Download The Basics of Investing 2012

The Basics of Investing
Stocks, Bonds & Cash Accounts
Why Invest (save) Money?
• Purchasing power = amount of goods/services money buys
• Money (savings) loses purchasing power over time
– Prices for goods rise on average +2.5% per year
– rising prices is called inflation
• Investors must earn more than the rate of inflation for
purchasing power to rise
Types of Investments:
4 Asset Classes
• Stocks:
– Over 5000 individual stocks to choose from!
• Bonds:
– Government bonds, corporate bonds, mortgage bonds
• Cash Accounts:
– Savings accounts, CD’s, money markets
• Real Estate
– Residential, commercial, houses, apartments, etc….
Reading:
Intro. To Investing
ANSWER KEY:
1)
2)
3)
4)
5)
6)
7)
B
C
C
B
A
C
D
Real & Nominal return per year by Asset Class
1925 - 2012
Returns before inflation = nominal return
.= real return
Savings
Account
Risk vs. Reward?
• Holding period = when do you need your money back?
– Time horizon determines which asset class you should invest in
• The longer the holding period----the more risk you should take!
– Stocks = long term investment
(5-years or longer)
– Bonds = medium term investment
( 1-3 years)
– Bank CD’s = short term investment
(30 days to 2 years)
Asset Allocation
Process of picking sectors to invest in
Cash
Account
Bonds
Stocks
no risk
med. risk
high risk
I think
I’m brilliant
very high risk
Rule of “70”
• 70 divided by RETURN = # Years for money to double
•
•
•
•
•
Money Doubles in:
70/2%
70/5%
70/10%
70/15%
= 35 years
= 14 years
= 7 years
= 4.6 years
Average return of
stock market
over last 75 years
How Money Grows!
• Money grows exponentially as it compounds
• $10,000 invested at 4% return for 30-Years:
• $33,000
• $10,000 invested at 15% return for 30-years
• $875,000
The power
of compound
interest!
Bonds
• Bonds: are a loan to a Gov’t or business where you earn interest
every year until you are paid back.
• If the company goes bankrupt => you usually will not be paid back!
You buy
a Bond
$1,000,000 cash
U.S. Gov’t
5-Year Bond
Plus $1
million in
5 years
$1.0 million turns into $1.1 over 5 Years
Janet Yellen leaves rates at ZERO
What does the Fed
policy do to savers?
0.0%
Bond Prices
• U.S. Government sells bonds to “borrow money”
• Bond prices move inversely with interest rates!
• Interest rates ↓ => Bond Prices ↑
You buy
a Bond
$1,000,000 cash
$20,000 interest per year
U.S. Gov’t
5-Year Bond