2Section 13.1 Investment Strategies ObjectivesExplain factors to consider when evaluating investments;Describe principles for investing wisely; andIdentify ways to learn more about investing.
3Investing - means putting money to work so that it makes even more money for you over timeBasic Characteristics to Evaluate InvestmentsReturn - income that an investment producesPay returns at regular intervalsSell an investment for a profitTax advantage
4Basic Characteristics to Evaluate Investments Continued Liquidity - ease of which assets can be converted to cashVolatility - degree to which an investment’s return or value may change (Figure 13-1)Risk - possibility of variation in the return on your investment; investments do not come with guaranteesConservative – lower risk, lower returnsRelated to Volatility and LiquidityInflation
5Principles of Investing Continued Identify Your ObjectivesAmount you can afford to investTimelineShorter – less risk; lower returnsLonger – more volatile; higher risk; potential for better returnsMore than one goal
6Principles of Investing Continued Focus on a StrategyIncome – pay relatively dependable returns at regular intervalsGrowth – put money into investment that may not pay now, but will grow in value in timeTax reduction
7Principles of Investing Continued Diversify your Investments – invest in a variety of investments to reduce your riskPortfolio – collection of investments that is diversified and well balancedAsset Allocation – percentage of your portfolio for each type of investment
8Learning About Investing Reliable media sources – books, magazines, newspapers, radio, TV shows, websitesCourses in financial planning – credit and noncredit coursesInvestment clubs – group of people who meet regularly to learn about investing and to make investments togetherPool money, share risks and rewards, split task of researching investments, vote, experience investors help new investors NAIC
9Professional advisors – banks, brokerage firms, and Professional advisors – banks, brokerage firms, and independent financial plannersCheck credentialsEvaluate the adviceDecide how you want to invest your money
10Section 13.2 Retirement Planning ObjectivesCompare and contrast investment options designed for retirement planning; andExplain the need to take an active role in retirement planning.
11Social Security Retirement BenefitsAdministered by the federal governmentFunded through a tax paid by citizens who are currently workingBenefits are influenced by:How long you workEarned incomeAge at which you applyEarliest you can apply is 67, applying early will reduce benefits
12Pension Plans – retirement plan offered to a company’s employees Both contribute, not taxed until employee draws on the accountDefined-benefit plan: (Not Common) employer assumes all risk; employer pays retiring employee a specific amount each month based on salary history and years of employmentDefined-contribution plan: employee assumes all risk; employee chooses to contribute into a retirement fund that is invested on their behalf. Employers may contribute.
13401 (K) Plans – type of defined-contribution pension plan to which employee contributes on a pretax basis.By having a percentage of your pay put into the plan, you reduce the amount of income that is subject to taxSome employers will match up to a certain percentage59 ½If you leave, you can transfer benefits into another retirement planVested - entitled to keep plan benefits; must work with company for a certain number of years to become fully vested
14Other Defined-Contribution Plans Profit-sharing plan – employer allocates a portion of the company’s annual profits to each participating employee; added - incentive to work toward achieving company’s goalEmployee Stock Ownership Plan (ESOP) – give participants shares of stock in the company; may not sell until you leave company or retire; disadvantage – not diversified
15Personal InvestmentsIndividual Retirement Accounts (IRA) – personal savings plan that enables workers to set aside money for retirement; limited by law to specific dollar amountTraditional – Tax-deductible; taxed when withdrawn; made up to 70 1/2 & withdrawals must begin; prior to 59 ½ subject to penaltiesRoth – not tax-deductible, but earnings are tax-free; can make tax free withdrawals after 5 yrs, if 59 ½ or can use the money to become first time home owner
16Personal Investments Continued Keogh Plans – is a federally approved, defined-contribution, tax-deferred retirement plan designed specifically for self-employed people.Early withdrawals are subject to penalties.
17Taking Charge of Retirement Planning Start EarlyFinal balance in your retirement account is determined not so much by the total amount invested, but by the number of years the investment is allowed to grow.Review Your Plan RegularlySet your goalsWhen to retire?How much of your income?How long this income will need to last?
18Taking Charge of Retirement Planning Continued Make estimates and calculations.Using calculations will allow you to determine if you need other sources of income to live after retirementAdjust your plan if neededSet aside more if needed for a higher return on your investment
19Section 13.3 The Stock Market ObjectivesExplain basic concept of stock ownership and the stock market;Evaluate the risks involved in stock ownership; andDescribe how to research stocks.
20Stock Market BasicsCompany sells stock instead of borrowing money from a bank.Stock – ownership interest in the corporationShares – individual units of ownership, available for purchaseShareholders – investors who purchase shares, part owners
21How Stocks are TradedInitial public offering – when first put on market to sell, it’s offered by companyStock market – organized trading of stocks, like an auctionStock exchange – central location where stocks are sold on a trading floor; Wall Street – New York Stock Exchange (NYSE); American Stock Exchange (AMEX)Listed - meet requirements for being traded on a particular stock exchangeOver the Counter Stocks – not listed; NASDAQ (list stocks) not sold on trading floor, traded over phone or Internet
22Regulating the Stock Market – Securities and Exchange Regulating the Stock Market – Securities and Exchange Commission (SEC) federal agency that protects interests of investors by regulating stock exchanges, OTC stocks, investment advisors, any companies financial recordsReturns on StocksDividends – payment to shareholders that represents a part of the company’s net profits; usually paid 4 times a year in a check or more stock sharesCapital gains or losses – buy low sell high = gain; buy high sell low = loss
23Working with a Stockbroker (individual or firm that will Working with a Stockbroker (individual or firm that will buy & sell stock for clients according to their instructions)Full service – provide investment advice in addition to handling stock transactionsDiscount brokers – offer basic service and less expensiveInternet – make trades; research materialsOther Ways to Buy Stock401 K – partially or fully invest in stocksESOPMutual FundsDirect stock plan – buy directly from company; fee less than broker
24The Risks of Owning Stocks - volatility Why Stock Prices Change - number of people who want to own stock, supply and demandThe company’s health – well managed and business thrivingIndustry trends – new federal regulations that impose on businessEconomic factors – low interest, during recession stocks fallNational and world events – election of new leaders, trade legislation, war
25Tracking the Stock Market NASDAQ Composite Index – 5,000 domestic stocksDow Jones Industrial Average – 30 industries: financial services, technology, retail, entertainment, and consumer goodsStandard & Poor’s 500 – 500 prominent industrial, transportation, financial, and utility stocks
26Types of Stock and Their Risks Common stock – entitles shareholders to vote on any matter affecting the company; dividends vary, increasing risk and potential returnPreferred stock – no voting rights; has less risk because dividend rate is fixedBlue chip – low in risk because company has proven track record of reliable earnings and dividendsGrowth stocks – new and innovative companies that are growing – riskyPenny stocks - less than a dollar a share, high risk- should be avoided
27Minimizing the RisksLong term investment – don’t invest money that you’ll need in five years, over ten year period-stocks offer higher return than any other form of investmentDiversify portfolio – not just companies, but industriesResearchDon’t worry about day-to-day up and downs – ride out short-term volatility
28Researching StocksFirst hand experience - Have you used their product? Did you like it?Company’s annual report – look on website; shows goal and results plus financial dataStock quotes – ticker symbol uniquely identifies each stockRead business magazines and newspapers
29Section 13.4 Other Investments Objectives Distinguish between different types of bonds;Explain the advantages of mutual funds;Describe insurance investment products; andEvaluate the risks of investing in real estate, commodities, and collectibles.
30Bonds - corporation and government can obtain funds by issuing certificates of debtsIssue bond – borrow moneyBuy bond – invest money and receives original investment plus additional amount by a certain date = maturity date
31Types of BondsSavings bonds – very safe; thought of as a form of savings instead of investmentTreasury securities – Guaranteed by U.S. government, not taxed; auctioned like stocks (Figure 13-16)Municipal bonds - issued by local and state government; federal tax free and maybe state and local taxesCorporate bonds – minimum $1000; higher rate than government bond, but riskier
32Bond Ratings – S & P’s Rating Service & Moody’s Investor Service Rate the issuer’s ability to repay the debt with interestRate from AAA (highest) to Aaa (lowest) riskHighest = investment-grade bondsLowest = high-yield bonds (return) or junk bonds (high risk)Mutual Funds – group of investments that is held in common by many individual investorsAdvantagesDiversificationProfessional management
33Mutual Fund StylesMoney market funds – restricted to certain types of short-term investment; maintain value of investment amountBond funds – fixed-income funds; risk and return vary depending on type of bonds investedStock funds – Aggressive growth funds- highest risk; growth funds – expected to rise; equity income – current income from their funds; index funds – included on an index, lower management feeInternational funds – foreign companies or governments
34Choosing a mutual fundRead the prospectus – legal document that provides potential investors with information about a mutual fund or other securityCheck out the feesLoad – sales charge for fund transaction
35Insurance as an investment Endowment InsuranceEducation or retirementPaying for so many years or reach a certain age, paid abenefit equal to the face valueIf you die, benefit is paid to the benefactors
36Insurance as an investment Continued Annuities – contract purchased from an insurance companyAfter 59 ½, provide regular paymentsIf you die, benefit is paid to the benefactorsNot high return, but safeFixed – fixed rate of returnVariable – variable rate of return depending on how well insurance companies performedEquity-indexed – guaranteed minimum with chance of higher returns based on the stock market index
37More Investment Options Real Estate – land and any structures on ithomes, apartment buildings, office and retail space, rentalsUsually rises with inflationDisadvantage – not liquid, time consuming and expensive to maintain property, irresponsible renters, not diversified
38More Investment Options Continued Commodities – basic economic goods bought and sold in quantityWheat, corn, iron ore, natural gas, precious metalsFuture contract- agreement to deliver a particularly commodity at a specific price at a certain date in the futureChicago Board of Trade – largest commodities exchange in U.S.Regulated by Commodities Futures Trading Commission (CFTC)Risky, but high return
39More Investment Options Continued CollectiblesExamplesMight be sold for profit, but usually the value does not go up oftenHave to find a willing buyerEnjoy collection more so than value of investment
40Chapter 13.5 Estate Planning ObjectivesExplain the benefits of estate planning;Describe the purpose of a will and other estate planning documents; andCompare ways to plan for funeral expenses.
41What is Estate Planning? Estate – The assets and liabilities left behind by a deceased personEstate Planning – is the process of making legal and financial arrangements for how one’s property should be administered before and after deathHelps people provide financially for loved ones, favorite organization, or causeReduce the time and legal complicationsAddresses what happens if a person becomes incapable of making financial and health decisions
42Steps in Estate Planning Review your assets and liabilities by creating a balance sheetThink about objectives and gather informationPrepare the necessary legal and financial documents (with an attorney)Preparing a WillWill – a legal document in which a person directs how his or her estate is to be distributed after death
43Functions of a WillIdentify an executorExecutor – is the individual who is in charge of handling the affairs of an estateIdentify a guardian for childrenYounger than 18 years oldGive instructions for liabilitiesOutstanding debts or obligations must be paidGive instructions for assetsBeneficiary – a person or group designated to receive some or all of a deceased person’s assets
44If there is No WillIntestate – person who dies without a valid willTime consuming and expensiveMay not be deceased persons wishesAfter Preparing the WillRequirement:Must be typed, signed, and datedWitnesses (not beneficiaries) of signingKept in a place accessible to your executorA copy in a safe place (deposit box)Codicil – legal amendment to a will (changes)
45Prepared Other Documents Living Trust – legal arrangement that can serve as an alternative to a willTrustee – someone who holds and manages assets for someone elseProbate – legal process involved in filing a willDurable Power of Attorney – a legal document assigning someone the right to act on a person’s behalfLiving Will – legal document that outlines a person’s wishes for medical treatment under specific circumstances
46Funeral PlanningPrepaid FuneralsAdvantagesConsumers can pay today’s prices instead of inflated future pricesDisadvantagesThe money is tied up for years and earns no interestMay not be transferable if you relocateFunerals may go out of businessInsurance PoliciesCoverage for funeral costLetter of Final InstructionsLeave in a place for the people to find