Basics of Investing

1
Basics of Investing
Over the long term, stocks have historically
outperformed all other investments. From
1926 to 2005, the SP 500 returned an average
annual 10.46 percent gain. The next best
performing asset class is bonds. Long term U.S.
Treasury notes returned, on average, 5.08 percent
over the same period.
Be Careful, there is no guarantee!!!!
2
Basics of Investing
Over the short term, stocks can be hazardous to
your financial health. On Oct. 19, 1987,
stocks experienced the worst one-day drop in
stock market history -- 22.6 percent. More
recently, the shocks have been prolonged and
painful If you had invested in a Nasdaq index
fund around the time of the market's peak in
March 2000, you would have lost three-fourths of
your money over the next three years.
3
Basics of Investing
Risky investments generally pay more than safe
ones (except when they fail). Investors demand
a higher rate of return for taking greater risks.
That's one reason that stocks, which are
perceived as riskier than bonds, tend to return
more. It also explains why long-term bonds pay
more than short-term bonds. The longer investors
have to wait for their final payoff on the bond,
the greater the chance that something will
intervene to erode the investment's value.
4
Basics of Investing
A diversified portfolio is less risky than a
portfolio that is concentrated in one or a few
investments. Diversifying -- that is,
spreading your money among a number of different
types of investments -- lessens your risk because
even if some of your holdings go down, others may
go up (or at least not go down as much). On the
flip side, a diversified portfolio is unlikely to
outperform the market by a big margin for exactly
the same reason.
5
Basics of Investing

• Stocks
• Stocks aren't just pieces of paper
• There are many different kinds of stocks
• Stocks are your best shot for getting a return
  over and above the pace of inflation.
• A smart portfolio positioned for long-term
  growth includes strong stocks from different
  industries.
• It's smarter to buy and hold good stocks than
  to engage in rapid-fire trading.

6
Basics of Investing

• Stocks continued
• Investors may talk about large-cap vs. small-cap
  stocks, energy vs. technology stocks, or growth
  vs. value stocks, for example.
• Since 1926, the average large stock has
  returned more than 10 percent a year -- well
  ahead of inflation, and the return of bonds, real
  estate and other savings vehicles.
• As a general rule, it's best to hold stocks
  from several different industries. That way, if
  one area of the economy goes into the dumps, you
  have something to fall back on.
• The cost of trading has dropped dramatically --
  it's easy to find commissions for less than 10 a
  trade. But there are other costs to trading --
  including mark-ups by brokers and higher taxes
  for short-term trades

7
Basics of Investing
Mutual Funds What exactly is a mutual fund? A
mutual fund pools money from hundreds and
thousands of investors to construct a portfolio
of stocks, bonds, real estate or other
securities, according to its charter. Each
investor in the fund gets a slice of the total
pie. Mutual funds make it easy to diversify.
Most funds require only moderate minimum
investments -- from a few hundred to a few
thousand dollars -- enabling investors to
construct a diversified portfolio much more
cheaply than they could on their own.
8
Basics of Investing
Mutual Funds Returns aren't everything -- also
consider the risk taken to achieve those returns.
Before buying a fund, look at how risky its
investments are. Can you tolerate big market
swings for a shot at higher returns? If not,
stick with low-risk funds. Low expenses are
crucial. In order to cover their expenses -- and
to make a profit -- funds charge a percentage of
total assets. At no more than a few percentage
points a year, expenses may not sound
substantial, but they create a serious drag on
performance over time. Don't chase winners.
Funds that rank very highly over one period
rarely finish on top in later ones. When choosing
a fund, look for consistent long-term results.
9
Basics of Investing
Mutual Funds Don't be too quick to dump a fund.
Any fund can -- and probably will -- have an
off year. Though you may be tempted to sell a
losing fund, first check to see whether it has
trailed comparable funds for more than two years.
If it hasn't, sit tight. But if earnings have
been consistently below par, it may be time to
move on