1. Chapter 11 Investing for Your Future
MYPF Chapter 11
19-Sept-2001
Chapter 11 Investing for Your Future
Investing Fundamentals
Exploring Investment Options

2. 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.

3. Stages of Investing Stage 1. Put-and-take account
First get a job
Use your money to pay bills and start an “emergency” fund
Put two paychecks worth into savings to use when car breaks down, medical bills, other larger expenses.
Stage 2. Beginning investing
Start conservatively and low risk in your 20s
Maybe buy some mutual funds or stocks for “fun”

4. Stages of Investing Stage 3. Systematic investing
Set aside a specific amount of money to invest each month
Should really start in your 20s and continue into your 30s
Set up an IRA (Individual Retirement Account), contribute to employer-sponsored 401(k)’s and 403(b)’s
Roth IRA
Invest post-tax dollars
Earnings grow tax free
When you start drawing money at retirement, you are not taxed
GET A ROTH IRA AND CONTRIBUTE THE MAXIMUM ALLOWED EACH YEAR!

5. Stages of Investing Stage 4. Strategic investing
In your 40s and 50s you need to more actively manage your investments
Move some riskier investments to more conservative as you get closer to retirement
Portfolio – your collection of investments
Always want to diversify (or mix up) what you are investing in – reduces risk
Stage 5. Speculative investing
Final stage – make or break
You have either made or lost a lot of money
Don’t make a risky investment to try to make up for previous losses!

6. Reasons for Investing Investing helps beat inflation.
Investing increases wealth.
Investing is fun and challenging.

7. Risk and Return Diversification Types of risk Interest-rate risk
Don’t invest in only one company or one sector of economy (banking, transportation, retail, etc.)
Types of risk
Interest-rate risk
Occurs during times of high inflation
Inflation makes your fixed-rate investments worth less
Fixed-rate bond at 3% and inflation rate is 6% - not so good
Fixed-rate bond at 6% and inflation rate is 3% - better

8. Risk and Return Types of risk (continued) Political risk Market risk
Governmental policies can affect business decisions
Increased taxes on businesses or environmental restrictions can make some investments less attractive
Market risk
Sudden world events affect entire market
The Great Depression, September 11th
Company or industry risk
Certain businesses or industries are affected by national trends
Adkins diet was good for the cattle industry – the price of beef increased!

9. Criteria for Choosing an Investment
Safety
Little chance of losing initial investment
Low risk bonds, savings accounts, CDs
High liquidity
Accessing your money quickly
Savings account, money market fund, CDs
Low liquidity means that it takes a little longer to cash out of your investment
Real estate, stocks, mutual funds, collectibles

10. Criteria for Choosing an Investment
High dividends or interest
Dividends are distributed to shareholders based on company profits
If dividend is $0.25 per share and you own 100 shares, you would receive a dividend of $25.00
Look at previous financial records (annual report) to see dividend history
Growth in value that exceeds the inflation rate
Inflation has increased 58% since 1982

11. Criteria for Choosing an Investment
Reasonable purchase price
Stock might be undervalued
Good buying opportunity if you think that it will increase in price
Remember there’s no guarantee!
Tax benefits
You will have to pay taxes on investment earnings – unless you invest in tax-exempt mutual funds or bonds
Tax-exempt bonds have a lower interest rate, which is offset by the tax benefits
Usually only high-net worth individuals purchase tax-exempt investments

12. Wise Investment Practices
Define your financial goals.
Saving for first home, retirement, college
Go slowly.
Research investments – don’t buy on impulse
Follow through.
Start saving now - take advantage of the benefits of compound interest!
Best bet is to have money taken directly from checking account each month

13. Wise Investment Practices
Keep good records.
Hold on to monthly/quarterly statements
For tax purposes you will need to have record of the purchase price of investments
This is called the cost basis
Seek good investment advice.
If need be, hire a certified financial planner
Listen to Money Talk on the radio

14. Wise Investment Practices
Keep investment knowledge current.
Again, listen to Money Talk
Good investments now, may not be good investments in the future
Watch world events and pay attention to economic changes
Know your limits.
Know your risk tolerance and what you can afford
Be weary of “get rich quick” investments that sound too good to be true

15. 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.

16. Sources of Financial Information
Newspapers have financial pages that keep track of the financial market
Papers that are specific for the financial market
Wall Street Journal, Barron’s, The Bond Buyer
Investor’s services provide extensive data to clients
Moody’s Investors Services and Standard & Poors

17. Sources of Financial Information
Financial Magazines
Fortune, Business Week
Full-service broker
Provide clients with investment advice based on their specific needs/risk tolerance
Raymond James, Merrill Lynch, Smith Barney
Discount brokers
Buy and sell securities for customers at a reduced cost
Little or no advice
Ameritrade, TD Waterhouse

18. Sources of Financial Information
Financial Advisor
Trained professional investment planners
Look at your goals, age, net worth, occupation, etc to determine what investments you should make
Annual Reports
Summary of a company’s financial results
Securities and Exchange Commission (SEC) requires all corporations to provide to stockholders each year

19. Sources of Financial Information
Trade yourself online (E-trade)
You do your own research
Costs about $5 a trade, but you are limited to only 10 trades a year
More than 10 trades and its more expensive
Costs to buy and sell (trade) depend on several factors
Commission, flat rate or per trade cost

20. Investment Options Low risk: low-to-medium return
Medium risk: medium return
High risk: high return

21. Low Risk: Low-to-Medium Return
Corporate and municipal bonds
U.S. government savings bonds
Treasury securities
Treasury bills – mature in one year or less
Also referred to as t-bills
Treasury notes – mature in 2 to 10 years
Treasury bonds – mature from 10 to 30 years

22. Medium Risk: Medium Return
Mutual funds
Annuities
Contract sold by an insurance company that provides the investor with a series of regular payments
These have ENOURMOUS fees!
Self-managed retirement accounts
The risk of the IRA depends on the particular investments
Real estate

23. High Risk: High Return Stocks Futures Options
Owner is called the stockholder
When the company makes a profit this is paid to stockholders in the form of dividends
Futures
Buy and sell commodities or stocks for a date in the future
You can also buy just commodities
When you sell you are betting the price will go down, when you buy you are betting the price will go up
Options
Puts and calls
The right (not obligation) to buy or sell a commodity or stock for a specific price for a set amount of time

24. High Risk: High Return Penny stocks Collectibles
Extremely low priced stocks of small companies with or without a proven track record
Usually costs less than a dollar
Many fail and become worthless
Collectibles
You need to make sure that there is a buyer for what you are collecting

25. Annual Reports
Published by “public” companies for shareholders to view
Legally required and shows all financial records
Important parts to look at
Income statement
Are sales (revenue) increasing?
Do they have low operating expenses?
Building, payroll, maintenance, etc.
Do they have a lot of interest expense/income?
What’s their net income (revenue – expenses)?
One of most important items for a stockholder!

26. Stock Common Stock Preferred Stock Shares Outstanding
Own share of company and have a voting right
Only receive dividends if company makes profit
Preferred Stock
Own share of company but have no voting rights
Pay dividend monthly or yearly regardless of the profitability of company
Shares Outstanding
Number of shares available for trading
Companies can change this amount
Effects supply and demand which in turns affects the price of the stock