Investment Fundamentals and Portfolio Management

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Investment Fundamentals andPortfolio Management
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Objectives

• Summarize reasons why people invest, what is
  required before beginning, how returns are
  earned, and some ways to obtain funds to invest.
• Determine your own investment philosophy.
• Recognize the variety of investments available.
• Identify the major factors that affect the return
  on investment.
• Specify some strategies of portfolio management
  for long-term investors.
• List three guidelines to use when deciding the
  best time to sell investments.

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Establishing Investment Goals

• Financial goals should be specific and
  measurable.
• Why are you accumulating these funds?
• How much do you need?
• How will you get it?
• How long will it take you to reach your goal?
• How much risk are you willing to assume?
• Are you willing to sacrifice current consumption
  to invest for the future?
• Is it realistic to try and save this amount?

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Steps to Create a Personal Investing Plan
Step 1 My investment goals are __________________
__ ____________________
Step 2 By ___________, I will have obtained
_______.
Step 3 I have __________ available to
invest. Date _____________
Step 9 Continue evaluating choices.
Step 4 Possible investment alternatives 1._______
__________ 2._________________ 3._________________
4._________________
Step 8 Final decision 1._______________ 2.________
_______
Step 5 Risk factors for each alternative 1._______
_____________ 2.____________________ 3.___________
_________ 4.____________________
Step 6 Projected return on each
alternative 1.__________ 2.__________ 3.__________
4.__________
Step 7 Investment decision 1._______________ 2.___
____________ 3._______________
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Investment Fundamentals
ATTENTION!

• Difference in return is a major distinction
  between savings and investing.
• Successful investors begin to live off earnings,
  without spending wealth itself.

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Preparations for Investing
WHY PEOPLE INVEST

• Achieve financial goals
• Increase current income
• Gain wealth and financial security
• Have funds available for retirement

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Preparations for Investing
PREREQUISITES TO INVESTING

• Live within means
• Continue savings program
• Establish lines of credit
• Carry adequate insurance
• Establish investment goals

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Preparations for Investing

• Interest
• Dividends
• Rent
• Capital gain/loss
• Rate of return or yield

INVESTMENT RETURNS
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Performing a Financial Checkup

• Learn to live within your means
• pay off high interest credit card debt
• Provide adequate insurance protection
• Start an emergency fund
• three to nine months of living expenses
• Have other sources of cash for emergencies
• line of credit
• cash advance

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Getting Money to Start an Investing Program

• Pay yourself first
• Participate in elective savings programs
• Payroll deduction
• electronic transfer
• Make a special effort to save one or two months a
  year
• Take advantage of windfalls
• Invest half of your tax refund

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Value of Having a Long-Term Investing Program

• Many people dont start investing because they
  only have a small amount to investbut....
• Small amounts invested regularly become large
  amounts over time

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Personal Investment Philosophy

• Handling risk
• Ultraconservative strategies
• Conservative
• Moderate
• Aggressive

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Investment Selection

• Lend or own
• Short-term or long-term
• Choose a vehicle

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Factors That Affect Investment Decisions

• Safety - minimal risk of loss
• Risk - uncertainty about the outcome
• inflation risk
• interest rate risk
• business failure risk
• market risk

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Income From Investments

• Safest
• CDs
• savings bonds
• T-bills
• Higher potential income
• municipal bonds
• corporate bonds
• preferred stocks
• mutual funds
• real estate

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Investment Growth and Liquidity

• Growth
• increase in value
• common stock
• growth stocks retain earnings
• bonds, mutual funds and real estate
• Liquidity
• ease and speed to convert an asset to cash

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Investment Pyramid
High risk
Lowrisk
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Major Factors That Affect Rate of Return

• INVESTMENT RISK

• Pure
• Speculative
• Risk pyramid

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Major Factors That Affect Rate of Return

• Financial
• Market volatility
• Political

• INVESTMENT RISK TYPES

• Inflation
• Deflation
• Interest rate

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Major Factors That Affect Rate of Return

• INVESTMENT RISK

• Random or unsystematic
• Diversification
• Market or systematic

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Major Factors That Affect Rate of Return

• Leverage
• Taxes
• Marginal tax rate
• Taxable vs. tax-free income
• Buying and selling costs/commissions
• Inflation

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Major Factors that Affect Rate of Return

• CALCULATE REAL RATE OF RETURN

• Identify before-tax return
• Subtract marginal tax rate
• Obtain net return after taxes
• Subtract estimate of inflation
• Obtain real rate

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Management Strategies Long-Term Investors

• Business-cycle timing
• Dollar-cost averaging
• Portfolio diversification
• Asset allocation

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Investment Alternatives

• What is stock?
• part ownership in a company
• the money you pay for shares of stock provides
  equity capital for the business

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Investment Alternatives
(continued)

• What is a bond?
• a loan to a corporation, the federal government,
  or a municipality
• The interest is paid twice a year, and the
  principal isrepaid at maturity (1-30 years)
• You can keep the bond until maturity or sell it
  to another investor

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Investment Alternatives
(continued)

• What is a mutual fund?
• investors money is pooled and invested by a
  professional fund manager
• you buy shares in the fund
• provides diversification to reduce risk
• funds range from conservative to extremely
  speculative
• match your needs with a funds objective

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Monitor Your Investments

• Read your account statements
• Chart the value of your investments
• Maintain accurate and current records
• Calculate the current yield

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Sources of Investment Information

• Newspapers
• Business Periodicals
• Government Publications
• Corporate Reports
• Statistical Averages
• Investor Services and newsletters
• Standard and Poors stock reports
• Value Line
• Moodys investment service

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Calculating Return on Investment

• Assume you invest 3,000 in a mutual fund. Also
  assume the mutual fund pays you 50 dividends
  this year and that the mutual fund is worth
  3,275 at the end of one year. Your rate of
  return is 10.8, as illustrated below
• Step 1 Subtract the investments initial value
  form the investments value at year end
• 3,275 - 3,000 275
• Step 2 Add the annual income to the amount
  calculated in step 1.
• 50 275 325
• Step 3 Divide the total dollar amount of return
  in Step 2 by the original investment.
• 325/3,000 0.108 10.8

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Components of the Risk Factor

• Inflation Risk
• Assume you deposited 10,000 in a bank at 3
  interest. At the end of year one, your money
  will have earned 300 in interest. Assuming an
  inflation rate of 4, it will cost you an
  additional 400, or a total of 10,400 to
  purchase the same amount of goods you could have
  purchased for 10,000 a year earlier.

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Components of the Risk Factor

• Interest Rate Risk
• Suppose you purchase a corporate bond with a face
  value of 1,000 issued by AMR Corp, that matures
  in 2016 and pays 9 interest until maturity.
  Using the following formula, you can calculate
  the dollar amount of annual interest for the AMR
  bond
• Dollar amount of annual interest Face value x
  Interest rate
• 1,000 x 9 90

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Components of the Risk Factor

• Interest Rate Risk
• If bond interest rates for comparable bonds
  increase to 10, the market value of your 9 bond
  will decrease as follows
• Approximate market value Dollar amount of
  annual interest
• 
  
  Comparable Interest Rate
• 
  
  90 900
• 
  
  10

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Components of the Risk Factor

• Market Risk
• Global Investment Risk

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Investment Philosophies
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Best Time to Sell

• Take profits
• Cut losses
• If wouldnt buy it now, sell it