1. Bonds, Stocks and Mutual Funds Leslie Lum

2. DRAFT 3/6/20072 Finding money to invest

3. DRAFT 3/6/20073 Activity: What will these goals cost? A house A college education Starting your own business Retirement

4. DRAFT 3/6/20074 The time value of money Future value of a sum of money now Present value of a sum of money in the future Future value of annual savings Annual savings needed for sum of money in the future

5. DRAFT 3/6/20075 1. Future value of sum now Using Table 1 look up the following: – $5000 at 7% over 10 years – $3000 at 5% over 20 years

6. DRAFT 3/6/20076 A real life example You are a typical employee in your 20s who when you left your job in 2005 cashed out (66% do) your 401K account of less than $10,000. What is the cost of cashing out your account if your balance was $8000?

7. DRAFT 3/6/20077 2. Set aside now for future sum Use table 2. What do I need to set aside for: $10,000 in 10 years at 7% $50,000 in 15 years at 8% $125,000 in 30 years at 6%

8. DRAFT 3/6/20078 3. The effect of saving every year What if you cut out candy and soda/two fast food meals/one sit-down restaurant meal a week/5 fancy coffees a week? Savings $25

9. Risk and return DRAFT 3/6/2007 9

10. 10 Understanding Returns

11. DRAFT 3/6/200711 Some investments can result in a gain

12. DRAFT 3/6/200712 Capital Loss

13. DRAFT 3/6/200713 Annualized gain or loss Allows you to make an apples-to-apples comparison

14. Yield – Annual dividend or interest DRAFT 3/6/200714

15. DRAFT 3/6/200715 A real life example You will get your paycheck next week but you need $100 now. You arrange for a payday loan paying a fee of $15 for the use of $100. The payday loan company will collect the $100 electronically from your bank account when your pay check is deposited next week. What is the rate charged?

16. DRAFT 3/6/200716 Planning for uncertainty

17. DRAFT 3/6/200717 Returns are uncertain

18. DRAFT 3/6/200718 Investment Risk

19. DRAFT 3/6/200719 Major asset classes: Risk & Return

20. Primer on bonds DRAFT 3/6/200720

21. Capital gain or loss on bonds DRAFT 3/6/200721

22. DRAFT 3/6/200722 Bonds

23. DRAFT 3/6/200723 Stocks

24. DRAFT 3/6/200724 Historical returns of major asset classes Average annual returns over the 30 years: Cash 7% Bonds 9% Stocks 15% Conclusion: If you need higher returns to reach financial goals, you have to invest in stocks.

25. DRAFT 3/6/200725 If you receive an offer of a guaranteed high return, is that possible? Only if they guarantee a high loss as well. There are no guarantees in any investment. All investments go up and down. Higher return means higher risk. Return versus Risk

26. DRAFT 3/6/200726 Given the same return, the investment with less risk is better

27. DRAFT 3/6/200727 The Northwest is the best.

28. DRAFT 3/6/200728 Bonds – Risk Return

29. DRAFT 3/6/200729 US Stocks – Risk Return

30. DRAFT 3/6/200730 Sectors – Risk Return

31. DRAFT 3/6/200731 International – Risk Return

32. DRAFT 3/6/200732 Combined – Risk Return

33. DRAFT 3/6/200733 Inflation rates are uncertain

34. DRAFT 3/6/200734 Inflation is also risk

35. DRAFT 3/6/200735 Which is the best return?

36. DRAFT 3/6/200736 After inflation, the 6% return is the best!!

37. DRAFT 3/6/200737 Year-to-year stock returns

38. DRAFT 3/6/200738 Risk gets lower with time

39. DRAFT 3/6/200739 Lowest risk over ten years

40. DRAFT 3/6/200740 Summary All investments have risk Buy and hold market index funds (doesn’t work for individual stocks) Have an emergency fund (3 to 6 months) to tide you over Have other sources of income so you don’t have to cash out during down markets

41. DRAFT 3/6/200741 Asset Allocation

42. DRAFT 3/6/200742 All eggs in one basket? 34.6 percent of families had stock in only one company 59.5 percent had stock in three or fewer companies 9.5 percent had stock in fifteen or more companies Source: 2004 Consumer Finance Survey

43. DRAFT 3/6/200743 Why asset allocate? It has to do with return and risk

44. DRAFT 3/6/200744 Can you predict the best return?

45. DRAFT 3/6/200745 Does the risk double with two investments? The key is having two investments which aren’t correlated.

46. DRAFT 3/6/200746 Adding a riskier investment to your portfolio decreases overall risk.

47. DRAFT 3/6/200747 If you allocate the right amount you reduce risk and increase return!

48. DRAFT 3/6/200748 Pension Fund Asset Allocation

49. DRAFT 3/6/200749 “Millionaires” Portfolio

50. 50 David Swensen suggests a portfolio

51. Do we buy at the right time? DRAFT 3/6/200751

52. Rebalancing Adjusting portfolio based on asset allocation goals DRAFT 3/6/200752

53. No rebalancing DRAFT 3/6/200753 Year BondStock 1992 40%60% 1993 40%60% 1994 39%61% 1995 35%65% 1996 32%68% 1997 27%73% 1998 24%76% 1999 21%79% 2000 24%76% 2001 28%72% 2002 36%64% 2003 31%69% 2004 30%70% 2005 29%71% 2006 27%73%

54. Rebalancing DRAFT 3/6/200754

55. Summary Don’t put all your eggs in one basket. Rebalance every year to keep your portfolio on track. DRAFT 3/6/200755

56. Funds DRAFT 3/6/200756

57. Types of funds Mutual funds Closed-end funds Exchange-traded funds (ETFs)

58. Mutual fund industry

59. Closed-end funds

60. ETFs

61. Fund evaluation DRAFT 3/6/200761

62. Evaluating funds 9/12/07 62 Objective Relates to your asset allocation goals Check the portfolio to be sure Fees The lower the better – check against index funds Performance How does it do against the index? How does it do against other funds? Risk Is it lower risk than other funds? Management If you are choosing an actively-managed fund – how experienced is the manager? www.morningstar.com or www.marketwatch.com for Lipper www.morningstar.comwww.marketwatch.com

63. 9/12/07 63 www.morningstar.com

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74. 9/12/07 74 Other American Funds Have sales fees

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76. Fund Fees True or False? 76 All fund fees are charged when you buy. All fund fees have the same effect. A no-load fund has no fees. All funds should have the same level of fees and expense ratios. Expense ratios are such a small part of your investment you shouldn’t worry about them.

77. Index Funds Index funds are funds that represent certain categories of assets There are index funds for large, medium and small stocks, international stock, bonds, industries, real estate, commodities, and more. They are not actively managed. Their investments don’t change. DRAFT 3/6/200777

78. Evaluate your fund performance/fees against index funds performance/fees 9/12/07 78 Index Funds Average Return %Risk % Expense Ratio % Emerging markets are international stocks of developing countries 42180.77 European large stocks 25100.6 International stocks of developed countries 2390.35 Real estate 22170.35 Small cap stock - Small US companies $300 M to $2 B 15120.2 Mid cap stock - Medium-sized US companies $1.5B to $5 B 16100.2 S&P 500 - Largest US stocks 1380.09 Bonds 430.2

79. How fees (negatively) impact your return 9/12/07 79 Source: Statement of John C. Bogle to the United States Senate Governmental Affairs Subcommittee, November 3, 2003

80. The bigger, the not-better 9/12/07 80 Source: Statement of John C. Bogle to the United States Senate Governmental Affairs Subcommittee, November 3, 2003

81. Investors hold funds for 3 years 9/12/07 81 Source: Statement of John C. Bogle to the United States Senate Governmental Affairs Subcommittee, November 3, 2003

82. Beating the indices -- negatively 9/12/07 82 Source: Statement of John C. Bogle to the United States Senate Governmental Affairs Subcommittee, November 3, 2003

83. DRAFT 3/6/200783 Advice from the pros David Swensen who manages the Yale University endowment, and who is considered one of the best investment managers, has sobering advice to give to individual investors: Individuals shouldn’t pick stocks themselves. The markets are competitive and they don’t have the information to compete nor the clout to negotiate. Beware of actively-managed mutual funds. They allow popular funds to grow too big so they can’t beat the market. They also tend to promote the wrong fund at the wrong time. The vast majority of actively- managed funds underperform the market. Mutual fund monitoring companies don’t help you either. They downgrade funds after the damage has been done. Individuals are best served by index funds with the lowest fees. Have a diversified portfolio and rebalance.