General Principles Flashcards
Heuristics
A strategy that ignores part of the info w/ the goal of quickly making decisions. ( rule of thumb, heneralizations)
Anchoring
Tendency of investors to become attached to a specific price.
Attachment Bias
Holding on to an investment for emotional reasons ( grandpa gave stock so I can never sell)
Endowment Bias
Emotional Bias .. value an ownedobject higher, often irrationally, than it’s fair market value.
Financial Enmeshment Bias
Parent child finances inappropriately coming led. Leads to kids lower motivation, low confidence and self-esteem.
Cognitive Dissonance
The challenge of reconciling two opposite beliefs. ( remem bring positive and forgetting negative of an experience)
Confirmation Bias
Tendency to accept any information confirming
our preconceived notions.
Diversification errors
Tendency to evenly diversify across all options presented.
Fear of regret
Tendency to take no action rather than make the wrong decision.
Gambler’s Fallacy
Wrong belief that something will happen following an event or series of events.
Herd behavior
Do what the group does. Also FOMO.
Hindsight Bias
20/20 vision when looking at past events and thinking we understand, when in reality we might not. This causes overconfidence.
Inappropriate Extrapolation
Look at recent events and assume they will continue.
Prospect Theory
How people evaluate losses and gains…losses have a much bigger effect.
Mental Accounting
Looking at sums of money differently. ( having speculative money and safe money, having a CD with low interest and a cc with high interest)
Outcome Bias
Tendency to decide based on outcome vs probability of that outcome
Overreaction
Investors emotionally react towatd new market information.
Over-weighting the recent past
Assume the recent past will repeat itself. Assumption with little research.
Self-affirmation bias
Believe that when something goes right it is because of you. If it doesn’t work out, it is someone else’s fault.
Spotting trends that are not there
Investors seek patterns without good research.
Status quo bias
Tendency to do nothing.
Money Script/ Money avoidance
Money is negative, ignore finances to avoid emotional distress.
Money script/ money worship
Money brings happiness, compulsive spending.
Money scrips/money vigilance
Saving, being prepared, overly cautious with money and enjoyable things are sacrificed.
Money scripts/ money status
Internal value and self worth directly related to financial worth. Overspending, associating shame with a lack of money.
Framing effect
Cognitive bias decisions affected by how options are presented…overlooking factual data. ( wording)
Money Illusion
view wealth nominal rather than real ( not considering inflation)
Steps in Financial Planning Pdocess
- Understandclient’s personal & financial circumstances.
- Identify & select goals
- Analyze current course of action & alt courses
- Develop FP recommendations
- Present FP recommendations
- Implement FP reco.mendations
- Monitor progress & update
Code of conduct…a CFP must…
Fiduciary duty, honesty, integrity, competence, diligence, due care, disclose/avoid conflicts of interest, maintain confidentiality and privacy of client info, positly act towards FP profession and CFP cert
Financial Statement
Balance Sheet (current assets, investments, use assets, liabilities) assets minus liabilities equals net worth.
Statement of cash flow
Inflows, fixed and variable outflows, taxes ( inflows minus outflows equal savings)
Pro forma
Prediction/future…projects expectations of the future
Emergency fund
High accessability, security of principal. 3 months / 6 mo (3-8) * subtract one month of fixed and variable expenses from emergency funds
Debt Management / housing expenses PITI
PITI (principal, interest,taxes ( property only), and insurance ( homeowners only) should be 28% of gross income or less.
Saving strategy
5 to 8% of gross income to savings. Pay yourself first.
Real rate of return
(1 + after tax return / 1 + inflation rate -1) × 100
FDIC insurance
$250k per type of account, per bank, per person. ( individual, joint, relocate trust, IRA/Keogh ( cash or CD)
Securities Act of 1933
First issues/ IPOs. Provide a detailed prospectus. Full and fair disclosure of risk
Securities Act of 1934
Secondary markets (NYSE, NASDAQ…) created the SEC to enforce securities law. ( Joe Kennedy 1st head of SEC)
Security investors protection act 1970 ( SIPC)
Established SIPC ..to supervise securities firms that get into financial difficulties. Lossesfrom failure of brokerage firm, not bad investing!
529 plans/ qualified state tuition programs (QTPs)
Maintained by state, can purchase tuition credits or put funds into an account. So college savings or prepaid tuition. Owner can be a trust, or anyone. Individuals can defer $90k (5 years at once)/ $18k per year. Disadvantages to a trust … if trust is funded first the 5 year is not available.
529 impact on financial aid
529 plan reduces students’ eligibility for needs-based financial aid, assets in pre-paid tuitiontreated as parental assets.
529s can be used for…
K to 12th grade up to $100K per year
Under secure act 529 used to pay student loans
$10k lifetime per person
Coverdale ESA
Contribute $2k per year for the benefit of a child under18. Contribution not deductible. Earnings accumulate tax deferred. Distributed free of taxes for qualified education expenses. Phase out based on MAGI. Liberal definition of educational expenses. Use before student turns 30 ( 30 day grace period) any left over can be rolled to another beneficiary related to original beneficiary.
American Opportunity Credit
$ fo $ tax credit of 100% of the first $2k plus 25% of the next $2k ( maximum credit of $2,500) ( not room and board) 4 years of college
Lifetime Learning Credits
20% of the first $10k ( maximum of $2k)
Graduate years
Fulbright scholarship-grants
529 plans- not state sponsored/ private
Cloverdale ESA-must be distributed by age 30
Fiscal policy
Government spending and taxation, a power of congress
Monetary policy
The federal reserve, tools include: 1. Reserve requirements- fed sets levels banks must maintain ( if fed level is 10% then bank can lend 90%) 2. Discount rate- rate fed charges it’s member banks to borrow 3. Open mkt operations-“best”4. Margin rayes-sets initial margin rates for reg T
Recession
2 consecutive quarters of decline in real GDP
Depression
6 quarters of decline in real GDP
QUALIFIED RESIDENCE INTEREST RULES
$750k for married filling jointly and single filers, $375k for each married filing separately.
Definition of an advisor
A, B, C…advice, in the Business of providing such services, Compensation
PITI/Debt management ratio
Housing ( principal, interest,taxes ( property only) insurance ( homeowners only) or rent should equal or not be greater than 28% of gross income
The steps in the Financial Planning Process (7)
- Understand the client personal & and financial circumstances
- Identify & select goals
- Analyze clients’ current course of action and potential alternative courses of action
- Develop financial planning recomendations
- Present financial planning recommendations
- Implement financial planning recommendations
- Monitor progress and update
Morale hazard vs moral hazard
Morale Hazard condition of carelessness or indifference ( i have insurance, so why lock my car dooe)
Morale hazard is a person being unethical or not telling the truth to get a claim paid.
Different branches of gov and what they do…
Legislative branch makes the law executive branch enforces laws in place
Judicial branch applies/ interprets the laws
Adhesion
If you write a contract, you are bound by the ambiguity you create
Captive agent
Represents several companies under common ownership, but with different operating business names.
