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Investing Basics

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					Goals
For This Session


   To review investing prerequisites

   To learn key investing concepts

   To discuss strategies for finding money
    to invest                               1
Basic Building Blocks of Successful
      Financial Management




                                  2
Cash Management

   Budgeting
   Financial record keeping
   Maximize the amount of interest earned
   Complete annual financial checkup,
    including net worth and cash flow
   Review and revise periodically

                                         3
Emergency Cash Reserve

  Money for unexpected expenses

  3 to 6 months living expenses

  Amount depends on situation

  Money can be sub-divided
                                   4
Risk Management

   Protect against catastrophic financial
    losses

   Purchase comprehensive insurance
    coverage if needed

   Evaluate current policies and be a smart
    consumer
                                             5
Tax Management

   Pay only what you owe

   Use tax laws to your financial
    advantage

   As tax laws change, adjust financial
    strategies
                                           6
$MART Financial Goals

   $   SPECIFIC
   M   MEASURABLE, MUTUAL
   A   ATTAINABLE
   R   RELEVANT, REALISTIC
   T   TIME-LINE, TRADE-OFFS



                                7
Credit Management

   Avoid overuse of credit

   Lower the total amount of debt

   Shorten the term of debt

   Reduce interest and finance charges
                                          8
Home Ownership

   Think of buying a home as purchasing
    shelter

   Not as an investment that will rapidly
    appreciate

   Home equity is an asset
                                             9
Investments


   Begin investing after a firm foundation is
    laid

   Develop investing strategies to
    accomplish specific financial goals


                                            10
Children’s Education

   Start early
   Make an estimate of the cost
   Develop a plan for accomplishing goal
   Consider tax implications
   Explore other ways to pay for education



                                          11
Retirement Planning


   AGAIN -

    Start early
    Make an estimate retirement needs
    Develop plan for accomplishing goal
    Consider tax implications
                                           12
Estate Planning

   The prize for successfully managing
    finances throughout your lifetime is the
    opportunity to pass assets on to loved
    ones or favorite causes at the end of
    your life




                                               13
Key Investing
Concepts
   Difference between saving and
    investing
   Risk tolerance
   Risk versus rate of return
   Impact of time on money accumulation
   Asset allocation
   Personal factors that affect investing
    decisions                              14
The Difference Between
Savings and Investing

   Savings:
    – Money held in a short-term cash assets
    – Money used for emergencies and specific
      purchases
   Investing:
    – Money used to increase net worth
      and achieve long-term financial goals

                                                15
Savings $                   Investment $
   Kept in safe,          Involve risk
    low-risk vehicles
                           Value can go up and
                            down in short time
   Liquid                  periods

   Yield low returns      Offer potential for
                            growth
   Used for short-
    term goals             Used for mid-& long-
                            term goals
                                                   16
Investment Return

   Total return
    – Profit (or loss) on an investment
       • Income PLUS capital gain or loss
       • $8.50 + $4.50 = $13 per share


   Rate of return (%)
    – Profit (or loss) on an investment
       • Return ÷ price of security
       • $3 ÷ $24 = .125 or 12.5%
                                            17
Compound Annual Rate of
Return 1925-2003

   Large Company Stocks…….…….10.2%
   Small Company Stocks…………..12.1%
   Government Bonds………….……..5.5%
   Treasury Bills……………………….3.8%
   Inflation………………………………3.1%
   Source: Ibbotson Associates

                                  18
Risk

   Associated with all
    investments because
    the future value of
    investments is never certain.

   Caused by:
    – Inflation          Changes in economy
    – Business failure   Interest rate changes
                                                 19
Risk and Return Are Related




                              20
Techniques to
Offset Risk:

   Diversification
    – Putting your money, “your eggs,” into
      several baskets (assets)


   Dollar Cost Averaging
    – Investing regular amounts at regular
      intervals regardless of price
                                              21
Impact of Time and Rate of
Return on Money Accumulation
   To grow the largest sum of money
    you need:
    – Maximum time
    – A high rate of return
    – Tax advantages
    – A generous pot of money
    – Frequent compounding of interest
   WHY???                               22
Asset Allocation
   The ratio of stocks, bonds and cash
    assets in your portfolio
    Conservative       Moderate       Aggressive
                                             C
                                  C
    S          C                                   B

                   S



                                  B   S
          B



   The most important determinant of
    overall investment success
                                                       23
Factors Affecting Asset
Allocation Decisions


   Investment goals and return needs
   Risk tolerance
   Time horizon
   Time & skill to manage portfolio
   Tax situation
                                        24
Investing Action You Can Take
Today

   Review your financial holdings and
    obligations. Calculate your net worth.
   Read investment pubs
   Sign up for financial classes
   Set short and long-term financial goals.
   Seek assistance if you are short on time
    or skill
                                             25
Finding Money To Invest

   70% of Americans live “paycheck to
    paycheck”


   Americans are not saving much money




                                          26
    Review Your Financial Status
   Do you have 3-6 months income in
    an emergency fund?
   Do you save regularly?
   Do you know how much you need to
    save to reach your goals?
   Do you save to buy major items
    instead of using credit?
                                       27
    Review Your Financial Status
   When you use credit, do you pay as
    large a down payment as possible?

   Do you save at least 10% of your
    disposable income?

   Do you know how much you need to
    save for retirement?                 28
Strategies for Saving Money to Invest

   Establish savings       Collect loose
    plan                     change
   Needs vs wants          Save lunch money
   Pay yourself first      Shop for sale prices
   Save bonus/coupon       Plan a “Nothing
    money                    Week”
   Continue loan           Avoid paying credit
    repayments               charges

                                                29
Breaking Habits = $$ to Invest
         6 Easy Steps
   1. Identify habit, frequency, and cost
   2. Make decision to change
   3. Act immediately
   4. Share your plan
   5. Stick with your plan to change
   6. Celebrate your success
                                             30
Step 1
Identify Habits, Frequency, & Cost
Where’s the Money?      Think of habits you
                         might be able to adjust
                         (hair care, soft drinks,
                         cigarettes, …

                        Frequency of habit

                        Calculate total cost for
                         a year
                                                31
Step 2
Make a Decision to Change
   Look for
    alternative ways
    to spend your
    money
   Take control of
    your money
   Choose another
    way to spend
    your money              32
Step 3
Act Immediately
                     Write down new
                      behavior

     START
                     Start within 24 hours
     TODAY


                     The sooner you
                      begin a new
                      behavior, the sooner
                      it will become a
                      habit              33
Step 4
Share Your Plan
   Tell others about
    your plan
   Provides opportunity
    for support
   Increases your
    determination to
    succeed
   Family must work
    together
                           34
Step 5
Stick With Your Plan
                   This is a critical step
                   Stay focused
                   Takes 30 days for a
                    new behavior to
                    become a habit
                   Will serve you well
                   Set an example for
                    your children

                                         35
Step 6
Celebrate Your Success
   Let others know of
    your success
   Enjoy the fruits of
    your savings
   Continue with your
    new behaviors
   Watch pennies grow
    into dollars

                          36
Other Strategies
                      Be a comparison
                       shopper

                      Investigate
                       untapped
                       strategies




                                         37
More Strategies To Stretch
             Your Money...

   Adopt the two-week rule

   Avoid unnecessary waste

   Become a coupon clipper


                              38
Next Three Class Sessions:
Characteristics of Specific
Investment Products

   Equity Investments (e.g., stock)

   Fixed-Income Investments (e.g., bonds)
   Mutual Funds


                                         39

				
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