Basics of Investing IIIScheduleAnnouncementsSlide 4CURRENT EVENT / NEWSRecessions & the Stock Market (S&P 500: 1951 – 1975)Slide 7LECTURE CONTENTToday’s LectureSlide 10Market HoursSlide 12Determining Your Financial GoalsDetermining Your Investment StyleThe Risk / Return TradeoffWhat is Your Risk Tolerance?Slide 17Portfolio ManagementPortfolioActive versus Passive ManagementSlide 21How many stocks should I own?DiversificationSlide 24Diversification…What’s the Catch?ConcentrationSlide 27How Many to Concentrate on?Other Investment Securities Mutual Funds & Exchange-Traded FundsVarious investment securitiesVarious Investment SecuritiesMutual Fund BasicsSlide 33Buying and Selling FundsAdvantages DisadvantagesChoosing Mutual FundsExchange-Traded FundsSlide 38Advantages over Mutual FundsSample ETF SymbolsAdditional Resources for ETF’sSlide 42Trading PsychologySlide 44Psychology & The Stock MarketSlide 46Next WeekReadingBasics of Investing IIIEconomics 98 / 198Spring 2008Copyright 2007 Jason LeeSchedule•Announcements•Quiz•Current Events•Today’s Lecture Content•Next WeekAnnouncements•Simulation Sign-Ups / Money (last chance)•Rules of Investment SimulationQUIZCURRENT EVENT / NEWSRecessions & the Stock Market (S&P 500: 1951 – 1975)0%100%200%300%400%Jan-51Jan-53Jan-55Jan-57Jan-59Jan-61Jan-63Jan-65Jan-67Jan-69Jan-71Jan-73Jan-75Source: Global Financial Data0%300%700%1100%1500%Jan-76Jan-78Jan-80Jan-82Jan-84Jan-86Jan-88Jan-90Jan-92Jan-94Jan-96Jan-98Jan-00Jan-02Jan-04Jan-06Recessions & the Stock Market (S&P 500: 1976 – 2007)Source: Global Financial DataLECTURE CONTENTToday’s Lecture•Basic investing concepts– Risk-Reward / Financial Goals / Understanding Yourself•Portfolio Management–Diversification–Concentration•Different investment securities– Bonds / CDs / Money Market– Mutual Funds / Exchanged-Traded Funds•Market PsychologyMore Market BasicsMarket Hours•Trading day begins 930AM EST and ends 4PM EST (630AM – 1PM)•Orders outside of trading day will not go through•Pre-market trading•After-hour tradingBasic Investing ConceptsDetermining Your Financial Goals•Investing is a long car trip. There needs to be a lot of planning that goes into it.– How much money do you want to make? By when?– Will you need to live off your investments in future years?–What will you be using your money for?•Having a good understanding of yourself will allow you to align your risk tolerance with various strategiesDetermining Your Investment Style•What kind of person and investor do you want to be?–Shooting for singles and doubles, aiming for slow and steady gains?– Sitting on the sidelines, relying on and cheering someone else?– Willing to take risks, go for homers, and achieve maximum gains?•Think about your risk tolerance, time horizons for your investments, and your time commitmentThe Risk / Return Tradeoff•“principle that potential return rises with an increase in risk”– Lower risk with lower returns– Higher risk with high returns•Important to know your personal risk tolerance when choosing investments– Balance between risk and rewardSource: Investopedia. “Determining Risk and The Risk Pyramid.” May 2 2003What is Your Risk Tolerance?Source: Investopedia. “Determining Risk and The Risk Pyramid.” May 2 2003Portfolio ManagementPortfolio•“collection of assets—such as stock, bonds, and mutual funds—held by an investor”•Portfolio Management– Deciding type of investment mix and allocation for your portfolio– Risk versus performanceActive versus Passive ManagementYou choose?versusSomeone else chooses for you?Active versus Passive Management•Examples (Active Management)– Buying / selling different stocks– Discuss with your broker which stocks to invest– Choosing between different mutual funds•Example (Passive Management)–Choose one mutual fund and forgetting about it for the next 10 years– Buying an index fund or having your portfolio match the index fund at all timesHow many stocks should I own?Diversification versusConcentration“Don’t put all your eggs in one basket”DiversificationDiversification•Mixing a wide selection of investments within a portfolio– By industry, sizes, geographic locations, or other characteristics•Positive performance of some investments may neutralize the negative performance of othersDiversification…What’s the Catch?•Limits your upside potential– Hot stock makes up only 5% of your portfolio–50% increase will have small effect•Many investors tend to over-diversify–Harder to keep track, slower to react – Less you know about one area of positions– Over-diversification usually leads to matching market performance (What’s the point then?)–Commissions becomes an issue with low capitalConcentration“putting your eggs in a few baskets that you know well and watching them very carefully”Concentration•Goal: Keep losses small and ride profits for big gains– Effect: big gains have major effect on your portfolio value•Note: Avoid temptation of committing too much of portfolio into one position – Why? PsychologyHow Many to Concentrate on?Account Size # of stocks$3,000 2$5,000 - $20,000 3$20,000 - $100,000 4 or 5$1,000 - $1,000,000 5 or 6$1,000,000 - $5,000,000 6 or 8Other Investment SecuritiesMutual Funds & Exchange-Traded FundsVarious investment securities•Money market funds– Type of risk-free debt investment that has slightly better returns than savings– Typically mature in less than 1 year– Very liquid (ie. easy to buy/sell and convert to cash)– Usually traded through institutions in high volumes•Certificate of deposits (CDs)– Certificate to the bearer to receive interest– Issued by commercial banks for 1 month to years– Short-term CD’s generally 5.29% percent or up– Bearer can’t withdraw money until term is upVarious Investment Securities•Bonds– An IOU issued by a borrower to a lender– Loaning money for pre-determined time– Borrower pays a coupon payment during time-span as well as lent amount– Borrowers range from banks, government, to corporations•Advanced / Alternative Investments – Options– Hedge Funds– Private Equity– Futures / DerivativesMutual Fund Basics•Nothing more than a collection of stocks and/or bonds•You contribute your money to a company that manages a large fund (made up of other people’s money) and invests in a portfolio•Often, these mutual funds can be hundreds
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