Basics of Investing
Things To Do Before Investing
Pay off credit card debt!
No investment pays as much as credit card companies charge
Build an emergency fund
Consider your goals
Timeline
How soon will you need the $?
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Consider your Goals
Vehicle purchase/replacement
Down payment on a home
Child’s education
To build wealth
For retirement
What are your financial goals?
How much $ will you need?
Determine your Risk Tolerance
How much risk can you stand?
If you have trouble sleeping at night because you are worried
about your investments then pick a more conservative mix
For experienced investors:
How did you react to 2008-2009 losses?
Relationship Between Risk and Return
Risk High
Low Expected
Return High
Low
Cash
Equivalents
Bonds
Int’l Bonds
Real Estate
Stocks
Int’l Stocks
Before you Invest
Is your budget balanced?
Do you save every month?
Do you pay credit cards in full every month?
Do you carry adequate insurance to protect against major
catastrophes?
Potential Risks
Being too conservative (Savings accounts, CDs, etc.)
Keeps principal safe but…
Inflation reduces purchasing power
Inflation averages about 3.1%
Risk not reaching your goal(s)
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Risks
Being too aggressive (too much in stocks)
Higher potential for growth but…
More market volatility
No guarantee or insurance
Potential to lose some or all of the principal
Managing Risks
Consider your goal
Emergency fund- be conservative
Retirement- be more aggressive
Match your goals with your risk tolerance
Can you handle the market volatility?
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Managing the risks continued
Consider your time frame
Short Term – months to 3 years
Stick with safe savings options
Mid Term – 3 to 10 years
Take some risk to grow your $ &
beat inflation
Long Term – 10 or more years
Take more risk to grow your $ &
beat inflation
Saving Terminology
Cash Equivalents
Usually low risk
Savings, CDs, cash on hand
Also called liquid assets
Use for short term goals or if you have you have low risk tolerance
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Investing Terminology
Stock – ownership in a company
Bond – loan money to issuer
Mutual fund – A diversified
portfolio of stocks and/or bonds
Opposite of putting all your eggs in one basket
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Retirement Funds
401(k) retirement plan offered by employer
$ grows tax deferred
Some employers will match (~3%)
Need to invest > just the match
IRA: individual retirement account
Invest on your own
$ grows tax deferred
Retirement Funds
Roth IRA
Pay taxes now
No taxes when you withdraw
= no taxes on the growth!
Traditional IRA
Upfront tax deduction
Retirement Funds
Retirement accounts are NOT an investment
How the government treats that money for tax purposes
Where you put that money is up to you
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IRA Criteria
Must have an earned income
If married, non-earning spouse can use a spousal IRA
$5,500 annual limit
You can contribute less
Age 50+: $6,500
401(k), Roth, or traditional IRA?
Invest in 401(k) up to full match
Instant 100% rate of return!!
Possible downsides
employer picks the funds
May charge heavy fees
If no employer match, consider an IRA
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401(k), Roth, or traditional IRA?
Use a traditional IRA if
Your employer doesn’t match or you’ve already invested up to the match
You expect to be in a lower tax bracket at retirement
Take the tax break now
401k, Roth, or traditional IRA?
Use a Roth IRA if
You expect taxes to rise
You expect to be in a higher tax bracket at retirement
Offers tax diversification
If most of your retirement
income will be taxable… invest in a Roth
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Establish Your Long-Term Investment Strategy
Strategy 1: Buy and hold
anticipates long-term economic growth.
Stock market has offered a
positive return over every 15 year period
Past returns no guarantee, but long- term buying and holding is a great
Long-Term Investment Strategy 2
• Dollar-cost averaging buys at
“below-average” costs
– Invest same amount every month
– Avoid following the crowd
– Jumping in when the market is high – Pulling out when it drops
– Set up automatic deposit
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Long-Term Investment Strategy 3 & 4
• Portfolio diversification reduces volatility
• Money is like manure. Left in a pile, it stinks. If you spread it around, it'll grow some stuff.
– Dave Ramsey
• Asset allocation keeps you in
Determinants of Portfolio Performance
Asset Allocation
91.5%
Other 2.1%
Market Timing
1.8%
Security Selection
4.6%
Source: “Determinants of Portfolio Performance II, An Update” by Gary Brinston, Brian D. Singer and Gilbert L. Beebower, Financial Analysts Journal May-June 1991.
Investing Made Easy
Set up Automatic Investing
Payroll deduction or
Automatic transfer from checking to:
Individual Retirement Account
Mutual fund
Other investment
Mutual Funds
Advantages
Professional management
Reduce risk through diversification
Own small part of lots of different investments
Monitoring investments is easy
Disadvantages
Funds charge fees
Be aware
follow market performance (down & up)
No guaranteed rate of return
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Successful Investing
Educate yourself
Determine your risk tolerance
Decide on asset allocation
Stick to your plan
Monitor investment performance
If you need help, consult a professional advisor
(N.B. most are salespeople)
More Successful Strategies
Ask questions about…
Expenses
Historical performance: 3, 5, 10 yrs.
Investment goal (e.g., capital appreciation)
“Rule of Three” comparison
Compare at least 3 investments
“Core and Explore” approach
For more adventurous
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Low-Maintenance Strategies
Target maturity date mutual funds for retirement
Index funds
Automatic deposits
Annual financial check-up
Ideas on where to invest
Fidelity (800) 343-3548
Vanguard (877) 662-7447
T. Rowe Price (855) 389-9464
Charles Schwab (866) 855-9102
Russell (800) 426-7969
*This is not a comprehensive list or an endorsement
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Remember
Never invest in something
you don’t understand
Investing Resources
Risk tolerance quiz:
http://njaes.rutgers.edu/money/riskquiz/
Investing for Your Future
http://www.extension.org/pages/
10984/investing-for-your-future
Money 101 #4: Investing basics:
http://money.cnn.com/magazines/moneym ag/money101/lesson4/index.htm
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Questions? Comments?
Experiences?
Where to Find FPW
http://usu.edu/fpw/
http://fpwusu.blogspot.com/
https://www.facebook.com/Finan cialPlanningforWomen
Second Wednesday of the month TSC room 336 11:30- 12:30
Family Life Center 493 North
700 East. 7:00 to 8:30 35
Financial Planning for Women www.usu.edu/fpw
April 10th: Social Security with SSA expert Mickie Douglas
11:30 only; no evening program
May 8th: Great Mutual Funds for your IRA
June 12th: Get your house in order before you buy