COA4131 Final Exam Chapter 11 Fundamentals of Investing Investment defined o Investment commitment of funds to achievement of long term goals Purpose of investment individuals invest to make money Importance of investing Job salary raises are not enough Competing with rising prices inflation People are living longer Threat of no longer having Social Security Turn towards self directed retirement plans Preparations for investing o Stable life o Net worth o Regular savings o No credit card debt o Employer sponsored retirement plan tax advantages Four steps in investing o Setting goals Developing Investment Attitude Questions to help in setting goals What do I really want How much money will it take to get there How much money do I have How long will it take How much risk can I take Am I being realistic o Assessing risk and return Investment horizon How long you need to save or invest to get something you want Expected returns Anticipated future returns Current income Money received from an investment Capital gains Capital losses Return Total return Income that results from an increase in the value of an investment Lost income resulting from a decrease in an investment s value Total income from an investment Annual return on an investment including appreciation and dividends or interest Katie McCrink Return on a capital investment typically bonds Annual interest on a bond divided by market price the actual rate Yield Current yield of return Investment risk Uncertainty over an investment s actual return o Selecting instruments and allocating assets Asset allocation Target mix of different types of investments stocks bonds cash investments Diversity Portfolio The investment ladder Putting money into different types of investments Combined holdings to increase diversification and to reduce risk Active portfolio management involves buying and selling Speculation junk bonds gems metals penny stocks Growth growth mutual funds and stocks raw land real estate o Safety and income preferred stocks corporate bonds government and municipal bonds Security cash CDs savings bonds insurance safest step money is most secure o Managing investments How much should be invested How long should investments be held Buy and hold a long term strategy involving keeping investments for many years A low return mutual fund should be sold and replaced Who should be involved in investment decisions and processing buy and holds The higher the risk the higher the return Money markets and short term bonds intermediate term bonds long term bonds high yield bonds large cap US stocks mid small cap US stocks international stocks emerging markets Accumulating funds in a risk free conservative manner based on interest Types of investments o Savings Katie McCrink o Stocks bonds mutual funds money markets Stocks ownership in a corporation represented by shares Bonds investments involving lending money to organizations Dividends distribution of money from a corporation or government to investors investment company Mutual funds groups of stocks bonds or other securities managed by an Money markets lending money to an organization such as a bank CDs or the government offers security and liquidity o Real estate Rental property o Social security o Company pensions o Large holdings Fixed pensions mean less buying power Executives and family owners of companies with a lot of money tired up in stock in that company Ex WalMart Bill Gates of Microsoft Michael Eisner of Disney o Your own business o Anticipated inheritance o Precious metals and collectibles Precious metals move against inflation Certain collectibles will provide high returns many will not o Annuities Periodic payments from life insurance companies until death o Transaction costs involved in investing Transaction costs charges for buying and selling securities Comparison shop Investing strategies and terms o Risk and investment The risk of losing money by being too aggressive vs the risk of losing buying power by being too conservative o Tradeoffs between risk and return Realized return actual return on investments o Tax shelters If you minimize your risk you lower the expected return Tax sheltered no taxes are charged on profits until a later date Trying to legally avoid tax liabilities o Dollar cost averaging systematic investing of equal sums of money at regular intervals regardless of price fluctuations in an investment Katie McCrink Dividend investment plans DRIPs automatic reinvestment of shareholder dividends to buy additional stock Direct investment plans investors buy stock directly from a corporation Employee stock ownership plans or stock options program in which employees can buy stock in the company they work for at a reduced price or with matching funds from employers o Investment formulas and experts o Rebalancing and life cycle investing Universal investment formula does not exist there is much trial and error Rebalancing adjusting asset allocation resetting targets for what percentages you want held in stocks bonds cash etc The younger you are the more risk you can take Small cap stocks companies with market capitalization of 500 million For less well established companies but fast growing Signing up through payroll deduction of stocks bonds mutual funds after or less o Starting to invest getting a career o Deciding to sell Sell when you reach your goal or need the money Cut losses quickly Decide if what you own is a good investment today o Time to invest Other aspects of investing Investing takes time o Global investing Investing in foreign countries Downsides include lack of knowledge about the currencies companies and potential volatility o Women and investing Concern studies indicated that college women know less about investing and plan to invest less than men students even when the women have higher GPA s and when majors are considered o Investment clubs groups that form partnerships to invest in stocks and to learn about investing Invest the money as a group Advice for beginners o Know your risk level o Investigate before you invest o Hope for the best Katie McCrink o Stay the course o Invest get in the market o Diversity o Accumulate and sell o Online brokerage start with professional broker or financial advisor Extra info o How much should we sacrifice or save today to have a better life tomorrow o Put as much money into 401k and pension retirement accounts tax benefits o Dollar cost averaging practice in which an investor builds stock over
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