an introduction to investing fin 303 fall 2015 james dow
TRANSCRIPT
An Introduction to Investing
Fin 303
Fall 2015
James Dow
12/01/15 "An Introduction to Investing" Professor Dow, FIN 303
Overview
1. Before You Invest
2. Some Basic Concepts
3. Asset Allocation
4. Investing Using Mutual Funds
5. Investing In Individual Securities
6. Good Habits For Investors
12/01/15 "An Introduction to Investing" Professor Dow, FIN 303
1. Before You Invest
Have a Financial Plan Be Properly Insured Have Emergency Funds Determine Your Savings Goals
12/01/15 "An Introduction to Investing" Professor Dow, FIN 303
What Are Your Savings Goals?
Short-Term Goals Down Payment on a House? Travel?
Longer-Term Goals College Education for Children? Retirement?
12/01/15 "An Introduction to Investing" Professor Dow, FIN 303
Your Goals Can Affect Your Investing Decisions
Short-Term Goals Usually easy to figure out what you need Invest in low-risk assets (more about this later)
Long-Term Goals Harder to determine the amount you need Be less conservative with your investments
12/01/15 "An Introduction to Investing" Professor Dow, FIN 303
How Much to Save for Retirement
Determine Expected Expenditures Sources of Retirement Income
Social Security Pensions Individual Savings
12/01/15 "An Introduction to Investing" Professor Dow, FIN 303
Calculate Annual Savings
Start with needed annual income when you retire.
Calculate the amount of savings needed when you retire.
Calculate the amount to save each year.
Online calculators and FIN 303 can help you.
12/01/15 "An Introduction to Investing" Professor Dow, FIN 303
Employer-Sponsored Programs
Defined Benefit: Amount paid is guaranteed by the company. It depends on salary and number of years with the company
Defined Contribution: Individual makes contributions. Amount paid depends on how well the investments do.
12/01/15 "An Introduction to Investing" Professor Dow, FIN 303
Self-Directed Accounts
Traditional IRA Roth IRA Keogh Plans Annuities
12/01/15 "An Introduction to Investing" Professor Dow, FIN 303
Now What?
You know how much you need to save. You’ve signed up for a savings plan with your
employer.
How do you invest the money?
12/01/15 "An Introduction to Investing" Professor Dow, FIN 303
2. Some Basic Concepts
What is Return? What is Risk? What is the Risk-Return Tradeoff? What is Diversification?
12/01/15 "An Introduction to Investing" Professor Dow, FIN 303
What is Return?
Where do returns come from? Current Income Capital Gains
Compounding: Interest earns interest.
Returns are uncertain: Investors refer to “expected” or “average” returns.
12/01/15 "An Introduction to Investing" Professor Dow, FIN 303
What is Risk?
How likely is it that your return will be higher or lower than you expect.
Some assets (such as bank accounts) have little risk.
Other assets (such as stocks) will have greater risk.
12/01/15 "An Introduction to Investing" Professor Dow, FIN 303
What is the Risk-Return Tradeoff?
Assets with higher risk will generally offer a higher expected return.
You can choose: investments with high risk and high return investments with low risk and low return but probably not low risk and high return
12/01/15 "An Introduction to Investing" Professor Dow, FIN 303
There are a range of assets
Expected
Return
Risk
Bank Accounts
Short-Term Bonds
Long-Term Bonds
Small-Company Stocks
Large-Company Stocks
12/01/15 "An Introduction to Investing" Professor Dow, FIN 303
What is Diversification?
Don’t put all your eggs in one basket.
You can reduce risk without hurting your expected return.
12/01/15 "An Introduction to Investing" Professor Dow, FIN 303
3. Asset Allocation
What can you invest in? What is the right mix of investments? Who do you invest with?
12/01/15 "An Introduction to Investing" Professor Dow, FIN 303
What Can You Invest In?
Bank Accounts Common Stock Bonds Real Estate Other Assets
12/01/15 "An Introduction to Investing" Professor Dow, FIN 303
Bank Accounts
Are convenient Are insured Are low risk
But do not offer the best returns Not the best choice for long-term investing
12/01/15 "An Introduction to Investing" Professor Dow, FIN 303
Common Stock
A share represents ownership in the company.
Stocks generate capital gains (or losses). Stocks may also pay dividends.
12/01/15 "An Introduction to Investing" Professor Dow, FIN 303
Bonds
An “IOU” issued by companies and governments.
Pay interest and can generate capital gains or losses.
Less risk than stock but also a lower expected return.
12/01/15 "An Introduction to Investing" Professor Dow, FIN 303
Real Estate
Income Properties Commercial Properties Residential Properties Single-Family Homes
REITs
12/01/15 "An Introduction to Investing" Professor Dow, FIN 303
What is the right mix of assets?
Asset allocation refers to how you allocate your wealth across different assets.
For example: 60% Stocks 30% Bonds 10% Short-Term Assets (Cash)
12/01/15 "An Introduction to Investing" Professor Dow, FIN 303
How to determine the best allocation?
The appropriate allocation depends on: Your investing horizon Your tolerance for risk
You can find programs online that will suggest allocations for you.
12/01/15 "An Introduction to Investing" Professor Dow, FIN 303
An Example
The Hudsons 30 years until retirement Average tolerance for risk
Recommended allocation is 55% stocks 30% bonds 10% real estate 5% cash Malkiel, Random Walk Down Wall Street, 2003
12/01/15 "An Introduction to Investing" Professor Dow, FIN 303
Who can you invest with?
Mutual Funds Stock Brokers Through Your Employer
12/01/15 "An Introduction to Investing" Professor Dow, FIN 303
4. Investing Using Mutual Funds
What are mutual funds? What is a mutual fund family? Why mutual funds? How to invest in mutual funds? What kind of fees are there?
12/01/15 "An Introduction to Investing" Professor Dow, FIN 303
What is a Mutual Fund?
It is a financial company. Allows small investors to pool their money. Professional managers at the fund choose
how to invest the money. They invest in stocks, bonds and other
assets.
12/01/15 "An Introduction to Investing" Professor Dow, FIN 303
Why Mutual Funds?
Advantages Can invest small amounts Easy to be diversified Convenient Professional management
Disadvantages Less flexibility in choice of securities May have tax disadvantages
12/01/15 "An Introduction to Investing" Professor Dow, FIN 303
What is a Mutual Fund Family?
Most mutual fund companies offer a number of different individual funds.
Each fund will have it’s own specific investment goals and strategies.
You will need to choose which specific funds to invest in.
12/01/15 "An Introduction to Investing" Professor Dow, FIN 303
How to Invest?
Buy shares in the mutual fund.
When you want to collect your return, you redeem your shares (sell them back to the mutual fund).
12/01/15 "An Introduction to Investing" Professor Dow, FIN 303
Net Asset Value (NAV)
NAV = (value of all the securities in the fund’s portfolio)/(# of shares).
Funds generally will sell and redeem shares at the NAV.
If the value of the securities increases, the value of your shares will increase too.
Holding shares in a mutual fund is just like owning the underlying assets.
12/01/15 "An Introduction to Investing" Professor Dow, FIN 303
Fees
Fees reduce whatever return you earn – shop around.
One-Time Fees Annual Fees
12/01/15 "An Introduction to Investing" Professor Dow, FIN 303
One-Time Fees (Loads)
Loads are like sales commissions.
Front-end loads are charged when you first buy the shares.
Back-end loads are charged when you redeem the shares.
No-load funds do not charge loads. Sometimes fees are charged if you redeem the
shares soon after you buy them.
12/01/15 "An Introduction to Investing" Professor Dow, FIN 303
Annual Fees
Management fees – The mutual fund company will take a percentage of the asset’s value each year – this is how they make their money.
12(b)-1 Fees – fees for marketing and promoting.
12/01/15 "An Introduction to Investing" Professor Dow, FIN 303
How to get information
Online! A prospectus provides the details. What to look for:
What does the fund invest in? Does it match your investing plan?
What are the fees? How has it performed in the past?
12/01/15 "An Introduction to Investing" Professor Dow, FIN 303
Types of Funds
Money Market Funds Low risk but low return You can write checks
Bond Funds Corporate bond funds High-yield bond funds Municipal bond funds International bond funds
12/01/15 "An Introduction to Investing" Professor Dow, FIN 303
Types of Funds (cont’d)
Stock funds Growth Income Value Sector International Mixed/Balanced
12/01/15 "An Introduction to Investing" Professor Dow, FIN 303
Types of Funds (cont’d)
Index Funds Follows some index (S&P500) Stocks or bonds Low fees and highly diversified Good choice
Asset Allocation Funds Real Estate Funds
12/01/15 "An Introduction to Investing" Professor Dow, FIN 303
Implementing your investment plan using mutual funds
Start with an asset allocation. Choose 3-5 funds that match your asset
allocation. Look for diversified funds (internationally too) Take advantage of index funds. Shop around for low fees.
12/01/15 "An Introduction to Investing" Professor Dow, FIN 303
5. Investing in Individual Securities
What if you want to pick your own stocks?
Go to a stockbroker Open an account Place an order for shares
12/01/15 "An Introduction to Investing" Professor Dow, FIN 303
Types of Brokers
Full-Service Brokers Discount Brokers Online Brokers Differ in terms of cost, information provided
and handholding.
12/01/15 "An Introduction to Investing" Professor Dow, FIN 303
Why brokers?
You have a specific reason for buying a stock.
You have a large amount of wealth and need specialized advice.
Mutual funds are fine for the typical investor.
12/01/15 "An Introduction to Investing" Professor Dow, FIN 303
Stock Picking
Judging whether a particular company’s stock is going to do well in the future.
Can be fun and profitable. You’ll get lots of advice – be skeptical. If you take this approach, do your research.
12/01/15 "An Introduction to Investing" Professor Dow, FIN 303
6. Good Habits for Investors
Have a plan. Save, save, save. Get the big picture right, don’t stress about
the little things. Be diversified Have the right asset allocation
12/01/15 "An Introduction to Investing" Professor Dow, FIN 303
More Good Habits
Avoid unnecessary taxes Avoid excessive fees Take a long-run approach
Keep trading to a minimum Don’t obsess about the short-run fluctuations of
the market.