Saving & Investing Math & Financial Applications Mr. Arbiter

What are some reasons for Saving?  Retirement  College  New House  Emergencies  Other Large Purchase  Other Life Event  Avoid Spending

Risk v. Return  Risk v. Return is the analysis of each persons desire to gain as opposed to her willingness to loose.  The greater the return, the greater the risk.  Can you think of an example in life?

Savings v. Investing  Investing is the act of using money to make more money.  Each investment alternative has its own risk profile.  Savings is the accumulation of money notwithstanding the possibility or probability of making more money.  A person’s position along the risk/return continuum is known as Risk Tolerance.

Ways to Save  Mattress  Bank Account  Certificates of Deposit  Bonds  Stocks  Real Estate

Inflation Risk  Inflation is the increase in the cost of living over time.  If the inflation rate exceeds the growth rate of savings or investing then capital looses value (looses money).

Inflation Risk Real Economic Loss $1,806 $1,990

Matching Risk with Objectives  Saving for different reasons may allow for changes in risk tolerance.  Would you accept more risk for a long-term investment than a short- term one?

Opportunity Cost  The opportunity cost is the cost of a lost opportunity.  If a shipwrecked sailor is on a desert island and is capable of catching 10 fish or harvesting 5 coconuts then the cost of harvesting one coconut is 2 fish.  All investment choices have an opportunity cost.

Portfolio  A portfolio is the set of all of a person’s savings and investments.  It generally includes three types of investments alternatives. Cash Fixed Income Securities Equities QBVR&pq=diversification&sc=8- 15&sp=4&qs=AS&sk=HS1AS2#view=detail&mid=16AE29352E31BF5F711916AE29352E31BF5 F7119

Investment Alternatives  Cash  Fixed Income  Equities

Cash  Most portfolios usually contain at least 10% cash.  Cash is essential as it provides the investor with liquidity.  Liquidity means ready cash.  A rule of thumb is that a person should have an amount equal to 2 months salary for emergencies.

Cash Vehicles  Checking Accounts  Money Market Accounts  Statement Savings Accounts  Certificates of Deposit (warning)  Brokerage CD’s

Fixed Income Securities  Savings Bonds (US)  Treasury Notes (US)  Treasury Bills (US)  Municipal Bonds (Local Governments)  Corporate Bonds (Businesses)

Features of Bonds  Typically bonds are loans to the issuing entity.  Bonds pay a promised rate of return for a specific period of time.  At the end of the time the entity must return the loaned funds.  Terms usually range from 90 days to 20years.

Features of Bonds (cont.)  Interest Rates on bonds usually range from low for longer maturities to high for short maturities.  Bonds that have a yield above the market rate are sold at a premium.  Bonds that have a yield below the market rate are sold at a discount.

Bonds (cont. ii)  The percentage of bonds one holds in their portfolio may fluctuate with the economy, their age or their goals.

Equities  The largest sector of the investment arena is equities.  Stocks are the most common form of equities.  A share of stock is an ownership interest in a Corporation.  Over 70% of Americans own Stocks in some form.

Stocks  People hold stocks for two reasons, dividends and growth.  Dividends are each shareholders’ share of the earnings that the corporation distributes.  The decision to distribute dividends resides with the board of directors.

Stocks (cont.)  Growth is the increase in the price of a corporation’s stock.  The increase comes from an increase in demand for the corporation’s stock fueled by good performance, perceived value, etc.

How is Stock Purchased  Stocks are purchased by brokers in an auction system known as the stock market.  The stock market is primarily electronic and individual paper securities rarely change hands.  Prices for active stocks change throughout the day and a quote can be readily checked online.

Initial Public Offerings  When a privately owned company wishes to generate capital it may sell its shares on the stock market in what is known as an IPO.  The IPO process is extremely expensive and time consuming the majority of companies that go public don’t succeed.  A well established company that goes public will command a high price for its stock.

Risk Concerns for Stock  Capitalization  Business Environment  Economic Concerns  Environmental Concerns  Competition  Regulatory Concerns  Green Concerns  Global Concerns

Capitalization  Micro-Cap Below $250 million  Small-Cap $250 million to $1Billion  Mid-Cap $1 Billion to $10 Billion  Large-Cap (The Blue-Chips) Over $10 Billion Relative Risk

Indices  Dow Jones Industrial Average  S&P 500  Russel 2000

The Dow  The most well known indices are the Dow, the S & P 500 and the Russel  The Dow consists of 30 of the largest and most powerful companies in America. Dow members sometimes change.  Big companies like General Motors, Goodyear, IBM and Exxon are the kinds of companies that make up this index.

S&P 500 & Russel 2000  A list of the 500 most powerful companies in America.  Often used as a benchmark  This index is maintained by Standard & Poors  The Russel 2000 is a listing of 2000 Small Caps.

Volatility  Volatility refers to the degree to which a given stock fluctuates relative to the S&P 500.  The greater the volatility, the greater the risk and of course the greater the potential for gains or losses.  Micros are far more volatile than Blues.

Mutual Funds  A Mutual Fund is a Corporation that holds a portfolio of investment assets based on a stated investment strategy.  Mutual Funds derive their value from the value of their investment portfolio at the end of the trading day.  Professional Management is an essential aspect of Funds.

Origin of Mutual Funds  The first mutual funds were created in 1924  Investment Act of 1940  They gained popularity in 1975 with a change in the tax laws  Today worldwide holdings in mutual funds are over $26 Trillion

Fund Expenses  Management Fees  Non-Management fees  12b-1 Fees  Brokerage Commissions

Load and No-Load Funds  No-Load Funds Usually not marketed through brokers so no commission is charged to the purchaser  Load Funds Purchased through a stock broker and generally have a 3 to 5% sales charge depending on the size of the block purchased.

Share Classes  A Shares  B Shares  C Shares

A Shares  A Shares are “Front Loaded”  This means that the purchaser pays the sales charge(commission) at the time of the purchase.  A Shares generally have the lowest expense charge associated with them.

B Shares  B Shares are “Back Loaded”  This means that a fee may be charged when the fund shares are liquidated.  The charge is based on the number of years you held the fund and decreases to zero after year 5.  Usually have a higher expense charge.

C Shares  C Shares charge a 1% commission per year that you own the shares.  They are often used by investors that seek a short-term vehicle with a moderate expense structure.

Net Asset Value  Prices of mutual funds are quoted at the Net Asset Value of the prior day’s close.  Net Asset Value is referred to as NAV  It represents the total value of all of the fund’s holdings divided by the total number of the fund’s outstanding shares.