believe that a given fund will return some crazy high return in the future just because it did last year – don’t fall for this.  Use common sense.).

Note the following:

A. If you have a normal risk tolerance (see below for explanation), you should strongly consider a 60/40 split between a globally diversified stock portfolio andsbonds.

B. If you have less of a risk tolerance, then more bonds are in order, and vice versa.  In any case explain why you did what you did.

———————————————————————————————————————————————————————————

Concerning risk tolerance, let’s look back to class 3 discussion:

1.  What is risk tolerance?  (see Definition) http://www.investopedia.com/terms/r/risktolerance.asp#axzz2Ie8J17gv

2.   What is my risk tolerance? (see short Questionnaire) https://www.calcxml.com/calculators/inv08;jsessionid=6FA6F86E50FDFCC3136E45F53F1225A8?skn=#calcoutput

(additional information from the SEC – this also explains investing) http://www.sec.gov/investor/pubs/roadmap/risk.htm

3.  What is my Risk Tolerance vs. Risk Capacity?  i.e. how much risk am I willing to take vs. how much am I able to take.  You must balance out the two.

This important question not only applies to your emergency fund, but also to how much risk you are able to take with your investments.

Here is a link that explains this better.  http://www.fivecentnickel.com/2009/05/06/risk-tolerance-vs-risk-capacity/

——————————————————————————————————————————————————————————–

II.  Finally, what will be your estimated account balance at age 65 with your selections with equal annual contributions?   Is this enough to retire on if you can take out 4% of the ending value per year to live on (a standard?

(Assume you earn a $50,000 salary for life.)  -Use the longest period available returns for your stock investments and trailing 5 year returns for bond investments.

Final thought:  Details and insight matter. Originality is good but not necessary for full credit. I will award extra credit for superior work.

-If you have questions email your instructor or search online for additional info!!

=================================================================================

Here is what you actually turn in (turn in both or you will lose significant points)! 

1.  Write a two page,1.5 line spaced, 12 pt. font detailed explanation of these questions. Why did you do what you did?

(Make sure it is:  Professional, grammatically correct & very little fluff.  Bullet points are a good idea, but paragraph form is fine.)

For the write up, consider all of the portions of the questions.

e.g. Is it in your budget to contribute more to the 401k?  If so, would you rather invest here or a Roth IRA.  This depends on your age and tax rate, but you can certainly address it.

How much into stocks or bonds?  This depends on your risk tolerance.  What is it?  High, med. low or in-between.  What different things determined this?

Searchonlinefor “Risk tolerance” for more info. if you need to.

2. Create an IPS (Investment Policy Statement) of 1-2 pages for your portfolio going forward.  Include this on a separate page(s).

Please use this template:  https://www.bogleheads.org/wiki/Investment_policy_statement

“Real World IPS”

List the  following:

1. Your Portfolio Objectives (Growth, Income, Capital Preservation, a combination, etc.)

A. Your Return objective, per year (possibly relative to the index/benchmarks or to your needs such as “I need 5% income per year.”)

B. Your portfolio risk objective/tolerance – what is the most risk that you wish to have in the portfolio (“No more that a 10% drop in any one year, etc.”)  Also, state what your own risk tolerance is:  low, medium or high or a mix.

2. Constraints (most will apply, but some will not)

A. Time horizon (Are you retiring in 5 years or 45 years?  This is a big deal.)

B. Tax constraints (now or in the future – Are you in a high tax bracket now and want to save on taxes?)

C. Liquidity needs/wants in your portfolio (If near retirement, or you may need a loan from your 401k, then list that here.)

D. Regulatory constraints – (i.e. prohibited investments, etc.  See also ERISA and here http://en.wikipedia.org/wiki/Investment_Policy_Statements)

E. Unique needs (e.g. socially responsible funds, possible early retirement, trustee for special needs, etc.)

==========================================================

Load you answers on the 401k Project Upload link.  Thanks.

See also the 401k/403b investment choices in the “NSU 403b.pdf”.

Common mistakes:  

1.  You can only invest in either a Roth or Traditional 401k, not both, but you can also invest in a Roth or Traditional IRA in addition.  

2.  If you participate, don’t forget to add in the employer match to your return calculations.

3.  Limit any returns to the historical average on stocks (10%/year).  No fund is going to get 13%=/year for 40 years.  Sorry folks.

Assume that i make $50k salary and i have a moderate risk teleorence! it should look like the smaple homework!