Investing(Or…some beginning thoughts on how to build wealth since I can’t sing like…

well, somebody who is crazy-rich because they CAN sing)

1.What are your GOALS/OBJECTIVES ?2.What is your tolerance for RISK?3.Patience! short-term V. long-term

Think about these 3 separate ideas for a moment…

•make a “bucket list” of some of important things you think you might want at different points of your life

Goal Timeframe Cost

Thinking about your objectives• What would you like to do at different points in your life? How much will you

need to make those things happen? WHY are you investing?

buy a car?

Buy a home and furnish it?

Rent a nice apt

or condo?

Pay a child’s college tuition?Retirement?

Now ask yourself…

TWO: How much time do I have to make each happen ?

ONE: When I think about these kind of things, how much will I need to make it happen?

Laying the Groundwork for Success

1. Identify your Goal(s): • be as specific as you can• is the goal measurable? How will you know if/when

you reach it?• are always subject to revision!

2. Identify/assign a deadline3. How much $ will it require?4. Does it expose you to an unacceptable

level of risk?

Risk and RewardThere’s a clear relationship between

risk and reward:

Higher returns = higher risk As your life circumstances change,

re- assess your tolerance for risk!

To reduce your risk: Diversify

Wealth Accumulation &

Growth

“Safer” Investments…Lower Returns

Speculation

Increasing potential for

higher returns

ANDIncreasing

risk

The Investment PyramidConservative

Aggressive

Moderate

Investment ChoicesThere are lots of things that you can invest in….• Real estate• Precious metals (gold, silver, etc.)• Commodities (generally they are farm products)• Oil and gas• Art• Collectables

• we will focus on the 2 most common:

Stocks and Bonds

Take notes on what you hear

about these

BONDS1. Are debts…like an I.O.U. The issuer/borrower/seller must repay the bond PLUS interest

2. Who issues bonds?• Gov’ts (federal, state, county & local)• Corporations

Bonds have 3 components:

•Principal – the amount borrowed

• Interest Rate – the % paid by the borrower for using the money

•Maturity – the date by which the borrower must pay off the bond

Who invests in bonds?

• People looking to generate an “income stream” (Investors collect the interest and then get their principal back

when the bond matures)

• Those looking for lower-risk investments• Bonds are rated by 2 major ratings agencies for safety • Bondholders get higher priority in a bankruptcy

• B/C they are relatively safer than many other investments, they are popular with senior citizens and conservative investors

Stocks

A common method for companies to raise large sums of cash is to sell stock in the company… if you own a share of stock, you own a piece of the company

When a company sells stock for the 1st time: “Initial Public Offering” (an “IPO”)

How do I make money investing in stocks?

•Capital Appreciation: “buy low….sell high”

•Dividends : cash payment to shareholders by the company from its

profits

(dividends are not automatic…the Board of Directors decides IF and HOW MUCH the dividend will be)

Where do shares of stock “trade”?(where are they bought / sold?)

• The New York Stock Exchange (NYSE)- generally, well-established companies

• Nat’l Assoc. of Securities Dealers Automated Quote System…or just NASDAQ

Reading a stock quotehttp://finance.yahoo.com/marketupdate/overview

Stock Indexes•What are they? Quick way to measure how “the market is doing”:

The Dow-Jones Industrial Average (the “Dow”)

Group of 30 stocksrepresenting the majorsectors of the USEconomy

* Microsoft* Ford and GM* General Electric

* Coca Cola * 25 others

• The Dow is a weighted average of the 30 stocks prices• In theory, if the average goes up, “the

Market” in general has moved higher

•Weakness of the DJIA: not a very large sample (can just 30 stocks really reflect accurately what the overall market is doing?)

The Standard & Poor’s 500 Index

•S+P 500 for short

• Same concept as the Dow, but uses 500 companies

•S + P 500 is generally the preferred index to measure market performance

Why do stock prices go up or down?

• Supply and demand! We want to own shares in companies with growing profits. Above all else: a company’s stock price is tied to its

future earnings (“profitability”)

If investors believe that earnings will grow, demand for shares of stock in that company grows & it’s price will rise (opposite if investors think earnings will decline)

Be Advised!

A company’s earnings (and stock price) are subject to many currents in the economy

• Events specific to that company• Events in that company’s industry• Events of the overall economy• National and/or World events

What could change a company’s earnings?1. An event or news specific to that company:• A new and exciting product• A new contract• A change of management• Cost-cutting measures such as:• closing unprofitable stores or divisions• Laying off workers

What could change a company’s earnings (continued)

• The industry the company is in could be changing • would you now invest in video rental companies?

• Is there an emerging industry that might produce the next Microsoft?

•Maybe the company & the industry are fine but the entire economy is struggling?

Types of Stock

•“Growth” stocks: grows in value faster than the S+P 500 Index

•“Blue Chip” stocks: stock in companies that are well-established…often household names…leaders in their industry

•“Income” stocks: those that pay high dividends

•“Cyclical” stocks: react to the business cycle…tend to rise when the economy is strong….fall when the economy struggles

•“Defensive” stocks: tend to hold value in poor economic cycles, but do not rise as fast in up cycles

•“Speculative” stocks: high risk stocks that offer the promise of spectacular returns… usually doesn’t happen!

“Stock-picking” isn’t very easy

•You might have the right industry…but the wrong company•Negative unforeseen events may occur AFTER you own it•A “solution”? Spread your risk over many stocks… DIVERSIFY your portfolio

Index Funds

•Mirrors one of the indexes…if the index rises 18% (for ex.), your investment rises 18%

•b/c they buy every stock in an index, no need to be professionally managed…(lower fees)

•Removes the necessity to be a “stock-picker”

Diversify with Mutual Funds

• Pools investors’ monies• Professionally managed • Buys 100’s…1,000’s of different stocks and/or bonds• DIVERSIFIES your investment $ automatically• Hundreds of “families of funds” to choose from

To summarize:1. Build wealth thru thoughtful investing (goals, timeframe, risk-tolerance, education)2. Life-long process to meet changing goals3. Hands-off Hands-on, you decide4. Diversify: different investments have different objectives 5. Patience! Not a “get rich quick” scheme