INVESTING BASICS

1
INVESTING BASICS

• CLASS OF 2008
• UNIT THREE
• NEFE

2
OBJECTIVES

• Know the difference between Savings and Investing
• Understand the time value of money
• Compare investment options
• Define risk-reward
• Discuss the meaning of G-T-R

3
SAVING INVESTING

• Survey on page 28
• Discuss T-RR-Q
• Inflation
• Effects of down payment on a loan
• Discuss PYF, payroll deduction, direct deposit,
  dollar cost averaging

4
SAVING

• Safe - FDIC
• Short-term goals
• Lower R of R
• liquidity

5
INVESTING

• No guarantees
• Long-term goals
• Volatility - rollercoaster
• Potential rewards higher

6
THINK

• Ibbotson research - 1927 - 10/5/3
• Delayed gratification
• Savings and Investing - not either/or
• Balance - DIVERSIFICATION
• Grow your money
• Exercise 3A - page 28
• Exercise 3E - page 37

7
THE 2 SISTERS

• Time is of the essence - power
• Start early
• Discuss page 29

8
THE TIME VALUE OF MONEY

• Time, value of money, interest rate
• Inflation
• Goal - rate of return must exceed inflation and
  taxes
• Earned Interest
• Compounding
• See Exercise 3B - page 30

9
SHOW ME THE

• Compounding - earning interest on interest
• 100 x 10 110
• 110 x 10 - 121
• Get into the NOW habit

10
PROCRASTINATE AT YOUR OWN RISK

• Im late, Im late for an important date
• Investing is risky - waiting to invest can be
  risky
• You pay an opportunity cost by waiting

11
THE RULE OF 72

• How long will it take for your money to double?
• Divide 72 by the interest rate
• 72/6 12 years
• 72/9 8 years
• 72/4 years 18 (college to graduation)
• Use for US Savings Bonds

12
RISKY BUSINESS

• How can you manage risk?
• Risk - Bear Stearns, Enron
• Risk - Google
• Risk - even savings has risk if your RR doesnt
  exceed inflation taxes
• Purchasing Power
• Higher Risk - Higher Potential Reward
• Lower Risk - Lower Reward

13
FINANCIAL PLANNING PYRAMID

• See page 33
• G-T-R
• Conservative v. Aggressive
• Diversification
• Asses Allocation Pie
• Earn - interest, dividends, capital gains
• Emergency Fund - rainy day, nest egg, safety net

14
INCOME V. GROWTH

• Invest for one of 2 reasons - income and/or
  growth
• Income - interest or dividend
• Growth - capital gain
• Income - CD, Bonds, Dividend Stock
• Growth - Stocks, Mutual Funds

15
WHICH TO CHOOSE?

• Trade-off - all economics is about CHOICES
• Opportunity Costs
• Income - lower but steadier returns, lending
  money
• Growth - potential 15higher but volatile returns,
  buying part of a company

16
INCOME INVESTMENTS

• Savings Accounts, U.S. Savings Bonds, CDs,
  MMDA, MMMF, Corporate Government Bonds

17
SAVINGS ACCOUNTS

• Small amount of interest
• Safety
• Low risk - FDIC
• Lower interest rates
• liquidity

18
U.S. SAVINGS BONDS

• Federal G pays interest to investors
• You lend your to G
• Held for up to 30 years
• Cash in less than 5 years - 3 month penalty
• Buy bond at 1/2 of its face value
• Higher interest, sooner matures
• Rates go up and down with market
• Guaranteed to reach face value in 20 years

19
CERTIFICATES OF DEPOSIT

• CDs - insured by FDIC
• Banks version of bond
• Fixed rate - know when it will mature and how
  much you will receive
• Lend your for a set period of time
• Longer the term, higher the RR
• Substantial penalty for early withdrawal - not
  liquid

20
MONEY MARKET DEPOSIT ACCOUNTS

• In your bank
• Work like a checking account
• Liquidity
• Limit the number of checks per month - 3
• Higher rate than savings account but lower than
  CD
• Insured by FDIC
• Catch - require higher minimum balance

21
MONEY MARKET MUTUAL FUNDS

• Offered by Mutual Fund Company
• Invests shareholders money in a diversified
  group of securities
• MMMF - designed to be stable
• No guarantee - can lose money but never happened
• Higher interest than MMDA because no insurance

22
GOVERNMENT BONDS

• Interest - yield
• U.S. government bonds - Treasury Bonds - bills,
  notes, bonds
• Up to 30 years
• Safe - full faith and credit

23
CORPORATE BONDS

• Higher interest rates - no guarantee
• Time period - up to 30 years
• Longer the time, higher the rate
• 1000 investment - fixed rates
• Risk - default, interest rate, inflation

24
GROWTH INVESTMENTS

• Stocks, Mutual Funds

25
STOCKS

• Own part of the company
• Company issues shares of stock to raise money for
  variety of reasons
• Buy stock - shareholder
• Riskier
• You can lose money
• Hold for long-term - historical returns better
  than bonds or cash

26
MUTUAL FUNDS

• Affordability
• Convenient
• Diversification
• Takes from many investors
• Makes growth and/or income investments based on a
  specific investment objective
• Professionally managed
• Fees - active v. passive funds
• Load v. no-load funds
• Thousands of funds to choose from

27
DOLLAR COST AVERAGING

• PYF
• Take advantage of compounding and time
• Avoid trying to time the market
• Evens out the ups and downs of the market
• Price of investment goes up, buy less shares
• Price of investment goes down, buy more shares
• BUY LOW, SELL HIGH
• Discuss page 39