Investing Basics - Amazon S3...Investing Basics August 01, 2016 Page 1 of 9, see disclaimer on final...

Beronio Wealth Planning SolutionsPeter Beronio, CFP®Registered Principal / Branch Office MgrPO Box 101002601 S TrimmierKilleen, TX 76547254-526-6603800-728-3067peter.j.beronio@lpl.comwww.peterberonio.com

Investing Basics

August 01, 2016 of 9, see disclaimer on final page

Saving and Investing Wisely

Saving builds a foundation

The first step in investing is to secure a strongfinancial foundation. Start with these fourbasic steps:

• Create a "rainy day" reserve: Set asideenough cash to get you through anunexpected period of illness orunemployment--three to six months' worthof living expenses is generallyrecommended. Because you may need touse these funds unexpectedly, you'llgenerally want to put the cash in a low-risk,liquid investment.

• Pay off your debts: It may make moresense to pay off high-interest-rate debt (forexample, credit card debt) before makinginvestments that may have a lower or moreuncertain return.

• Get insured: There is no better way to putyour extra cash to work for you than byhaving adequate insurance. It's your bestprotection against financial loss, so reviewyour home, auto, health, disability, life, andother policies, and increase your coverage,if needed.

• Max out any tax-deferred retirement plans,such as 401(k)s and IRAs: Putting moneyin these accounts defers income taxes,which means you'll have more money to

The impact of 3% yearly inflation on the purchasing power of $200,000

Why invest?

To try to fight inflation

When people say, "I'm not an investor," it'soften because they worry about the potentialfor market losses. It's true that investinginvolves risk as well as reward, and investingis no guarantee that you'll beat inflation oreven come out ahead. However, there's alsoanother type of loss to be aware of: the loss ofpurchasing power over time. During periods ofinflation, each dollar you've saved will buy lessand less as time goes on.

To take advantage of compound interest

Anyone who has a savings accountunderstands the basics of compounding: Thefunds in your savings account earn interest,and that interest is added to your accountbalance. The next time interest is calculated,it's based on the increased value of youraccount. In effect, you earn interest on yourinterest. Many people, however, don't fullyappreciate the impact that compoundedearnings can have, especially over a longperiod of time.

save. Take full advantage if they areavailable to you.

Inflation reduces thepurchasing power of yourdollars over time.

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Compounding interest

Let's say you invest $5,000 a year for 30 years(see illustration). After 30 years you will haveinvested a total of $150,000. Yet, assumingyour funds grow at exactly 6% each year, after30 years you will have over $395,000,because of compounding.

Note: This is a hypothetical example and isnot intended to reflect the actual performanceof any specific investment. Taxes andinvestment fees and expenses are notreflected. If they were, the results would belower. Actual results will vary. Rates of returnwill vary over time, particularly for long-terminvestments.

Compounding has a "snowball" effect. Themore money that is added to the account, thegreater its benefit. Also, the more frequentlyinterest is compounded--for example, monthlyinstead of annually--the more quickly yoursavings build. The sooner you start saving orinvesting, the more time and potential yourinvestments have for growth. In effect,compounding helps you provide for yourfinancial future by doing some of the work foryou.

Building on Your Foundation

Setting investment goals

Setting goals is an important part of financialplanning. Before you invest your money, youshould spend some time considering andsetting your personal goals. For example, doyou want to retire early? Would you like tostart your own business soon? Do you need topay for a child's college education? Would youlike to buy or build a new house? In addition tothese, there are several other considerationsthat can help you and your financialprofessional develop an appropriate plan.

Think about your time horizon

One of the first questions you should askyourself in setting your investment goals is"When will I need the money?" Will it be in 3years or 30? Your time horizon for each ofyour financial goals will have a significantimpact on your investment strategy.

The general rule is: The longer your timehorizon, the more risky (and potentially morelucrative) investments you may be able tomake. Many financial professionals believethat with a longer time horizon, you can rideout fluctuations in your investments for thepotential of greater long-term returns. On theother hand, if your time horizon is very short,you may want to concentrate your investmentsin less risky vehicles because you may nothave enough time to recoup losses should

they occur.

Understand your risk tolerance

Another important question is "What is myinvestment risk tolerance?" How do you feelabout the potential of losing your hard-earnedmoney? Many investors would forgo thepossibility of a large gain if they knew therewas also the possibility of a large loss. Otherinvestors are more willing to take on greaterrisk to try to achieve a higher return. You can'tcompletely avoid risk when it comes toinvesting, but it's possible to manage it.

Almost universally, when financialprofessionals or the media talk aboutinvestment risk, their focus is on pricevolatility. Advisors label as aggressive or riskyan investment whose price has been prone todramatic ups and downs in the past, or thatinvolves substantial uncertainty andunpredictability. Assets whose priceshistorically have experienced a narrowerrange of peaks and valleys are consideredmore conservative.

In general, the risk-reward relationship makessense to most people. After all, no sensibleperson would make a higher-risk investmentwithout the prospect of a higher reward fortaking that risk. That is the tradeoff. As aninvestor, your goal is to maximize returnswithout taking on more risk than is necessary


or comfortable for you. If you find that youcan't sleep at night because you're worryingabout your investments, you've probablyassumed too much risk. On the other hand,returns that are too low may leave you unableto reach your financial goals.

The concept of risk tolerance refers not only toyour willingness to assume risk but also toyour financial ability to endure theconsequences of loss. That has to do withyour stage in life, how soon you'll need themoney, and your financial goals.

Remember your liquidity needs

Liquidity refers to how quickly you can convertinvestments into cash. Real estate, for

Your need for liquidity will affect the types ofinvestments you might choose to meet yourgoals. For example, if you have an emergencyfund, you're in good health, and your job issecure, you may be willing to hold some lessliquid investments that may have higherpotential for gain. However, if you have twochildren going to college in the next couple ofyears, you probably don't want all of theirtuition money invested in less liquid assets.Also, having some relatively liquid investmentsmay help protect you from having to sellothers when their prices are down.

The risk/return relationship

example, tends to be relatively illiquid; it cantake a very long time to sell. Publicly tradedstock, on the other hand, tends to be fairlyliquid.

Types of Investments: Stocks

How do stocks work?

When you buy a company's stock, you'repurchasing a share of ownership in thatbusiness. You become one of the company'sstockholders or shareholders. Yourpercentage of ownership in a company alsorepresents your share of the risks taken andprofits generated by the company. If thecompany does well, your share of its earningswill be proportionate to how much of thecompany's stock you own. The flip side, ofcourse, is that your share of any loss will besimilarly proportionate to your percentage ofownership.

Advantages

• Historically, have hadgreater potential for higherlong-term total return thancash or bonds

• Easy to buy and sell

• Can provide capitalappreciation as well asincome from dividends

• Ownership rights

Tradeoffs

• Poor company performancecan affect dividends andshare value

• Greater risk to principal

• May not be appropriate forshort-term investment

• Subject to market volatility


Stocks by SizeSize Description

Large cap • $10+ billion• Widely bought and sold• Often are well-known

names

Midcap • $2 billion-$10 billion• Somewhat smaller than

large caps

Small cap • $200 million-$2 billion• Less widely traded• Fewer institutional investors

Microcap • $20 million-$200 million• May trade infrequently• More difficult to research

Note: The values used to define companiesby size are highly variable. Differentorganizations define these ranges in differentways, and the ranges can vary over time withgeneral stock market values.

If you purchase stock, you can make money inone of two ways. The company's board ofdirectors can decide to distribute a portion ofthe company's profits to its shareholders asdividends, which can provide you with income.Also, if the value of the stock rises, you maybe able to sell your stock for more than youpaid for it. Of course, if the value of the stockhas declined, you'll lose money.

The role of stocks in yourportfolio

Though past performance is no guarantee of

The universe of stocks offers enormousflexibility to construct a stock portfolio that istailored to your needs. There are manydifferent types of stock, and many differentways to diversify your stock holdings. Forexample, you can sort through stocks byindustry, by company size, by location, and bygrowth prospects or income.

Growth stocks are usually characterized bycorporate earnings that are increasing at afaster rate than their industry average or theoverall market. Income stocks (for example,utilities or financial companies) generally offerhigher dividend yields than market averages.Value stocks are typically characterized byselling at a low price relative to a company'ssales, earnings, or book value.

These are only some of the many ways inwhich stocks can be identified, and yourfinancial professional can help you decidewhich might be more appropriate for you thanothers. With stocks, it's especially important todiversify your holdings. That way, if onecompany is in trouble, it won't have as muchimpact on your overall return as it would if itrepresented your entire portfolio.

future results, stocks historically have hadgreater potential for higher long-term totalreturns than cash equivalents or bonds.However, that potential for greater returnscomes with greater risk of volatility andpotential for loss. You can lose part or all ofthe money you invest in a stock. Because ofthat volatility, stock investments may not beappropriate for money you count on to beavailable in the short term. You'll need to thinkabout whether you have the financial andemotional ability to ride out those ups anddowns as you try for greater returns.

Types of Investments: Bonds

How do bonds work?

When you buy a bond, you're basically buyingan IOU. Bonds, sometimes calledfixed-income securities, are essentially loansto a corporation or governmental body. Theborrower (the bond issuer) typically promisesto pay the lender, or bondholder, regularinterest payments until a certain date. At thatpoint, the bond is said to have matured. Whenit reaches that maturity date, the full amount ofthe loan (the principal or face value) must berepaid.

A bond typically pays a stated interest ratecalled the coupon, a term that dates back tothe days when a bondholder had to clip a

Advantages

• Generally, a predictablestream of income

• Income typically higher thancash investments

• Relatively lower riskcompared to stocks

• Low correlation with stockmarket

Tradeoffs

• Risk of default

• Bond values fluctuate withinterest rates

• Generally, lower potentialreturns compared to stocks


coupon attached to the bond and mail it in toreceive each interest payment. Most bondspay interest on a fixed schedule, usuallyquarterly or semiannually, although some payall interest at maturity along with the principal.

There are two fundamental ways that you canprofit from owning bonds. The most obvious isthe interest that bonds pay. However, you canalso make money if you sell a bond for morethan you paid for it. As with any security, bondprices move up and down in response toinvestor demand; they also are sensitive tochanges in interest rates. Bonds redeemedprior to maturity may be worth more or lessthan their original cost, and those that seek toachieve higher yields also involve a higherdegree of risk.

The role of bonds in yourportfolio

One of the most important reasons thatinvestors choose bonds is for their steady andpredictable stream of income through interestpayments. Bonds have traditionally beenimportant for retirees for this reason. Also,

Ways to Classify BondsBy maturity • Long-term (10+ years)

• Intermediate (1-10 years)• Short-term (less than 1 year)

By issuer • Corporate• Municipal• U.S. Treasury• Government-sponsored entities• Foreign corporations and governments

By quality • Investment grade• High yield ("junk")

By tax status • Tax-exempt: municipal bonds (generallyexempt from federal tax)

• Taxable: corporate, U.S. Treasury (exemptfrom most state and local tax)

The bond market often behaves verydifferently from stocks. For example, whenstock prices are down, investors often preferbonds because of their relative stability andinterest payments. Also, when interest ratesare high, bond returns can be attractiveenough that investors decide not to assumethe greater risk of stocks. Interest from bondscan help balance stock fluctuations andincrease a portfolio's stability. And because abond's face value gets repaid upon maturity,you can choose a bond that matures whenyou need the money.

Some bonds are exempt from federal or stateand local income tax. This can be appealing toinvestors in high tax brackets.

though they are not risk-free--for example, abond issuer could default on a payment oreven fail to repay the principal--bonds areconsidered somewhat less risky than stocks.In part, that's because a corporation must payinterest to bondholders before it paysdividends to its shareholders. Also, if itdeclares bankruptcy or dissolves, bondholdersare first in line to be compensated.


Types of Investments: Cash

Cash and cash alternatives

In daily life, cash is all around you, ascurrency, bank balances, negotiable moneyorders, and checks. However, in investing,"cash" is also used to refer to so-called cashalternatives: investments that are consideredrelatively low-risk and can generally beconverted to cash quickly. Some examples ofcash alternatives include savings accounts,money market accounts, certificates ofdeposit, guaranteed investment contracts(GICs), government savings bonds, U.S.Treasury bills, Eurodollar certificates ofdeposit, and commercial paper.

Using cash alternatives

Because of their conservative nature, cashalternatives involve the least risk. However,there is a tradeoff for their relative safety:Their potential return is not as high asinvestments that involve more risk. Byfocusing solely on playing it safe, you maylimit your investment income, especially overlonger time periods.

Cash alternatives can be useful in many ways.First, they can provide relative stability. Whilecash alternatives can't assure you of a gain orprotect you from losses, they are generallyconsidered safer than other asset classes,such as stocks or bonds. Also, they canprovide income on cash that would otherwisebe idle. They can serve as a ready source ofcash to pay bills or make purchases. Forexample, cash alternatives can help preservemoney earmarked for a down payment or afamily vacation. Readily available cash alsocan help you cope in a financial emergency.Finally, cash alternatives can serve as atemporary parking place when you're not surewhere to invest.

Investing Through Mutual Funds and ETFsYou can invest in all three major asset classesthrough mutual funds, which pool your moneywith that of other investors. Each fund'smanager selects specific securities to buybased on a stated investment strategy.

Mutual funds offer two key benefits. Becausemost mutual funds own dozens or hundreds ofsecurities, you achieve greater diversificationthan buying a few individual securities on yourown. Also, the fund manager's expertise ispart of what you pay for in buying mutual fundshares.

A mutual fund may invest in one of the threemajor asset classes, or combine them. Forexample, a balanced fund typically includesstocks and bonds. With an actively managedmutual fund, the fund manager buys and sellsspecific securities, trying to beat a benchmark

Note: Before investing in a mutual fund orETF, carefully consider its investmentobjectives, risks, fees and expenses, whichcan be found in the prospectus available fromthe fund. Read it carefully before investing.

Like index funds, exchange traded funds(ETFs) typically invest in a group of securitiesrepresented in a specific index, and the waythey're organized means that expensestypically are lower than those of activelymanaged mutual funds. But you must pay abrokerage commission whenever you buy orsell ETFs, so your overall costs could behigher, especially if you trade frequently.

index such as the S&P 500. A passivelymanaged or index fund tries to match thereturn of a specific index by holding only thesecurities included in that index.

Advantages

• Predictable earnings

• Highly liquid

• Relatively low risk toprincipal

Tradeoffs

• Relatively low returns

• May not outpace inflation

Advantages

• Professional moneymanagement

• Small investment amounts

• Diversification

• Liquidity

Tradeoffs

• Fluctuating share values

• Some money kept in cashfor fund liquidity needs

• Potential tax inefficiency

• Mutual fund fees andexpenses


Asset AllocationThe combination of investments you choosecan be as important as your specificinvestments. The mix of various asset classes,such as stocks, bonds, and cash alternatives,account for most of the ups and downs of aportfolio's returns.

Deciding how much of each you shouldinclude is one of your most important tasks asan investor. That balance between potentialfor growth, income, and stability is called yourasset allocation. It doesn't guarantee a profitor insure against a loss, but it does help youmanage the level and type of risks you face.

Balancing risk and return

Ideally, you should strive for an overallcombination of investments that can help tominimize the risk you take in trying to achievea targeted rate of return. This often meansbalancing more conservative investmentsagainst others that are designed to provide ahigher return but that also involve more risk.For example, let's say you want to get a 7.5%return on your money. Your financialprofessional tells you that in the past, stockmarket returns have averaged about 10%annually, and bonds roughly 5%. One way totry to achieve your 7.5% return would be bychoosing a 50-50 mix of stocks and bonds. Itmight not work out that way, of course. This isonly a hypothetical illustration, not a realportfolio, and there's no guarantee that eitherstocks or bonds will perform as they have inthe past. But asset allocation gives you aplace to start.

Many publications feature model investmentportfolios that recommend generic assetallocations based on an investor's age. Thesecan help jump-start your thinking about how todivide up your investments. However,because they're based on averages andhypothetical situations, they shouldn't be seenas definitive. Your asset allocation is--orshould be--as unique as you are. Even if twopeople are the same age and have similarincomes, they may have very different needsand goals. You should make sure your assetallocation is tailored to your individualcircumstances.

Many ways to diversify

When financial professionals refer to assetallocation, they're usually talking about overall

asset classes once you've got those basicscovered. They include real estate andalternative investments such as hedge funds,private equity, metals, or collectibles. Becausetheir returns don't necessarily correlate closelywith returns from major asset classes, theycan provide additional diversification andbalance in a portfolio.

Even within an asset class, consider how yourassets are allocated. For example, if you'reinvesting in stocks, you could allocate acertain amount to large-cap stocks and adifferent percentage to stocks of smallercompanies, or allocate based on geography.Bond investments might be allocated byvarious maturities, with some money in bondsthat mature quickly and some in longer-termbonds. Or you might favor tax-free bonds overtaxable ones, depending on your tax statusand the type of account in which the bondsare held.

Monitoring your portfolio

Even if you've chosen an asset allocation,market forces may quickly begin to tweak it.For example, if stock prices go up, you mayeventually find yourself with a greaterpercentage of stocks in your portfolio than youwant. If they go down, you might worry thatyou won't be able to reach your financialgoals. The same is true for bonds and otherinvestments.

Do you have a strategy for dealing with thosechanges? Of course you'll probably want totake a look at your individual investments, butyou'll also want to think about your assetallocation. Just like your initial investingstrategy, your game plan for fine-tuning yourportfolio periodically should reflect yourinvesting personality.

Even if you're happy with your assetallocation, remember that your circumstanceswill change over time. Those changes mayaffect how well your investments match yourgoals. At a minimum, you should periodicallyreview the reasons for your initial choices tomake sure they're still valid. Also, someinvestments, such as mutual funds, mayactually change over time; make sure they'restill a good fit.

classes: stocks, bonds, and cash or cashalternatives. However, there are others thatalso can be used to complement the major

Note: Asset allocation anddiversification don'tguarantee a profit or insureagainst a loss. All investinginvolves risk, including thepotential loss of principal,and there can be noguarantee that any investingstrategy will be successful.


Beronio Wealth PlanningSolutions

Peter Beronio, CFP®Registered Principal / Branch

Office MgrPO Box 10100

2601 S TrimmierKilleen, TX 76547

254-526-6603800-728-3067

[email protected]

August 01, 2016Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2016

This report is intended to serve as a basis for further discussion with your other professional advisors.Although great effort has been taken to provide accurate numbers and explanations, the information in thisreport should not be relied upon for preparing tax returns or making investment decisions. Assumed rates ofreturn are not in any way to be taken as guaranteed projections of actual returns from any recommendedinvestment opportunity. The actual application of some of these concepts may be the practice of law and isthe proper responsibility of your attorney.

Peter Beronio is a Registered Representative offering securities through LPL Financial. LPL Financial is amember of FINRA/SIPC. Advisory Services offered through LPL Financial, a Registered Investment Advisor.

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