Chapter 13: Investment Fundamentals and Portfolio Management

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Chapter 13 Investment Fundamentals
andPortfolio Management
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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.

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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?

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Steps to Create a Personal Investing Plan
Step 1 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 5 Risk factors for each alternative 1._______
_____________ 2.____________________ 3.___________
_________ 4.____________________
Step 6 Projected return on each
alternative 1.__________ 2.__________ 3.__________
4.__________
Step 7 Investment decision 1._______________ 2.___
____________ 3._______________
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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.

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Preparations for Investing
WHY PEOPLE INVEST

• Achieve financial goals
• Increase current income
• Gain wealth and financial security
• Have funds available for retirement

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Preparations for Investing
PREREQUISITES TO INVESTING

• Live within means
• Continue savings program
• Establish lines of credit
• Carry adequate insurance
• Establish investment goals

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Preparations for Investing

• Interest
• Dividends
• Rent
• Capital gain/loss
• Rate of return or yield

INVESTMENT RETURNS
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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

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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

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Value of Having a Long-Term Investing Program

• Many people dont start investing because they
  only have a small amount to investbut....
• Small amounts invested regularly become large
  amounts over time

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Personal Investment Philosophy

• Handling risk
• Ultraconservative strategies
• Conservative
• Moderate
• Aggressive

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Investment Selection

• Lend or own
• Short-term or long-term
• Choose a vehicle

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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

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Income From Investments

• Safest
• CDs
• savings bonds
• T-bills
• Higher potential income
• municipal bonds
• corporate bonds
• preferred stocks
• mutual funds
• real estate

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Investment Growth and Liquidity

• Growth
• 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

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Investment Pyramid
High risk
Lowrisk
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Major Factors That Affect Rate of Return

• INVESTMENT RISK

• Pure
• Speculative
• Risk pyramid

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Major Factors That Affect Rate of Return

• Financial
• Market volatility
• Political

• INVESTMENT RISK TYPES

• Inflation
• Deflation
• Interest rate

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Major Factors That Affect Rate of Return

• INVESTMENT RISK

• Random or unsystematic
• Diversification
• Market or systematic

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Major Factors That Affect Rate of Return

• Leverage
• Taxes
• Marginal tax rate
• Taxable vs. tax-free income
• Buying and selling costs/commissions
• Inflation

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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

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Management Strategies Long-Term Investors

• Business-cycle timing
• Dollar-cost averaging
• Portfolio diversification
• Asset allocation

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Investment Alternatives

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

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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 isrepaid at maturity (1-30 years)
• You can keep the bond until maturity or sell it
  to another investor

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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 funds objective

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Monitor Your Investments

• Read your account statements
• Chart the value of your investments
• Maintain accurate and current records
• Calculate the current yield

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Sources of Investment Information

• Newspapers
• Business Periodicals
• Government Publications
• Corporate Reports
• Statistical Averages
• Investor Services and newsletters
• Standard and Poors stock reports
• Value Line
• Moodys investment service

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Investment Philosophies
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Best Time to Sell

• Take profits
• Cut losses
• If wouldnt buy it now, sell it