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Investing, IRAs, and Behavioral Finance BTB 1025 Matthew Zimpelman Richard Segal Kevin Smeaton.

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Presentation on theme: "Investing, IRAs, and Behavioral Finance BTB 1025 Matthew Zimpelman Richard Segal Kevin Smeaton."— Presentation transcript:

1 Investing, IRAs, and Behavioral Finance BTB 1025 Matthew Zimpelman Richard Segal Kevin Smeaton

2 Why Invest?  https://www.youtube.com/watch?v=tp6n8ChUPZA https://www.youtube.com/watch?v=tp6n8ChUPZA  Understand your risk tolerance

3 Understanding Bonds  How Bonds Work  Coupon Rate vs. Interest Rate  Receive invested amount at end of duration  Types of Bonds  Treasury (Government) Bonds: low risk, low return  Municipal Bonds: tax-free interest  Corporate Bonds: higher risk, higher return

4 Important Factors when Choosing a Bond  Pricing  Discount  Premium  Par Value  Duration  Coupon Rate  Depends on Risk Tolerance

5 Understanding Stocks  What are stocks?  Ownership in a corporation  Buy Low, Sell High  Understand Return  Dividends  A distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.  Shorting Stocks = Betting against a company  Sell High, Buy Low  Example  Average Return on Stock Market = 10-11%

6 Long Term Investing Tips  Diversification  Investment types (Bonds vs. stocks vs. other investment types)  Market type (Ex: automobile market)  Be Patient  Don’t track daily, weekly, monthly changes  Some years you might lose money, don’t worry  Invest Earlier = More Money = Retire Earlier!

7 Long Term Investment Scenario  http://www.daveramsey.com/article/how-teens-can- become-millionaires/lifeandmoney_kidsandmoney/ http://www.daveramsey.com/article/how-teens-can- become-millionaires/lifeandmoney_kidsandmoney/

8 Who Wants to Be a Millionaire?  If you took $1,000 and invested it, what would happen?  If you waited for 50 years, you could be a millionaire!!!! (Or at very least a hundred-thousand-aire!))  How??? Compounding Interest and Smart Investing!  What is compounding interest?  Return Rates  Historical Average Return on the Stock Market = 11%  Aggressive Approach (Good Investing) = 15%

9 Path to Becoming a Millionaire! YearTotal Amount: Avg. Market Rate Return = 11% Total Amount: Aggressive Approach/ Return = 15% 0$1,000.00 1$1,100.00$1,150.00 2$1,232,00$1,322,50 10$2,839.4$4,045.56 20$8,062.3$16,366.54 35$38,574.85$133,175.52 50$184,564.83$1,083,657.44

10 Retirement Planning  Save now in order to retire at younger age  Money growth is exponential  Different forms of retirement accounts:  Benefit Plans (employer sponsored)  Traditional IRAs  Roth IRAs  IRA—individual retirement account  Personal account that works similar to benefit plan

11 Benefit Plans  Most common is a 401k plan  Contributions made by employee into the firm’s plan  Sometimes employer will match your contributions up to a certain amount  If possible, ALWAYS contribute the MAXIMUM that the employer will match  Earnings are tax deferred  Major benefit due to compound interest  403b plan (non-profit organizations  457b plan (governmental employers)

12 Traditional IRA  Personal retirement account  Each person allowed to contribute max $5,500  Age 50+, can contribute additional $1,000 as “catch up”  Earnings are tax deferred until withdrawn  Compound interest on larger sum of money  Because it isn’t being taxed today  Good if tax rate is lower when money is withdrawn

13 Roth IRA  Also a personal retirement account  Max contribution is also $5,500  Age 50+, can contribute additional $1,000 as “catch up”  Earnings are taxed when earned  Do not pay taxes when withdraw funds  Good if tax rate increases over time

14 What is Behavioral Finance? “The area of finance dealing with the implications of investor reasoning errors on investment decisions and market prices” ● Reasoning Errors Occur by Investors ● Proponents of behavioral finance believe these errors cause market inefficiencies

15 Introductory Activity We give you $4000. Next, you can take one of the following two options: A.You can have $1000 more dollars from us B.You can flip a coin. If it lands on heads, you get $2000 more from us. Tails, you get nothing.

16 Introductory Activity 2 We give you $6000. Next, you can take one of the following two options: A.You can lose $1000 B.You can flip a coin. Heads, you lose $2000. Tails, you lose nothing

17 Frame Dependence Both scenarios we went through were exactly the same. ● Option A: You would have ended up with $5000 ● Option B: 50% chance you would have ended up with $6000, and 50% chance of getting $4000 Therefore, you should chose the same answer in both scenarios. Why didn’t you?

18 Loss Aversion ● Reluctance to selling investments after they fall in value ● Always evaluate stocks at their current price o Do not base on past prices ● Barings Bank and Nicholas Leeson ● Individual 1.5 times more likely to sell a gain then sell a loss

19 Overconfidence ● Overconfidence leads to more trading o more trades leads to lower relative returns ● Overtrading is “a guy thing” o men trade about 50% more than women o men have riskier portfolios than women ● 43% of households outperform market o lack of diversification

20 Misperceiving Randomness  The Hot Hand Fallacy:  Common misconception in sports:  If player is doing well, he should continue to do well?  Stats show that having “hot hand” does not increase chances of staying “hot”  Coin flip activity  You flip the coin one more time, do you think it will it be heads or tails?

21 Overreacting to Chance ● The Gambler’s Fallacy: o The idea that if an event hasn’t happened recently it is “overdue” and is bound to happen soon ● These types of cognitive errors are called “forecasting errors”

22 Works Cited  The Motely Fool  http://www.fool.com/teens/teens01.htm http://www.fool.com/teens/teens01.htm  Jordan, Bradford, Thomas Miller, Jr., and Steven Dolvin. Fundamentals of Investments. 7th ed McGrawHill, 2015. Print. ("Hedge Fund Definition | Investopedia." Investopedia. N.p., n.d. Web. 23 Sept. 2014.)


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