Key Investment Concepts (that everyone should know)

This program is provided through a grant from the Financial Industry Regulatory Authority (FINRA) Investor Education Foundation and the American Library Association (ALA). The grant is distributed as part of the smartinvesting@your library® initiative, an ALA program. This project is in its sixth year of educational partnership with libraries across Colorado and the country. Marsha Yelick CFA(retired) Financial Programs Consultant myelick@estesvalleylibrary.org 970-586-8116 Ext 831

Common Sense Diversification Simplicity Impulse in your enemy. Major Themes du jour Impulse in your enemy. Time is your friend.

Who’s in control? It is, after all, your money! Where do you want to go? How long do you have to spend in the car? How much risk will you take? Are you headed where you want to go? What if circumstances change? How much do you want to be charged? It is, after all, your money!

To be in control! ELEVEN Investment Terms... you need to understand Allocation Return Yield Inflation To be in control! Risk Compounding Volatility Tax Deferral Fees Liquidity Dollar Cost Averaging

Annualized total rate of return Term 1: RETURN Measuring dollars is not enough! Simple return? (too simple) Total return? (better) Rate of return? (allows comparison) Annualized total rate of return ...a valid measure, excellent for evaluation and comparison purposes Return

Historic Returns What returns can be expected? “A page of history is worth a volume of logic.” Oliver Wendell Holmes 1926 – 1996 Average annual rates of return Small stock 12.6% Real Estate 11.1% Large stock 10.4% Bonds (long) 5.9% Treasury bills (1-yr.) 3.7% Inflation 3.0% Historic Returns ...and what is the RISK???

annual total rate of return? According to history, what is a reasonable annual total rate of return? 50% stocks (~10%) + 50% bonds (~5%) = ~7.5% 7.5% - 3.0% inflation = REAL RETURN of ~4.5% A FAIR rate of return

What is return? To review return Simple return – in dollars Total return – including all costs & income Rate of return – stated in percentage Annualized total rate of return – full picture Fair annualized total rate of return = 7.5% REAL Return - after inflation takes its bite. What is return?

TERM 2: YIELD Money you collect annually from the investment you make. (Annual total rate of return is still the most important) Yield

Types of Yield… Types of yield

(manage by diversification) TERM 3: RISK …usually implies downside risk (loss), meaning the uncertainty of a positive return and the potential for financial loss. Risk Non systematic (manage by diversification) Systematic (manage with secure financial base)

Investment risk planning The PYRAMID… Highest Risk/ Highest Earnings Investment risk planning Lowest Risk/ Lowest Earnings http://www.arfamilies.org

Risk avoidance The BIGGEST RISK is to take NO RISK… http://www.ivyfunds.com/educ_invest_risk.aspx

Volatility TERM 4: VOLATILITY …. the standard deviation of the continuously compounded returns of a financial instrument within a specific time horizon. Volatility The more volatile an investment is, the more it can potentially lose or gain value in the short-term.

Liquidity TERM 5: LIQUIDITY Cash whenever you want it! Cash only when someone agrees!

TERM 6: COMPOUNDING Mathematical magic…

TERM 7: INFLATION Inflation also COMPOUNDS over time! Inflation

Dollar Cost Averaging Example TERM 8: DOLLAR COST AVERAGING Invest at VARIOUS times at VARIOUS prices. You buy more shares when prices are lower, less when prices are higher. (unless you KNOW what the market is going to do). Dollar cost averaging Dollar Cost Averaging Example Month Amount Invested Cost per Share No. of Shares March $100 $20.00 5 April $100 $25.00 4 May $100 $10.00 10 June $100 $50.00 2 Average cost per share $19.05 21 https://www.ohio457.org

Tax-defer (legally) TERM 9: TAX-DEFERRED SAVINGS 401(k) (Paying unnecessary funds to Uncle Sam is not conducive to nest egg growth!) 401(k) Traditional IRA Roth IRA Annuities Limit trading Tax-defer (legally)

Fees TERM 10: FEES Mutual funds - use no-load Mutual funds - find low annual expense Avoid frequent trading Buy for the long term

Allocation/Diversification TERM 11: ALLOCATION Allocation/Diversification From: http://www.investopedia.com/university/beginner/beginner6.asp

Rule of thumb Rules of thumb...(not really rules, just suggestion) For retirement monies… The percentage of fixed income = your age (cash counts as part of fixed income) 60 years old: 60% bonds, 40% stock 50 years old: 50% bonds, 50% stock 40 years old: 40% bonds, 60% stock … Rule of thumb

Apply the terms! Check list for Investment Concepts What you do today does make a difference in what you have tomorrow. Apply the terms!

Be money smart for life