Overview

We designed this Basic Principles Module to provide you with an understanding of the essential aspects of wealth management. In this module, we discuss 6 principles that lie at the core of the classes we teach on Wealth Management at the University of Iowa. The principles are Objectives, Asset Allocation, Administrative Costs, Tax Shields, Retirement Income – Social Security, Annuities & Investments, Risk Management & Insurance and Building a Plan.

Here is a quick overview of these principles and a hint of what you will find in the corresponding module components.

Objectives

Establishing clear objectives is one of the most important principles of sound financial planning. Some people skip this part of the financial planning process, and others adopt objectives that are somewhere between inappropriate and downright dangerous. For example, if you are thinking that your overall objective is to maximize your wealth, we will try to convince you that you are headed on a path that is extremely dangerous to your financial health. In this component we provide our views and recommendations for the objectives in your financial plans.

Asset Allocation

In planning for your financial future, it is important to have a sound understanding of the basic financial landscape for investing. In particular, you need to have a realistic expectation for the level of return that the different assets classes provide, and the level of risk that is entailed when you invest in them. In this component, we review the characteristics of the major asset classes: money markets, bonds, stocks, and real estate.

Administrative Costs

This area is extremely important to sound financial planning. The costs of investing typically seem quite modest, almost negligible. They are often a fraction of one percent. Yet these “small costs” have a huge impact on your future financial health. How can this be possible? There are two reasons: 1) the time horizon for personal financial planning is quite long – much longer, for example, than the time horizons we see in corporate finance; and 2) the expected average returns available to you over these long periods of time are actually somewhat modest, so “small reductions” can be highly significant. In this component we show the impact of “small costs” and discuss the many areas you need to be careful in this regard.

Tax Shields

The Federal Government and our state governments provide significant tax benefits to encourage you to save and invest more for your retirement and for education. These tax shields can have a huge impact. Most of these incentives are in the form of tax shields, such as 401k Plans and Individual Retirement Accounts (IRAs). Some of these vehicles provide other benefits (such as matching funds found in most 401k Plans) to you in addition to the tax shields. In this component we discuss the major tax shields available to you and provide our views on their comparative features.

Retirement Income – Social Security, Annuities & Investments

During our working years, most of us depend upon wages and salary income to meet our living expenses. Then, with retirement, we shift to other sources to meet our needs. There are three broad sources for our retirement income: Social Security, private pensions and annuities, and our personal investments. In this section we review the important principles regarding these three components, outline the important features of each, and provide our views regarding how to best use them.

Risk Management and Insurance

Managing your risk constitutes a major element of your financial plan. You know your plan needs to provide protection against catastrophic insurable risks. But what about lesser risks — how much risk should you insure? And what about the risks in your investments, where insurance typically is not available? In this section, we provide our recommendations for how to view these risks and how to determine the amount of risk protection that is appropriate for you.

Building a Plan

Are you on track to achieve financial security in retirement? If you are not, what changes do you need to make to put you on track? This section outlines the major components of your financial plan for retirement and some considerations for its design. We then detail the steps to follow in building your plan, and conclude with some cautionary notes regarding some common mistakes.

Those are the components. Time to “get on with it” – enjoy your reading.