Investing for Your FutureChapter 11

Investing Fundamentals

• GOALS:– Describe the stages of investing and the

relationship between risk and potential return.

– Explain effective investment strategies, criteria for choosing an investment, and steps for investing wisely.

Lesson 11.1 Investing Fundamentals

I) Stages of Investing A. Stage 1 - Put-and-Take Account (Emergency Fund)

1. When you first begin to earn a paycheck

2. Recommend that you have three to six months’ net pay set aside for this type of fund

3. Main concern in saving these funds is safety

Stage 2 - Beginning Investing1. Investing—the use of

savings to earn a financial return, earn money with money

2. Make permanent investments in addition to temporary emergency funds

3. Initial investments should be conservative and low risk

4. Typically, workers in 20s and 30s begin investing when their budgets and spending are stable and excess cash is increasing

Stage 3 - Systematic Investing

• Systematic Investing —investing on a regular and planned basis– Should really start in

20s and into 30s• Goals are long-range,

investing for a secure future, 30s and 40s

Stage 3 - Systematic Investing

• Things to seriously consider during this stage:

• Set up an IRA (Individual Retirement Account), contribute to employer-sponsored 401(k)’s and 403(b)’s– Roth IRA

• Invest post-tax dollars• Earnings grow tax free• When you start drawing money at

retirement, you are not taxed• GET A ROTH IRA AND CONTRIBUTE THE

MAXIMUM ALLOWED EACH YEAR!

Stage 4 - Strategic Investing

• Strategic investing—the careful management of investment alternatives to maximize growth of your portfolio (collection of investments) over the next 5—10 years

• In your 40s and 50s you need to more actively manage your investments– Move some riskier investments to

more conservative as you get closer to retirement

– Portfolio – your collection of investments• Always want to diversify (or mix up) what

you are investing in – reduces risk

Stage 5 - Speculative Investing

• FINAL stage – make or break!!!

• Speculative investing -take greater risks; can make or lose a great deal of money

• Don’t make a risky investment to try to make up for previous losses!

II. Reasons for Investing

A. Investing Helps Beat Inflation1. Inflation — rise in the general level of prices. Inflation reduces purchasing power over time2. Investors seek investments for the long term that will grow faster than the inflation rate

Rule of 72

3. Rule of 72—estimates the number of years required to double your money at a given rate of return. Divide the percentage rate of return into 72.

Reasons for Investing

B. Investing Increases Wealth1. Over the long run, investments earn higher profits than savings do2. When you invest in stocks and bonds, you are helping businesses

C. Investing is Fun and Challenging

III - Risk and ReturnA. Risk — the chance that an

investment’s value will decrease

1. Risk averse — afraid to make risky investments

2. Risk-takers — can make or lose a lot

B. Diversification—minimizes risk

1. Spreads the risk among many types of investments

2. Stocks, bonds, real estate

3. Diversify types of stocks

C. Types of Risk

1. Interest-rate risk — during inflation, return on investment will not keep pace with inflation rate, “locked in” at lower rates

2. Political risk — government actions that affect business conditions

3. Market risk — sudden world events affect entire market

• Great Depression, 9/11

Types of Risk

4. Nonmarket risk — risk unrelated to market trends (terrorism)

5. Company or industry risk — produced by events that affect only one company or industry

IV - Investment Strategies

A.Criteria for Choosing an Investment1. Degree of safety (risk of loss)

• Little chance of losing initial investment

2. Degree of liquidity• Access your $$ quickly

3. Expected dividends or interest• Dividends - $$ distributed to

shareholders based on company profits• Example - Dividend = $0.25 and you

own 100 shares.– You get a check for $25

Criteria for Choosing an Investment

4. Expected growth in value, preferably exceeding inflation rate5. Reasonable purchase price and fees6. Tax benefits (saving or postponing tax liability)

B - Wise Investment Practices

1. Define your financial goals — specific and measurable, set $ targets

2. Go slowly — gather info and make a wise decision. If is sounds too good to be true, it probably is

3. Follow through — act on your important goals now

4. Keep good records — personal net worth statement, lists of insurance policies and investments, account balances, location of bank accounts, contents and location of safe deposit box. Keep statements.

Wise Investment Practices

5. Seek good investment advice — don’t be afraid to ask questions, attend investment seminar

6. Keep investment knowledge current — it is your responsibility to make final decisions

7. Know your limits — understand your risk tolerance. The chance of making huge profits is not worth being stressed out by the risk.

Lesson 11.2

Exploring Investment

Options

Sources of Financial Information

A. Newspapers—contain financial pages1. Wall Street Journal—daily with detailed coverage of business and financial world2. Barron’s—weekly with charts of trends, financial news, analysis of financial data

Sources of Financial Information

B. Investor Services and Newsletters1. Investor Services provide extensive financial data to clients 2. Moody’s Investors Service (www.moodys.com)3. Standard and Poor’s Reports

(www.standardandpoors.com)

Sources of Financial Information

C. Financial Magazines1. Business Week

(www.businessweek.com)2. Forbes (www.forbes.com)3. Money (

www.money.cnn.com) Fortune (www.fortune.com)

Sources of Financial Information D. Brokers

1. Full-service brokers — provide clients with analysis and opinions based on their judgments and the opinions of experts at their company (Merrill Lynch, Fidelity Investments, American Express)2. Discount brokers — buy and sell securities for clients at a reduced commission; usually provides little or no investment advice. (Charles Schwab, Ameritrade, E*Trade)3. Many banks, credit unions, S&Ls have discount brokers available4. With most brokerage accounts, you can manage your account online.

Sources of Financial Information

E. Financial Advisors1. Professional investment planners (CFP—Certified Financial Planners). Trained to give investment advice based on your goals, age, lifestyle. 2. Usually receive a fee

Sources of Financial Information

F. Annual Reports1. Summary of a corporation’s

financial results for the year and prospects for the future2. SEC requires all corporations to prepare this report yearly and send it to stockholders. Can also find annual reports online (www.sec.gov)

Sources of Financial Information

G. Online Investor Education1. Teenvestor (

www.teenvestor.com)2. The Motley Fool (

www.fool.com)

Investment OptionsA. Low Risk/Low Return

1. Corporate and Municipal Bonds

a. Bonds are debt obligations of corpor- ations (corporate bonds) or state or local

governments (municipal bonds)

b. Corporation pays you a fixed amount of money (interest) at a fixed interval, and

then pays the principal at maturity

c. Interest on govt bonds is usually tax-free

Low Risk/Low Return

2. U.S. Government Savings Bondsa. Lending money to the U.S.

governmentb. Series EE bond is a discount

bond, pay $25, receive $50 at maturity

c. Series HH bond, purchased in exchange of maturing EE bonds

d. Series I bond, sold at face value, grow with inflation based earnings

e. Buy at bank, store in safe deposit box. Safe and liquid.

Low Risk/Low Return

3. Treasury Securitiesa. U.S. Treasury bills (t-

bills) available $10,000 + $5000 increments. Matures in one year or less.

b. Treasury Notes—units of $1000 or $5000, 2—10 years

c. Treasury bonds--$1000 units, 10—30 year maturity

Medium Risk/Medium Return

1. Stocks — unit of ownership in a corporation; stockholders earnings depend on the company’s fortunes

2. Mutual Funds — shares in a large, professional managed group of investments. Pools the money of many investors and buys a large selection of securities. Some have different objectives.

Medium Risk/Medium Return

3. Annuity — a contract sold by an insurance company that provides the investor with a series of regular payments, usually after retirement. Taxes are deferred until you receive payment of your annuity.4. Real Estate — houses and land. Protection against inflation. Own home

High Risk/High Return

1. Involves considerable uncertainty2. Futures — contracts to buy and sell commodities or stocks for a specified price on a specified date in the future.3. Options — the right, but not the obligation, to buy or sell a commodity or stock for a specified price within a specified time period. Short-term investment devices used by speculators to make a quick profit.

High Risk/High Return

4. Penny stocks — low-priced stocks of small companies that have no track record. Usually sells <$1.00/share. 5. Collectibles — coins, art, memorabilia, ceramics, antiques