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Investor Profile and Asset Allocation Wickham Financial Group Inc. Wickham Agency Inc. Graham S. Wickham Pres,CEO 116 Margaret Ave. Investor Profile and Marietta, GA 30060 770-424-8711 800-274-4773 Asset Allocation [email protected] www.wickhamservices.com March 26, 2010 Wickham Financial Group Inc. Page 2 of 8 Saving and Investing Wisely Saving builds a foundation the U.S. Department of Labor, the average annual rate of inflation over the past 20 years has been The first step in investing is to secure a strong finan- approximately 3%. At 3% annual inflation, something cial foundation. Start with these four basic steps: that costs $100 today would cost $181 in 20 years. • Create a "rainy day" reserve: Set aside enough To take advantage of compound interest cash to get you through an unexpected period of illness or unemployment--three to six months' Anyone who has a savings account understands the worth of living expenses is generally recom- basics of compounding: The funds in your savings mended. Because you may need to use these account earn interest, and that interest is added to funds unexpectedly, you'll generally want to put your account balance. The next time interest is cal- the cash in a low-risk, liquid investment, such as culated, it's based on the increased value of your a money market account or mutual fund. account. In effect, you earn interest on your interest. Many people, however, don't fully appreciate the • Pay off your debts: It may make more sense to impact that compounded earnings can have, espe- pay off high-interest-rate debt (for example, cially over a long period of time. credit card debt) before making investments that may have a lower or more uncertain return. Growth of annual $5,000 investments at 6% • Get insured: There is no better way to put your extra cash to work for you than by having ade- $500,000 quate insurance. It's your best protection $400,000 against financial loss, so review your home, $300,000 auto, health, disability, life, and other policies, $200,000 and increase your coverage, if needed. $100,000 $0 • Max out any tax-deferred retirement plans, such 1 4 7 10131619222528 as 401(k)s and IRAs: Putting money in these Year accounts defers income taxes, which means you'll have more money to save. Take full ad- This is a hypothetical example and is not intended to vantage if they are available to you. reflect the actual performance of any specific investment. Taxes and investment fees and expenses are not Why invest? reflected. If they were, the results would have been lower. To keep ahead of inflation Let's say you invest $5,000 a year for 30 years (see illustration). After 30 years you will have invested a When people say, "I'm not an investor," it's often total of $150,000. Yet, assuming your funds grow at because they worry about the potential for loss. It's exactly 6% each year, after 30 years you will have true that investing involves risk as well as reward. over $395,000, because of compounding . However, there's also another type of loss to be aware of: the loss of purchasing power over time. Compounding has a "snowball" effect. The more During periods of inflation, each dollar you've saved money that is added to the account, the greater its will buy less and less as time goes on. According to benefit. Also, the more fre- quently interest is com- The impact of 3% yearly inflation pounded--for example, on the purchasing power of $200,000 monthly instead of annually-- the more quickly your savings Inflation reduces build. The sooner you start $250,000 the purchasing saving or investing, the more power of your $200,000 time and potential your in- dollars over vestments have for growth. In time. $150,000 effect, compounding helps $100,000 you provide for your financial future by doing some of the $50,000 work for you. $0 Today's Dollars 1 6 11 16 21 26 31 36 Year March 26, 2010 Wickham Financial Group Inc. Page 3 of 8 Building on Your Foundation Setting investment goals on price volatility. Advisors label as aggressive or risky an investment whose price has been prone to Setting goals is an important part of financial plan- dramatic ups and downs in the past, or that involves ning. Before you invest your money, you should substantial uncertainty and unpredictability. Assets spend some time considering and setting your per- whose prices historically have experienced a nar- sonal goals. For example, do you want to retire rower range of peaks and valleys are considered early? Would you like to start your own business more conservative. soon? Do you need to pay for a child's college edu- cation? Would you like to buy or build a new house? In general, the risk-reward relationship makes sense In addition to these, there are several other consid- to most people. After all, no sensible person would erations that can help you and your financial profes- make a higher-risk investment without the prospect sional develop an appropriate plan. of a higher reward for taking that risk. That is the tradeoff. As an investor, your goal is to maximize Think about your time horizon returns without taking on more risk than is necessary or comfortable for you. If you find that you can't One of the first questions you should ask yourself in sleep at night because you're worrying about your setting your investment goals is "When will I need investments, you've probably assumed too much the money?" Will it risk. On the other be in 3 years or 30? The risk/return relationship hand, returns that Your time horizon for are too low may each of your finan- leave you unable cial goals will have to reach your fi- a significant impact nancial goals. on your investment Options & Futures strategy. The concept of risk Common Stock tolerance refers The general rule is: not only to your Preferred Stock The longer your willingness to as- time horizon, the Corporate Bonds sume risk but also more risky (and to your financial potentially more Government Bonds ability to endure Potential Return the consequences lucrative) invest- CDs (Cash alternatives) ments you may be of loss. That has to able to make. Many Treasury Bills (Cash alternatives) do with your stage financial profession- in life, how soon you'll need the als believe that with Risk a longer time hori- money, and your zon, you can ride out financial goals. fluctuations in your investments for the potential of greater long-term returns. On the other hand, if your Remember your liquidity needs time horizon is very short, you may want to concen- trate your investments in less risky vehicles because Liquidity refers to how quickly you can convert in- you may not have enough time to recoup losses vestments into cash. Real estate, for example, tends should they occur. to be relatively illiquid; it can take a very long time to sell. Publicly traded stock, on the other hand, tends Understand your risk tolerance to be fairly liquid. Another important question is "What is my invest- Your need for liquidity will affect the types of invest- ment risk tolerance?" How do you feel about the ments you might choose to meet your goals. For potential of losing your hard-earned money? Many example, if you have an emergency fund, you're in investors would forgo the possibility of a large gain if good health, and your job is secure, you may be they knew there was also the possibility of a large willing to hold some less liquid investments that may loss. Other investors are more willing to take on have higher potential for gain. However, if you have greater risk to try to achieve a higher return. You two children going to college in the next couple of can't completely avoid risk when it comes to invest- years, you probably don't want all of their tuition ing, but it's possible to manage it. money invested in less liquid assets. Also, having some relatively liquid investments may help protect Almost universally, when financial professionals or you from having to sell others when their prices are the media talk about investment risk, their focus is down. March 26, 2010 Wickham Financial Group Inc. Page 4 of 8 Types of Investments: Stocks How do stocks work? downs as you try for greater returns. When you buy a company's stock, you're purchasing The universe of stocks offers enormous flexibility to a share of ownership in that business. You become construct a stock portfolio that is tailored to your one of the company's stockholders or shareholders. needs. There are many different types of stock, and Your percentage of ownership in a company also many different ways to diversify your stock holdings. represents your share of the risks taken and profits For example, you can sort through stocks by indus- generated by the company. If the company does try, by company size, by location, and by growth well, your share of its earnings will be proportionate prospects or income. to how much of the company's stock you own. The flip side, of course, is that your share of any loss will Growth stocks be similarly proportionate to your percentage of are usually ownership. characterized by corporate If you purchase stock, you can make money in one earnings that of two ways. The company's board of directors can are increasing decide to distribute a portion of the company's prof- Stocks at a faster rate its to its shareholders as dividends, which can pro- than their in- vide you with income.
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