Professional Documents
Culture Documents
Life Insurance: Providing death benefits and, possibly, additional cash values
o Term life and whole life insurance
o Universal and variable life insurance
Non-life Insurance
o Health insurance & disability insurance
o Automobile insurance & Home/rental insurance
Cash Reserve
o To meet emergency needs
o Equal to six months living expenses
Investment Constraints:
1. Liquidity
Vary between investors depending upon age, employment, tax status, etc.
Planned vacation expenses and house down payment are some of the liquidity
needs.
2. Time
Influences liquidity needs and risk tolerance
Longer investment horizons generally requires less liquidity and more risk
tolerance
Two general time horizons are pre-retirement and post-retirement periods
3. Taxes and Interest Income
Calculation
Dividend Income
$2,000
$2,900
$754
($2,900 X 26%)
$550 ($2,900 X
18.97%)
$204
10.20% ($204
$2,000)
($754 - $550)
Assuming a marginal tax rate of 26%, the dividend tax credit effectively reduced the effective tax
rate by about 60%
5. Investment Constraints: Taxes and Capital Gains
Capital gains are also taxed at an effectively lower tax rate because only 50% of a
gain is taxed in Canada
$2,000
$260
Importance
of Asset
Allocation
Acco
rding
to
research studies, most (85 to 95%) of the overall investment return is due to
the first two decisions, not the selection of individual investments
Historically, small company stocks have generated the highest returns, so have
the volatility
Inflation and taxes have a major impact on returns
Returns on Treasury Bills have barely kept pace with inflation
Social, political, and tax environments influence the asset allocation decision
Equity allocations of U.S. pension funds average 58%
In the United Kingdom, equities make up 78% of assets
In Germany, equity allocation averages 8%