Chapter 11 fundamentals of investing 1 Investment commitment of funds to achievement of long term goals 2 Purpose of investment Individuals invest to make money a b Achieve financial goals increase income gain wealth and financial security have funds for homes children s college and retirement 3 Importance of investing due to a Rising of prices inflation b People are living longer and their money has to last longer c Worries that social security will not exist in the future d Self directed retirement plans and how retirement funds are invested 4 Preparations for investing a Stable life live in a place you will stay for a while secure job etc b Net worth estimate what you won what you owe c Regular savings and money set aside for emergencies d No credit card debt e Employer sponsored retirement plan tax advantages and most employers match at least part of your contribution 5 Four steps in investing a Setting goals developing investment attitude i Goals should be flexible realistic specific desirable and evaluated ii Develop investment attitude by asking companies about expansion and develop interest in topic b Assessing risk and return i Investment horizon how long do you need to save money or invest to get something that you want ii Expected returns anticipated future returns iii Current income money received from an investment iv Capital gains income that results from an increase in the value of an investment taxed v Capital loses lost income resulting from a decrease in an investment s value deducted from tax tax benefit vi Return total income from an investment vii Total return annual return on an investment including appreciation and dividends or interest viii Yield return on a capital investment typically bonds ix Current yield annual interest on a bond divided by market price current worth Investment risk uncertainty over an investment s actual return x 1 The greater the uncertainty the higher the risk c Selecting investments and allocating assets i Asset allocation target mix of different types of investments ii Diversify putting money into different types of investments what do I want 1 Key to success 2 Don t put all into one 3 Mix different categories reduce risk 1 Group of investments iii Portfolio combined holding to increase diversification and to iv Investment ladder as you move up the ladder more risk is encountered 1 Security cash CDs gov savings bonds insurance etc 2 Safety and income preferred stocks corporate bonds etc 3 Growth raw land real estate convertible bonds etc 4 Speculation collectibles metals gems future contracts d Managing investments i How much should be invested ii How long should investments be held 1 Buy and hold is a long term strategy involving keeping investment for many years iii Who should be involved in investment decisions and processing buy and holds 1 Stockbrokers 6 Types of investment interest over time a Savings accumulate funds in a risk free conservative manner based on b Stocks ownership in a corporation represented by shares c Bonds investments involving lending money to organizations d Dividends distribution of money from a corporation or government to e Mutual funds groups of stocks bonds or other securities managed by investors an investment company f Money market lend money to an organization such as bank or government and they offer security and liquidity in exchange g Real estate as general rule real estate increases in value and you will make a profit but these are no guarantees i Rental property serves as a source of income and a hedge against ii Ownership of land or won and live in a house is also a hedge inflation against inflation Conservative moderate aggressive h Social security those in retirement or close to it will receive monthly checks Have built in inflation protection i Company pensions provide monthly check at retirement Pension money that does not go for immediate living expenses should be invested j Large holdings less common Executives and family owners of companies have a lot of money tied up n a stock in the company k Your own business risky If successful it can be a great investment l Anticipated inheritances things can go wrong Will can change or final health expenses and taxes can take away money that was left in an estate m Precious metals and collectibles serve as a hedge against inflation Some are overestimated Know your subject and buy from reputable dealers n Annuities contracts brought from life insurance companies in which the company promises the insured a series of periodic payments If the company is secure an annuity pays as long as a person lives o Transaction costs charges for buying and selling securities 7 Investing strategies and terms a Risk and investment i Two types of risk 1 Losing money by being too aggressive 2 Losing buying power by being too conservative b Tradeoffs between risk and return i Realized return actual returns of investment c Tax shelters no taxes are charged on profits until a later date d Dollar cost averaging systematic investing of equal sums of money at regular intervals regardless of price fluctuations in an investment i Dividend reinvestment plans DRIPs automatic reinvestment of shareholder dividends to buy additional stock ii Direct investment plans investors buy stick directly from a corporation iii Employee stock ownership programs programs in which employees can buy stick in the company they work for at a reduced price or with matching funds from employers 8 Investing strategies and terms a There is no perfect formula 9 Rebalancing and life cycle investing a Rebalancing adjusting asset allocation b Starting to Invest i Remove 50 a month for investment ii Youth is an advantage c Deciding to Sell i Sell when you reach your goal or need money ii Cut losses quickly iii Decide if what you won is a good investment today iv Buy and hold but not stranglehold d Time to Invest i ii If salary is barely keeping up with inflation your investments should be beating inflation If investments aren t beating inflation rebalance portfolio 10 Other aspects of investing a Global investing Coca Cola Colgate Palmolive and Ford derive a large percentage of their revenue from abroad b Women and investing i Women need to take into consideration divorce rate and death rate and they need to know what is going on in their finances c Investment clubs i Most people invest as individuals ii Members pool their money and invest in stocks iii Oldest known club began in 1898 in Texas 11
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