Contemporary Investments: Chapter 1 Chapter 1 WHY INVEST? The reasons for investing A definition of investing Investment goals How investing benefits the.

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Presentation transcript:

Contemporary Investments: Chapter 1 Chapter 1 WHY INVEST? The reasons for investing A definition of investing Investment goals How investing benefits the economy and society

Contemporary Investments: Chapter 1 The importance of investment decisions today Larger menu of investment choices Longer life expectancies Trend toward self directed retirement plans Future of Social Security and traditional pensions Flat growth in personal income Changing labor market

Contemporary Investments: Chapter 1 A brief history of investing Investing doesn’t have that long a history Some background on joint-stock corporations Early history of stock markets and stock ownership Investing in the post-war era

Contemporary Investments: Chapter 1 The investment process Some preliminary steps Prepare current financial statements Establishing investment goals Short term and long term goals Monetary and non-monetary goals Importance of goals being specific and realistic Reviewing insurance coverage Establishing an emergency fund

Contemporary Investments: Chapter 1 Risk and return assessment What holding period is appropriate? What expected return is necessary to achieve goals? How much risk is tolerable?

Contemporary Investments: Chapter 1 Other questions Investor’s tax status Preference for capital gains or income How much time can you afford to spend managing your investments?

Contemporary Investments: Chapter 1 Investment selection Major investment options Stocks Bonds Money market instruments (cash) Strategic asset allocation Tactical asset allocation Passive versus active investing

Contemporary Investments: Chapter 1 Investment management Evaluating performance A life-cycle approach to investing

Contemporary Investments: Chapter 1 Investment truisms Lessons of history History can teach us much about investing However, the past is no guarantee of the future

Contemporary Investments: Chapter 1 Positive relationship between risk and return Riskier investments have to promise higher returns People are risk-averse by nature Benefits of diversification Helps beat the risk/return tradeoff Diversification works because security returns are not perfectly correlated over time

Contemporary Investments: Chapter 1 Positive relationship between risk and return- Cont. Investing knows no national boundaries Financial markets function pretty well Markets are fair, open and orderly with lots of buyers and sellers Characteristics of well functioning markets Prices react quickly to new information Existence of equilibrium pricing relationships No easy money left on the table

Contemporary Investments: Chapter 1 Figure 1.1– The Positive Relationship Between Risk and Return

Contemporary Investments: Chapter 1 Mistakes happen Fad investing and chasing returns Ignoring the impact of taxes and inflation Selling after a big drop or buying after a big increase Hanging on to a loser Failing to diversify Trusting the self appointed touts and gurus

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