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Chapter 13: Investment Fundamentals Garman/Forgue Personal Finance Ninth Edition PPT slide program prepared by Amy Forgue and Ray Forgue.

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Presentation on theme: "Chapter 13: Investment Fundamentals Garman/Forgue Personal Finance Ninth Edition PPT slide program prepared by Amy Forgue and Ray Forgue."— Presentation transcript:

1 Chapter 13: Investment Fundamentals Garman/Forgue Personal Finance Ninth Edition PPT slide program prepared by Amy Forgue and Ray Forgue.

2 Copyright ©Houghton Mifflin Company. All rights reserved.13 - 2 Learning Objectives 1.Explain how to get started as an investor. 2.Discover your own investment philosophy. 3.Identify the kinds of investments that match your interests.

3 Copyright ©Houghton Mifflin Company. All rights reserved.13 - 3 Learning Objectives 4.Describe the major factors that affect the rate of return on investments. 5.Decide which of the five long-term investment strategies you will utilize. 6.Create your own investment plan.

4 Copyright ©Houghton Mifflin Company. All rights reserved.13 - 4 Starting Your Investment Program Investing is more than saving. –Savings –Investing –Securities –Stocks –Portfolio Are you ready to invest?

5 Copyright ©Houghton Mifflin Company. All rights reserved.13 - 5 Starting Your Investment Program Decide why you want to invest. Where can you get the money to invest?

6 Copyright ©Houghton Mifflin Company. All rights reserved.13 - 6 Starting Your Investment Program What investment returns are possible? –Financial (or Business) Risk –Total Return –Current Income –Interest –Rent

7 Copyright ©Houghton Mifflin Company. All rights reserved.13 - 7 Starting Your Investment Program What investment returns are possible? –Dividend –Capital Gain –Capital Loss –Rate of Return (or Yield)

8 Copyright ©Houghton Mifflin Company. All rights reserved.13 - 8 Your Investment Philosophy How to handle investment risk –Pure risk –Speculative risk –Investment risk

9 Copyright ©Houghton Mifflin Company. All rights reserved.13 - 9 What is your Investment Philosophy? Are you a conservative Investor? –Preservation of capital Are you a moderate investor? –Risk indifferent Are you an aggressive investor? –Risk seeker

10 Copyright ©Houghton Mifflin Company. All rights reserved.13 - 10 Your Investment Philosophy Should you take an active or passive investing approach?

11 Copyright ©Houghton Mifflin Company. All rights reserved.13 - 11 Identify the kinds of investments you want to make. Do you want to lend or own? –Lend = Bonds –Debts –Fixed maturity –Fixed income –Equities Choose investments for their components of total return.

12 Copyright ©Houghton Mifflin Company. All rights reserved.13 - 12 Random and Market Risk Random (or unsystematic) risk Diversification Systematic (or market or undiversifiable) risk

13 Copyright ©Houghton Mifflin Company. All rights reserved.13 - 13 Other Types of Investment Risks Business failure (or financial) fisk Inflation (or purchasing power) risk Time risk Business cycle risk

14 Copyright ©Houghton Mifflin Company. All rights reserved.13 - 14 Other Types of Investment Risks Market-volatility risk Liquidity risk Reinvestment risk Marketability risk

15 Copyright ©Houghton Mifflin Company. All rights reserved.13 - 15 Returns Transaction costs reduce returns –Commissions Leverage may increase returns.

16 Copyright ©Houghton Mifflin Company. All rights reserved.13 - 16 The Tax Consequences in Investment Fundamentals After-Tax Return Income Versus Capital Gain Tax-Deferred Investments Tax-Exempt Income Tax-Exempt Investments

17 Copyright ©Houghton Mifflin Company. All rights reserved.13 - 17 Establish Your Long-Term Investment Strategy Real Rate of Return Securities Markets Bear Market Bull Market

18 Copyright ©Houghton Mifflin Company. All rights reserved.13 - 18 Establish Your Long-Term Investment Strategy Long-term investors understand market timing. –They are market timers. Calculate the real rate of return (after taxes and inflation) on investments.

19 Copyright ©Houghton Mifflin Company. All rights reserved.13 - 19 Establish Your Long-Term Investment Strategy Strategy 1: Buy and hold anticipates long-term economic growth. –Buy-and-Hold (or Buy to Hold)

20 Copyright ©Houghton Mifflin Company. All rights reserved.13 - 20 Establish Your Long-Term Investment Strategy Strategy 2: Dollar-cost averaging buys at “below-average” costs. –Dollar-Cost Averaging (or Cost Averaging) –Below-Average Costs Dollar-cost averaging in a fluctuating market –Average Share Price –Average Share Cost

21 Copyright ©Houghton Mifflin Company. All rights reserved.13 - 21 Establish Your Long-Term Investment Strategy Strategy 3: Portfolio diversification reduces portfolio volatility. Strategy 4: Asset allocation keeps you in the right investment categories at the right time.

22 Copyright ©Houghton Mifflin Company. All rights reserved.13 - 22 Establish Your Long-Term Investment Strategy Strategy 5: Modern portfolio theory evolves from asset allocation –Modern Portfolio Theory (or MPT) –Monte Carlo Analysis

23 Copyright ©Houghton Mifflin Company. All rights reserved.13 - 23 The Top 3 Financial Missteps In Investing People slip up in when they do the following: 1. Invest only money that is left over at the end of the month. 2. Follow a conservative investment philosophy for long-term goals. 3. Fail to regularly rebalance the assets in their portfolio.

24 Copyright ©Houghton Mifflin Company. All rights reserved.13 - 24 Good Money Habits in Investing Fundamentals Sacrifice some of your income by investing for your future needs and lifestyle. Start early in life to invest in a diversified portfolio of assets consistent with your investment philosophy. When investing for the long term, willingly accept more risk.

25 Copyright ©Houghton Mifflin Company. All rights reserved.13 - 25 Good Money Habits in Investing Fundamentals Invest regularly through your employer’s retirement plan using an asset allocation strategy. Invest no more than 10 percent of your portfolio in your company stock, or any single company stock, for that matter.

26 Copyright ©Houghton Mifflin Company. All rights reserved.13 - 26 Good Money Habits in Investing Fundamentals Follow the buy-and-hold long-term approach to investing. Invest in stocks, mutual funds, bonds, and real estate, not life insurance or annuities.


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