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December Sessions Personal Risk Tolerance & Asset Allocation – December 7 th Mutual Funds – December 14 th Mortgages: Refinancing & Reverse – December.

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Presentation on theme: "December Sessions Personal Risk Tolerance & Asset Allocation – December 7 th Mutual Funds – December 14 th Mortgages: Refinancing & Reverse – December."— Presentation transcript:

1 December Sessions Personal Risk Tolerance & Asset Allocation – December 7 th Mutual Funds – December 14 th Mortgages: Refinancing & Reverse – December 21 st 1

2 Solid Finances Sponsors MSU Extension MSU Human Resources This program is made possible by a grant from the FINRA Investor Education Foundation through a partnership with United Way Worldwide. 2

3 Investment Risks 3

4 Practice Question A: My Age is: 1.Under Over 60 4

5 Question B: Do you select the investments for your employer sponsored retirement plan? 1.Yes 2.No 3.Partly 5

6 Question C: Do you select your investments for any other accounts? 1.Yes 2.No 6

7 Question D: When did you last visit with an investment advisor in person? 1.In the past 0-5 months 2.In the past 6-11 months 3.Over 12 months ago 4.Never 7

8 Question E: When did you last get investment advice over the phone, internet or mail? 1.In the past 0-5 months 2.In the past 6-11 months 3.Over 12 months ago 4.Never 8

9 Why not just avoid all risk of losing your investment? There is risk in every investment option. 9

10 Two Main Types of Risk Risk of losing some or all of initial investment – Investment Risk Loss of purchasing power – Inflation Risk 10

11 Two Main Types of Risk Risk of losing some or all of initial investment – Investment Risk Loss of purchasing power – Inflation Risk 11

12 Types of Risks Systemic Risks – Risks that affect large sectors of the economy – Examples: Inflation Risk, Currency Risk Non-Systemic Risks – Risks that affect relatively small parts of economy – Examples: Management, Natural Disasters 12

13 Systemic Risk: Inflation Risk Risk that the purchasing power of your assets will decline. – Buy a gallon of milk for $1.50 vs. $3.00 Investments particularly impacted by Inflation risk: Money in the mattress 13

14 Inflation Risk Example Bob has $10 Lunch $8 Coke $1 Candy Bar $1 Jane has $15 Lunch $12 Coke $2 Candy Bar $2 14

15 Question F: Who has more purchasing power? 1.Bob 2.Jane 3.Equal 15

16 Systemic Risk: Interest Rate Risk Risk that interest rates will decline after you purchase an investment. 16

17 Reinvestment Risk Example – You buy a one year bond paying 4% on January 1 st – Rates on similar investments decline to 3% over the summer – When you reinvest the proceeds of the 4% bond…you get a lower rate. 17

18 Resale Risk Example – You buy a 5 year bond for $1,000 paying 3% on January 1 st – Rates for new similar bonds rise to 5% by January of – You want to sell the bond in March of The resale value of the 3% bond declines. 18

19 Systemic Risk: Currency Risk Risk that the value of investments in “non-U.S. Dollar investments” declines in dollar terms. 19

20 Exchange Rate Risk A US company earns 10,000 British pounds of profit in London. – Currently, 1 pound can be exchanged for $1.55 – The company can exchange the 10,000 pounds for $15,500 dollars. 20

21 Exchange Rate Risk – If the exchange rate changes to $1.45 – The 10,000 pounds of profit can now be converted to $14,500. – The profit in US dollars declined by 6.5%. 21

22 Systemic Risk: Liquidity Risk Risk that you have difficulty converting your investment to cash. Examples: – Real Estate, Collectables, Stock of non-publicly companies, Specialty Crops, etc. 22

23 Systemic Risk: Sociopolitical Risk Risk that political decision cause your investment to decline in value. 23

24 Sociopolitical Risk Examples A Libyan oil well owned by a US company is “nationalized” by a new government. A company exports beef to Korea and the Korean government places restrictions on beef imports from the US. Due to pirates, your company has to take a longer shipping route to deliver products. 24

25 Question G: Which Systemic Risk are you most concerned about? 1.Inflation 2.Interest Rate 3.Sociopolitical 4.Liquidity 5.Exchange Rate 25

26 Non-Systemic Risks Risks isolated by to a few companies, regions, etc. Management, Credit Risk, Geographical 26

27 Non-Systemic Risk: Management Risk that the management of a particular company makes bad decisions. Examples: – Enron – Bernie Madoff – Touch America 27

28 Non-Systemic Risk: Credit Risk Risk that issuer will not complete the promised bond payments. Examples: – Greece – Two Rivers Development Company – GM 28

29 Other Risks: Geographical Risk that a natural disaster impacts a specific company or region. Examples: – Floods – Japan’s Tsunami 29

30 Key Points All investments have risk. Many investments are affected by the same factors. – Systemic Risks Different investments have different risks. – Non-Systemic 30

31 Questions 31


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