The Basics of Investing Stocks, Bonds & Cash Accounts

Why Invest (save) Money? Purchasing power = amount of goods/services money buys Money (savings) loses purchasing power over time Prices for goods rise on average +2.5% per year rising prices is called inflation Investors must earn more than the rate of inflation for purchasing power to rise

Types of Investments: 4 Asset Classes Stocks: Over 5000 individual stocks to choose from! Bonds: Government bonds, corporate bonds, mortgage bonds Cash Accounts: Savings accounts, CD’s, money markets Real Estate Residential, commercial, houses, apartments, etc….

Reading: Intro. To Investing ANSWER KEY: B C A D

Returns before inflation = nominal return Real & Nominal return per year by Asset Class 1925 - 2012 Returns before inflation = nominal return . = real return Savings Account

Risk vs. Reward? Holding period = when do you need your money back? Time horizon determines which asset class you should invest in The longer the holding period----the more risk you should take! Stocks = long term investment (5-years or longer) Bonds = medium term investment ( 1-3 years) Bank CD’s = short term investment (30 days to 2 years)

Process of picking sectors to invest in Asset Allocation Process of picking sectors to invest in I think I’m brilliant very high risk Cash Account Bonds Stocks no risk med. risk high risk

Rule of “70” 70 divided by RETURN = # Years for money to double Money Doubles in: 70/2% = 35 years 70/5% = 14 years 70/10% = 7 years 70/15% = 4.6 years Average return of stock market over last 75 years

How Money Grows! Money grows exponentially as it compounds The power of compound interest! $10,000 invested at 4% return for 30-Years: $33,000 $10,000 invested at 15% return for 30-years $875,000

Bonds Bonds: are a loan to a Gov’t or business where you earn interest every year until you are paid back. If the company goes bankrupt => you usually will not be paid back! You buy a Bond U.S. Gov’t 5-Year Bond $1,000,000 cash Gov’t pays you 2% interest per year $20,000 per year Plus $1 million in 5 years $1.0 million turns into $1.1 over 5 Years

What does the Fed policy do to savers? Janet Yellen leaves rates at ZERO What does the Fed policy do to savers? 0.0%

Bond Prices U.S. Government sells bonds to “borrow money” Bond prices move inversely with interest rates! Interest rates ↓ => Bond Prices ↑ You buy a Bond U.S. Gov’t 5-Year Bond $1,000,000 cash $20,000 interest per year