By: Michael Alfaro & Wellington Rodriguez Investing
Basics
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Our Objective Today is to Identify your investment needs See
whats out there Recognize the risks Understand the fees Reap the
rewards Diversify your asset pool
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Thinking Like an Investor Dale Carnegie Take a chance! All life
is a chance. The man who goes the furthest is generally the one who
is willing to do and dare. Russian Proverb: He who doesnt risk
never gets to drink champagne. Oscar Wilde: When I was young I
thought that money was the most important thing in life; now that I
am old I know that it is.
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I dont like risk Well thats too bad! Risk is a fact of life No
risk= a big risk Limit your returns
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An Introduction to Risk This is Boring
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So what is this Risky Business? There are multiple definitions
for risk Standard deviation Opportunity Cost Bad outcome Charlie
Sheen What we really care about is downside risk!
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Financial Products: Treasuries T-Bills, T-Notes, T-Bonds, and
TIPS Bills are 4 weeks to 52 weeks in maturity Notes are for 2-10
years Bonds are for 30 years TIPS range from 5 years to 30 years in
maturity
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Financial Products: Treasuries Treasury Bill Characteristics
Bills are zero coupon bonds Considered to be risk-free Historically
have returned 3.7% from 1926-2005 Highly liquid, practically cash
Treasury Bill Conventions Quoted in terms of discount yield Minimum
Investment $100 Exempt from state and local taxes, but not federal
MaturityAuction Date 4-weekTuesdays 13-weekMondays 26-weekMondays
52-week Every 4 weeks
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Financial Products: Treasuries Treasury Bond/Notes
Characteristics Pay interest semi-annually When it matures the
owner is paid the face value Trade of increments of $100 Can be
held to maturity or sold prior to maturity Historical return for
bonds 5.5% and 5.3% for notes from 1926-2005 How can I buy some
Treasuries? From a broker From your bank From
Treasurydirect.gov
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Ok, so whats the catch? Low risk means low return Price risk
Inflation risk Interest rate risk
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Financial Products: Bonds Bonds are known as fixed-income
investments They traditionally pay a fixed coupon payment They come
in different flavors such as high-yield, corporate, and municipal.
Most bonds pay interest semiannually Have historically returned
5.9% from 1926-2005 for corporates
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Advantages of Bonds over Stocks to Investors Safety Reliable
income Potential for capital gains Diversification Tax
advantages
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Risks of Bonds Bonds are generally less risky than stocks, but
they do suffer from several types of risk. NOTHING is risk free:
Credit risk Reinvestment risk Purchasing power risk Call risk
Liquidity risk Foreign exchange risk Bond risk
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Bonds prices and interest rates An interest rate is the price a
borrower pays for using someone else's money. When market interest
rates rise, the prices of existing bonds in the market fall and
vice versa. Investors are willing to pay more for a bond that has
higher coupon payments. This leads to bonds selling at a premium
(over par, > $1,000) or discount (under par, < $1,000)
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Financial Products: Stocks Common SharesPreferred Shares
Represents ownership rights Returns achieved through dividends and
capital gains Have historically returned 10.4% from 1926-2005
Hybrid equity/bond instrument No voting rights Dividends can be
suspended
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Financial Products: Common Stocks BenefitsRisks High Reward
Very liquid Reduce your tax liability Different flavors High
Volatility Systematic risk Unsystematic risk Last during
liquidation
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Financial Products: Stocks Income Portion Dividend paying
stocks Master Limited Partnerships (MLP) Real Estate Investment
Trusts (REITs) Growth Portion Make money through capital
appreciation Known as growth companies Man Chasing Yield
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Financial Products: Stocks Taxation and Fees Short-term capital
gains: Regular tax-bracket Long-term capital gains: 15% Broker
Commissions: Flat fee trading: ThinkorSwim $9.95 per trade Per
share commission: ThinkorSwim $0.015 per share OTC Pinks:
ThinkorSwim $9.99
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Financial Products: Mutual Funds & ETFs Mutual Funds An
Investment pool used to buy financial instruments There are two
types: Open-ended Closed-ended They have a Net Asset Value Can be
actively or passively managed ETFs Investment Fund that tracks an
index Trade on Exchanges just like closed-ended Mutual Funds Can be
leveraged Can track virtually anything
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Mutual Fund Process
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Financial Products: ETFs Advantages Great tax advantages No
minimum investment Very liquid Great way to diversify at a low
expense Alter risk-reward style Disadvantages Price risk Dividend
Distribution Commissions
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Financial Products: Mutual Funds Advantages Prices are
consistent No commissions for trades Dividend reinvestment
Diversification Disadvantages Required minimum investments
Front-end, back-end, management, and 12b-1 fees May not match your
investment style
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Asset Allocation
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Diversification
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Investors Characteristics Objectives Risk tolerance Time
horizon Capital amount Liquidity needs
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Objectives Each investor has different goals: Retirement Buy a
new house Vacations College of his/her kids It is important to:
Prioritize Compromise
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Risk What would you prefer? Earn a 2% return with inflation at
6% Lose 1% with inflation at 2%
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Risk Tolerance
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Time Horizon Interest-Generating Investments Equity Investments
AdvantageLess volatility and stable principal value Long- term real
capital growth DisadvantageInflation susceptibilityHigh Volatility
Appropriate forShort time horizonsLong time horizons Two major
risks Inflation Volatility
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Types of Investors Conservative Average Aggressive
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Deciding Investment Portfolio Asset Classes Long-term
percentage of each class Ranges that can be modified (Exploit
Opportunities) Market Timing Securities within the classes Passive
(Indexes) Active (Notion of superior skills)