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Chapter 13: Investment Fundamentals and Portfolio Management

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Chapter 13: Investment Fundamentals and Portfolio Management Objectives Summarize reasons why people invest, what is required before beginning, how returns are earned ... – PowerPoint PPT presentation

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Title: Chapter 13: Investment Fundamentals and Portfolio Management


1
Chapter 13 Investment Fundamentals
andPortfolio Management
2
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.

3
Quotes
  • It is fundamental to human nature that we fear
    loss much more than we hope for gain. Nick
    Murray
  • Losing money feels twice as bad as making money
    feels good. Richard Thaler
  • Fear has a greater grasp on human action than
    does the impressive weight of historical
    evidence. Jeremy Siegel
  • The single most important variable in the quest
    for equity investment success is also the only
    variable you ultimately control your own
    behavior. Nick Murray

4
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?

5
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._______________
6
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.

7
Preparations for Investing
WHY PEOPLE INVEST
  • Achieve financial goals
  • Increase current income
  • Gain wealth and financial security
  • Have funds available for retirement

8
Preparations for Investing
PREREQUISITES TO INVESTING
  • Live within means
  • Continue savings program
  • Establish lines of credit
  • Carry adequate insurance
  • Establish investment goals

9
Preparations for Investing
  • Interest
  • Dividends
  • Rent
  • Capital gain/loss
  • Rate of return or yield

INVESTMENT RETURNS
10
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

11
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

12
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

13
Personal Investment Philosophy
  • Handling risk
  • Ultraconservative strategies
  • Conservative
  • Moderate
  • Aggressive

14
Investment Selection
  • Lend or own
  • Short-term or long-term
  • Choose a vehicle

15
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

16
Income From Investments
  • Safest
  • CDs
  • savings bonds
  • T-bills
  • Higher potential income
  • municipal bonds
  • corporate bonds
  • preferred stocks
  • mutual funds
  • real estate

17
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

18
Investment Pyramid
High risk
Lowrisk
19
Major Factors That Affect Rate of Return
  • INVESTMENT RISK
  • Pure
  • Speculative
  • Risk pyramid

20
Major Factors That Affect Rate of Return
  • Financial
  • Market volatility
  • Political
  • INVESTMENT RISK TYPES
  • Inflation
  • Deflation
  • Interest rate

21
Major Factors That Affect Rate of Return
  • INVESTMENT RISK
  • Random or unsystematic
  • Diversification
  • Market or systematic

22
Major Factors That Affect Rate of Return
  • Leverage
  • Taxes
  • Marginal tax rate
  • Taxable vs. tax-free income
  • Buying and selling costs/commissions
  • Inflation

23
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

24
Management Strategies Long-Term Investors
  • Business-cycle timing
  • Dollar-cost averaging
  • Portfolio diversification
  • Asset allocation

25
Investment Alternatives
  • What is stock?
  • part ownership in a company
  • the money you pay for shares of stock provides
    equity capital for the business

26
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

27
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

28
Monitor Your Investments
  • Read your account statements
  • Chart the value of your investments
  • Maintain accurate and current records
  • Calculate the current yield

29
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

30
Investment Philosophies
31
Best Time to Sell
  • Take profits
  • Cut losses
  • If wouldnt buy it now, sell it
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