Foundations of Money Education Investments Mitchell Byrum CFP Scott Harris CIMA An Independent Registered Investment Advisor Securities offered through Raymond James Financial Services Inc Member FINRA SIPC S Harris Financial Group is not a registered broker dealer and is independent of Raymond James Financial Services Investment advisory services offered through S Harris Financial Group and Raymond James Financial Services Advisors Inc IMPORTANCE OF INFORMATION What is the most important thing that you have learned so far What is the most surprising thing that you have learned so far Tax do the wealthy pay enough taxes What is the average A M Grad Starting Salary Percentage of Wage Earners of Total Taxes Starting Salary NFL League Minimum 750k Top 1 548k Top 5 220k Top 10 152k Top 25 85k Top 50 42k Bottom 50 42K 42 3 62 7 73 7 88 5 97 7 2 3 Average A M Mid career Salary 139 7K Average A M Early career Salary 72 6k Average A M Starting Salary 54 4 Those who know fare better than those who don t WHY SHOULD I INVEST Investing is how you make your money grow or appreciate for long term financial goals such as Large Future Purchases Education and Family Goals Retirement and Legacy Goals Investing is how we combat inflation from taking away the purchasing power of our hard earned dollars THE RATE OF RETURN MATTERS Rule of 72 Estimated number of years required to double your money assuming a given rate of return 72 Rate of Return of Years to Double Investment Bank Account 200 000 3 Rate of Return 72 3 24 Years to double Stock Market 200 000 6 Rate of Return 72 6 12 Years to double Now In 24 years In 48 years 200 000 400 000 800 000 Now In 12 years In 24 years In 36 years In 48 years 200 000 400 000 800 000 1 600 000 3 200 000 HOW DO I EARN FROM MY INVESTMENTS Investments Financial and Real Assets provide return in the form of 1 2 Capital Gains Profit from selling the investment stock at a higher value Income Payments Rent Interest dividends etc Example Buy a Rental Property for 400 000 Receive monthly rent payments Income of 1 000 Sell the home for 500 000 two years later Total Return Capital Gain 500 000 400 000 100 000 Income 1 000 x 24 months 24 000 124 000 TYPES OF INVESTMENTS Real Assets Real Estate Collectibles Equipment Financial Assets Bonds Debt Stocks Equity Mutual Funds Index Funds WHY FINANCIAL ASSETS Can be done quickly and easily costs No Low transaction Can be passively managed RISK AND RETURN Speculative Stocks Stocks Bonds Bonds Cash Investors require higher returns for higher risk Level of Risk Expected Return BONDS Interest Income Payments A loan to an entity with the expectation to receive 1 2 Face Value of Bond at Maturity What was lent Example 5 year 1 000 FV Bond 2 Paying Semi Annually Paid 1 000 and received 1 100 Total Return 100 over 5 years 1000 10 10 10 10 10 10 10 10 10 1 010 Year 1 2 3 4 5 TYPES OF BONDS ISSUERS Who are you lending your money to U S Treasury Lowest Risk Municipalities Companies Varying Risk RATINGS S P ratings for long term issuers AAA AA A BBB And lower aka High Yield COUPON How is the interest payment calculated Fixed Floating Zero Tax Free The lower the rating the higher the risk and the higher interest rate return required RISKS WITH BOND INVESTING When people think about bonds they often think about them as being the safe investment Although bonds may appear safer than other assets they may be riskier than you think Default Risk Interest Rate Risk Liquidity Risk Inflation Risk Reinvestment Risk STOCKS So then what are you getting when you buy a stock Ownership of a Company Voting Rights Dividends Risk with Stocks You end up with nothing DIVERSIFY YOUR INVESTMENTS Systematic Risk The risk all investments are subject to tax reform interest rate hikes natural disasters human behavior etc Unsystematic Risk The risk specific to the investment political risk legal risk financial risk etc Can be diversified away Diversification A type of Risk Management How can you Diversify Correlation How an asset moves in the market in relation to the movements of other assets ASSET CORRELATION 1 Correlation Perfectly Positive Correlation If one moves up the other means up in the exact amount If one moves down the other moves the exact same amount 0 Correlation Perfectly Uncorrelated Completely random movements Not Diversified 1 Correlation Perfect Negative Correlation Opposites really One moves up the other down in the exact same amount Southwest Airlines Exxon Valero Exxon Common Mistake People invest heavily in the companies they work for or in the industry they work in ASSET CLASS RETURNS FUNDS How can I easily diversify my assets Mutual Funds Index Funds A basket of investments A basket of investments Actively professionally managed Passive management style Can be multiple market classes pieced Matches a financial market index broad together exposure lower fees MANAGING RISK AND REWARD The Efficient Frontier Goal of diversifying your investments and correlation is to optimize your portfolio to get the best return for a given amount of risk RISK TOLERANCE TIME HORIZON Risk Capacity and Risk Tolerance Risk Capacity How much risk you can accept Risk Tolerance How much risk you are willing to accept ASSET ALLOCATION Less volatility risk More inflationary risk More volatility risk Less inflationary risk HOW DO I START TO INVEST Considerations Account Type Minimum Deposit Balance Requirements Technology Customer Service Automatic Monthly Investments Account Fees INVESTMENT FEES Example 100 000 invested 6 earned per year over 25 years Option A 0 fees Option B 2 fees Option A No costs or fees End up with about 430 000 Option B Pay 2 a year in costs End up with about 260 000 Transaction Fees Asset Management Fees You Pay Mutual Fund ETF Expenses On average people with Financial Advisors earn 4 91 net higher returns 170 000 difference THE DANGER OF TIMING THE MARKET GREATEST INVESTOR OF ALL TIME Warren Buffett aka The Oracle of Omaha Philosophy 1 Buy and hold long term thinking 2 Skeptical of high risk investing In the 58 calendar years from 1965 to 2022 Berkshire Hathaway stock appreciated at a 19 8 compound annual growth rate compared with a 9 9 annualized return for the S P 500 To illustrate the power of compounding that amounted to a 3 787 464 return for Berkshire shareholders compared with a 24 708 return for investors in the S P 500 INVEST EARLY AND OFTEN Invest 4 000 per year starting at age 22 with an 8 return How much do you have at 65 years old 65