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Transcript of Fidelity Retirement Funds Making the Right Investments Dr. Eskandar Tooma.
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Fidelity Retirement Funds
Making the Right Investments
Dr. Eskandar Tooma
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Outline
Introduction and Objective of Lecture Fidelity Retirement Plan Investor lifecycle Risk Tolerance :Questionnaire Risk-return relationship Table of returns How to choose funds? Benchmarking-
investment funds Using the software
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Selection of the new Fidelity Funds A range of fund options covering all
asset classes, e.g. equities, bonds and cash
A range of fund options covering the entire risk reward spectrum, low risk and high risk alternatives
‘Self select’ fund options ‘Lifestyle’ options
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Objective of Lecture
Assist Faculty and Staff in allocating their funds among 10 Fidelity Investment Funds
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Things to look for before investing in funds
Investor Lifecycle: Where am i? Risk Tolerance: How risky can I get?
Portfolio Mix: How much in each asset class?
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Investor Life-Cycle: Where am I?
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Investor Life-CycleAccumulation phase
Long-term: Retirement Children College Needs
Short-term: House Car
Consolidation phase
Long-term: Retirement
Short-term: Vacations Children College Needs
Spending phaseGifting phase
Long-term: Estate planning
Short-term: Lifestyle needs gifts
Networth
Age
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Risk Tolerance: How risky can I get?
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Risk Tolerance
The degree of uncertainty that an investor can handle in regards to a negative change in the value of their portfolio.
An investor's risk tolerance varies according to age, income requirements, financial goals, etc.For example, a 70-year-old retired widow
would generally have a lower risk tolerance than a single 30-year-old executive.
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Risk ToleranceQuestionnaire
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Risk Preferences for Investors
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Risk and Return Fundamentals We don’t know how much a stock will be worth
in the future.
It is difficult to make such predictions with any
degree of certainty.
As a result, investors often use history as a
basis for predicting the future.
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Risk Defined Risk is variability of returns associated with a
given asset
Assets (real or financial) which have a greater
chance of loss are considered more risky than
those with a lower chance of loss.
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Return Defined Return represents the total gain or loss on an investment.
The most basic way to calculate return is as follows:
kt = Pt - Pt-1 + Ct
Pt-1
kt is the actual, required or expected return during period t,
Pt is the current price,
Pt-1 is the price during the previous time period,
Ct is any cash flow accruing from the investment
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Return Defined
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Risk-Reward Concept Most Investors are risk averse In theory the higher the risk, the more you
should receive for holding the investment, and the lower the risk, the less you should receive
For investment securities, we can create a chart with the different types of securities and their associated risk/reward profile.
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Investment Risk Pyramid
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Portfolio Construction: Fidelity Retirement Funds
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A Guide To Portfolio Construction
Step 1: Determining the Appropriate Asset Allocation for You
Step 2: Achieving the Portfolio Designed in Step 1you simply need to divide your capital between the appropriate asset classes.
Step 3: Re-assessing Portfolio Weightings Step 4: Rebalancing Strategically
Always remember the importance of diversification
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AggressiveGrowth Portfolio
ConservativePortfolio
GrowthPortfolio
BalancedPortfolio
pick your
mix
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modelfind the
AggressiveGrowth Portfolio
ConservativePortfolio
BalancedPortfolio
GrowthPortfolio
Average Annual Return (1951–2002)
Best Annual Return
Worst Annual Return
# of Up Years
# of Down Years
7.38 %
22.04 %
-1.15 %
49
3
9.49 %
25.52 %
-10.92 %
42
10
10.81 %
35.80 %
-17.35 %
40
12
11.85 %
44.08 %
-22.02 %
39
13
30%50%
85%70%
20%25%
10% 5%
40%
15%
50%
Source: Ibbotson Associates 12/1951-12/2002
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Choosing your investment funds – Self-Select OptionsFidelity Fund Name
Risk Objective
Defensive Fund
Low Growth
Euro Stoxx 50 Medium Growth
America Medium Growth
European Growth
Medium/High Growth
Pacific High Growth
Global Growth Medium Growth
Emerging Markets
Very High Growth
International Bond
Low/Medium Protection
US$ Bond Low Protection
US$ Cash Very Low Protection
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INFLATION RISKINFLATION RISK INVESTMENT RISKINVESTMENT RISK
High V HighMedium-High Medium Low-Medium Low Very Low
Fidelity Funds – risk reward spectrum
US Dollar Cash
US Dollar Bond
FPS Defensive
International Bond
America FPS
Global Growth
Euros Stoxx 50
Pacific Emerging Markets
European Growth
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Understanding Funds Terminology Benchmark Index Funds Growth % Fund annualized growth Index annualized growth
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Choosing your investment funds – Self-Select OptionsFidelity Fund Name
Risk Funds Growth Since Launch
Index Growth since Launch
Defensive Fund
Low 4.4% 4.8%
Euro Stoxx 50 Medium 3.8% 4.5%
America Medium 10.9% 11.7%
European Growth
Medium/High 13.2% 10.7%
Pacific High 4.6% 2.5%
Global Growth Medium 6.6% 5.3%
Emerging Markets
Very High 2.9% 6.3%
International Bond
Low/Medium 5.8% 8%
US$ Bond Low 6.3% 7.7%
US$ Cash Very Low 3.5% N/A