1. Basics of Investing Erica Abbott & Jean Lown, FCHD Dept., USU with assistance from Advanced Family Finance students Information Credits to: Dr. Barbara O'Neill Rutgers Cooperative Extension

2. Welcome Please ask questions or ask for clarification as we go along. Please ask questions or ask for clarification as we go along. I may defer some Q that require a detailed answer to the end I may defer some Q that require a detailed answer to the end 2

3. 3 Things To Do Before Investing Pay off credit card debt! Pay off credit card debt! No investment pays as much as credit card companies charge No investment pays as much as credit card companies charge Build an emergency fund Build an emergency fund Consider your goals Consider your goals Timeline Timeline How soon will you need the $? How soon will you need the $?

4. 4 Consider your Goals Vehicle purchase/replacement Vehicle purchase/replacement Down payment on a home Down payment on a home Child’s education Child’s education To build wealth To build wealth For retirement For retirement What are your financial goals? What are your financial goals? How much $ will you need? How much $ will you need?

5. 5 Determine your Risk Tolerance How much risk can you stand? How much risk can you stand? If you have trouble sleeping at night because you are worried about your investments then pick a more conservative mix If you have trouble sleeping at night because you are worried about your investments then pick a more conservative mix For experienced investors: For experienced investors: How did you react to 2008-2009 losses? How did you react to 2008-2009 losses? Risk tolerance scale-worksheet Risk tolerance scale-worksheet

6. Relationship Between Risk and Return RiskHighLow Expected Return High Low Cash Equivalents Bonds Int’l Bonds Real Estate Stocks Int’l Stocks

7. 7 Before you Invest Is your budget balanced? Is your budget balanced? Do you save every month? Do you save every month? Do you pay credit cards in full every month? Do you pay credit cards in full every month? Do you carry adequate insurance to protect against major catastrophes? Do you carry adequate insurance to protect against major catastrophes?

8. Potential Risks Being too conservative (Savings accounts, CDs, etc.) Being too conservative (Savings accounts, CDs, etc.) Keeps principal safe but… Keeps principal safe but… Inflation reduces purchasing power Inflation reduces purchasing power Inflation averages about 3.1% Inflation averages about 3.1% Risk not reaching your goal(s) Risk not reaching your goal(s) 8

9. Risks Being too aggressive (too much in stocks) Being too aggressive (too much in stocks) Higher potential for growth but… Higher potential for growth but… More market volatility More market volatility No guarantee or insurance No guarantee or insurance Potential to lose some or all of the principal Potential to lose some or all of the principal 9

11. 11 Managing Risks Consider your goal Consider your goal Emergency fund- be conservative Emergency fund- be conservative Retirement- be more aggressive Retirement- be more aggressive Match your goals with your risk tolerance Match your goals with your risk tolerance Can you handle the market volatility? Can you handle the market volatility?

12. 12 Managing the risks continued Consider your time frame Consider your time frame Short Term – months to 3 years Short Term – months to 3 years Stick with safe savings options Stick with safe savings options Mid Term – 3 to 10 years Mid Term – 3 to 10 years Take some risk to grow your $ & beat inflation Take some risk to grow your $ & beat inflation Long Term – 10 or more years Long Term – 10 or more years Take more risk to grow your $ & beat inflation Take more risk to grow your $ & beat inflation

13. 13 Saving Terminology Cash Equivalents Cash Equivalents Usually low risk Usually low risk Savings, CDs, cash on hand Savings, CDs, cash on hand Also called liquid assets Also called liquid assets Use for short term goals or if you have you have low risk tolerance Use for short term goals or if you have you have low risk tolerance

14. 14 Investing Terminology Stock – ownership in a company Stock – ownership in a company Bond – loan money to issuer Bond – loan money to issuer Mutual fund – A diversified portfolio of stocks and/or bonds Mutual fund – A diversified portfolio of stocks and/or bonds Opposite of putting all your eggs in one basket Opposite of putting all your eggs in one basket

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16. 16 Retirement Funds 401(k) retirement plan offered by employer 401(k) retirement plan offered by employer $ grows tax deferred $ grows tax deferred Some employers will match (~3%) Some employers will match (~3%) Need to invest > just the match Need to invest > just the match IRA: individual retirement account IRA: individual retirement account Invest on your own Invest on your own $ grows tax deferred $ grows tax deferred

17. Retirement Funds Roth IRA Roth IRA Pay taxes now Pay taxes now No taxes when you withdraw = no taxes on the growth! No taxes when you withdraw = no taxes on the growth! Traditional IRA Traditional IRA Upfront tax deduction Upfront tax deduction Pay taxes at withdrawal Pay taxes at withdrawal 17

18. Retirement Funds Retirement accounts are NOT an investment Retirement accounts are NOT an investment How the government treats that money for tax purposes How the government treats that money for tax purposes Where you put that money is up to you Where you put that money is up to you 18

19. IRA Criteria Must have an earned income Must have an earned income If married, non-earning spouse can use a spousal IRA If married, non-earning spouse can use a spousal IRA $5,500 annual limit $5,500 annual limit You can contribute less You can contribute less Age 50+: $6,500 Age 50+: $6,500 19

20. 401(k), Roth, or traditional IRA? Invest in 401(k) up to full match Invest in 401(k) up to full match Instant 100% rate of return!! Instant 100% rate of return!! Possible downsides Possible downsides employer picks the funds employer picks the funds May charge heavy fees May charge heavy fees If no employer match, consider an IRA If no employer match, consider an IRA 20

21. 401(k), Roth, or traditional IRA? Use a traditional IRA if Use a traditional IRA if Your employer doesn’t match or you’ve already invested up to the match Your employer doesn’t match or you’ve already invested up to the match You expect to be in a lower tax bracket at retirement You expect to be in a lower tax bracket at retirement Take the tax break now Take the tax break now 21

22. 401k, Roth, or traditional IRA? Use a Roth IRA if Use a Roth IRA if You expect taxes to rise You expect taxes to rise You expect to be in a higher tax bracket at retirement You expect to be in a higher tax bracket at retirement Offers tax diversification Offers tax diversification If most of your retirement income will be taxable… invest in a Roth If most of your retirement income will be taxable… invest in a Roth 22

23. Establish Your Long-Term Investment Strategy Strategy 1: Buy and hold anticipates long-term economic growth. Strategy 1: Buy and hold anticipates long-term economic growth. Stock market has offered a positive return over every 15 year period Stock market has offered a positive return over every 15 year period Past returns no guarantee, but long- term buying and holding is a great strategy Past returns no guarantee, but long- term buying and holding is a great strategy 23

24. Long-Term Investment Strategy 2 Dollar-cost averaging buys at “below-average” costsDollar-cost averaging buys at “below-average” costs –Invest same amount every month –Avoid following the crowd –Jumping in when the market is high –Pulling out when it drops –Set up automatic deposit 24

25. Long-Term Investment Strategy 3 & 4 Portfolio diversification reduces volatilityPortfolio diversification reduces volatility Money is like manure. Left in a pile, it stinks. If you spread it around, it'll grow some stuff. – Dave Ramsey Asset allocation keeps you in the right investment categories at the right timeAsset allocation keeps you in the right investment categories at the right time 25

26. Determinants of Portfolio Performance Source: “Determinants of Portfolio Performance II, An Update” by Gary Brinston, Brian D. Singer and Gilbert L. Beebower, Financial Analysts Journal May-June 1991.

27. 27 Investing Made Easy Set up Automatic Investing Set up Automatic Investing Payroll deduction or Payroll deduction or Automatic transfer from checking to: Automatic transfer from checking to: Individual Retirement Account Individual Retirement Account Mutual fund Mutual fund Other investment Other investment

28. Mutual Funds Advantages Advantages Professional management Professional management Reduce risk through diversification Reduce risk through diversification Own small part of lots of different investments Own small part of lots of different investments Monitoring investments is easy Monitoring investments is easy Disadvantages Disadvantages Funds charge fees Funds charge fees Be aware Be aware follow market performance (down & up) follow market performance (down & up) No guaranteed rate of return No guaranteed rate of return 28

29. Successful Investing Educate yourself Educate yourself Determine your risk tolerance Determine your risk tolerance Decide on asset allocation Decide on asset allocation Stick to your plan Stick to your plan Monitor investment performance Monitor investment performance If you need help, consult a professional advisor If you need help, consult a professional advisor (N.B. most are salespeople) (N.B. most are salespeople) Avoid fraud! Avoid fraud! 29

30. More Successful Strategies Ask questions about… Ask questions about… Expenses Expenses Historical performance: 3, 5, 10 yrs. Historical performance: 3, 5, 10 yrs. Investment goal (e.g., capital appreciation) Investment goal (e.g., capital appreciation) “Rule of Three” comparison “Rule of Three” comparison Compare at least 3 investments Compare at least 3 investments “Core and Explore” approach “Core and Explore” approach For more adventurous For more adventurous 30

31. Low-Maintenance Strategies Target maturity date mutual funds for retirement Target maturity date mutual funds for retirement Index funds Index funds Automatic deposits Automatic deposits Annual financial check-up Annual financial check-up 31

32. Ideas on where to invest Fidelity (800) 343-3548 Fidelity (800) 343-3548 Vanguard (877) 662-7447 Vanguard (877) 662-7447 T. Rowe Price (855) 389-9464 T. Rowe Price (855) 389-9464 Charles Schwab (866) 855-9102 Charles Schwab (866) 855-9102 Russell (800) 426-7969 Russell (800) 426-7969 *This is not a comprehensive list or an endorsement *This is not a comprehensive list or an endorsement 32

33. Remember Never invest in something you don’t understand 33

34. Investing Resources Risk tolerance quiz: http://njaes.rutgers.edu/money/riskquiz/ Risk tolerance quiz: http://njaes.rutgers.edu/money/riskquiz/ http://njaes.rutgers.edu/money/riskquiz/ Investing for Your Future http://www.extension.org/pages/ 10984/investing-for-your-future Investing for Your Future http://www.extension.org/pages/ 10984/investing-for-your-future http://www.extension.org/pages/ 10984/investing-for-your-future http://www.extension.org/pages/ 10984/investing-for-your-future Money 101 #4: Investing basics: http://money.cnn.com/magazines/moneym ag/money101/lesson4/index.htm Money 101 #4: Investing basics: http://money.cnn.com/magazines/moneym ag/money101/lesson4/index.htm http://money.cnn.com/magazines/moneym ag/money101/lesson4/index.htm http://money.cnn.com/magazines/moneym ag/money101/lesson4/index.htm 34

35. Questions? Comments? Experiences?

36. Where to Find FPW http://usu.edu/fpw/ http://usu.edu/fpw/ http://usu.edu/fpw/ http://fpwusu.blogspot.com/ http://fpwusu.blogspot.com/ http://fpwusu.blogspot.com/ https://www.facebook.com/Finan cialPlanningforWomen https://www.facebook.com/Finan cialPlanningforWomen https://www.facebook.com/Finan cialPlanningforWomen https://www.facebook.com/Finan cialPlanningforWomen Second Wednesday of the month TSC room 336 11:30- 12:30 Second Wednesday of the month TSC room 336 11:30- 12:30 Family Life Center 7:00 to 8:30 Family Life Center 493 North 700 East. 7:00 to 8:30 36

37. 37 Financial Planning for Women www.usu.edu/fpw April 10 th : Social Security with SSA expert Mickie Douglas April 10 th : Social Security with SSA expert Mickie Douglas 11:30 only; no evening program 11:30 only; no evening program May 8 th : Great Mutual Funds for your IRA May 8 th : Great Mutual Funds for your IRA June 12 th: Get your house in order before you buy June 12 th: Get your house in order before you buy July 10 th : Investing for College July 10 th : Investing for College