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Financial Investing Presentation to USF

Graduate & Professional Student Council

05/21/10Delroy M Hunter

1-2 The Investment Process

What is INVESTING? Is it different from SAVING?

Saving requires the consumption of only a part of your income

Investing requires a decision to allocate the savings to one or more asset classes, typically with a given objective(s) in mind

1-3 The Investment Process

What are the implications of “investing”?

1. Requires conscious, active (not passive) decisions

2. A crucial decision is the allocation across assetclasses

3. Investing is goal oriented

1-4 Essential Nature of Investing

1. Reduce current consumption (save)

2. Invest using a two-step, “top-down” process- Asset allocation- Security selection

3. Enjoy higher (real) consumption at end of investment horizon

1-5 Doing the “Two Steps”What is Asset Allocation?

• The process of deciding the relative proportions of theinvestment budget that is invested in various asset classes

• The “top” of the “top-down” approach to investing

• Different from security selection, which is the identificationof individual securities or even sub-classes of assets, once theasset allocation decision has been made

• Studies and life experiences show that asset allocation is thedominant determinant of an investor’s terminal wealth

1-6ALLOCATION! What Allocation?Essentials of Asset Allocation

• Investor-specific – though investors can be broadly groupedand offered a similar allocation (e.g., Lifestyle Funds)

• Is influenced by age, risk tolerance, investment objective,investment horizon

• Not a science, although there are some “rules”:e.g., % equity allocation = (100 – AGE)%

• Should be the cornerstone of local and internationalDIVERSIFICATION

1-7 Asset Classes

Main asset classesEquities (stocks) – issued by private sector firmsBonds (medium to long-term fixed-income securities) – issued by private and public sectorsReal estate (through investment companies or owner-managed)Cash equivalents (short-term, fixed income securities) – issued by private and public sectorsCommodities (typically through investment companies)

1-8 Asset Classes

There is a risk-return trade-off to investing in risky securities

- What is return?- What is risk?- Where is the trade-off?

Higher risk securities are priced to offer higher returns

1-9 Investing in Equities

Using investment companies for a feeEquity mutual funds

- Morningstar (http://screen.morningstar.com/FundSelector.html?fsection=ToolScreener)

- Yahoo (http://www.finance.yahoo.com/funds)- Investment Co. Institute (http://www.ici.org/stats/index.html)

Exchange traded funds (http://screen.morningstar.com/ETFScreener/Selector.html) SPDRS (Standard & Poors Depositary Receipts) VIPERS (Vanguard Index Participation Equity Receipts)DIAMONDS (DJIA index)

1-10 Investing in Equities

Using investment companies for a feeClosed end funds (http://www.cefconnect.com/Screener/FundScreener.aspx)

Selecting individual stocks (http://finance.yahoo.com/)

Beware of following the hypeChoose stocks that are not highly correlatedLimit the proportion of your portfolio invested in individual stocks

1-11 Investing in Fixed Income

Using investment companies for a feeBond mutual funds

- Morningstar (http://screen.morningstar.com/FundSelector.html?fsection=ToolScreener)

Selecting individual bonds –U.S. government bonds (http://www.treasurydirect.gov/indiv/myaccount/myaccount_treasurydirect.htm)

Corporate bonds (local and foreign) and foreign sovereigns – see a broker

1-12 Investing in Other Asset Classes

Using investment companies for a feeReal Estate mutual funds (REITs)

- (http://finance.yahoo.com/))

Money Market Funds- through mutual fund families

Commodities- through sector-focused ETFs