Roadmap for Investing Wisely

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• Roadmap for Investing Wisely
• Leslie Lum
• llum_at_bcc.ctc.edu
• www.bellevuecollege.edu/financialeducation

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The Roadmap

• Save
• Focus on financial goals
• Understand returns
• Understand risk
• Evaluate and asset allocation
• Monitor your investments

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You are the influencers

• Many of you can directly benefit from this
  presentation
• Many of you have successfully navigated the
  financial journey
• We need you to be the influencers of those
  around you

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Rule 1 You can make more money saving
aggressively than you can investing aggressively.
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How much does a typical family make?
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What happens to your income over your life?
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How are we doing at savings?
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Could we save more?
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Rule 2 If you dont have goals, you wont
achieve them.
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Lay out your goals(Yours/your kids/your
grandkids)

• Down payment on house
• Wedding
• College tuition
• Starting your own business
• Retirement
• Estate (Inheritance or charity)

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Rule 3 Know how to measure returns (it will
make you less susceptible to fraud.)
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Returns

• Always calculate returns on an annualized basis

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Calculate the return

• You will get your paycheck next week but you need
  100 now. You arrange for a payday loan paying a
  fee of 15 for the use of 100. The payday loan
  company will collect the 100 electronically from
  your bank account when your pay check is
  deposited next week. What is the annual rate
  charged?

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Calculate the lost return

• You are a typical employee in your 20s who when
  you left your job in 2005 cashed out (66 do)
  your 401K account of less than 10,000. What is
  the cost of cashing out your account if your
  balance was 8000?

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Rule 4 Understand risk
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Investment Risks

• Market risk
• Business risk
• Interest rate
• Inflation risk
• Political risk
• Fraud risk

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Cash
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Bonds
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Stocks
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Return versus Risk
Lessons to learn If you want a higher return,
you need to invest in riskier assets (stocks) The
more return, the more risk. 322 gain
guaranteed? Only if 322 loss guaranteed!
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Given the same return, the investment with less
risk is better
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The Northwest is the best.
www.riskgrades.com For advanced analysis of risk
return
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How do you get both a good return and low risk?
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Risk of loss in stocks is high year to year
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Over 5 years, risk of loss is lower
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Over 10 years, risk of loss is small
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Buy low, sell high or Buy high, sell low?
Source John Bogle testimony to US Senate 11/3/03
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Lesson?

• Buy and hold market index funds (doesnt work for
  individual stocks)
• Have an emergency fund (3 to 6 months) to tide
  you over
• Have other sources of income so you dont have to
  cash out during down markets

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• Rule 5 Asset allocate

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All eggs in one basket?

• 34.6 percent of families had stock in only one
  company
• 59.5 percent had stock in three or fewer
  companies
• 9.5 percent had stock in fifteen or more companies

Source 2004 Consumer Finance Survey
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Two investments double risk?
The key is having two investments which arent
correlated.
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Adding a riskier investment to your portfolio
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If you allocate the right amount you reduce risk
and increase return!
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Pension Fund Portfolio
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Millionaires Portfolio
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401K Allocations by Age
Source Investment Company Institute
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Lessons learned

• Dont try to time the market
• Allocate between asset classes based on your
  income requirements, your financial goals and
  your time horizon
• Ladder your fixed income investments
• Rebalance your portfolio (at least annually) to
  sell at highs and buy at lows

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Rule 6 Always watch your money.
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Evaluating funds

• Fund company/manager reputation
• Fund expenses
• Past performance (asset class)
• Fund risks
• For information, check out www.morningstar.com

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Use indices to monitor your portfolio
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Investment Advice

• According to the Consumer Federation about
  one-third of mutual fund investors rely
  completely on their advisors to choose
  investments and do not read about or research
  their investments
• Is this good?

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Investment Advice

• Spend time and take care in choosing your advisor
• Read all your statements, keep good records, and
  check for errors
• Only invest in what you understand (Warren Buffet
  rule 1)
• Assess your portfolio at least once a year
  against your cash requirements, financial goals
  and time horizon

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The Roadmap

• Save
• Focus on financial goals
• Understand returns
• Understand risk
• Asset allocation
• Monitor your investments