Download The Value of Early Investing

Chapter 13
Investments
Section 13.1
INVESTMENT CHARACTERISTICS
Investment Terms
• Return-the income that an
investment produces.
• Some investments pay returns at
regular intervals while you own them,
similar to the way a savings account
pays interest. Another way to gain a
return is t sell an investment for profit.
Liquidity
• Liquidity—the ease with which
assets can be converted to cash.
Volatility
• Volatility—the degree t which an
investment’s return or value may
change. Some investments are quite
volatile; their value swings up and
down often, and can change
suddenly and drastically.
Risk
• Risk—is the possibility of variation in
the return on your investment.
• Some investments are considered
conservative, r lower in risk. These
tend to produce lower returns.
• More risk means often means more
possible gain.
Principles of Investing
• Questions to ask…
• Do you follow a well-planned budget?
• Have you set aside enough savings to
cover emergencies and short term
goals?
• Is your use of credit under control?
Identify your objective
• Successful investing involves clear
purpose and goals.
• Ask yourself—what amount can you
affrd to invest, and how much do you
hpe to end up with?
• What is your time line…how long do you
have until you need the money?
• With a longer time line you can choose
investments that are less liquid, more volatile,
and higher in risk?
Three basic types of investment …
• Income—this strategy involves putting
money into investments that pay relatively
dependable returns at regular intervals.
• Growth—if you’re more concerned with the
future value of your investments than in
receiving present income, you would
probably follow a growth strategy.
• Tax Reeducation- for some people,
reducing their income tax obligation is a
primary goal of investing.
Diversify your Investments
• Diversification—is a strategy of making
a variety of investments in order t
reduce your exposure to risk.
• Wise investors develop a portfolio, or
collection of investments, that is both
diversified and well balanced.
• Asset allocation is the process of
developing an overall plan for
balancing an investment portfoli0.
Learning about Investing
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Reliable media sources
Courses in financial planning
Investment clubs
Professional Advisors
Section 13.2
RETIREMENT PLANNING
Social Security
• Social Security is a fund administered by
the federal government and funded
through a tax paid by citizens who are
currently working.
• Benefits are influenced by how long you
work, your earned income, and the age at
which you apply.
• The earliest you can apply for benefits is
age 62, however if you apply before full
retirement age which is now age 67 your
benefits will be greatly reduced.
Pension Plans
• A pension plan is any retirement plan
offered to a company’s employees. A
retirement fund is set aside for each
employee who participates. Money in
the fund is contributed by the
employer, the employee or both. The
money in the fund grows over time,
and the contributions and earnings are
not taxed until the employee draws
from the retirement account.
Pension Plan Types
• Defined-benefit plan—In this type of plan, a
company pays its retiring employees a
specified amount each month, based on each
employee’s salary history and years of
employment.
• Defined-contribution plan—In this type of
plan, employees can contribute to a retirement
fund that is invested on their behalf. In some
cases, the employer also contributes. Since
the amount the employee recieves depends on
the investment results, the employee assums
all risk.
401(k) Plans
• 401(k) plan is a type of defined contribution
pension plan t which the employee contributes
on a pretax basis. By directly contributing to
the plan, the employee reduces the amount of
income that is subjest to tax. In addition, some
employers will match 401(k) contributions up
to a certain percentage.
• Most plans require that the investor keeps
their money in the plan until they reach a
certain age.
• Many of these are portable, so it is able to be
transferred from job to job.
403 (b) Plans
• A 403 (b) plan is similar to a 401 (k)
however, only certain types of
employees may contribute. Such as
teachers, and some doctors and
nurses.
Other Defined-contribution plans…
• Profit –sharing– the employer
allocates a portion of the company’s
annual profits to each participating
employee.
• Employee Stock Ownership—Instead
of profits, employers give
participants shares of the stock in
their company. These shares may
not be sold until the employee
leaves the company or retires.
Individual Retirement Accounts…
• IRA’s are personal savings plans that
enable workers and their spouses t set
aside money for retirement.
• Traditional IRA—Contributions to this IRA
may be tax-deductible. Instead of
counting as taxable income in the year
earned, money put into this IRA will be
subjected to tax when it is withdrawn in
retirement.
• Roth IRA—contributions are not taxdeductible, however, earning accumulated
are tax-free.
Keogh Plans
• Is a federally approved, definedcontribution, tax-deferred
retirement plan designed specifically
for self-employed people.
Contributions are fully taxdeductible.
Secrets to success!!!!
• Start early—time is the best
component to a great retirement
plan.
• Set goals
• Make estimates and calculations
• Adjust your plan if needed.
The Value of Early
Investing
Chris and Pat each invest $500 per
month in a retirement plan that
earns 7% annual yield.
Their Contributions: Chris starts
making contributions at age 18 and
stops at age 28, leaving the money
invested.
Pat waits until age 38 to start
investing and continues making
contributions until age 68.
The Results: Chris
contributed one-third as
much as Pat. Yet Chris’s
ending balance at age 68
is over twice as great.
The Stock Market
Section 13.3
Stock Market Basics
• Stock—Ownership interest in the
corporation. It does this by making
shares, or individual units of
ownership, available for purchase.
• Investors who purchase shares of
stocks are called shareholders.
Shareholders are actually partowners of the company.
How stocks are traded…
• When a company first issues stocks,
investors buy shares directly from the
company in an initial public offering. After
that, investors usually buy the stock from
other investors who own it and wish to sell
it.
• The organized trading of stocks is known as
the stock market. It works much like an
auction.
• Stocks may be traded at a stock exchange, a
central location when stocks are sold on a
trading floor. Historically, Wall Street, in
Manhattan, housing the New York Stock
Exchange.
Stock Market…
• Stocks that are not listed on any
stock exchange are called over-thecounter stocks. Instead of being
brought and sold on a trading floor,
they are traded by phone and
computer.
Regulating the Stock Market…
• The securities and Exchange
Commission is the federal agency
that protects the interest of
investors by regulating companies
that sell stock. The SEC requires
these companies to publicly disclose
dishonest practices. The SEC is the
final authority over their activities.
Returns on Stocks…
• Investors who own shares of stocks
may receive returns in two forms.
• Dividends—Owners of stock may
periodically receive a dividend, a payment
to shareholders that represents a profits
of the company’s net profits.
• Capital gains and losses—If you buy shares
when their value is low and sell them
when their value is high, your profit is
called a capital gain.
Working with a Stockbrker…
• A stockbroker is an individual or firm that will
buy and sell stocks for clients according to their
instructions.
Other ways to buy stocks…
• It’s possible to invest in the stock
market without going through a
broker. Money in a 401 (k) plan
might be entirely or partly invested
in stocks, for example, or an
employee might own company
stock.
• It also may be possible to buy a
company’s stock directly from the
company through a direst stock plan.
The risk of owning stocks
• Much of the risk involved with stocks comes from
their own voltility. Stock Prices can move up or
down in value every day, sometimes dramatically.
• Why stock prices change
•
•
•
•
The company’s health
Industry Trends
Economic factors
National and World events
Types of Stocks and Their Risk
• Common stocks and preferred
stock—Common stock entitle stock
holders to vote on any matter
affecting the company. Where
preferred stock do not give share
holders voting rights but carry less
risk due to a fixed dividend return.
• Blue ship stocks—these are stocks of
large companies with a proven track
record f reliable earnings and
dividends.
Types of Stocks and Their Risk
• Growth stocks—those companies
that re growing rapidly, often
because they are new and
innovative—these carry more risk.
• Penny stocks—those costing less
than a dollar per share, should be
avoided because they carry
extremely high risk.
Minimizing the risks
• Consider stocks as a long term
investment.
• Invest in stocks only as part of a
diversified portfolio.
• Make sure to spend time researching
and monitoring your stocks.
• Try not to become overly concerned
with the daily ups and downs of the
stock markets.
Bonds
• Corporations and governments can obtain
funds by issuing certificates of debt called
bonds.
• Types of bonds
• Saving Bonds
• Treasury Securities –in addition to savings bonds , the
U.S.
• Municipal bonds—bonds issued by local and states
governments are know as municipal bonds.
• Corporate bonds –bonds issued by corporation s can
be purchased though brokers or banks, normally in
monimum amounts of $1000.
Section 13.4
Mutual Funds
• A Mutual fund is a group of investments
that is held in common by many individual
investors.
• Diversification—A single fund may hold
securities from hundreds of different
companies—something few investors could
accomplish on their own.
• Professional management—few individual
investors have the knowledge, time,
dedication or resources to select stocks and
bonds and track their progress. Mutual funds
enable a professional to do this for a group at
the same time.
Mutual Fund Styles
• Funds with similar objectives can be
placed in groups, or styles .
• Money market funds—these are
restricted by law to certain types of
short-term investments. These are
lowest in both risk and returns.
• Bond funds—are called fixed income
funds. Their risk and return vary
widely depending on the types of
bonds in which they invest.
Stock Funds…
• Aggressive Growth Stock—these hold the
highest risk.
• Growth funds—like aggressive stocks these
seek stock that are expected to rise.
• Equity income—these funds are for
investors who want current income from
their funds.
• Index funds—invest in stocks that are
included in an index such as the Standard &
poor’s 500. They tend to have lower
management fees than other mutual
funds..
International Funds
• International funds—invest in either
the stocks of foreign corporations or
the bonds of foreign governments or
agencies.
Choosing a mutual fund..
• Read the prospectus
• Check out the fees
Insurance as investment
• Endowment Insurance—an
endowment insurance policy can be
purchased with a specific investment
goal in mind, such as education
expenses or retirements.
• Annuities—this is a contrat
purchased from an insurance
company. The contract guarantees
to provide payments at regular
intervals later in life.
More investment options…
• Real Estate
• Commodities
• Collectibles
Estate Planning 13.5
• Estate—The assets and liabilities left behind
by a deceased person. (Settling an estate
involves paying off liabilities and distributing
assets.)
Estate Planning
• Estate planning is the process of
making legal and financial
arrangements for how one’s
property should be administered
before and after death.
Steps in Estate Planning
• The first step is to review your assets and
liabilities.
• Next think about your goals and liabilities
• Finally prepare the necessary documents.
Preparing a Will…
• A Will is a legal document in which a
person directs how his or her estate
is to be distributed after death.
Functions of a will….
• Identify an executor
• Identify a guardian for the children if needed.
• Give instructions for liabilities.—Outstanding debts or
obligations.
• Give instructions for distribution of assets.
– Beneficiary—A person or group designated to receive
some or all of a deceased person’s assets.
– WILLS USUALLY MUST BE TYPED AND MUST BE
WITTNESSED BY NONE OF THE BENEFICIARIES!!!!
If there is no will…..
• A person who dies without a valid
will is said to die intestate. In this
case, state law will determine how
the estate is to be settled. This
process is very time consuming and
expensive. It often does not
represent the wishes of the
deceased.
After preparing a will…
• Make sure to meet state
requirements. Most states direct
that the will must be typed, dated
signed, and witnessed.
Other important documents….
• Living Trust—is a legal arrangement
that can serve as an alternative to a
will. It transfers control of a living
person’s assets to a trustee
represents it for him.
• While you live you have use of your
assets and when you die, the assets
go to your beneficiaries without
going through probate (an extensive
legal process of filing a will.
Durable power of attorney…
• A legal document assigning
someone the right to act on a
person’s behalf. (make decisions if
you become incapacitated.)
Living Will….
• A legal document that outlines a
person’s wishes for medical
treatment under specific
circumstances.
Funeral Planning
• The average cost of a funeral is close
to $10,000.
• The FTC Funeral Rule requires
funeral homes to:
– Disclose their cost over the telephone
upon request.
– Provide itemized price lists outlining
the services available and their cost.
Preplanned Funerals
Advantages
Disadvantages
You can plan exactly what type
you want.
Your money is tied up for years
without earning interest
You can lock in today’s prices
If you move you may not be able
to transfer your funeral
arrangements
Funeral home may go out of
business.
MAKING MONEY WORK FOR YOU
THREE IMPORTANT ELEMENTS OF INVESTING
- MONEY
- TIME
- INTEREST
RATE
AMOUNT OF MONEY
$50/MONTH
$400/MONTH
7%
7%
33 YEARS
33 YEARS
$126,398
$1,010,928
AMOUNT OF TIME
8 YEARS
31 YEARS
AGE 25 – 33
AGE 33 – 65
$2,000/YEAR
$2,000/YEAR
$18,000 TOTAL $62,000 TOTAL
INVESTMENT INVESTMENT
$909,280
$555,678
INTEREST RATE
SAVINGS
ACCOUNT
$10,000
MUTUAL
FUND
$10,000
5%
14%
20 YEARS
20 YEARS
$26,533
$137,434
COMPARE INVESTMENTS
NAME
ADVANTAGE
DISADVANTAGES
PASSBOOD *Few restrictions
ACCOUNT *Unlimited
withdrawals
NOW
*Checking
ACCOUNTS privileges
*Low rate of return
MONEY
MARKET
High minimum deposit
Limited # of withdrawals
Higher interest rate
than savings
*High minimum
deposit
*% rate can drop
T-BILLS
*Interest tax exempt *High minimum
deposit
*Easily sold
STOCKS
*High gains
*High risk
*Must track daily
GOLD &
SILVER
*Holds value when
others don’t
*Doesn’t earn interest
*Not always liquid
MUTUAL
FUNDS
*Diversified
*Professional manager
*Easily sold
*Risky