Isabella Bedoya Personal Finance Final Review Sample Need to Know Many individuals retirement accounts plummeted 35 from March 2007 through summer 2009 Ups and downs since Dec 12 12 30 2 30 Third test Final exam on Chapters 11 16 Investment commitment f funds to achievement of long term goals Key to long term financial success Purpose of investment to make money Importance of investing building wealth and security Inflation has affected investments Salaries don t keep up with inflation People live longer money has to last longer Preparations of Investment Stable life budget under control loans paid off long term residence Net worth what you own what you owe have a monthly budget Regular Savings be a saver before you become an investor have an emergency fund No credit card debt hardest part for people interests paid on credit cards is money down the drain that can t be made back through investments Employer sponsored retirement plan have tax advantages it is a form of investment retirement plans are the biggest investments most people have Four steps in investing 1 Setting goals developing an investment attitude a Important factor affecting goals current income Isabella Bedoya b Realistic goal for college students is to save up 1 000 dollars and then invest them c Ask yourself these questions i What do I really want 1 Learn to prioritize ii How much money will it take to get there iii How much money do I have or will have iv How long will it take to get the money v How much risk can I take vi Am I willing to give up things I want now to live better in the future vii Given my circumstances what can I realistically expect 2 Assessing risk and return a Evaluation revolves around three questions i How long do you plan to invest 1 Investment horizon how long do you eed to save or invest to get something that you want 2 How far is retirement away from you ii What amount of expected return are you aiming for iii How do you feel about risk b Expected returns anticipated future returns c Current income money received from an investment d Capital gains income that results from an increase in the value of an investment e Capital losses lost income resulting from a decrease in the value of an investment f Return total income from an investment g Total return annual return on an investment including appreciation and dividends or interst h Yield return on a capital investment typically bonds i Current yield annual interest on a bond actual rate of return Investment risk uncertainty over an investments actual return j 3 Selecting investments and allocating assets a Asset allocation target mix of different types of investment b Diversity putting money into different types of investments c Portfolio combined holdings to increase diversification and to reduce risk once established they should be managed and revised i Active portfolio management involves buying and selling d Investment Ladder as you move up the ladder more risk may be encountered but also the possibility of getting a higher rate return i Step 1 security at the bottom of the ladder 1 Safest step money is most secure 2 Cash CDs gov savings bonds insurance retirement plans money market funds savings account US treasury security ii Step 2 Safety and Income 1 Preffered stocks corporate bonds gov and municipal bonds savings bonds utility stocks some REITS real estate investment trusts iii Step 3 growth Isabella Bedoya 1 Growth stocks growth mutual funds raw land real estate convertible bonds iv Step 4 speculation 1 Options commodities junk bonds penny stocks collectibles metals gems future contracts 4 Managing investments a How much should be invested b How long investments should be held i Short and long term strategies include buy and hold and more activity ii Long term strategy involves keeping investments for many years iii Short term strategies performance of individual investments often leads to changels 1 Ex Stock or mutual fund that loses money or remains stagnant over a period of time should be sold and replaced with an investment with more potential c Who should be involved in investment decisions and processing buy and holds i 80 000 registered stockbrokers in USA ii Besides selecting your investment you also have to elect the broker firm or institution you will use to buy or sell d Asset allocation model Types of investments Savings accumulate funds in a risk free conservative manner based on interest over time Stocks bonds mutual funds money markets o Stocks ownership in a corporation represented by shares o Bonds investments involving lending money to organizations o Dividends distributions of money from a corporation or government to investors Isabella Bedoya o Mutual funds groups of stocks bonds r other securities managed by an investment company o Money market you end money to an organization and they offer security and liquidity Real estate o General rule real estate increases in value and you will make a profit but there are no guarantees o Location and timing of transactions are important o Less liquid less readily turned into cash Social security o Varies amongst individuals o Lifetime checks for those in retirement o Built in inflation protection Company pensions o Company pensions provide monthly checks at retirement o No built in inflation protection Large holdings o Less common o Execs and family owners of companies may have a lot of money tied p in a company stock Your own business o Owning a business is risky o If business s successful it is a great investment Anticipated inheritance Precious metals and collectibles o Buy from reputable dealers Annuities o Contracts bought from life insurance companies o Company insures a series of periodic payments Transaction costs involved in investing Keep investment costs fees to a minimum Transaction cost charges for buying and selling securities Investing strategies and terms Risk and investment of losing money by being too conservative Tradeoffs between risk and return o Realized return actual return on investment Tax shelters o Tax free tax exempt no taxes o Aware of first risk but not of any following risks o Two kinds of investment risk risk of losing money by being too aggressive or risk Isabella Bedoya o Tax sheltered no taxes are charged on profits until a later date Dollar cost averaging systematic investing f equal sums of money at regular intervals regardless of price fluctuation in an investment o Dividend investment plans DRIPs automatic reinvestment of
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