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Personal Finance
Bennie Waller
[email protected]
434-395-2046
Longwood University
201 High Street
Farmville, VA 23901
Bennie D Waller, Longwood University
Investments
Bennie D Waller, Longwood University
Investing
 Understand the difference between investing and speculating.
 An investment is an asset that generates a return. For
example, many stocks pay dividends and bonds pay interests.
 Speculation is in essence a gamble on what might happen in
the future. For example, buying a piece of real estate because
you heard a rumor that Microsoft was moving into the area.
 Gold coins
 Baseball cards
 Speculation revolves largely around supply and demand
 Invest, don’t speculate
Bennie D Waller, Longwood University
Investing
 Starting your investment program
 Pay yourself first.
 Make investing automatic.
 Take advantage of Uncle Sam and your employer.
 Windfalls
 Make two months each year investment months.
Bennie D Waller, Longwood University
Investing
 Securities – stocks and bonds issued by companies to raise
capital
 Securities markets – where you buy and sell securities
 Primary market – where companies take the company
“public” (IPO)
 Seasoned new issues –
 Investment banking
 Secondary market – marketplace where previously issued
securities trade
 Organized exchanges, (NYSE)
 OTC – NASDAQ
Bennie D Waller, Longwood University
Investing
 Regulation of Securities markets
 SEC
 Insider trading
 Churning
 Types of Orders
 Market order – buy/sell at current market price
 Limit order – trade made only at certain price
 Stop-loss order – order to sell if price drops some
specified amount
Bennie D Waller, Longwood University
Investing
 Short selling – very dangerous!
 If you believe that stock will drop, you borrow stock from
broker account and sell it.
 IF stock price does drop, you buy it back at the lower
price and return to broker account
 HOWEVER, if price goes up, you must buy it back at
higher price and return to broker account.
Bennie D Waller, Longwood University
Investing
 Full service brokers
 Get paid on commissions
 Discount brokers – execute trades, but no advice
 Cost of trading includes
 Commissions to buy/sell stock
 Transaction fees
 Day trading is not investing
 Good sources of investment information
 Financial news
 Yahoo! Finance
 WSJ
Bennie D Waller, Longwood University
Investing
 Derivative securities – a security whose value is dependent
upon the value of some underlying asset, e.g., MBS
Bennie D Waller, Longwood University
Investing
 Options – a security (financial instrument) that gives the owner
the right to buy or sell an asset (typically common stock) for a
specified price over a specified period of time.
 Call option – gives the owner the right to purchase an asset
at a given price (strike price) before the expiration of the
option. e.g., if you believe that a stock will increase in price,
you could purchase a call option. If the stock goes above the
strike price, the option could be exercised and the underlying
stock purchased.
 Put option – give the owner the right to sell an asset at a
given price before the expiration of the option.
Bennie D Waller, Longwood University
Investments
 Investment goals should consist of short-term (<1 year),
intermediate (1-10 yrs.) and long term (>10 yrs.)
 Basic Investment choices
 Lending (Debt) investments –
 Bonds (corporate or government)
 Savings account
 Ownership (Equity) investments – ownership in an income
producing asset
 Stocks
 Real estate
Bennie D Waller, Longwood University
Investments
 Returns on investments
 Holding period return
 Tax considerations
 Capital gains (or loss) –
 Income –
 Stocks – dividend payments
 Bonds – interest payments
 Real Estate – rental payments
Bennie D Waller, Longwood University
Interest rates
 Interest rates
 Affect the value of assets
 Interest rates are affected by a number of factors. The Federal
Reserve, which is charged with maintaining the stability of the
nation's financial system, raises or lowers short-term interest
rates in an effort to maintain that stability (bankrate.com)
 Nominal Interest rate 𝑅𝑎𝑡𝑒 = 𝑟 = 𝑟 ∗ + 𝐼𝑃 + 𝑅𝑖𝑠𝑘 𝑃𝑟𝑒𝑚𝑖𝑢𝑚
𝑟 ∗ + IP + DRP + LP + MRP
Bennie D Waller, Longwood University
Interest Rates
Normal Yield Curve - A line that plots the interest rates, at a set
point in time, of bonds having equal credit quality, but differing
maturity dates.
Bennie D Waller, Longwood University
Risk/Return
 Expected return is a function of risk.
 “The risk curve is upward sloping”
 The more risk you assume, the more return you should
expect to earn!
 The objective is to optimize the trade-off between risk and
return.
Bennie D Waller, Longwood University
Risk and Return
Both kickers made
10 field goals.
Which one would
you want on your
team? Why?
A
B
Bennie D Waller, Longwood University
Risk and Return
E(Return)
A
The “Risk Curve” is upward sloping
Time
Bennie D Waller, Longwood University
Risk and Return
E(Return)
The “Risk Curve” is upward sloping
B
Time
Bennie D Waller, Longwood University
Risk/Return
18%
Small-Company Stocks
Annual Return Average
16%
14%
12%
Large-Company Stocks
10%
8%
6%
T-Bonds
4%
T-Bills
2%
0%
5%
10%
15%
20%
25%
Annual Return Standard Deviation
Bennie D Waller, Longwood University
30%
35%
Risk/Return
 Sources of Risk
 Interest rate risk  Inflation risk  Liquidity risk
 Business risk – risk associated with particular business
 Market risk – overall market fluctuations
 Diversification – the reduction of risk by investing in different
assets. “Don’t put all of your eggs in one basket”
Bennie D Waller, Longwood University
Diversification
Bennie D Waller, Longwood University
Asset allocation
 The Early years (<54)
 Your investment horizon is significant, so you can handle
fluctuations in the market. A typical portfolio might include
80% in stocks, 20% bonds.
 The Golden Years (55-64)
 Preserve wealth and plan for retirement
 Move out of stocks (due to volatility and investment
horizon) and into bonds. (e.g., 60% stocks, 40% bonds)
 Retirement
 You will be spending more than saving. Income should be
primary investment objective. Continue to move into bonds
and other liquid assets.
Bennie D Waller, Longwood University
Asset allocation
 Calculating returns
 Holding period return
Bennie D Waller, Longwood University
Investments
 Market efficiency – asset prices reflect information.
 Be mindful of trying to “beat” the market
 Don’t get overconfident (arrogance) – trading too often
 “Disposition” effect – no one wants to be a loser
 “House money” effect – don’t take irrational risk
 “Herd behavior” effect –
Bennie D Waller, Longwood University
Thank You
Bennie D Waller, Longwood University