Download Annual total rate of return

Key Investment Concepts
(that everyone should know)
This program is provided through a grant from the Financial
Industry Regulatory Authority (FINRA) Investor Education
Foundation and the American Library Association (ALA). The
grant is distributed as part of the smartinvesting@your library®
initiative, an ALA program. This project is in its sixth year of
educational partnership with libraries across Colorado and the
country.
Marsha Yelick CFA(retired)
Financial Programs Consultant
[email protected]
970-586-8116 Ext 831
du jour
Major Themes
Common Sense
Diversification
Simplicity
Impulse in your enemy.
Time is your friend.
Who’s in control?
Where do you want to go?
How long do you have to spend in the car?
How much risk will you take?
Are you headed where you want to go?
What if circumstances change?
How much do you want to be charged?
It is, after all, your money!
To be in control!
ELEVEN Investment Terms...
you need to understand
Term 1: RETURN
Return
Measuring dollars is not enough!
Simple return? (too simple)
Total return? (better)
Rate of return? (allows comparison)
Annualized total rate of return
...a valid measure, excellent for
evaluation and comparison purposes
Historic Returns
What returns can be expected?
“A page of history is worth a volume of logic.”
Oliver Wendell Holmes
1926 – 1996 Average annual rates of return
•Small stock
•Real Estate
•Large stock
•Bonds (long)
•Treasury bills (1-yr.)
Inflation
12.6%
11.1%
10.4%
5.9%
3.7%
3.0%
...and what is the RISK???
A FAIR rate of return
According to history,
what is a reasonable
annual total rate of return?
50% stocks (~10%) +
50% bonds (~5%) =
~7.5%
7.5% - 3.0% inflation =
REAL RETURN of ~4.5%
What is return?
To review return
• Simple return – in dollars
• Total return – including all costs & income
• Rate of return – stated in percentage
• Annualized total rate of return – full picture
• Fair annualized total rate of return = 7.5%
• REAL Return - after inflation takes its bite.
TERM 2: YIELD
Yield
Money you collect annually from the
investment you make.
(Annual total rate of return
is still the most important)
Types of yield
Types of Yield…
TERM 3: RISK
Risk
…usually implies downside risk
(loss), meaning the uncertainty of a
positive return and the potential
for financial loss.
Non systematic
(manage by diversification)
Systematic
(manage with secure financial base)
Investment risk planning
The PYRAMID…
Highest Risk/
Highest Earnings
Lowest Risk/
Lowest Earnings
http://www.arfamilies.org
Risk avoidance
The BIGGEST RISK is to take NO RISK…
http://www.ivyfunds.com/educ_invest_risk.aspx
TERM 4: VOLATILITY
Volatility
…. the standard deviation of the continuously
compounded returns of a financial instrument within
a specific time horizon.
The more volatile an
investment is, the more it can
potentially lose or gain value
in the short-term.
Liquidity
TERM 5: LIQUIDITY
Cash whenever you want it!
Cash only when someone agrees!
Compounding
TERM 6: COMPOUNDING
Mathematical magic…
TERM 7: INFLATION
Inflation
Inflation also COMPOUNDS over time!
Dollar cost averaging
TERM 8: DOLLAR COST AVERAGING
Invest at VARIOUS times at VARIOUS
prices. You buy more shares when
prices are lower, less when prices
are higher.
(unless you KNOW what the market is going to do).
Dollar Cost Averaging Example
Month Amount Invested Cost per Share No. of Shares
March
$100
$20.00
5
April
$100
$25.00
4
May
$100
$10.00
10
June
$100
$50.00
2
Average cost per share $19.05
21
https://www.ohio457.org
Tax-defer (legally)
TERM 9: TAX-DEFERRED SAVINGS
(Paying unnecessary funds to Uncle Sam
is not conducive to nest egg growth!)
• 401(k)
• Traditional IRA
• Roth IRA
• Annuities
• Limit trading
Fees
TERM 10: FEES
Large Cap Domestic Mutual Funds
Average
annual
Average
total
Expense return
ratio (%)
(%)
Quartile 1
0.6
9.09
Quartile 2
1.04
8.25
Quartile 3
1.57
7.64
Quartile 4
2.05
6.37
•
•
•
•
Mutual funds - use no-load
Mutual funds - find low annual expense
Avoid frequent trading
Buy for the long term
Allocation/Diversificatio
n
TERM 11: ALLOCATION
From: http://www.investopedia.com/university/beginner/beginner6.asp
Rule of thumb
Rules of thumb...(not really rules, just suggestion)
For retirement monies…
The percentage of fixed income = your age
(cash counts as part of fixed income)
60 years old: 60% bonds, 40% stock
50 years old: 50% bonds, 50% stock
40 years old: 40% bonds, 60% stock …
Apply the terms!
Check list for Investment Concepts
What you do today
does make a
difference in
what you have
tomorrow.
Be money smart for life