Managing Your Investments Money Management Chapter 11 Notes

Got the Safety Net, Now What…? Once you’ve got a bit of emergency cash stashed away in some type of conservative savings plan … then what? TIME TO INVEST, BABY! Investments can run the gamut from conservative to risky. The more risk you are willing to take, the bigger the potential gain AND the bigger the potential loss! In this chapter you will learn about the basic types of investment alternatives!

Investment Essentials Personal investing is the use of your savings to earn a financial return. The overall objective, is obviously, to earn MORE MONEY with your money! Initial savings are cautious and conservative. Once you have a safe cushion stashed away, more “risky” (and more profitable) investments can be made.

Essentials of Investing $$$$$$ Type of Investment Strategy Considerations Put-And-Take Account Short-Term Savings (3-6 months’ pay) Safety Security, future expected & unexpected needs Beginning Investments Conservative, Low-Risk Diversification Tax Advantages Systematic Investments Retirement Planning, Kids College Fund Long-Range Growth, Future Financial Security Speculation Taking chances to realize quick profit Risk Uncertain future income, Short-Term profit potential EVERYTHING ELSE -- SPEND AND ENJOY! 

Reasons for Investing To supplement your income To make a profit and earn a better return on your savings! (You can do better than standard bank interest rates!) To minimize tax burdens now and in the future! To provide income for retirement To stay ahead of inflation Inflation is a rise in the general level of prices over time. You want to seek out investments that are growing faster than the rate of inflation! Recent Inflation Rates: http://inflationdata.com/Inflation/Inflation_Rate/CurrentInflation.asp

Risk Investing involves some risk! The greater the risk you are willing to take the greater the potential returns. Risk in an investment means a measure of uncertainty about the outcome. On the other hand, safety in an investment means minimal risk of loss. Different types of risk include: Short-Term vs. Long-Term Risk, Inflation and Interest Rate Risk, Political Risk, Market Risk, and Company or Industry Risk. How comfortable you are with risk will play a key factor in your decision-making as an investor.

Investment Strategies Many individuals NEVER start an investment plan because they don’t think they have enough money! THAT IS A HUGE MISTAKE! Even small amounts of money can do miracles over time! Investing wisely over a period of time is hard… the suggestions that follow, however, may make this task easier for you!

Criteria for choosing an investment The Dream investment would accomplish all of the following Safety (Minimal risk of loss) High Liquidity High Return (investment income) Growth in value > inflation Reasonable purchase price Has Tax Benefits Obviously, this “dream investment” is hard to obtain. You may not find an investment that does all of this. BUT the more of these criteria that are met, the more desirable the investment!

Wise Investment Practices People commonly make one or more serious mistakes in connection with their investment practices. Some are minor; others are serious. If you wish to avoid mistakes follow this advice: Define your financial goals Go slowly Follow through Keep good records Seek good investment advice Keep investment knowledge current

Sources of Financial Information Newspapers – most newspapers have finance sections. The Wall Street Journal is a top-notch daily resource. Barron’s is a weekly newspaper that has great info. Both of these are available online as well! The most widely reported and followed financial index is the Dow Jones Industrial Index. Often simply called the Dow, it is an index of the price movements of thirty major industrial corporate stocks listed on the New York Stock Exchange. The New York Stock Exchange Index and the NASDAQ are also very widely reported. These measure the overall impact of EVERY stock traded on that exchange on a given day. Financial Magazines – For Example: Money, Fortune, & Kiplinger’s Annual Reports – corporations are required to provide financial information to potential investors once a year. These reports outline the financial condition of the company.

Brokers and Advisors Full-Service Brokers – buy and sell stocks for you at a price, provide you with research and advice. Discount Brokers – buy and sell stocks for you at a price. Usually provides little to no advice to clients. Financial Advisers – professional investment planners who are trained to give intelligent overall investment advice based on your goals, age, net worth, occupation, investment experience, lifestyle, & family responsibilities.

Investment Options Stocks and Bonds Stocks -- represent ownership in a corporation. A share of stock is a unit of ownership The owner of stock is called a stockholder or a shareholder When you are a stockholder, you will share in the companies profits, which can be paid to you with higher stock prices and/or dividends. We will go into much more detail on stocks in Chapter 12! Bonds – are debt obligations of corporations or governments. For example, a corporation may sell bonds to raise money. You give them money for the bond. They agree to pay you back the price of the bond PLUS a given interest rate after a set period of time has passed. (Ex: A $1,000, 1 year, 6% bond) We will go into more detail on bonds in Chapter 13!

Government Savings Bonds and Treasury Securities Government Savings Bonds – When you buy a savings bond you are, in effect, loaning money to the U.S. Government. The most common type of Bond is the discount bond. These are bonds purchased for less than their maturity value. For example you pay $25 for a bond that will be worth $50 at maturity. You hang on to it until it matures (usually ten years). Very safe option with a decent return, better than most cd’s and traditional savings accounts. Also, interest earned is exempt from state and local taxes (you do have to pay federal tax though!) Treasury Securities – U.S. Treasury Bills, Notes, and Bonds are available. Maturities range from a few months up to to10 years. Interest Rates vary but go up as the length of time until maturity goes up. Note, the interest earned on these types of investments is also exempt from state and local income taxes. (Not federal though!)

Mutual Funds and Retirement Plans Suppose you have $500 to invest but do not know which stocks or bonds to buy, when to buy them, or when to sell them? You can buy shares in a large, professionally managed company called a mutual fund. A mutual fund pools the money of many investors and buys a large selection of securities that meet the fund’s stated investment goals. Two major advantages of a mutual fund are: Professional Management AND Diversification – which means investment in a wide variety of securities. Mutual Funds are the fastest growing segment of the United States Financial Services Industry. We will go into more detail about Mutual Funds in Chapter 14! Retirement Plans – There are a wide variety of retirement plans that you can put money into regularly. Most of these plans have great tax advantages. They allow you to avoid paying taxes on that income until you actually withdraw it from the retirement account years later. That can be huge! We will discuss retirement plans in more detail in Chapter 15.

Real Estate Many people like to invest in Real Estate – houses and land! While this type of investment usually represents a large and often illiquid investment of cash, it has proven (over time) to be protection against inflation in most parts of the U.S. Real Estate investments also have great tax benefits. Certain costs of home ownership are deductible and therefore lower taxable income. That is huge! We will go into more detail about real-estate investing in Chapter 14.