1 Personal Investing

2 Step 1: Set your financial goals Step 2: Understand investment vehicles Step 3: Develop an investment strategy Step 4: Implement your strategy Step 5: Monitor the performance of your investments Personal Investing Steps

3 Four Elements in Setting Your Financial Goals Step 1: Set Your Financial Goals Your investment time horizon Your priorities Quantification Your personal investment profile

4 Your Time Investment Horizon The length of time that you have to reach your goal is considered by many advisors as the most important factor in determining which type of invest­ment is best suited to meet that goal

5 Your Priority You must also prioritize your financial goals and decide which are necessary and which are merely desirable

6 Quantification After determining your financial priorities, you should develop financial projections and calculate different alternative scenarios to quantify your goals. From these calculations, you can then establish the amount you can save and what rate of return is necessary from your investments to assure that you'll achieve your goals.

7 Your Personal Investment Profile Your investment profile is shaped by: Your age and the stage in your career Your need for liquidity The size of your portfolio Your cash flow needs Your income tax bracket Your required rate of return Your risk tolerance

8 Step 2: Understand Investment Vehicle Three Major Investment Vehicles: Cash Bonds Stocks

9 The Bonds Corporate bonds U.S. government securities Municipal bonds Mortgage-backed securities

10 The Stocks Income Stocks Growth Stocks Value Stocks Cyclical Stocks Defensive Stocks Blue Chip Stocks

11 Income Stocks Income stocks are those with a long and sustained record of paying high dividends. Generally, a company whose common stock falls into this category is in a fairly stable and mature industry (e.g., an electric utility company). Because these companies distribute (rather than reinvest) their earnings, their stocks are less likely to experience substantial capital appreciation.

12 Growth Stocks Growth stocks are stocks that are expected to experience high rates of growth in operations and/or earnings. These growth rates are usually substantially higher than the market averages. Growth stocks are generally much riskier than income stocks.

13 Value Stocks These are stocks of companies which are considered undervalued because they may be in an industry that is out of favor, they may be experiencing management turmoil, or they may be restructuring their business operations. These stocks tend to have lower price/earnings and price to book ratios than growth stocks do. Their prices are cheap compared to the prices required to be paid for growth stocks.

14 Cyclical Stocks Typically, cyclical stocks are stocks of companies whose earnings tend to follow the business cycle. Highly cyclical industries include oil and other natural resources, steel, and housing. Cyclical stocks are often more risky than stocks in companies less subject to changes in the business cycle.

15 Defensive Stocks Defensive stocks are stocks that are, in a sense, countercyclical. Prices of these stocks tend to remain stable or perhaps rise during periods of economic downturn, while showing poorer results (in comparison to other stocks) during periods of economic upturn. Defensive stocks are well-established companies producing goods that are generally still in demand during an economic downturn, such as food, beverages, and pharmaceuticals.

16 Blue Chip Stocks The stocks of the companies with the highest overall quality are those considered to be "blue chips." The companies with blue chip common stocks are often financially stable companies with steady dividend-paying records during both good and bad years. They are usually the leaders within their industry or industry segment.

17 Step 3: Develop An Investment Strategy Developing this strategy involves three tasks: 1. Select an Asset Allocation 2. Formulate a Goal-Funding Plan 3. Understand Transaction Cost

18 Task 1 : Select An Asset Allocation What asset classes do you want in your portfolio, and in what combination? The asset classes should be as many as possible based on your investment profile. The proportion of your portfolio to allocate to each asset class is ideally determined based on historical data.

19 Task 2 : Formulate a Goal-funding Plan Before you make actual investments, you must identify the specific goals that you want to fund. Then you can purchase the appropriate investments based on when the item being funded will be paid. Therefore, your first task in developing an investment strategy is to formulate a goal- funding plan.

20 Task 2 : Formulate a Goal-funding Plan Here are some typical investments suitable for three sample goals: Contingency fund: money market fund College funding for a 16-year-old: bonds maturing in 2-6 years College funding for a 2-year-old: common stock portfolio

21 Task 3 : Understand Transaction Cost 1.Commissions 2.Income Tax You should consider those two transaction costs because in the long run they can significantly reduce your investment return

22 Step 4: Implement Your Strategy Implementing your strategy involves two fundamental issues : How to Buy When to Buy

23 How to Buy You have four options to buy : Through an investment advisor or financial planner Through broker (either full-service or discount) Through a professional money manager Through mutual fund Through an insurance company

24 WHEN to Buy You can use dollar cost averaging strategy to decide when to buy Let’s say you have $ 2,500 to invest. Using dollar cost averaging, you’d not invest all your money at once; instead, you’d invest $ 500 per month for 5 months.

25 Step 4: Monitor Your Investment Once you implemented your investment strategy, it’s important that you monitor your investment from time to time to ensure that they remain appropriate for your financial goals.

26 Step 4: Monitor Your Investment While you should generally try to avoid frequent changes to your investments, you should periodically (for instance, annually) assess each investment’s performance to se that it meets your expectations.