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Investing for the Future CH 11 Personal Finance CH 11 Investing in the Future pg.239 1 11.1 Basic Investing Concepts Why Invest? Investing is the use of long term savings to earn a financial return. Investing is a proven and powerful way to strengthen your financial position. Investing helps beat inflation. Personal Finance CH 11 Investing in the Future 2 Inflation Inflation is a RISE in the general level of prices. The value of the US dollar FALLS. Inflation reduces purchasing power. Personal Finance CH 11 Investing in the Future 3 Rule of 72 A way to estimate how long it will take to double your money. How to do it? Divide the % (percentage) rate of return into 72. Personal Finance CH 11 Investing in the Future 4 Rule of 72 EXAMPLE Question: An investment is yielding 6% how long will it take to double your money? How to do it? Divide the % (percentage) rate of return into 72. 72 / 6 = 12 years Answer: At an interest rate of 6%, it will take 12 years to double your money. Personal Finance CH 11 Investing in the Future 5 Rule of 72 You Do Question: An investment is yielding 4% another is yielding 12% how long will it take to double your money with each investment? How to do it? Divide the % (percentage) rate of return into 72. 72/X Answer: At a interest rate of 4%, it will take _____ years to double your money. At a interest rate of 12%, it will take _____ years to double your money. Personal Finance CH 11 Investing in the Future 6 Answer: At a interest rate of 4%, it will take 18 years to double your money. 72 / 4 = 18 At a interest rate of 12%, it will take 6 years to double your money. 72 / 12 = 6 Personal Finance CH 11 Investing in the Future 7 Question: An investment is yielding 5.5% how long will it take to double your money? Round your answer to the nearest tenth. Personal Finance CH 11 Investing in the Future 8 Stages of Investing pg. 241-243 1. 2. 3. 4. 5. Put and Take Account Initial Investing Systematic Investing Strategic Investing Speculative Investing Personal Finance CH 11 Investing in the Future 9 1. Put and Take Account When you get a paycheck you will put it in an account. Put and Take accounts = Checking and Savings This is where your emergency fund goes. Why is it called Put and Take? Because you EASILY put money in and EASILY take money out. = Liquid Personal Finance CH 11 Investing in the Future 10 Liquidity or Liquid Assets Assets = things you own Liquidity or Liquid = something that you can turn into $ cash $ - FAST! Personal Finance CH 11 Investing in the Future 11 2. Initial Investing Do this when you have excess in your saving account. “a little here, a little there” When to do this? Teens - Twenties - Thirties What to invest in? SAFE Things CD’s, Bonds, Mutual Funds, Gold, Silver Personal Finance CH 11 Investing in the Future 12 3. Systematic Investing Making investments on a regular and planned basis. Less Liquid When to do this? Teens - Twenties - Thirties What to invest in? Long Term / Long Range Investments Big Cap (Big Company) Mutual Funds Well Established Companies Precious Metals – Gold, Silver Personal Finance CH 11 Investing in the Future 13 Systematic Investing Continued… GOAL Growth over a LONG period of time Vehicles Roth IRA’s - 403B ‘s - 401K ‘s Have a Diversified Portfolio Portfolio = A collection of different Investments DO NOT “Put all your eggs in 1 basket” Example – all your money in Apple Computer Personal Finance CH 11 Investing in the Future 14 4. Strategic Investing Managing and Growing your portfolio. Take gains & Shave Losses TAKING A LOOK AT WHATS GOING ON! Portfolio = your collection of investments Personal Finance CH 11 Investing in the Future 15 5. Speculative Investing Higher Risk Investing Possible: BIG GAINS or BIG LOSSES When to do this? After you have: Emergency Fund Initial Investing Systemic Investing What to invest in? Small Cap Stocks, Mutual Funds ETF’s – Electronically Traded Funds Commodities – Food, Oil, Natural Gas, Gold, Silver, Platinum Technology Start up Companies Personal Finance CH 11 Investing in the Future 16 Risk & Return Investing Risk A chance that an investments value will decrease You could make ALOT or….. You could loose A LOT Diversification Spreading the risk among many types of investments. Ex. Mutual Funds, Bonds, Gold, CD’s, Real Estate NOT – “putting all your eggs in one basket” EX. Putting all your money in EA Sports because the new Madden is coming out. Personal Finance CH 11 Investing in the Future 17 Types of Risks pg 244 Interest Rate Risk Political Risk -The chance that inflation will rise faster than the return on your investment. -Government interferences EX. Taxes, regulations Market Risk NonMarket Risk -How is the economy doing? -Unpredictable nature of events EX. War, Terrorism, Natural Disasters Company Risk -Owning any single company stock EX. Ford, Dell, Abercrombie & Fitch Industry Risk -Owing groups of a business EX. GM, Toyota, Honda EX. McDonalds, Wendy's, Taco Bell Personal Finance CH 11 Investing in the Future 18 Investment Strategies pg. 245 Common Remark: “I don’t have enough money to save” TRUTH: Even small sums of money grow over time. Bottom Line: Save SOME $, even if it is a small amount Personal Finance CH 11 Investing in the Future 19 Criteria for Choosing an Investment Degrees of safety How Liquid is the Investment? Liquidity - How quick can you get your money Expected interest or dividends? Expected growth? Can you buy it for a good price? Any tax benefits? NO investment has all of these Every investment has a tradeoff DIVERSIFICATION is KEY Personal Finance CH 11 Investing in the Future 20 Wise Investment Practices Define your Goals GO SLOW EX. Temporary investments 1 year or less Follow through EX. Permanent investments are to be held for the “long haul” Keep good records Seek good advice (from trained professionals with experience) Keep your knowledge current Know your limits Personal Finance CH 11 Investing in the Future 21 11.2 Making Investment Choices pg. 249 Sources of Financial Information Personal Finance CH 11 Investing in the Future 22 Sources of Financial Information Newspapers EX. Wall Street Journal, Barron's Newsletters EX. Moody’s, Valueline Financial Magazines EX. Money, Fortune, Forbes Personal Finance CH 11 Investing in the Future 23 Brokers Provide customers with an actual advisor to talk to Provide clients with analysis and opinions Based on judgments and opinions of the experts EX. Vanguard, Fidelity Investments, American Express Personal Finance CH 11 Investing in the Future 24 Discount Brokers Allow a person to buy and sell stocks for a reduced commission Provide customer with electronic information Do not provide a person to give advice EX. Scottrade, TD Ameritrade, ETrade, Charles Schwab Personal Finance CH 11 Investing in the Future 25