Presentation on theme: "Chapter 13: Investment Fundamentals and Portfolio Management"— Presentation transcript:
1 Chapter 13: Investment Fundamentals and Portfolio Management
2 ObjectivesSummarize 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 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?
4 Steps to Create a Personal Investing Plan My investment goals are:____________________Step 2By ___________, I willhave obtained $_______.Step 3I have $__________available to invest.Date _____________Step 9Continue evaluating choices.Step 4Possible investment alternatives:1._________________2._________________3._________________4._________________Step 8Final decision1._______________2._______________Step 6Projected return on each alternative1.__________2.__________3.__________4.__________Step 5Risk factors for each alternative1.____________________2.____________________3.____________________4.____________________Step 7Investment decision1._______________2._______________3._______________
5 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.
6 Preparations for Investing WHY PEOPLE INVEST:Achieve financial goalsIncrease current incomeGain wealth and financial securityHave funds available for retirement
7 Preparations for Investing PREREQUISITES TO INVESTING:Live within meansContinue savings programEstablish lines of creditCarry adequate insuranceEstablish investment goals
8 Preparations for Investing InterestDividendsRentCapital gain/lossRate of return or yieldINVESTMENT RETURNS:
9 Performing a Financial Checkup Learn to live within your meanspay off high interest credit card debtProvide adequate insurance protectionStart an emergency fundthree to nine months of living expensesHave other sources of cash for emergenciesline of creditcash advance
10 Getting Money to Start an Investing Program Pay yourself firstParticipate in elective savings programsPayroll deductionelectronic transferMake a special effort to save one or two months a yearTake advantage of windfallsInvest half of your tax refund
11 Value of Having a Long-Term Investing Program Many people don’t start investing because they only have a small amount to invest but....Small amounts invested regularly become large amounts over time
12 Personal Investment Philosophy Handling riskUltraconservative strategiesConservativeModerateAggressive
13 Investment Selection Lend or own Short-term or long-term Choose a vehicle
14 Factors That Affect Investment Decisions Safety - minimal risk of lossRisk - uncertainty about the outcomeinflation riskinterest rate riskbusiness failure riskmarket risk
15 Income From Investments SafestCDssavings bondsT-billsHigher potential incomemunicipal bondscorporate bondspreferred stocksmutual fundsreal estate
16 Investment Growth and Liquidity increase in valuecommon stockgrowth stocks retain earningsbonds, mutual funds and real estateLiquidityease and speed to convert an asset to cash
18 Major Factors That Affect Rate of Return INVESTMENT RISK:PureSpeculativeRisk pyramid
19 Major Factors That Affect Rate of Return INVESTMENT RISK TYPES:FinancialMarket volatilityPoliticalInflationDeflationInterest rate
20 Major Factors That Affect Rate of Return INVESTMENT RISK:Random or unsystematicDiversificationMarket or systematic
21 Major Factors That Affect Rate of Return LeverageTaxesMarginal tax rateTaxable vs. tax-free incomeBuying and selling costs/commissionsInflation
22 Major Factors that Affect Rate of Return CALCULATE REAL RATE OF RETURN:Identify before-tax returnSubtract marginal tax rateObtain net return after taxesSubtract estimate of inflationObtain real rate
24 Investment Alternatives What is stock?part ownership in a companythe money you pay for shares of stock provides equity capital for the business
25 Investment Alternatives (continued)What is a bond?a loan to a corporation, the federal government, or a municipalityThe interest is paid twice a year, and the principal is repaid at maturity (1-30 years)You can keep the bond until maturity or sell it to another investor
26 Investment Alternatives (continued)What is a mutual fund?investors’ money is pooled and invested by a professional fund manageryou buy shares in the fundprovides diversification to reduce riskfunds range from conservative to extremely speculativematch your needs with a fund’s objective
27 Monitor Your Investments Read your account statementsChart the value of your investmentsMaintain accurate and current recordsCalculate the current yield %annual income from investmentmarket value of the investment
28 Sources of Investment Information NewspapersBusiness PeriodicalsGovernment PublicationsCorporate ReportsStatistical AveragesInvestor Services and newslettersStandard and Poor’s stock reportsValue LineMoody’s investment service
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