Investing

1
Investing

• www.lifethenfinance.com

www.lifethenfinance.com
2
Why invent ?

• The top reason to invest is to see a return
  (profit) on the investment.
• Financial Security Many people decide to learn
  more about investing because they want to feel
  secure financially.
• Lifestyle Earning money through investing can
  help people afford a desired lifestyle so they
  can afford those things they want.
• Investing can also be a way for people to get
  their money working for them (instead of having
  to work for every dollar) to free up time to live
  the lifestyle they desire.

www.lifethenfinance.com
3
Why Invest? Cont.

• Retirement Most people today rely on Social
  Security (a social welfare program that provides
  people over the age of 62 monthly payments) and
  Medicare (a social welfare program that provides
  older people medical insurance coverage) to
  retire.
• Unfortunately, for people under the age of 35
  today, the SSI and Medicare system will likely be
  bankrupt by the time you reach retirement age so
  you will likely receive no or very limited
  benefits.
• This means you need to plan for your own
  retirement early.

www.lifethenfinance.com
4
Why invest ? Cont.

• Beat Inflation Inflation is defined as to many
  dollars chasing to few goods.
• When this happens prices go up.
• Inflation many people use a rough 3 figure to
  calculate the average inflation per year . . .
  This varies widely.

www.lifethenfinance.com
5
Power of the Dollar

• Decreased purchasing power of the dollar due to
  inflation

www.lifethenfinance.com
6
The Rule of 72

• The rule of 72 says to divide the interest rate
  you are receiving on an investment into 72 and
  the answer is how many years it will take for
  that money to double.
• The earlier you save for retirement the more
  chances your money has to double.

www.lifethenfinance.com
7
Savings Accounts

• A deposit with a bank or credit union that earns
  interest.
• Returns
• Low, typically well below inflation. Currently
  most savings rates are under 1.
• Benefits
• Able to access money fast and safety of
  principle.
• Risk
• Very low riskinsured by the FDIC banks or by the
  NCAU for credit unions.
• Liquidity
• Can access money instantly however with larger
  amounts there may be some delay.
• Cost to access money 0
• Risks
• Having returns lower than inflation rates.

www.lifethenfinance.com
8
Certificates of Deposits (CDs)

• Definition
• Short and medium term debt instruments offered by
  banks and credit unions.
• CDs are similar to savings accounts except they
  typically have a higher interest yields and have
  set time lengths.
• For example common CD terms are 3 month, 6 month,
  1 year, 2 years and 5 years.
• Returns
• Low but typically higher than savings accounts.
• The more money you have to invest in CDs the
  larger return you can earn.
• A current 1-year CD rate with 10,000 is around
  1.4

www.lifethenfinance.com
9
Certificates of Deposits (CDs) Cont

• Benefits
• Safety of principle and higher return than
  typical savings accounts.
• Risk
• Very low risk of loss of capital because they are
  insured by the FDIC banks or by the NCAU for
  credit unions.
• However the longer term CD you choose the higher
  risk that it will earn a return less than
  inflation.
• Liquidity
• CDs vary on their liquidity. Cost to access
  money 0 as long as you wait until maturity
  date.
• If you sell before the CD maturity date you
  will likely pay penalties.
• Note
• Money Market accounts have similar qualities but
  are typically shorter in nature, often maturity
  dates of 1 year or less.

www.lifethenfinance.com
10
Annuities

• Definition
• An annuity is a contract created between an
  individual and insurance company that will later
  be distributed back to the individual over time.
• Returns
• Vary. There are fixed annuities that offer
  returns higher than CDs and savings accounts.
• There are also variable annuities that offer
  higher returns than fixed annuities.
• Current rates now for a fixed annuity are about
  3 while variable annuities can be around 6.

www.lifethenfinance.com
11
Annuities

• Benefits
• Are good vehicles to create income streams and
  some annuities offering protection of capital.
• Risk
• Varies with the annuity however common risks
  include lack of liquidity and inflation risk.
• There is also a smaller risk of loss of capital
  investment if the insurance company that insures
  the annuity fails.
• Liquidity
• Most annuities allow for some type of
  distribution penalty fee however you likely
  wont have access to all your money immediately
  without large penalties.

www.lifethenfinance.com
12
Individual Stocks

• An instrument that signifies a stockholder is
  part owner in the corporations.
• A more detailed explanation of stocks is included
  later in the chapter.
• Returns
• The stock market average return is over 10 when
  looking at a 50-year history.
• Plus when investing in an individual stock,
  experienced investors have a chance to earn large
  returns.

www.lifethenfinance.com
13
Individual Stocks Cont

• Benefits
• Have the potential to earn returns that exceed
  inflation. Many people that invested in
  Microsoft, Wal-Mart and other stocks have become
  millionaires.
• Risks
• You can lose 100 of your money.
• Liquidity
• You can sell stocks anytime the market is open
  and many stocks you can trade after hours.
• Cost to access money Trading fees that range
  from 10 to 120 per trade.

www.lifethenfinance.com
14
Mutual Funds

• Are operated by an investment company and raises
  money from shareholders then invest that money
  into assets that aligns with the stated
  investment objective.
• Returns
• Vary greatly upon type of mutual fund investment.
• Benefits
• You have a wide selection of mutual funds to
  choose from to meet a variety of investment
  goals.
• The returns that one can expect are tied to the
  amount of risk one is willing to take.

www.lifethenfinance.com
15
Mutual Funds Cont.

• Risk
• Vary greatly depending on the type of mutual fund
  you invest in however you can lose a substantial
  portion of your capital investment.
• Liquidity
• Most mutual funds are liquid and like shares can
  be sold the same or next day at NAV (Net Asset
  Value).
• There are different types of mutual fund classes
  that you can choose, some will penalize you for
  an early withdrawal.

www.lifethenfinance.com
16
Bonds

• A bond is an investment in debt. The investor
  receives a contract from the organization
  borrowing money that they will repay borrowed
  money with interest at fixed intervals.
• Returns
• There are a wide variety of bonds available.
  Bonds have a price and yield however for this
  example the yield (interest) will be explored. US
  Treasury bonds are considered the safest and
  currently earn a return under 1.
• Other form of municipal bonds (bonds issued by
  cities, counties, etc) varies depending on safety
  of investment but typically range from 2 to 5.
• Corporate bonds again vary depending on risk of
  investment and currently range from 4 to 20 for
  very high-risk bonds (also know as junk bonds).

www.lifethenfinance.com
17
Bonds Cont

• Benefits
• Typically less volatile than stocks and are often
  used by investors to stabilize value of their
  portfolios.
• Income is received at regular intervals and there
  may be tax advantages with some bonds.
• Risk
• Varies depending on bond. If you choose a
  high-risk bond and the company that issued the
  debt goes bankrupt you could lose your entire
  investment Default risk.
• Interest rate risk bond prices have an inverse
  relationship to interest rates. When one rises,
  the other falls so if you sell before it matures
  you could lose money.
• There is also inflation risk.
• Liquidity
• Not as liquid as stock investments and if a bond
  is downgraded or in default there could be
  trouble getting out of the investment.

www.lifethenfinance.com
18
Real Estate

• Real estate investments can range from buying
  your own home, to a rental property, to
  commercial buildings.
• Benefits
• There are several benefits associated with real
  estate appreciation (property goes up in value),
  cash flow (rental and income producing
  properties), potential tax benefits and leverage.
• Risks
• Depreciation, housing prices fall. Most people
  purchase real estate with a loan if at anytime
  you lose a job or have other financial hardships
  you may not be able to pay the loan back.

www.lifethenfinance.com
19
Real Estate Cont.

• In cases like this you may have to short sell the
  home (sell it for less than the house is worth)
  or have your home foreclosed (the lender takes
  back the home) and in both cases you would lose
  the money you invested in the home, plus it would
  negatively impact your credit rating.
• Benefits
• Rental property you can benefit from appreciation
  (prices going up), cash flow (income from the
  rents you collect) and potential tax benefits.
• The benefits of owning a home you live in
  include appreciation and potential tax benefits.
• Liquidity
• In good real estate markets you can sell within a
  few months.
• In bad real estate markets it may take years to
  sell at a deep discount. Cost of sale about 8 of
  the home sales price.

www.lifethenfinance.com
20
Prepare to Invest

• With the reduction and/or elimination of pension
  and SSI benefits it is now critical that you
  become an educated investor.
• Investing is buying assets that you think will go
  up in value.
• Assets are things like real estate, stocks, gold,
  or a business to name a few.
• Assets do not always increase in value so anytime
  you invest your risk losing some or all of your
  money.
• Its important to become an educated investor and
  get your money working for you.

www.lifethenfinance.com
21
What is a Ponzi Scheme ?

• A ponzi scheme is an investment fraud when people
  invest and their return on the investment is paid
  from the money of new investors.
• Example The Bernie Madoff Scandle

www.lifethenfinance.com
22
Types of Financial Markets

• Example Stock, bond, option, and futures markets
  are just a few.
• The stock market is one piece of the overall U.S.
  financial market.
• When comparing it to all the other markets, the
  stock market offers the best returns for a young
  adult investor. Its a great place to get started
  and get involved in investing

www.lifethenfinance.com
23
Types of Financial Markets Cont

• The stock market is a market for the trading of
  company stock and other financial securities.
• A stock is genuine partial ownership in a
  company.
• The stock of companies in the United States is
  listed on several different exchanges for
  example, the New York Stock Exchange (NYSE) and
  the NASDAQ

www.lifethenfinance.com
24
Buying and Selling Stocks

• When trading, stocks are bought and sold by
  bidding. When the bid price (price buyer is
  willing to buy at) and ask price (price seller is
  willing to sell at) match, a sale takes place.
• This means that prices can fluctuate day-to-day,
  and the worth of the stock you own can change,
  depending on demand for the companys stock.

www.lifethenfinance.com
25
Buying and Selling Stocks Cont

• The stock market moves based on prices at which
  people are offering to purchase a stock.
• A stockbroker is the middleman. He sells or buys
  stock on your behalf.
• The reason is that stock transactions must be
  made between two members of the exchangeyou
  cant just walk into a stock exchange and start
  trading stocks.
• So, youre going to be using a broker to invest
  in stocks.

www.lifethenfinance.com
26
Buying and Selling Stocks Cont

• In addition, stockbrokers may also offer
  financial advice to their clients on which stocks
  to buy. (Bare in mind, theyre on
  commissioneveryones after your hard-earned
  money!)
• Therefore, a basic stock market transaction works
  like this
• You Broker Electronic Exchange
  Broker You

www.lifethenfinance.com
27
Basic Principles of the Stock Market

• Supply and Demand
• This is a fundamental rule of economics, and what
  you need to know is that the stock market runs
  according to this rule.
• Supply is the quantity of stock shares available
  for sale.
• Demand is the number of stock investors are
  willing to purchase at a given price.
• If supply is greater than demand, in the case of
  stocks, then the price will naturally fall.
• If supply is less than demand, the price will go
  up.
• This basically explains why stocks prices go up
  and down, but the reason for greater interest (or
  lack of interest) in a stock is more related to
  the companys performance, or gossip about the
  companys future, and technical factors.

www.lifethenfinance.com
28
Basic Principles of the Stock Market Cont.

• Risk and Return
• Just like supply and demand, risk and return have
  a correlative relationship, or at least they
  should if youre getting a good deal.
• If youre investing in something with low risk,
  then you probably wont be expecting high
  returns.
• The opposite is true of high-risk ventures, where
  you would expect higher returns in exchange for
  risking your money (which you could lose!).
• For instance, if you invest your money in a brand
  new company that does not have a proven track
  recordthat is a high risk investment.
• That company could easily go out of business, and
  you would lose everything. On the other hand, it
  could be successful, and you would make a lot of
  money.
• Once you have established a solid savings account
  and have a lot of knowledge on how to choose
  individual stocks, its OK to allocate a small
  portion of your portfolio to riskier investments,
  but not before!

www.lifethenfinance.com
29
Basic Principles of the Stock Market

• Ownership
• Owning a stock makes you a co-owner of the
  company.
• With ownership, you gain a voice in the companys
  business.
• You can vote at meetings and take a real interest
  in the inner workings of the company you invest
  in.
• There is an important difference, though
  limited liability. if something bad happens in
  your company, they cant haul you off to prison
  for it (just think Martha Stewart being carted
  off to jail in handcuffs!).
• The people in your company who break the law are
  the only ones who go to jail for it, not you.
• The most that can happen to you is your stock
  becomes worthless.

www.lifethenfinance.com
30
Types of Funds

• Aggressive Growth Funds
• Try to maximize capital gains and may leverage
  their assets by borrowing money and may trade in
  stock options.
• Growth Funds
• Similar to aggressive growth funds usually do not
  leverage their investments (borrow money) or use
  stock options.
• Growth-Income Funds
• The goal is to generate dividend income while and
  growth.
• Income Funds
• The main focus is on generating dividend income.

www.lifethenfinance.com
31
Types of Funds

• International Funds
• Hold stock of companies around the world.
• Asset Allocation Funds
• These funds dont just invest in stocks they also
  may have bonds, real estate, metals and money
  market funds.
• Sector Funds
• Invest in a specific sector of the stock market.
  For example, technology fund would buy tech
  stocks.
• Bond Funds
• Invest in corporate and government bonds.
• Money market funds
• Mutual funds that invest solely in
  government-insured short-term instruments.

www.lifethenfinance.com
32
Dollar Cost Averaging

• Dollar cost averaging allows investors to buy
  smaller amounts of a stock, mutual fund or index
  fund over a longer period of time.
• This technique can help you reduce your risk and
  achieve longer-term gains.

www.lifethenfinance.com
33
Dollar Cost Averaging Plan

• Budget the exact amount of money you can invest
  each month.
• It is important that amount is consistent
  otherwise the plan will not be as effective.
• At set specific intervals (weekly, monthly or
  quarterly), invest that money into the same
  investment.
• Your broker can set up an automatic withdrawal
  plan that automatically will transfer money from
  your checking account.

www.lifethenfinance.com
34
Dollar Cost Averaging Chart
www.lifethenfinance.com
35
Dollar Cost Averaging chart Explained

• if you were to invest 100 per month you would
  own 131 shares after one year.
• Your investment would of increased in value 376
• If you did not follow a dollar cost averaging
  plan and purchased
• 1,200 worth of shares at once, in January, your
  return would be 240. You would own 120 total
• Shares (10 cost per share divided by 1,200
  investment 120 total shares)

www.lifethenfinance.com
36
Roth IRA

• This is an Individual Retirement Account,
  designed for a person to set aside money each
  year towards retirement.
• There are two types of IRAs traditional and
  Roth.
• Both types of IRAs have early withdrawal
  policies.
• Traditional IRA
• An IRA that you set aside pre-tax income and must
  pay taxes on the income upon withdrawal of the
  money.
• Roth IRA
• An IRA that you set aside after-tax income and
  you do not pay taxes upon withdrawal of the money.

www.lifethenfinance.com
37
401k

• 401k
• Is similar to an IRA where a person pays taxes on
  when they withdraw and they are able to invest
  pretax dollars.
• The main difference is that a 401k is employer
  sponsored and there are different contribution
  limits.
• Some employers will match the amount of the
  contribution the employee invests.

www.lifethenfinance.com
38
Diversification

• Diversification is defined as spreading
  investments among many different securities or
  sectors to reduce the risk of owning any single
  investment.

www.lifethenfinance.com
39
Expenses associated with buying a Home

• Mortgage payment.
• Property Taxes
• Each area has different tax rates, so these can
  vary from place to place. They are typically
  between 1 and 3 of the purchase price.
• Insurance This would protect the homeowner
  against such perils as fire, wind, and earthquake
  damage.
• Its important to have, and some lenders will not
  allow a mortgage on an uninsured property.
• Contact an insurance agent for a rough quote on
  potential homes. In states like Florida, a
  resident pays a lot higher insurance premiums
  after the recent major hurricanes.

www.lifethenfinance.com
40
Expenses associated with buying a Home

• Association dues
• Related to condominium, town home or planned unit
  developments, this could be a monthly or annual
  fee.
• Maintenance
• This expense will be directly affected by the age
  and condition of the property, so you might need
  to estimate these costs.
• The real estate agent or a registered home
  inspector can help, or you could ask a friendly
  builder or knowledgeable family member to take a
  look.
• Generally, newer, well-kept properties will
  require less maintenance.

www.lifethenfinance.com
41
Fees associated with buying a Home

• For the Buyer
• Loan closing costs 2.5 of the loan amount
• For the Seller
• Closing costs around 7 to 8 of selling price
  Sellers pay for a full service real estate agent
  commission, which is negotiable, but accounts for
  5 to 6 in most areas
• Careful and considerate planning of your budget
  will be key to your success in real estate.

www.lifethenfinance.com
42
Benefits of Home Ownership

• Leverage
• You have the enviable ability to control a
  property of greater value than the cash you
  invested.
• Leverage is achieved through borrowing money,
  typically from a financial institution.
• For instance, when you purchase a 100,000
  property, most people get a loan for the majority
  of that amount.
• They may have 20,000 to use as a down payment,
  and then borrow the remaining 80 from a mortgage
  company.
• The 80,000 is the loan and is referred to as the
  principle balance.
• This allows you to control a much larger asset,
  and pay down the 80 loan over time (mortgage
  payments).

www.lifethenfinance.com
43
Benefits of Home Ownership Cont

• Equity growth
• Paying down the principle balance over time will
  give you predictable, steadily increasing equity
  growth over time.
• Each time you make a mortgage payment, you are
  paying down part of the balance you owe.
• Its like a savings account built into home
  ownership.
• Tax benefits
• There are many tax benefits available to real
  estate owners. Check with your tax advisor to
  find out more.

www.lifethenfinance.com
44
Benefits of How Ownership Cont.

• Appreciation
• This is a real estate term for the increase in
  value of land and buildings.
• If you purchase a 200,000 house, for example,
  and it appreciates 10, your house value is now
  220,000.
• And if it appreciates 10 again the next year,
  the value grows to 242,000.
• Higher return on investment potential
• Due to the leverage you have with real estate
  investing and the fact your investment
  appreciates on the total value of the property,
  your ROI is much higher than other forms of
  investing.
• If you purchased 10,000 worth of stocks and you
  get a 15 return, you earned 1,500 for the year.
  
• This also greatly increases your risk.
• Cash flow
• Rental property owners are able to generate cash
  flow via the monthly income from their tenants
  (discussed further in this chapters section on
  owning a rental property).

www.lifethenfinance.com
45
Risks of Home Ownership

• Liquidity
• If you need to sell a property it can take years
  depending on the market conditions.
• When it is a strong market most communities
  average 2 6 months to sell.
• When it is bad market conditions the property can
  be listed for years before it sells.
• Change in loan market
• Lenders can change their rules at any point. This
  can affect future purchasers and your ability to
  sell the property.

www.lifethenfinance.com
46
Risks of Home Ownership Cont

• Market conditions
• When market conditions change things can turn
  quickly.
• When owning a property it is important to look at
  the long-term outlook of the national market and
  your local community.
• Maintenance
• Repairs on a home can be quite costly.
• Ensure you have enough money saved and the right
  insurance so you are prepared.

www.lifethenfinance.com