Basics of Investing

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Basics of Investing Erica Abbott & Jean Lown, FCHD Dept., USU with assistance from Advanced Family Finance students Information Credits to: Dr. Barbara O'Neill Rutgers Cooperative Extension

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Basics of Investing. Erica Abbott & Jean Lown, FCHD Dept., USU with assistance from Advanced Family Finance students Information Credits to: Dr. Barbara O'Neill Rutgers Cooperative Extension. Welcome. Please ask questions or ask for clarification as we go along. - PowerPoint PPT Presentation

Transcript of Basics of Investing

Page 1: Basics of Investing

Basics of Investing

Erica Abbott & Jean Lown, FCHD Dept., USU

with assistance from Advanced Family Finance students

Information Credits to:Dr. Barbara O'Neill

Rutgers Cooperative Extension

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Welcome

Please ask questions or ask for clarification as we go along. I may defer some Q that require a

detailed answer to the end

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Things To Do Before Investing

Pay off credit card debt!No investment pays as much as

credit card companies charge Build an emergency fund Consider your goals Timeline

How soon will you need the $?

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Consider your Goals

Vehicle purchase/replacement Down payment on a home Child’s education To build wealth For retirement

What are your financial goals? How much $ will you need?

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Determine your Risk Tolerance

How much risk can you stand? If you have trouble sleeping at

night because you are worried about your investments then pick a more conservative mix

For experienced investors: How did you react to 2008-2009

losses?

Risk tolerance scale-worksheet

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Relationship Between Risk and Return

Risk HighLow

Expected Return

High

Low

CashEquivalents

Bonds

Int’l Bonds

Real Estate

Stocks

Int’l Stocks

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Before you Invest

Is your budget balanced? Do you save every month? Do you pay credit cards in full

every month? Do you carry adequate insurance

to protect against major catastrophes?

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Potential Risks

Being too conservative (Savings accounts, CDs, etc.)Keeps principal safe but… Inflation reduces purchasing

power Inflation averages about 3.1%

Risk not reaching your goal(s)

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Risks

Being too aggressive (too much in stocks)Higher potential for growth but…More market volatilityNo guarantee or insurancePotential to lose some or all of the

principal

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Managing Risks

Consider your goalEmergency fund- be conservativeRetirement- be more aggressive

Match your goals with your risk toleranceCan you handle the market

volatility?

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Managing the risks continued

Consider your time frame Short Term – months to 3 years

Stick with safe savings options Mid Term – 3 to 10 years

Take some risk to grow your $ & beat inflation

Long Term – 10 or more yearsTake more risk to grow your $ &

beat inflation

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Saving Terminology

Cash Equivalents Usually low riskSavings, CDs, cash on hand Also called liquid assetsUse for short term goals or if you

have you have low risk tolerance

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Investing Terminology

Stock – ownership in a company Bond – loan money to issuer Mutual fund – A diversified

portfolio of stocks and/or bondsOpposite of putting all your eggs

in one basket

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Retirement Funds

401(k) retirement plan offered by employer $ grows tax deferredSome employers will match (~3%)

Need to invest > just the match IRA: individual retirement account

Invest on your own$ grows tax deferred

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Retirement Funds

Roth IRAPay taxes nowNo taxes when you withdraw

= no taxes on the growth!

Traditional IRAUpfront tax deductionPay taxes at withdrawal

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Retirement Funds

Retirement accounts are NOT an investmentHow the government treats that

money for tax purposesWhere you put that money is up to

you

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IRA Criteria

Must have an earned income If married, non-earning spouse

can use a spousal IRA $5,500 annual limit

You can contribute lessAge 50+: $6,500

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401(k), Roth, or traditional IRA?

Invest in 401(k) up to full match Instant 100% rate of return!!Possible downsides

employer picks the funds May charge heavy fees

If no employer match, consider an IRA

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401(k), Roth, or traditional IRA? Use a traditional IRA if

Your employer doesn’t match or you’ve already invested up to the match

You expect to be in a lower tax bracket at retirementTake the tax break now

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401k, Roth, or traditional IRA? Use a Roth IRA if

You expect taxes to riseYou expect to be in a higher

tax bracket at retirementOffers tax diversification

If most of your retirement income will be taxable… invest in a Roth

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Establish Your Long-Term Investment Strategy

Strategy 1: Buy and hold anticipates long-term economic growth.Stock market has offered a

positive return over every 15 year period

Past returns no guarantee, but long-term buying and holding is a great strategy

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Long-Term Investment Strategy 2

• Dollar-cost averaging buys at “below-average” costs– Invest same amount every month

– Avoid following the crowd– Jumping in when the market is high– Pulling out when it drops

– Set up automatic deposit

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Long-Term Investment Strategy 3 & 4

• Portfolio diversification reduces volatility

• Money is like manure.  Left in a pile, it stinks.  If you spread it around, it'll grow some stuff. – Dave Ramsey

• Asset allocation keeps you in the right investment categories at the right time

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Determinants of Portfolio Performance

Asset Allocation

91.5%

Other2.1%

Market Timing1.8%

Security Selection

4.6%

Source: “Determinants of Portfolio Performance II, An Update” by Gary Brinston, Brian D. Singer and Gilbert L. Beebower, Financial Analysts Journal May-June 1991.

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Investing Made Easy

Set up Automatic InvestingPayroll deduction orAutomatic transfer from checking

to: Individual Retirement Account Mutual fund Other investment

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Mutual Funds Advantages

Professional management Reduce risk through diversification

Own small part of lots of different investments

Monitoring investments is easy

Disadvantages Funds charge fees

Be aware follow market performance (down & up) No guaranteed rate of return

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Successful Investing Educate yourself Determine your risk tolerance Decide on asset allocation Stick to your plan Monitor investment performance If you need help, consult a

professional advisor (N.B. most are salespeople)

Avoid fraud! 29

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More Successful Strategies

Ask questions about…Expenses Historical performance: 3, 5, 10 yrs. Investment goal (e.g., capital

appreciation) “Rule of Three” comparison

Compare at least 3 investments “Core and Explore” approach

For more adventurous30

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Low-Maintenance Strategies

Target maturity date mutual funds for retirement

Index funds

Automatic deposits

Annual financial check-up

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Ideas on where to invest

Fidelity (800) 343-3548Vanguard (877) 662-7447T. Rowe Price (855) 389-9464Charles Schwab (866) 855-9102Russell (800) 426-7969

*This is not a comprehensive list or an endorsement

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Remember

Never invest in something you don’t understand

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Investing Resources

Risk tolerance quiz: http://njaes.rutgers.edu/money/riskquiz/

Investing for Your Future http://www.extension.org/pages/10984/investing-for-your-future

Money 101 #4: Investing basics: http://money.cnn.com/magazines/moneymag/money101/lesson4/index.htm

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Questions? Comments? Experiences?

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Where to Find FPW

http://usu.edu/fpw/ http://fpwusu.blogspot.com/ https://www.facebook.com/Finan

cialPlanningforWomen Second Wednesday of the

month TSC room 336 11:30-12:30

Family Life Center 493 North 700 East. 7:00 to 8:30

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Financial Planning for Womenwww.usu.edu/fpw

April 10th: Social Security with SSA expert Mickie Douglas 11:30 only; no evening program

May 8th: Great Mutual Funds for your IRA

June 12th: Get your house in order before you buy

July 10th: Investing for College