1. Chapter 11 Investing for Your Future
MYPF Chapter 11
19-Sept-2001
Chapter 11 Investing for Your Future
Investing Fundamentals
Exploring Investment Options
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2. Chapter 11 Investing for Your Future
Understand some investment options
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3. Savings Accounts Pros Cons access any time risk – little to none
minimum balance - $10-$50
Cons
yield – low
taxable - yes
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4. Certificates of Deposit (CDs)
What are they?
Bank pays a fixed amount of interest for a fixed amount of money during a fixed amount of time
i.e. 4.5% interest over 6 months
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5. Certificates of Deposit (CDs)
Pros
risk – little to none
simple
no fees
higher interest rate than savings
Cons
restricted access to money
penalty for early withdrawal
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6. Bonds What are they? An “IOU” certifying that you loaned money to
a corporation
municipal government
federal government
terms of repayment are outlined
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7. Bonds – cont. Corporate Bonds - risky
Sold by private companies to raise money
If company goes bankrupt, bondholders have first claim to assets, before stockholders
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8. Bonds – cont. Municipal Bonds - less risky
issued by any non-federal government
Interest paid comes from taxes or revenues from special projects
Earned interest is exempt from federal income tax
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9. Bonds – cont. Federal Government Bonds – safest
even if U.S. Government goes bankrupt, it is obligated to repay
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10. Mutual Funds What are they? How they work
professionally managed portfolios made up of stocks, bonds, and other investments
How they work
individuals buy shares, and fund uses money to purchase stocks, bonds, etc.
profits returned monthly, quarterly, or semi-annually in the form of dividends
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11. Mutual Funds Advantage
allows small investors to take advantage of professional account management and diversification normally only available to large investors
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12. Types of Mutual Funds Balanced – variety of stocks & bonds
Global Bond Fund – has corporate bonds of companies from around the world
Global Stock Fund – has stocks from companies in many parts of the world
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13. Types of Mutual Funds
Growth Fund – companies expected to increase in value – higher risk
Income Fund – stocks and bonds with high dividends & interest
Industry Fund – stocks of companies in a single industry (technology, health care, banking)
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14. Types of Mutual Funds
Municipal Bond Fund – features debt instruments of state and local governments
Regional Stock Fund – stocks of companies from one geographic region of the world (i.e. Asia or Latin America)
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15. Stocks What is stock? stock represents ownership in a company
Stockholders own a share of the company & are entitled to a share of the profits as well as a vote in how the company is run
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16. Stocks How earnings are made
Company profits may be divided among shareholders in the form of dividends
Larger profits can be made through an increase in the value of the stock on the open market
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17. Stocks
Pros
If the market value goes up, the gain can be considerable
Money is easily accessible
Cons
If market value goes down, the loss can be considerable
Selecting and managing stock often requires study and time
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18. Retirement Plans
Plans help individuals set aside money to be used after they retire
Federal income tax not immediately due on money put into a retirement account, or on the interest it makes
Income tax paid when money is withdrawn
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19. Retirement Plans
Penalty charges apply is money is withdrawn before retirement age, except under certain circumstances
Income after retirement is usually lower, so tax rate is lower
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20. Self-Managed Retirement Accounts
IRA - Individual Retirement Account
individual savings for retirement
-- tax deferred (59-1/2)
-- specified maximum contribution each year
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21. IRA Ages 22-30 (9 yrs.) Ages 31-65 (35 yrs.)
$2,000 each year = $18,000
Interest rate 9% by 65 = $579,471
Ages (35 yrs.)
$2,000 each year = $70,000
Interest rate 9% by 65 = $470,249
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22. Self-Managed Retirement Accounts
Roth IRA
While the annual contribution to this plan is not tax-deductible, the earnings on the account are tax-free after five years.
Withdraws can occur after age 59, disability, educational expenses, or purchase of first home
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23. Self-Managed Retirement Accounts
Keogh - retirement savings for self-employed
-- allowable contribution is higher than IRA
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24. Self-Managed Retirement Accounts
401K - employer sponsored account
-- deferred taxes
403(b) - not-for-profit / government
-- equivalent of 401K
employee may choose how contributions will be invested
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25. Real Estate Large and often non-liquid investment
must find buyer (time factor)
proven protection against inflation in most parts of the US
REITs - Real Estate Investment Trust
corporation pooling individual investments
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26. Real Estate Large and often non-liquid investment
must find buyer (time factor)
proven protection against inflation in most parts of the US
REITs - Real Estate Investment Trust
corporation pooling individual investments
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27. Annuities Contract sold by an insurance company
Provides investor with a series of regular payments (usually after retirement)
Generally receive monthly payments as long as you continue to live
Buy from life insurance company
Tax deferred
Opposite of life insurance
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28. Comparing Retirement Options
Refer to your handout -- “Saving
for Retirement”
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29. © South-Western Educational Publishing
Activity Sheet 1: Saving for Retirement
Help Bob and Sidney calculate the potential gains for the three different accounts by completing the amounts in the grayed section of the table. Results are rounded to the whole dollar amount. Compound interest is the amount of investment + earned interest x the interest rate = the interest earned:
Scenario One Scenario Two Scenario Three
Age Savings account interest rate Savings account balance Certificate of deposit interest rate* Certificate of deposit account balance IRA
Rate of Return IRA balance
22 2% $1,020 4% $1,040 5% $1,050
23 2% $1,040 4% $1,081 5% $1,102
24 2% $1,061 4% $1,125 5% $1,157
25 2% $1,082 4% $1,170 5% $1,215
26 2% $1,104 4% $1,217 5% $1,276
27 2% $1,126 6% $1,290 5% $1,340
28 4% $1,171 6% $1,367 9% $1,461
29 2% $1,195 6% $1,449 4% $1,519
30 2% $1,219 6% $1,536 4% $1,580
31 3% $1,256 6% $1,628 4% $1,643
32 3% $1,293 8% $1,758 4% $1,709
33 5% $1,357 8% $1, % $1,897
34 5% $1,425 8% $2, % $2,105
35 5% $1,497 8% $2, % $2,316
36 5% $1,572 8% $2, % $2,548
37 5% $1,650 8% $2, % $2,802
38 5% $1,732 8% $2,790 9% $3,055
39 4% $1,802 8% $3,013 9% $3,330
40 4% $1,874 8% $3,255 7% $3,563
41 3% $1,930 8% $3,515 7% $3,812
42 3% $1,988 8% $3,796 7% $4,079
43 4% $2,067 8% $4,100 9% $4,446
44 5% $2,171 8% $4, % $4,935
45 7% $2,323 8% $4, % $5,478
46 7% $2,486 8% $5, % $6,081
47 7% $2, % $5, % $6,749
48 7% $2, % $6,249 9% $7,356
49 5% $2, % $6,874 9% $8,019
50 5% $3, % $7,562 7% $8,580
51 5% $3, % $8,318 7% $9,180
52 3% $3,393 6% $8,817 5% $9,639
53 3% $3,495 6% $9,346 5% $10,121
54 3% $3,600 6% $9,907 5% $10,627
55 3% $3,707 6% $10,501 5% $11,159
56 3% $3,818 6% $11,131 5% $11,717
57 3% $3,933 4% $11,577 4% $12,185
58 3% $4,051 4% $12,040 5% $12,795
59 3% $4,173 4% $12,521 6% $13,562
60 3% $4,298 4% $13,022 6% $14,376
61 3% $4,427 4% $13,543 6% $15,239
62 4% $4,604 5% $14,220 6% $16,153
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30. Saving for Retirement
Based on the results above, which savings vehicle yields the best results for retirement? Why?
The best results would have to be the IRA, Scenario 3 because from the ages of 22-62, its balance is the highest.
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31. The story of Bob and Sidney includes changes in interest rates throughout the years. Which type of savings account is the most stable? Which the most volatile?
CD is the most stable because its interest rates do not change over the deposit period. The interest rates don’t differ much. On the other hand, the IRA interest rates are unstable. They usually change every couple of years with very major interest rate differences.
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32. The Individual Retirement Account seems to have risks and rewards
The Individual Retirement Account seems to have risks and rewards. Based upon the chart, is the IRA a sound investment over the 40 years? What could happen to have you change your advice?
The IRA sounds like a really nice investment over 40 years, but if the interest is unstable and decides to drop low for most of the 40 years, then I would change my advice.
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33. Lesson 11.1 Investing Fundamentals
Describe the stages of investing and the relationship between risk and potential return.
Explain effective investment strategies, criteria for choosing an investment, and steps for investing wisely.
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34. Stages of Investing Stage 1. Put-and-take account
Stage 2. Beginning investing
Stage 3. Systematic investing
Stage 4. Strategic investing
Stage 5. Speculative investing
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35. 1) Put and Take Account
PUT your paycheck into an account and TAKE money as needed to pay bills
Investment begins with budgeting
INCOME
EXPENSES
SAVINGS PUT & TAKE
excess  BEGINNING INVESTMENTS
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36. Put & Take - continued Financial advisers recommend
3 to 6 months set aside for unexpected expenses
avoids having to tap into permanent
investments
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37. 2) Beginning Investing
Investing – use of savings to earn a financial return
begins when savings are “permanent” rather than “put and take”
First investments should be:
conservative
low risk (can’t afford to risk losing)
(20s to 30s)
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38. 3) Systematic Investing
Systematic Investing – investing on a regular and planned basis
Each month – set aside $ for investing; increasing $ as your income grows
Goals: long-range (middle age)
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39. 4) Strategic Investing
Strategic Investing - careful management of investment alternatives to maximize portfolio growth over next 5-10 years
 Manage Portfolio – transfer $ to various types of investments to take advantage of opportunities (maximize returns)
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40. 5) Speculative Investing
Speculation – final stage of investing where you have $ to assume larger risks and can continue to invest regularly in a diversified account
can lose or gain large sums in a short time period
Be aware of risks & prepared to deal with consequences
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41. Reasons for Investing Investing helps beat inflation.
Investing increases wealth.
Investing is fun and challenging.
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42. Inflation Inflation - rise in the general level of prices
The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.
Greatest impact on people living on fixed-income
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43. Risk and Return Diversification Types of risk Interest-rate risk
Political risk
Market risk
Company or industry risk
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44. Diversification
Diversification: An investment strategy in which you spread your investment dollars among industry sectors.
It is a widely used and highly successful way to reduce risk.
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45. Diversification
Most financial planners agree with the admonition “don’t put all your eggs in one basket.
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46. Types of Risk
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47. Types of Investment Risk
Company Risk / Financial Risk
business or government may not be able to return your money
Market Risk
if demand for certain investments decrease, so does the price of the investment (national/world events, business decline)
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48. Types of Investment Risk
Political Risk
government actions affect business decisions
Liquidity Risk
ability to turn your money into cash or spendable funds
Fraud Risk
investments that are misrepresented
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49. Types of Investment Risk
Inflation Risk
return on investment will not keep up with inflation
Real Rate of Return v. Nominal Rate of Return
Nominal Rate minus (-) inflation rate
EX: 8% return = If inflation rate is 3%, your real rate of return is 5%
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50. Lesson 11.2 Exploring Investment Options
List and describe sources of financial information useful for making investment decisions.
List and define basic investment options, rated by risk.
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51. Investment Options
RISK - The chance of losing all or part of the value of an investment. Risk can be divided into three categories;
Conservative—fixed income and preferred stocks are considered conservative.
Moderate—include growth stocks—particularly young companies with great potential.
Speculative—stocks that are highly unpredictable. For example, many dot/com stocks are highly speculative, with incredible highs and devastating lows.
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52. Investment Options
Risk Tolerance: An investor’s ability to accept loss of some or all of the money he or she has invested, based on a number of factors including
-- age, financial stability, amount of time before the invested funds are needed for other purposes, etc.
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53. Risk Tolerance Quiz Go to MHS Website  K. Cohen / Personal Finance
 Student Activities
 Chapter 11 – Risk Tolerance
Test
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54. Risk Tolerance Quiz What your score means:
8 to 16 points Conservative investor; you are willing to take few risks
17 to 24 points Average investor; you are willing to take average risks
25 to 32 points Aggressive investor; you are willing to take greater-than-average risks
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55. Investment Options Low risk: low-to-medium return
Medium risk: medium return
High risk: high return
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56. Low Risk: Low-to-Medium Return
Corporate and municipal bonds
U.S. government savings bonds
Treasury securities
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57. Medium Risk: Medium Return
Mutual funds
Annuities
Self-managed retirement accounts
Real estate
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58. High Risk: High Return Stocks and trading instruments Futures Options
Penny stocks
Collectibles
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59. Investment Options Go to Quia  Personal Finance Chapter 11 - RISK
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60. Criteria for Choosing an Investment
Safety
High liquidity
High dividends or interest
Growth in value that exceeds the inflation rate
Reasonable purchase price
Tax benefits
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61. Wise Investment Practices
Define your financial goals.
Go slowly.
Follow through.
Keep good records.
Seek good investment advice.
Keep investment knowledge current.
Know your limits.
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62. Sources of Financial Information
Newspapers
Investor services and newsletters
Financial magazines
Brokers
Financial advisers
Annual reports and financial statements
Online investor education
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63. Types of Brokers
Brokers are required to pass an exam and register with the National Association of Securities Dealers (NASD).
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64. Types of Brokers Full-service brokers
Helping clients develop investment goals, researching and recommending investment opportunities for individual clients, as well as executing purchases and sales of bonds for a client’s portfolio
Higher costs involved for providing service
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65. Types of Brokers
Discount/Online brokers execute buy and sell orders for clients, but they generally do not make investment recommendations and they often provide very little advice
Commissions are lower
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66. Considerations for Evaluating a Potential Financial Professional
T R U S T
You need to feel confident about this person’s knowledge of the market as well as his or her ability to maintain and manage a professional relationship with you.
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67. Considerations for Evaluating a Potential Financial Professional
C O M P E T E N C E
Make sure he or she has the education, experience, and credentials necessary, as well as proven success in the field.
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68. Considerations for Evaluating a Potential Financial Professional
C O M P L I A N C E
Ask whether or not he or she has a history of regulatory disciplinary problems. You can check on a brokers’ background through the National Association of Securities Dealers’ NASD Broker Check online service or through the U.S. Securities and Exchange Commission Investment Adviser Public Disclosure service.
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69. BETA
A stock’s beta number is one way investors can estimate the level of a stock’s risk. However, no measure of risk or volatility is fool-proof or consistently accurate. The beta—a measure of a stock’s volatility—shows of how a particular stock's price moves in relation to the market as a whole.
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70. BETA
There are betas for individual stock and for industries. A beta number greater than 1 is considered high risk.
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71. BETA
A beta of 1 indicates that the stock price should move with the overall market. For example, if a stock’s beta is 1 and the market goes up 20%, the stock’s price can be expected to go up 20%. If the market is down 10%, the stock may be down 10%. The beta reflects the stock’s performance over months, not days.
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75. BETA
A beta of more than 1 indicates a stock that is more volatile than the market. For example, if the market goes up 10%, the stock may increase 15%.
In short, the higher the beta, the more volatile the stock; the lower the beta the more stable the stock compared with the market.
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77. Percentage Change Original amt. – Ending amt. = ? X 100 Original amt.
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78. Beta (S&P x Beta) x Cost of Share
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79. Annual Report
An SEC (Securities and Exchange Commission) -required summary of a corporation’s financial results for the year and prospects for the future.
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