Introduction to Financial Investing

1
Introduction to Financial Investing

• Pamela Scott
• LIS 693 Business Information Sources and Services
• Spring 2007

2
Personal Savings Rate

3
Start Saving

• With compounding interest, it pays to save early
  and save regularly.
• Its not about how much you make, its how much
  you can put away.
• No matter how much you make, everyone needs to
  live within a budget.
• Save automatically with direct deposit.
• http//www.choosetosave.org/psaplayer/index.html
  (Work forever)

4
Compounding Interest
5
Why Invest?

• Generally, investments offer a higher rate of
  return than savings accounts
• Accumulate more wealth with less input
• Rule of 72 72/interest rate length of time to
  double your investment (compare to savings acct.)
• Save for college, major purchase, retirement

6
Investing Issues to Consider - problems

• Capital gains will affect your taxes
• Taxes will become more complex may need a tax
  professional
• Information on stocks can be complex
• Must overcome fear of risk

7
Planned Investing

• The best plan
• Find an appropriate target allocation choose
  what feels comfortable
• Adjust portfolio accordingly to maintain that
  allocation
• Buy and hold for best return look at the long
  term (day-trading is not a sound investing
  strategy)
• Diversify portfolio to minimize risk
• Dont invest money that you can not afford to
  lose
• No rule of thumb works for everyone

8
Target Allocations

• Conservative
• You seek current income and stability, and are
  less concerned about growth. Fixed-income
  investments 50. Cash 30. Stocks 20.
• Moderately Conservative
• You seek current income and stability with modest
  potential for increased investment value.
  Fixed-income investments 50. Cash 10.
  Stocks 40 (25 Large Cap, 5 Small Cap, 10
  International).

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Target Allocations (cont.)

• Moderate
• Youre a long-term investor seeking steady
  growth potential without the need for current
  income. Stocks 60 (30 Large Cap, 10 Small
  Cap, 15 International). Bond funds 35. Cash
  5.
• Moderately Aggressive
• Youre a long-term investor seeking good
  growth potential. Stocks 80 (45 Large Cap,
  15 Small Cap, 20 International). Bond funds
  15. Cash 5. This portfolio could be volatile.
  
• Aggressive
• Youre a long-term investor seeking high
  growth potential. Stocks 95 (50 Large Cap,
  20 Small Cap, 25 International). Cash 5.
  This portfolio may have substantial year-to-year
  value fluctuation.
• Available from http//www.schwab.com

10
Allocations Explained

• Large Cap Equity Generally, companies with a
  market of over 10 billion. Normally companies
  that are well-established with solid histories of
  growth and dividend payments. These tend to be
  more stable investment options.
• Small Cap Equity Generally, companies with a
  market value of less than 1.5 billion. Small-cap
  companies tend to be newer, smaller companies and
  are more volatile than large-cap companies.
• International Equity Any stock based outside of
  the United States.
• Fixed Income A security that pays a fixed
  interest rate (bonds, money market, treasury
  bills).

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Allocations Explained (cont.)

• Stocks Partial ownership of a corporation,
  represented in shares.
• Mutual Funds A company that uses shareholder
  money to invest in an assortment of securities,
  usually with a set objective.
• Bonds A long-term debt security issued by the
  Government or a company. Purchased for a
  specific price and matures in 10 years or more.
  Accrues regular interest.

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Choosing an Investment Firm what to consider

• Manage your own account or have an account
  manager (management fees)
• Brokerage fees for stocks/mutual funds
• Account fees account balance?
• Online services vs personal assistance
• Contact/availability
• Investment analysis advice

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Investment Firms

• Fidelity Investments http//www.fidelity.com
• TDAmeriTrade http//www.tdameritrade.com
• Charles Schwab http//www.schwab.com
• Merrill Lynch http//www.ml.com
• Morgan Stanley http//www.morganstanley.com

14
Retirement Investing

• Probably the largest savings requirement for an
  individual
• How much to save? predicting the future
• Should not take more than 4 of your nest egg
  during 1st year of retirement
• Social Security will only pay about 800. for
  average American 30-40 of retirement monies
• What life-style do you want when you retire
  travel, living conditions

15
Retirement Savings Statistics

• Only 31 of eligible workers ages 18 to 25, and
  only 63 of eligible workers ages 26 to 41,
  participate in a tax-deferred 401(k) plan,
  according to a 2006 Hewitt Associates Inc.
  survey.
• http//www.choosetosave.org/psaplayer/index.html
  (the horror movie)

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Types of Retirement Income

• Social Security regularly monthly pay, as long
  as you live
• Employment Retirement regularly monthly pay, as
  long as you live
• 401(K) or similar tax-deferred savings, pot of
  money that YOU contributed to (often partial
  agency matching)
• Traditional IRA tax-deferred savings, pot of
  money that YOU contributed to
• Roth IRA taxed now, not when you retire, pot of
  money that YOU contributed to

17
Key Investing Terms

• Bear Market A period when security prices are
  primarily falling
• Bull Market A period when security prices are
  primarily rising
• Capital Gains A stocks increase in value
• Capital Loss A stocks decrease in value
• Compounding interest Interest on the original
  amount plus interest on the interest
• Closed-end Funds mutual funds with a finite
  number of shares
• Open-end Funds Mutual funds with an unlimited
  number of shares
• Closed funds Mutual funds that are closed to
  new investors
• Annuity A contract that pays a monthly sum
  during retirement

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Market Indices

• DJIA (http//djindexes.com/mdsidx/)
• NASDAQ (http//www.nasdaq.com/)
• SP 500 (http//www2.standardandpoors.com/)
• Russell 2000 (http//www.russell.com)

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Equity Rating Firms

• Equity rating firms rate stocks and mutual funds
• Goldman Sachs (http//www.gs.com)
• Standard Poors (http//www.standardandpoors.com
  )
• Reuters Research Average (http//www.reuters.com)

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Online Information

• Choose to Save http//www.choosetosave.org/Calcu
  lators, saving tips, brochures. Easy to
  understand for the layman.
• Kiplingers Online http//www.kiplinger.comInve
  sting tools for taxes, retirement, college,
  insurance, more, calculators, stock quotes,
  financial advice, retirement planner.
• Investor Guide http//www.investorguide.comStoc
  k and mutual fund research, financial advisor
  search, market information, glossary of business
  and financial terms.
• Investor Words http//www.investorwords.com/Def
  initions of financial terms.
• Yahoo Finance http//www.finance.yahoo.com

21
Videos

• Picking a Discount Broker
• http//link.brightcove.com/services/link/bcpid2192
  43162/bclid174314760/bctid212352305
• Mutual Funds
• http//link.brightcove.com/services/link/bcpid2192
  43162/bclid174314760/bctid212352305
• When the market drops
• http//link.brightcove.com/services/link/bcpid2192
  43162/bclid174314760/bctid755361818
• Available from http//www.kiplingers.com

22
References

• Bureau of Economic Analysis (2007). Personal
  Saving Rate. Retrieved April 21, 2007, from
  http//www.bea.gov/briefrm/saving.htm.
• Roberts, S. (2006, August 28). Savings lesson
  vital to build nest egg. Business Insurance, pp.
  16,16. Retrieved Wednesday, April 25, 2007 from
  the Business Source Premier database.
• Also, websites listed on Online Information
  slide were consulted for information.