INVESTING FOR THE FUTURE CHAPTER 11

11.1 BASIC INVESTING CONCEPTS INVESTING: THE USE OF LONG-TERM SAVINGS TO EARN A FINANCIAL RETURN PROVEN AND POWERFUL WAY TO STRENGTHEN YOUR FINANCIAL POSITION OVER TIME PROVIDES SOURCE OF INCOME IN ADDITION TO A PAYCHECK

INVESTING HELPS BEAT INFLATION INFLATION: THE RISE IN THE GENERAL LEVEL OF PRICES REDUCES PURCHASING POWER OVER TIME AS PRICES RISE, IT TAKES MORE MONEY TO BUY THE SAME GOODS AND SERVICES INVESTORS SEEK INVESTMENTS THAT GROW FASTER THAN INFLATION RATE EX. IF ANNUAL INFLATION RATE IS 4%, YOU’LL WANT INVESTMENTS THAT YIELD A RATE OF RETURN HIGHER THAN 4%

RULE OF 72 RULE OF 72: A TECHNIQUE FOR ESTIMATING THE NUMBER OF YEARS REQUIRED TO DOUBLE YOUR MONEY AT A GIVEN RATE OF RETURN A QUICK WAY TO EVALUATE INVESTMENT’S RATE OF RETURN TO FIGURE OUT: DIVIDE THE PERCENTAGE RATE OF RETURN INTO 72 EX. AN INVESTMENT THAT YIELDS AN AVERAGE OF 6% WILL TAKE 12 YEARS TO DOUBLE YOUR MONEY 72 DIVIDED BY 6 = 12 AN INVESTMENT YIELDS AN AVERAGE OF 10%. HOW LONG WILL IT TAKE TO DOUBLE YOUR MONEY?

RULE OF 72 INVESTMENT: YIELDING AN AVERAGE OF 10% 72 DIVIDED BY 10 = 7.2 YEARS YOU CAN ALSO USE THE RULE OF 72 TO ESTIMATE THE RATE OF RETURN NEEDED TO DOUBLE YOUR MONEY IN A NUMBER OF YEARS YOU HAVE $5,000 AND WANT TO DOUBLE IT IN 6 YEARS 72 DIVIDED BY 6 = 12 SO YOU WOULD NEED TO FIND AN INVESTMENT YIELDING AN AVERAGE RATE OF RETURN OF 12% IN ORDER TO DOUBLE YOUR $5,000 IN 6 YEARS

RULE OF 72: QUESTIONS 1.A POTENTIAL INVESTMENT IS YIELDING AN AVERAGE RATE OF RETURN OF 3%. HOW LONG WILL IT TAKE TO DOUBLE YOUR INVESTMENT? 2.AN INVESTMENT YIELDING AN AVERAGE OF 7% WILL TAKE HOW LONG TO DOUBLE? 3.AN INVESTMENT THAT YIELDS AN AVERAGE OF 5% WILL TAKE HOW LONG TO DOUBLE? 4.HOW LONG WILL IT TAKE TO DOUBLE AN INVESTMENT THAT AVERAGES 11%? 5.IF YOU HAVE $4,500 AND WANT TO DOUBLE THAT IN A SPAN OF 10 YEARS, WHAT RATE MUST YOUR INVESTMENT EARN TO ACHIEVE THAT? 6.IF YOU WANT TO DOUBLE THE SAME AMOUNT ($4,500) IN ONLY 6 YEARS, WHAT RATE MUST YOUR INVESTMENT EARN TO ACHIEVE THAT?

INVESTING QUESTIONS 7. TRUE OR FALSE: INFLATION IS A RISE IN LONG-TERM SAVINGS. 8. TRUE OR FALSE: INVESTING IS THE USE OF LONG-TERM SAVINGS TO EARN A FINANCIAL RETURN. 9. TRUE OR FALSE: THE RULE OF 72 IS A TECHNIQUE FOR ESTIMATING THE NUMBER OF YEARS REQUIRED TO DOUBLE YOUR MONEY AT A GIVEN RATE OF RETURN. 10. TRUE OR FALSE: INVESTORS SEEK INVESTMENTS THAT WILL GROW SLOWER THAN THE INFLATION RATE.

ANSWERS 1.24 YEARS YEARS (ROUNDED) YEARS YEARS (ROUNDED) 5.7.2% 6.12% 7.FALSE 8.TRUE 9.TRUE 10.FALSE

STAGES OF INVESTING STAGE 1: PUT-AND-TAKE ACCOUNT WHEN YOU BEGIN EARNING A PAYCHECK, YOU PUT IT IN AN ACCOUNT AND TAKE MONEY OUT AS NEEDED (BILLS, ETC) TYPE OF INVESTMENT: SHORT-TERM SAVINGS STRATEGY: SAFETY PURPOSE: TO COVER SHORT-TERM NEEDS

STAGES OF INVESTING STAGE 2: INITIAL INVESTING INVESTING REALLY BEGINS WHEN YOU HAVE “EXCESS” SAVINGS BEYOND WHAT YOU NEED FOR DAILY EXPENSES AND EMERGENCIES TYPE OF INVESTMENT: CONSERVATIVE, LOW RISK STRATEGY: HIGHER RATES OF RETURN THAN SAVINGS

STAGES OF INVESTING STAGE 3: SYSTEMATIC INVESTING ONCE YOU’RE COMFORTABLE MAKING INITIAL INVESTMENTS, CAN ENTER THIS STAGE MAKING INVESTMENTS ON REGULAR AND PLANNED BASIS TYPE OF INVESTMENT: RETIREMENT FUNDING STRATEGY: LONG-RANGE PLANNING

STAGES OF INVESTING STAGE 4: STRATEGIC INVESTING THE CAREFUL MANAGEMENT OF INVESTMENT ALTERNATIVES TO MAXIMIZE GROWTH OF YOUR PORTFOLIO OVER THE NEXT 5 – 10 YEARS PORTFOLIO: COLLECTION OF INVESTMENTS TYPE OF INVESTMENT: PORTFOLIO EXPANSION STRATEGY: MAXIMIZATION OF RETURN IN MEDIUM TERM (5-10 YEARS)

STAGES OF INVESTING STAGE 5: SPECULATIVE INVESTING (FINAL STAGE) WHEN YOU’RE INVESTING REGULARLY IN BROAD COLLECTION OF INVESTMENTS BUT STILL HAVE MONEY AVAILABLE TO TAKE BIGGER RISKS BOLD AND HIGH-RISK INVESTMENT CHOICES, MAKE OR LOSE A LARGE AMOUNT OF MONEY IN SHORT PERIOD OF TIME TYPE OF INVESTMENT: HIGH-RISK OPTIONS STRATEGY: HIGH PROFITS

RISK AND RETURN INVESTING RISK: THE CHANCE THAT AN INVESTMENT’S VALUE WILL DECREASE ALL TYPES OF INVESTING INVOLVE SOME DEGREE OF RISK THE GREATER THE RISK, THE GREATER THE POTENTIAL RETURNS “SAFE INVESTMENTS” HAVE LITTLE RISK OF LOSS THOSE WILLING TO ACCEPT A REASONABLE AMOUNT OF RISK WILL LIKELY MAKE CONSIDERABLY MORE IN THE LONG RUN THAN THOSE WHO ARE RISK AVERSE RISK AVERSE: AFRAID TO MAKE INVESTMENTS WHICH THEY MIGHT LOSE SOME OR ALL OF THEIR INVESTMENT

DIVERSIFICATION DIVERSIFICATION: THE SPREADING OF RISK AMONG MANY TYPES OF INVESTMENTS ONE WAY TO MINIMIZE RISK RATHER THAN ONLY ONE TYPE OF INVESTMENT, YOU CHOOSE MULTIPLE EX. STOCKS (AND TYPES OF STOCKS), BONDS, REAL ESTATE WHY DOES IT REDUCE YOUR OVERALL RISK??

DIVERSIFICATION WHY DOES IT REDUCE YOUR OVERALL RISK?? ODDS ARE THAT NOT ALL OF YOUR CHOICES WILL PERFORM POORLY AT THE SAME TIME IF ONE DOES BADLY, OTHERS WILL LIKELY MAKE UP SOME OR ALL OF THE LOSS

TYPES OF RISK SHORT TERM INVESTMENTS ARE GENERALLY LESS RISKY THAN LONG-TERM WHY? YOU CAN MORE ACCURATELY PREDICT WHAT WILL HAPPEN W/IN ONE YEAR THAN IN YEARS

TYPES OF RISK INTEREST-RATE RISK THE CHANCE THAT INFLATION WILL RISE FASTER THAN THE RETURN ON YOUR INVESTMENTS INFLATION MAKES YOUR FIXED-RATE INVESTMENTS WORTH LESS BECAUSE THEY’RE “LOCKED IN” AT LOWER RATES THE VALUE OF A FIXED-RATE INVESTMENT DECREASES WHEN OVERALL INTEREST RATES INCREASE THEIR VALUE INCREASES WHEN OVERALL RATES DECREASE

TYPES OF RISK POLITICAL RISK REFERS TO ACTIONS THE GOVERNMENT MIGHT TAKE THAT WOULD REDUCE THE VALUE OF YOUR INVESTMENT INCREASED TAXES AND CERTAIN REGULATIONS CAN MAKE SOME INVESTMENTS LESS ATTRACTIVE EX. REQUIRED ENVIRONMENTAL CONTROLS THAT ARE COSTLY TO BUSINESSES

TYPES OF RISK MARKET RISK CAUSED BY THE BUSINESS CYCLE PERIODS OF ECONOMIC GROWTH OR DECLINE WHEN THE ECONOMY DOES WELL, SO DO THE FINANCIAL MARKETS

TYPES OF RISK NONMARKET RISK UNRELATED TO MARKET TRENDS UNPREDICTABLE AND UNCONTROLLABLE EX. TERRORISM PEOPLE SELL INVESTMENTS TO HOLD MORE CASH FOR PERSONAL SECURITY MARKETS SUFFER

TYPES OF RISK COMPANY AND INDUSTRY RISK COMPANY RISK: ASSOCIATED WITH OWNING ONE COMPANY’S STOCK IF COMPANY FAILS, YOU LOSE INVESTMENT INDUSTRY RISK: AFFECTS GROUPS OF BUSINESSES EX. CANDY INDUSTRY ALL CANDY COMPANIES CAN SUFFER WITH TREND OF AVOIDING ALL SUGAR

MATCHING: TYPES OF RISKS a.INTEREST-RATE RISK b.POLITICAL RISK c.MARKET RISK d.NONMARKET RISK e.COMPANY RISK f.INDUSTRY RISK 1.CAUSED BY THE BUSINESS CYCLE – PERIODS OF ECONOMIC GROWTH OR DECLINE 2.THE CHANCE THAT INFLATION WILL RISE FASTER THAN THE RETURN ON YOUR INVESTMENTS 3.IF THAT COMPANY FAILS, YOU LOSE YOUR INVESTMENT 4.ACTIONS THE GOV’T MAY TAKE THAT WOULD REDUCE THE VALUE OF YOUR INVESTMENT 5.AFFECTS GROUPS OF BUSINESSES 6.UNRELATED TO MARKET TRENDS, COMPLETELY UNPREDICTABLE AND UNCONTROLLABLE

MATCHING: TYPES OF RISKS a.INTEREST-RATE RISK b.POLITICAL RISK c.MARKET RISK d.NONMARKET RISK e.COMPANY RISK f.INDUSTRY RISK 1.CAUSED BY THE BUSINESS CYCLE – PERIODS OF ECONOMIC GROWTH OR DECLINE C 2.THE CHANCE THAT INFLATION WILL RISE FASTER THAN THE RETURN ON YOUR INVESTMENTS A 3.IF THAT COMPANY FAILS, YOU LOSE YOUR INVESTMENT E 4.ACTIONS THE GOV’T MAY TAKE THAT WOULD REDUCE THE VALUE OF YOUR INVESTMENT B 5.AFFECTS GROUPS OF BUSINESSES F 6.UNRELATED TO MARKET TRENDS, COMPLETELY UNPREDICTABLE AND UNCONTROLLABLE D

INVESTMENT STRATEGIES MANY PEOPLE NEVER START INVESTING, THINK THEY DON’T HAVE ENOUGH MONEY EVEN SMALL AMOUNTS OF MONEY CAN GROW OVER TIME INVESTING CAN HELP YOU ACHIEVE FINANCIAL SECURITY SOME INVESTMENTS INCREASE IN VALUE AT A HIGHER RATE THAN INFLATION

INVESTMENT STRATEGIES CRITERIA FOR CHOOSING AN INVESTMENT DEGREE OF SAFETY (RISK OF LOSS) DEGREE OF LIQUIDITY (ABILITY TO GET YOUR MONEY QUICKLY) EXPECTED DIVIDENDS OR INTEREST EXPECTED GROWTH IN VALUE, PREFERABLY EXCEEDING INFLATION RATE REASONABLE PURCHASE PRICE AND FEES TAX BENEFITS (SAVING OR POSTPONING TAX LIABILITY)

WISE INVESTMENT PRACTICES IT IS COMMON TO MAKE INVESTING MISTAKES SOME ARE SMALL AND CAN BE EASILY CORRECTED SOME CAN CAUSE SERIOUS FINANCIAL DAMAGE FOLLOW WISE INVESTMENT PRACTICES TO HELP AVOID POSSIBLE MISTAKES

WISE INVESTMENT PRACTICES DEFINE YOUR FINANCIAL GOALS CLEARLY DEFINED FINANCIAL GOALS WILL HELP YOU TO IDENTIFY WHICH INVESTMENTS TO PURCHASE INVESTMENT GOALS MUST BE SPECIFIC AND MEASURABLE SET SPECIFIC MONETARY TARGETS IDENTIFY HOW YOU PLAN TO USE THE MONEY

WISE INVESTMENT PRACTICES GO SLOWLY BEFORE MAKING INVESTMENTS, GATHER NEEDED INFORMATION YOU NEED TO MAKE WISE DECISIONS TEMPORARY INVESTMENTS: INVESTMENT CHOICES THAT WILL BE REEVALUATED WITHIN A YEAR OR LESS IF THEY’RE NOT PERFORMING AS EXPECTED, THEY WILL BE SOLD AND OTHER CHOICES SELECTED AVOID GET-RICH-QUICK SCHEMES… IF IT SOUNDS TOO GOOD TO BE TRUE, IT PROBABLY IS!

WISE INVESTMENT PRACTICES FOLLOW THROUGH COMMON MISTAKE IS KEEPING TEMPORARY INVESTMENTS TOO LONG AND NOT REGULARLY RE-EVALUATING THEM PERMANENT INVESTMENTS: INVESTMENT CHOICES THAT WILL BE HELD FOR THE LONG RUN (5-10 YEARS OR LONGER) THESE WILL BECOME THE “CRITICAL MASS” OF YOUR INVESTMENT PORTFOLIO

WISE INVESTMENT PRACTICES KEEP GOOD RECORDS KEEP A CLEAR VIEW OF PROGRESS AND GOOD FINANCIAL RECORDS PAY CLOSE ATTENTION KEEP STATEMENTS, VERIFY ACCOUNT BALANCES

WISE INVESTMENT PRACTICES SEEK GOOD INVESTMENT ADVICE ASK QUESTIONS! SEEK ADVICE FROM TRAINED PROFESSIONALS KEEP INVESTMENT KNOWLEDGE CURRENT BE AWARE OF WHAT IS NEW IN THE FINANCIAL MARKET GOOD PROSPECTS, WHEN TO BUY AND SELL, UNDERSTANDING HOW ECONOMY WORKS

WISE INVESTMENT PRACTICES KNOW YOUR LIMITS UNDERSTAND YOUR RISK TOLERANCE HOW MUCH MONEY CAN YOU AFFORD TO RISK AVOID RISKS IF YOU’RE UNCOMFORTABLE TAKING THEM

11.2 MAKING INVESTMENT CHOICES MUST HAVE GOOD INFO TO MAKE GOOD INVESTMENT CHOICES NEWSPAPERS INVESTOR SERVICES AND NEWSLETTERS FINANCIAL MAGAZINES BROKERS FINANCIAL ADVISORS ANNUAL REPORTS ONLINE INVESTOR EDUCATION

11.2 MAKING INVESTMENT CHOICES NEWSPAPERS THE FINANCIAL PAGES OF PAPERS LIST ALL TYPES OF STOCKS AND BONDS, AS WELL AS OTHER INFO RELATED TO INVESTING (WALL STREET JOURNAL AND BARRON’S, FOR EXAMPLE) INVESTOR SERVICES AND NEWSLETTERS THESE COMPANIES PROVIDE EXTENSIVE FINANCIAL DATA TO CLIENTS FOUND IN PRINT AND ONLINE, CONTAIN CURRENT AND HISTORICAL DATA

11.2 MAKING INVESTMENT CHOICES FINANCIAL MAGAZINES MANY WEEKLY AND MONTHLY MAGAZINES SPECIALIZE IN BUSINESS AND FINANCIAL INFORMATION (EXAMPLES: FORBES, BUSINESS WEEK, FORTUNE, ETC) THESE HELP KEEP YOU CURRENT, SO YOU CAN DETERMINE TIME TO SELL, HOLD, BUY, ETC)

11.2 MAKING INVESTMENT CHOICES BROKERS FULL-SERVICE BROKERS: PROVIDE CLIENTS WITH ANALYSIS AND OPINIONS BASED ON THEIR JUDGMENTS AND OF OTHERS AT THEIR COMPANY DISCOUNT BROKERS: BUY AND SELL SECURITIES FOR CLIENTS AT A REDUCED COMMISSION FOR THOSE MORE WELL-INFORMED PROVIDES LITTLE OR NO INVESTMENT ADVICE

11.2 MAKING INVESTMENT CHOICES FINANCIAL ADVISORS PROFESSIONAL INVESTMENT PLANNERS AKA CERTIFIED INVESTMENT PLANNERS (CFP’S) TRAINED TO GIVE INVESTMENT ADVICE BASDED ON YOUR GOALS, AGE, LIFESTYLE USUALLY RECEIVES A FEE, SOMETIMES ALSO RECEIVES A COMMISSION IF THEY SELL YOU STOCKS, BONDS, ETC.

11.2 MAKING INVESTMENT CHOICES ANNUAL REPORTS SUMMARY OF A CORPORATION’S FINANCIAL RESULTS FOR THE YEAR AND ITS PROSPECTS FOR THE FUTURE ONLINE INVESTOR EDUCATION INTERNET OFFERS MANY EDUCATIONAL SITES FOR NEW INVESTORS

LOW-RISK INVESTMENT CHOICES BONDS: DEBT OBLIGATIONS OF CORPORATIONS (CORPORATE) OR STATE/LOCAL GOVERNMENTS (MUNICIPAL) WHEN A CORP. OR GOV’T BODY SELLS A BOND, IT’S BORROWING FROM AN INVESTOR CORP. MUST REPAY THE AMOUNT BORROWED AT MATURITY MATURITY DATE: DATE ON WHICH THE BORROWED MONEY MUST BE REPAID

LOW-RISK INVESTMENT CHOICES GOVERNMENT SAVINGS BONDS SERIES EE SAVINGS BOND  KNOWN AS DISCOUNT BONDS DISCOUNT BOND IS PURCHASED FOR LESS THAN THE MATURITY VALUE SERIES I SAVINGS BOND  DESIGNED FOR INVESTORS WANTING TO PROTECT AGAINST INFLATION AND EARN A GUARANTEED RATE OF RETURN

LOW-RISK INVESTMENT CHOICES TREASURY SECURITIES U.S. TREASURY BILLS  AVAILABLE FOR MINIMUM PURCHASE OF $100 MATURITY DATE RANGES FROM 3 DAYS TO 1 YEAR U.S. TREASURY NOTES  MINIMUM PURCHASE OF $100, MATURITIES ARE 2, 5, OR 10 YEARS U.S. TREASURY BONDS  MINIMUM OF $100, 30-YEAR MATURITY INTEREST PAID EVERY 6 MONTHS

MEDIUM RISK/MEDIUM RETURN STOCKS UNIT OF OWNERSHIP IN A CORPORATION STOCKHOLDER – THE OWNER OF STOCK AS A STOCKHOLDER, YOU WILL SHARE IN COMPANY PROFITS (PAID TO YOU AS DIVIDENDS)

MEDIUM RISK/MEDIUM RETURN MUTUAL FUNDS THE POOLING OF MONEY FROM MANY INVESTORS TO BUY A LARGE SELECTION OF SECURITIES A LARGE, PROFESSIONALLY MANAGED GROUP OF INVESTMENTS TWO MAJOR ADVANTAGES PROFESSIONAL MANAGEMENT DIVERSIFICATION

MEDIUM RISK/MEDIUM RETURN ANNUITIES CONTRACT THAT PROVIDES THE INVESTOR WITH SERIES OF REGULAR PAYMENTS, USUALLY AFTER RETIREMENT TAXES ARE DEFERRED UNTIL YOU RECEIVE PAYMENTS FROM YOUR ANNUITY PAYMENTS FROM ANNUITY NORMALLY USED TO SUPPLEMENT RETIREMENT INCOME.

MEDIUM RISK/MEDIUM RETURN REAL ESTATE HOUSES AND LAND IN SOME AREAS, MARKET VALUES OF HOMES HAVE INCREASED FASTER THAN INFLATION RATE

HIGH RISK/HIGH RETURN THESE TYPES OF CHOICES INVOLVE CONSIDERABLE UNCERTAINTY RETURNS CAN BE HIGH, BUT CAN ALSO BE LOW OR NEGATIVE (LOSS) FUTURES CONTRACTS TO BUY AND SELL COMMODITIES (PRODUCTS THAT ARE MINED OR GROWN) OR STOCKS FOR A SPECIFIED PRICE ON A SPECIFIED DATE IN THE FUTURE THIS TYPE IS NOT FOR BEGINNERS WHO CANNOT AFFORD TO LOSE INVESTMENT

HIGH RISK/HIGH RETURN OPTIONS OPTION IS THE RIGHT, BUT NOT THE OBLIGATION, TO BUY OR SELL A COMMODITY OR STOCK FOR A SPECIFIED PRICE WITHIN A SPECIFIED TIME PERIOD PENNY STOCKS LOW-PRICED STOCKS OF SMALL COMPANIES THAT HAVE NO TRACK RECORD STOCK USUALLY SELLS FOR UNDER $5 PER SHARE

HIGH RISK/HIGH RETURN COLLECTIBLES MANY PEOPLE COLLECT ITEMS COINS, ART, MEMORABILIA, CERAMICS, BEANIE BABIES, BASEBALL CARDS, ETC MUST SELL ITEMS WHEN THEY’RE A HOT COMMODITY OTHERWISE, THEY WILL LOSE ALL THEIR VALUE CAN SOMETIMES BE DIFFICULT TO RESELL SUBJECT TO CHANGING PUBLIC TASTES