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Chapter 13: Investment Fundamentals and Portfolio Management

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Presentation on theme: "Chapter 13: Investment Fundamentals and Portfolio Management"— Presentation transcript:

1 Chapter 13: Investment Fundamentals and Portfolio Management

2 Objectives Summarize reasons why people invest, what is required before beginning, how returns are earned, and some ways to obtain funds to invest. Determine your own investment philosophy. Recognize the variety of investments available. Identify the major factors that affect the return on investment. Specify some strategies of portfolio management for long-term investors. List three guidelines to use when deciding the best time to sell investments.

3 Establishing Investment Goals
Financial goals should be specific and measurable. Why are you accumulating these funds? How much do you need? How will you get it? How long will it take you to reach your goal? How much risk are you willing to assume? Are you willing to sacrifice current consumption to invest for the future? Is it realistic to try and save this amount?

4 Steps to Create a Personal Investing Plan
My investment goals are: ____________________ Step 2 By ___________, I will have obtained $_______. Step 3 I have $__________ available to invest. Date _____________ Step 9 Continue evaluating choices. Step 4 Possible investment alternatives: 1._________________ 2._________________ 3._________________ 4._________________ Step 8 Final decision 1._______________ 2._______________ Step 6 Projected return on each alternative 1.__________ 2.__________ 3.__________ 4.__________ Step 5 Risk factors for each alternative 1.____________________ 2.____________________ 3.____________________ 4.____________________ Step 7 Investment decision 1._______________ 2._______________ 3._______________

5 Investment Fundamentals
ATTENTION! Difference in return is a major distinction between savings and investing. Successful investors begin to live off earnings, without spending wealth itself.

6 Preparations for Investing
WHY PEOPLE INVEST: Achieve financial goals Increase current income Gain wealth and financial security Have funds available for retirement

7 Preparations for Investing
PREREQUISITES TO INVESTING: Live within means Continue savings program Establish lines of credit Carry adequate insurance Establish investment goals

8 Preparations for Investing
Interest Dividends Rent Capital gain/loss Rate of return or yield INVESTMENT RETURNS:

9 Performing a Financial Checkup
Learn to live within your means pay off high interest credit card debt Provide adequate insurance protection Start an emergency fund three to nine months of living expenses Have other sources of cash for emergencies line of credit cash advance

10 Getting Money to Start an Investing Program
Pay yourself first Participate in elective savings programs Payroll deduction electronic transfer Make a special effort to save one or two months a year Take advantage of windfalls Invest half of your tax refund

11 Value of Having a Long-Term Investing Program
Many people don’t start investing because they only have a small amount to invest but.... Small amounts invested regularly become large amounts over time

12 Personal Investment Philosophy
Handling risk Ultraconservative strategies Conservative Moderate Aggressive

13 Investment Selection Lend or own Short-term or long-term
Choose a vehicle

14 Factors That Affect Investment Decisions
Safety - minimal risk of loss Risk - uncertainty about the outcome inflation risk interest rate risk business failure risk market risk

15 Income From Investments
Safest CDs savings bonds T-bills Higher potential income municipal bonds corporate bonds preferred stocks mutual funds real estate

16 Investment Growth and Liquidity
increase in value common stock growth stocks retain earnings bonds, mutual funds and real estate Liquidity ease and speed to convert an asset to cash

17 Commodities Junk bonds Options
Investment Pyramid High risk Commodities Junk bonds Options Rental property Utility stocks Government Securities Corporate bonds CDs Money Market Savings Accounts Cash High Quality Stocks Mutual funds Low risk

18 Major Factors That Affect Rate of Return
INVESTMENT RISK: Pure Speculative Risk pyramid

19 Major Factors That Affect Rate of Return
INVESTMENT RISK TYPES: Financial Market volatility Political Inflation Deflation Interest rate

20 Major Factors That Affect Rate of Return
INVESTMENT RISK: Random or unsystematic Diversification Market or systematic

21 Major Factors That Affect Rate of Return
Leverage Taxes Marginal tax rate Taxable vs. tax-free income Buying and selling costs/commissions Inflation

22 Major Factors that Affect Rate of Return
CALCULATE REAL RATE OF RETURN: Identify before-tax return Subtract marginal tax rate Obtain net return after taxes Subtract estimate of inflation Obtain real rate

23 Management Strategies — Long-Term Investors
Business-cycle timing Dollar-cost averaging Portfolio diversification Asset allocation

24 Investment Alternatives
What is stock? part ownership in a company the money you pay for shares of stock provides equity capital for the business

25 Investment Alternatives
(continued) What is a bond? a loan to a corporation, the federal government, or a municipality The interest is paid twice a year, and the principal is repaid at maturity (1-30 years) You can keep the bond until maturity or sell it to another investor

26 Investment Alternatives
(continued) What is a mutual fund? investors’ money is pooled and invested by a professional fund manager you buy shares in the fund provides diversification to reduce risk funds range from conservative to extremely speculative match your needs with a fund’s objective

27 Monitor Your Investments
Read your account statements Chart the value of your investments Maintain accurate and current records Calculate the current yield % annual income from investment market value of the investment

28 Sources of Investment Information
Newspapers Business Periodicals Government Publications Corporate Reports Statistical Averages Investor Services and newsletters Standard and Poor’s stock reports Value Line Moody’s investment service

29 Investment Philosophies

30 Best Time to Sell Take profits Cut losses
“If wouldn’t buy it now, sell it”

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