The Financial Future of the United States : How Do We Prepare?
Sroczynski, Austin Tyler
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This project focuses on developing a financial plan for individuals in the United States of America. With the status of a comfortable retirement being uncertain for Millennials and Generation Xers, it is critical that each individual creates a financial plan to secure her financial stability. This study begins with a literature review of the history and evolution of traditional investment theory. Then, the investment theory is considered in the context of an Investment Policy Statement (IPS). Finally, the investment theory and IPS are applied in a theoretical case study analyzing the financial situation of an average recent college graduate. This project begins with a literature review introducing fundamental investment " theory: the efficient market hypothesis, modern portfolio theory, capital asset pricing model, risk versus reward, and active versus passive investing. This project provides an analytical history of the evolution of investment theory. These investment principles are utilized in the personal finance industry, as well as the institutional finance industry. Part two of the literature review is a summation of the current financial future of the United States. This portion of the literature review analyzes the status of Social Security, Medicare, the Millennial generation, the college debt crisis, and the irrational behavior of individual investors. This section of the literature review combines past, present, and future trends to illustrate the necessity of financial planning for those living in the United States. The connection section goes on to utilize the theoretical framework of the Literature review to create a financial plan for individual investors. Once the investment theory and the status of the United States is outlined, the connection section creates a holistic financial plan for investors by creating an Investment Policy Statement (IPS), choosing the appropriate insurance policies, and avoiding behavioral finance issues. The IPS is a tool for investors to use to make investment decisions without their emotions interfering, which will maximize long-term returns. The IPS is structured to help investors implement a passive investment strategy as early as possible in their life. Although the IPS is a necessary condition for investment success, it is not sufficient. For an IPS to be successful, an investor must pair it with the appropriate life insurance. The connection sections analyzes whether whole-life or term-life insurance is the best option. The final section of this paper is the application section. This section will demonstrate a fully developed IPS statement that is paired with life insurance products to achieve a comfortable retirement. Tom, the individual in the case study, is a recent college graduate that has chosen a passive investment style. Throughout his life, Tom will encounter many ups and downs, but he is well-equipped with insurance products to protect him from uncertainties. By passively investing his money, Tom will retire with a net worth of almost 4 million dollars. In the end of this project, it will be clear that the financial future of the United States is uncertain, and that value is only as meaningful in the context of risk-adjusted returns. For investors to have the most investment success, they must create an Investment Policy Statement that revolves around passive investing over the long-term. The literature review and application section argued that passive investing strategies achieve higher market returns than active investors. Not only should investors use a passive investment strategy, but they must always keep in mind common behavioral finance problems.