Managing Your Investments

1
Managing Your Investments

• Money Management
• Chapter 11 Notes

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Got the Safety Net, Now What?

• Once youve got a bit of emergency cash stashed
  away in some type of conservative savings plan
  then what?
• TIME TO INVEST, BABY!
• Investments can run the gamut from conservative
  to risky. The more risk you are willing to take,
  the bigger the potential gain AND the bigger the
  potential loss!
• In this chapter you will learn about the basic
  types of investment alternatives!

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Investment Essentials

• Personal investing is the use of your savings to
  earn a financial return.
• The overall objective, is obviously, to earn MORE
  MONEY with your money!
• Initial savings are cautious and conservative.
  Once you have a safe cushion stashed away, more
  risky (and more profitable) investments can be
  made.

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Essentials of Investing
Type of Investment Strategy Considerations
Put-And-Take Account Short-Term Savings (3-6 months pay) Safety Security, future expected unexpected needs
Beginning Investments Conservative, Low-Risk Diversification Tax Advantages
Systematic Investments Retirement Planning, Kids College Fund Long-Range Growth, Future Financial Security
Speculation Taking chances to realize quick profit Risk Uncertain future income, Short-Term profit potential
EVERYTHING ELSE -- SPEND AND ENJOY! ?
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Reasons for Investing

• To supplement your income
• To make a profit and earn a better return on your
  savings!
• (You can do better than standard bank interest
  rates!)
• To minimize tax burdens now and in the future!
• To provide income for retirement
• To stay ahead of inflation
• Inflation is a rise in the general level of
  prices over time. You want to seek out
  investments that are growing faster than the rate
  of inflation!
• Recent Inflation Rates http//inflationdata.com/I
  nflation/Inflation_Rate/CurrentInflation.asp

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Risk

• Investing involves some risk!
• The greater the risk you are willing to take the
  greater the potential returns.
• Risk in an investment means a measure of
  uncertainty about the outcome.
• On the other hand, safety in an investment means
  minimal risk of loss.
• Different types of risk include
• Short-Term vs. Long-Term Risk, Inflation and
  Interest Rate Risk, Political Risk, Market Risk,
  and Company or Industry Risk.
• How comfortable you are with risk will play a key
  factor in your decision-making as an investor.

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Investment Strategies

• Many individuals NEVER start an investment plan
  because they dont think they have enough money!
• THAT IS A HUGE MISTAKE!
• Even small amounts of money can do miracles over
  time!
• Investing wisely over a period of time is hard
  the suggestions that follow, however, may make
  this task easier for you!

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Criteria for choosing an investment

• The Dream investment would accomplish all of the
  following
• Safety (Minimal risk of loss)
• High Liquidity
• High Return (investment income)
• Growth in value gt inflation
• Reasonable purchase price
• Has Tax Benefits
• Obviously, this dream investment is hard to
  obtain. You may not find an investment that does
  all of this. BUT the more of these criteria that
  are met, the more desirable the investment!

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Wise Investment Practices

• People commonly make one or more serious mistakes
  in connection with their investment practices.
  Some are minor others are serious. If you wish
  to avoid mistakes follow this advice
• Define your financial goals
• Go slowly
• Follow through
• Keep good records
• Seek good investment advice
• Keep investment knowledge current

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Sources of Financial Information

• Newspapers most newspapers have finance
  sections.
• The Wall Street Journal is a top-notch daily
  resource. Barrons is a weekly newspaper that has
  great info. Both of these are available online as
  well!
• The most widely reported and followed financial
  index is the Dow Jones Industrial Index. Often
  simply called the Dow, it is an index of the
  price movements of thirty major industrial
  corporate stocks listed on the New York Stock
  Exchange.
• The New York Stock Exchange Index and the NASDAQ
  are also very widely reported. These measure the
  overall impact of EVERY stock traded on that
  exchange on a given day.
• Financial Magazines For Example Money,
  Fortune, Kiplingers
• Annual Reports corporations are required to
  provide financial information to potential
  investors once a year. These reports outline the
  financial condition of the company.

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Brokers and Advisors

• Full-Service Brokers buy and sell stocks for
  you at a price, provide you with research and
  advice.
• Discount Brokers buy and sell stocks for you at
  a price. Usually provides little to no advice to
  clients.
• Financial Advisers professional investment
  planners who are trained to give intelligent
  overall investment advice based on your goals,
  age, net worth, occupation, investment
  experience, lifestyle, family responsibilities.

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Investment Options Stocks and Bonds

• Stocks -- represent ownership in a corporation.
• A share of stock is a unit of ownership
• The owner of stock is called a stockholder or a
  shareholder
• When you are a stockholder, you will share in the
  companies profits, which can be paid to you with
  higher stock prices and/or dividends.
• We will go into much more detail on stocks in
  Chapter 12!
• Bonds are debt obligations of corporations or
  governments.
• For example, a corporation may sell bonds to
  raise money. You give them money for the bond.
  They agree to pay you back the price of the bond
  PLUS a given interest rate after a set period of
  time has passed. (Ex A 1,000, 1 year, 6 bond)
• We will go into more detail on bonds in Chapter
  13!

13
Government Savings Bonds and Treasury Securities

• Government Savings Bonds When you buy a savings
  bond you are, in effect, loaning money to the
  U.S. Government.
• The most common type of Bond is the discount
  bond. These are bonds purchased for less than
  their maturity value.
• For example you pay 25 for a bond that will be
  worth 50 at maturity. You hang on to it until it
  matures (usually ten years).
• Very safe option with a decent return, better
  than most cds and traditional savings accounts.
  Also, interest earned is exempt from state and
  local taxes (you do have to pay federal tax
  though!)
• Treasury Securities U.S. Treasury Bills, Notes,
  and Bonds are available. Maturities range from a
  few months up to to10 years. Interest Rates vary
  but go up as the length of time until maturity
  goes up.
• Note, the interest earned on these types of
  investments is also exempt from state and local
  income taxes. (Not federal though!)

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Mutual Funds and Retirement Plans

• Suppose you have 500 to invest but do not know
  which stocks or bonds to buy, when to buy them,
  or when to sell them?
• You can buy shares in a large, professionally
  managed company called a mutual fund.
• A mutual fund pools the money of many investors
  and buys a large selection of securities that
  meet the funds stated investment goals.
• Two major advantages of a mutual fund are
• Professional Management AND
• Diversification which means investment in a
  wide variety of securities.
• Mutual Funds are the fastest growing segment of
  the United States Financial Services Industry. We
  will go into more detail about Mutual Funds in
  Chapter 14!
• Retirement Plans There are a wide variety of
  retirement plans that you can put money into
  regularly. Most of these plans have great tax
  advantages. They allow you to avoid paying taxes
  on that income until you actually withdraw it
  from the retirement account years later. That can
  be huge! We will discuss retirement plans in more
  detail in Chapter 15.

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Real Estate

• Many people like to invest in Real Estate
  houses and land!
• While this type of investment usually represents
  a large and often illiquid investment of cash, it
  has proven (over time) to be protection against
  inflation in most parts of the U.S.
• Real Estate investments also have great tax
  benefits. Certain costs of home ownership are
  deductible and therefore lower taxable income.
  That is huge!
• We will go into more detail about real-estate
  investing in Chapter 14.