Download Fundamentals of Investing Chapter Fifteen

Investing Fundamentals
Investing for the Future: Goal Setting
• Investment goals should be specific and
measurable. Develop your goals by
asking questions:
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What will I use the money for?
How much will I need?
How will I get the money I need?
How long will it take me to get the money I
need?
• How much risk am I willing to take on?
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Goal Setting
(continued)
• What could make me change my goals?
• Given my economic circumstances, are
my investment goals reasonable?
• Am I willing to make the sacrifices
necessary, to meet my goals?
• What will the consequences be if I
don’t reach my investment goals?
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First Steps
• Get a good education and good training to win
the means to finance your future.
• Establish a budget and stick to it.
• Establish a savings account.
• Save for emergencies (3 – 9 months of living
expenses).
• Save for your education.
• Save to invest.
• Avoid debt.
• Make sure you are insured.
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Second Steps
• Start or have someone start for you a
Roth IRA
• Choose a reputable no-load mutual
fund or Exchange-traded fund.
Plow into your future as much as you
can of gifts, inheritances, and windfalls.
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Third Steps
• Participate in any 401(k) or other
savings / investing plan your employer
may offer.
• Add to your portfolio of mutual funds
and exchange-traded funds.
• Educate yourself about other
possibilities, such as investing directly
in the stock market.
The Value of Investing into and for the
Future
• Many people don’t start investing because
they only have a small amount to invest,
but....
• Even small amounts invested regularly
grow over a long period of time.
• If you save $2,000 each year at 5%, you
would have $241,600 at the end of 40
years. The higher the rate of return the
greater the risk.
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Factors Affecting the
Choice of Investments
• Safety and risk.
• Safety means a lessening of the possibility of
losing your money.
• Risk means hat there’s a chance you WILL
lose your money.
• Investments range from very safe to very
risky.
• The greater the risk, the greater the potential
return: risk is best borne by the young.
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Five Components of Risk
• Inflation risk - during periods of high inflation your
investment return may not keep pace with the inflation
rate.
• Interest rate risk - you may invest in a bond at a 6%,
rates later go up to 8%; your bond price falls.
• Business failure risk - bad management or products
affect stocks and corporate bonds.
• Market risk - prices fluctuate because of behaviors of
investors.
• Global investment risk - changes in currency affect the
return on your investment.
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Investment Risk: the Lows and
Highs
• Safe investments = predictable and low
income.
• Savings accounts and certificates of deposit.
• U.S. savings bonds.
• United States treasury bills.
• Riskier investments = higher potential
income.
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Municipal bonds.
Corporate bonds.
Preferred stocks and income common stocks.
Income mutual funds.
Real estate rental property.
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Investment Growth and Liquidity
• Growth:investment will increase in
value over time.
• Liquidity.
• The ability to buy or sell an investment quickly
without substantially affecting the investment’s
value.
• Cash is immediately liquid.
• Savings is very liquid.
• Precious metals are not very liquid.
• Real estate is not very liquid.
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Asset Allocation and Diversification
• Asset allocation is the process of spreading
your assets among several different types of
investments, usually by percentage, to lessen
risk.
• Determine what percent you want in stock,
bonds, CDs, and mutual funds based on your
time frame, age, and tolerance for risk.
• Investing in different asset classes provides
diversification.
• Younger investors generally should put a larger
percentage in growth-oriented investments.
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Investment Alternatives - Stock
• Stock or equity financing.
• Equity capital is provided by stockholders,
who buy shares of a company’s stock.
• Stockholders are owners and share in the
success of the company.
• A corporation is not required to repay the
money obtained from the sale of stock.
• They are under no legal obligation to pay
dividends to stockholders. They may
instead retain all or part of earnings.
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Investment Alternatives - Bonds
• Corporate and government bonds.
• A bond is a loan to a corporation,
the federal government, or a
municipality.
• Bondholders receive periodic
interest payments, and the principal
is repaid at maturity (1-30 years).
• Bondholders can keep the bond
until maturity or sell it to another
investor before maturity.
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Investment Alternatives – Mutual Funds
• Mutual funds.
• Investors’ money is pooled and invested by a
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professional fund manager.
You buy shares in the fund.
Provides diversification to reduce risk .
Funds range from conservative to extremely
speculative.
Match your needs with
a fund’s objective.
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Investment Alternatives - Real Estate
• The goal of a real estate investment is
to buy a property and sell it at a profit.
Nationally, 3% appreciation in price a
year is average.
• Location, location, location is important.
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Speculation – Don’t Be Stupid!
• Speculative investments.
• A speculative investment is a high-risk
investment made in the hope of
earning a relatively large profit in a
short time. Typical speculative
investments include:
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Antiques and collectibles.
Options.
Commodities.
Coins and stamps.
Precious metals and gemstones.
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A Personal Investment Plan
• Establish realistic goals.
• Determine the amount of money needed to
meet your goals.
• Specify the amount of money available to
fund your investments.
• List different investments you want to
evaluate.
• Evaluate risk and potential return for each.
• Reduce possible investments to a
reasonable number.
• Choose at least two different investments.
• Continue to evaluate your investment
program.
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Your Role in the Investment Process
• Evaluate potential investments.
• Seek the assistance of a financial
planner (see Appendix at the back of
the text).
• Monitor the value of your
investments.
• Keep accurate and current records.
• Consider the tax consequences of
selling your investments.
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Sources of Investment Information
• The internet.
• A wealth of investment information is
available.
• View sites such as www.fool.com,
www.cnn.com , and www.money.com
• Newspapers and news programs.
• Business periodicals such as
Smart Money and government publications.
• Corporate Reports.
• Investor services and newsletters, such as
ValueLine or Morningstar.
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