1. Chapter 13: Investment Fundamentals and Portfolio 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. 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 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 6
Projected return on each alternative
1.__________
2.__________
3.__________
4.__________
Step 5
Risk factors for each alternative
1.____________________
2.____________________
3.____________________
4.____________________
Step 7
Investment decision
1._______________
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 goals
Increase current income
Gain wealth and financial security
Have funds available for retirement

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

8. Preparations for Investing
Interest
Dividends
Rent
Capital gain/loss
Rate of return or yield
INVESTMENT RETURNS:

9. 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

10. 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

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 risk
Ultraconservative strategies
Conservative
Moderate
Aggressive

13. Investment Selection Lend or own Short-term or long-term
Choose a vehicle

14. 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

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

16. Investment Growth and Liquidity
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

17. Commodities Junk bonds Options
Investment Pyramid
High risk
Commodities Junk bonds Options
Rental property
Utility stocks
Government
Securities
Corporate bonds
CDs
Money Market
Savings Accounts
Cash
High Quality
Stocks
Mutual funds
Low risk

18. Major Factors That Affect Rate of Return
INVESTMENT RISK:
Pure
Speculative
Risk pyramid

19. Major Factors That Affect Rate of Return
INVESTMENT RISK TYPES:
Financial
Market volatility
Political
Inflation
Deflation
Interest rate

20. Major Factors That Affect Rate of Return
INVESTMENT RISK:
Random or unsystematic
Diversification
Market or systematic

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

22. 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

23. Management Strategies — Long-Term Investors
Business-cycle timing
Dollar-cost averaging
Portfolio diversification
Asset allocation

24. Investment Alternatives
What is stock?
part ownership in a company
the 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 municipality
The 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 manager
you buy shares in the fund
provides diversification to reduce risk
funds range from conservative to extremely speculative
match your needs with a fund’s objective

27. Monitor Your Investments
Read your account statements
Chart the value of your investments
Maintain accurate and current records
Calculate the current yield %
annual income from investment
market value of the investment

28. Sources of Investment Information
Newspapers
Business Periodicals
Government Publications
Corporate Reports
Statistical Averages
Investor Services and newsletters
Standard and Poor’s stock reports
Value Line
Moody’s investment service

29. Investment Philosophies

30. Best Time to Sell Take profits Cut losses
“If wouldn’t buy it now, sell it”