Personal Finance: Investment Fundamentals

Agenda Investment fundamentals Stocks Bonds Mutual funds

Investment fundamentals – slide 1 What is investing? Making money from personal savings Where do I get the extra money to invest? 1. Break a bad-habit 2. participate in an employers retirement plan 3. Cut back on entertainment and food 4. Automatic savings 5. Part-time job

Investment fundamentals - slide 2 If someone smokes 4 packs of cigarettes per week at $6 per pack, cutting the habit in half would save how much per month? Per year? If someone visits the bar 2 times per week and spends $25 per visit, cutting back to one visit per week would save how much per month? Per year?

Investment fundamentals Common investment terms: Securities Stocks Bonds Portfolio Interest Capital gain Yield (rate of return)

Diversification –slide 1 Random risk vs Diversification Random risk – owning one or few investments High risk Diversification – spreading money through several investment opportunities Reduced risk

Diversification – slide 2

Diversification Averages out an investor’s return

Asset Allocation –slide 1 Asset Allocation Form of diversification in which the investor decides on the proportions of the investment portfolio that will be devoted to various assets.

Asset Allocation –slide 2 A portfolio should be a mix of: 1) Stocks or stock mutual funds (equities) Highest risk, highest yield 2) Bonds (debt) Low risk, low/moderate yield 3) Cash or cash equivalents (such as Treasury Securities) lowest risk, lowest yield

Asset Allocation – pie charts

Asset Allocation: Rebalancing Assets Should rebalance asset allocations every 5-10 years!!

Asset Allocation Asset Allocation Rules of Thumb: The percent to invest in equities is (age) x 1.25 If you are 40 years old, here is the formula: *1.25= % to invest in stocks 87.5%

Stocks What is a stock? Part ownership of a company What do stockholders typically expect? 1. Cash dividends 2. Value of stock to increase over time

Stocks – Purchasing Basic Here a some basic principles for purchasing stocks: 1. Timing, timing, timing!!!! Buy at low prices, sell high at high prices 2. Understand your company Research your company Stock performance history 3. Be aware of economic trends

Purchasing Stocks – slide 1 Where can I research stocks: Search engines (Yahoo Finance, Google) Big Newspapers (New York Times, Wall Street Journal) Link to MarketWatch website Review Security Market Indexes Company Annual Reports

Purchasing stocks – slide 2 Let’s research a stock: Market Watch.com - Link to MarketWatch websiteLink to MarketWatch website

Screenshot of Money Market Watch for McDonald's Stock

Purchasing Stocks – Market Indexes Make sure to look at Security Market Indexes DOW Jones Industrial (most widely reported of all indexes) 65 top stocks in industrial, transportation, and utility companies S&P 500 Index (Standard and Poor’s) Top 500 companies in US NASDAQ Index Includes virtually ever US stock

Purchasing Stocks – where? Where can I purchase stocks? 1. Discount brokers Fidelity, TD Ameritrade, Charles Schwab, USSA Brokerage, Vanguard 2. Online Brokers E*Trade, Scott Trade 3. Full service Brokerage Firms Edward Jones, Wells Fargo, Morgan Stanley, UBS, T. Rowe Price

Bonds Investment grade Reasonably certain principle and interest will be paid Speculative grade (junk bonds) Riskier than investment grade, but better earning potential

Bond Ratings

Bank Credit Ratings

Country Credit Ratings by Moody’s, S & P, and Fitch

Bonds – types Types of bonds: 1. Corporate Bonds State law requires corporations pay bond payments on time, a given priority over other financial obligations 2. Government bonds Very safe, high quality 3. Municipal bonds Tax-free on interest for federal returns!! Lower interest rates, but good overall returns due to tax-exempt status

Government Bonds T-bills, notes or bonds Treasury Inflation-Protected Securities (TIPS) Savings Bonds Series I Bonds Series EE Savings bonds

Purchasing Bonds Where can I buy bonds? Corporate: Link to a website to buy and sell bonds, Link to a website to buy bonds, Link to a website to buy bondsLink to a website to buy and sell bondsLink to a website to buy bondsLink to a website to buy bonds Government: banks, brokers or direct from Treasury Link to a website to buy treasury bonds

Mutual Funds – slide 1 What are a mutual funds? An investment program that pools funds from shareholders and invests in a diversified portfolio by professional investment managers

Mutual Funds – slide 2 What are the advantages to owning mutual funds? Diversified investments Affordable Professionally managed Liquidity Low transaction costs Uncomplicated investment choices

Mutual funds –slide 3 2 common objectives of Mutual funds 1. Income 2. Growth

Mutual Funds - slide 4 Common type’s of growth funds: 1. Growth 2. Value 3. Aggressive 4. Specific Large-cap; mid-cap; small-cap Sector Funds Global or international funds Index

Mutual funds – final slide Where do I invest in a mutual fund? Funds companies Retirement plans Brokers, financial planners

Retirement Saving Social Security retirement benefits Supplemental retirement income

Questions Robert Caldwell South Omaha Campus, ITC

Additional Information

Additional Information 2