LearnVest Classes Investing Challenge. Investing Basics Learning the Ropes

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1 LearnVest Classes Investing Challenge Investing Basics Learning the Ropes

2 Resources Quick Guide to Investment Terms Investment Vehicles Stock: A unit of ownership in a company. As the company value grows, so does the value of the stock. If the value of the company shrinks, so too can the value of the stock. Stocks can be categorized in a few ways: By arket Cap: # of Shares x Share Price Large Cap: ore than $10 billion id Cap: $2 billion - $10 billion Small Cap: Less than $2 billion By Style Value: Slower growth companies that often provide dividends Growth: Faster growth companies, but stock price can drop when growth slows By Location Domestic Stocks: U.S. Companies International Stocks: Outside the U.S. Emerging arket Stocks: Emerging markets like Russia, Brazil, India, China, Africa, Latin America Bond: An investment in the form of a loan to a company or government with the promise that they ll pay you back at a certain time (the maturity date). In the meantime, you receive interest. A bond s risk lies in the possibility of default, as measured by its credit rating, and in the interest rate environment. Higher interest rates push bond prices down and lower interest rates push bond prices up. utual Fund: A collection of stocks and/or bonds that you can buy in a unit. Your Return = Overall Return - Expense Ratio Fees Actively anaged Fund: A mutual fund actively managed by a portfolio manager and team of analysts. Expense ratio fees are generally higher. Index Fund: A passively managed mutual fund. The contents of the fund mirror the index it is tracking. Because it has no manager to pay, expense ratio fees are generally lower. Target Date Fund: A collection of mutual funds designed to meet a target retirement date. Target date funds rebalance automatically as you approach the date. Exchange-Traded Fund (ETF): Like an index fund, ETFs contain a variety of stocks and/or bonds, but you must buy an exact number of shares with each purchase, similar to a stock. 1

3 Investment Accounts TYPE DESCRIPTION TAXES ON CONTRIBU- TIONS TAXES ON WITHDRAWALS TAXES ON EARNINGS 401(k) An employer-sponsored account into which you can save pre-tax money from every paycheck. In retirement, the money you withdraw including earnings will be taxed in whatever income bracket you re in at the time. 403(b) Operates almost exactly like a 401(k) plan, but is usually offered to those who work for public schools and tax-exempt organizations. Traditional IRA An Individual Retirement Account into which you can save money and receive a tax deduction if you meet certain income requirements or if you don t have an employer-sponsored retirement plan such as a 401(k) available to you. ndeductible IRA Roth IRA Roth 401(k) An Individual Retirement Account into which you can save money if you don t meet the income requirements for a traditional IRA and you have an employer-sponsored retirement plan available to you. Your contributions to this plan are not deductible on your taxes, but that also means you won t pay taxes on the money when you withdraw it in retirement. You will, however, pay taxes on any earnings. An Individual Retirement Account into which you can save after-tax money if you meet certain income requirements. In retirement, the money you withdraw both your deposits and all of your earnings is entirely tax free. An employer-sponsored account that allows you to contribute after-tax money to a 401(k). As in a Roth IRA, both your deposits and earnings can be withdrawn entirely tax-free in retirement. The key difference between a Roth IRA and a Roth 401(k) is that the contribution limit for Roth 401(k)s is significantly higher. Taxable account An account, such as a savings account or an investment account, that exists outside of your traditional retirement accounts. There is no limit to the amount of money you can contribute to these accounts every year, but you ll owe taxes on any money you make in this account, in the form of earnings or capital gains. You might have this account at a bank or brokerage house. *Created by LearnVest 2

4 Other Terms Risk tolerance: How comfortable you feel with fluctuations in your investment accounts. Dividend: A small cash payment to shareholders that can be re-invested to buy more stock, or paid in cash as an income stream. Asset allocation: How much of your portfolio is allotted to different asset classes. Diversifying Depending on your specific situation, LearnVest generally recommends holding a variety of different types of investments, which is called diversifying. Diversification can be key to investment success because it can help protect you from the ups and downs of the market. If you invest all your money in one type of investment, and the market shifts, you could stand to lose all of your money. But if you spread your money around among various investments, and one of them fails, only part of your portfolio could be at risk. Here s how it might look: Before Undiversified If Stock A loses 70% of its value... Before Diversified If Stock A loses 70% of its value... $5,000 in Stock A $1,500 in Stock A $3,500 LOSS $700 LOSS Stock A Stock A $5,000 in Stock B $5,000 in Stock B Total: $10,000 Total Remaining: $6,500 $1,000 each in stock A, B, C, D, E, F, G, H, I, J Total Remaining: $10,000 $1,000 in stock B, C, D, E, F, G, H, I, J Total Remaining: $9,300 *Created by LearnVest Hypothetical information for illustrative purposes only. Rebalancing As your investments gain and lose money, your portfolio s original mix will probably fall out of line a bit. What used to be 75% stocks and 25% bonds, for example, might now look like 85% stocks and 15% bonds. Rebalancing restores your investments to their original allocations, assuming that s what you still want. At LearnVest we usually recommend doing this at least annually, if possible. Here s an example of how allocations may change over time: 50% 60% 20% 30% 15% 20% Allocation on Day 1 Balanced Allocation 1 Year Later Time to rebalance International Stocks U.S. Stocks Bonds *Created by LearnVest Hypothetical information for illustrative purposes only. 3

5 Exercises Evaluate Your Investment Goals These questions can help you think more concretely about your investment goals: What are my life goals? Think big, and think long-term. Do you want to buy a house? Put your kids through college? Retire at age 60? Other common investing goals include starting a business and leaving money to your heirs. How much am I going to need? Do your best to put a realistic dollar amount on each of your goals. If you re struggling, do some research there are plenty of calculators out there that will tell you what you ll need to pay for college or retirement. How much do I already have? Are you starting from zero, or do you have some funds already in place? For instance, do you already have a little cash in your 401(k) or in a brokerage account somewhere? What s my time frame? Do you need to reach your goal in the next 10 years? Next 35? Once again, if you re hoping to reach your target in fewer than five years, that s generally a short-term, non-investing goal, and it may be better to try to meet it with your savings account. Goal Amount Needed Already Saved Timeline 4

6 Take Stock of Your Investments List your different investment accounts and action items you d like to take for each (such as enrolling, rolling them over or rebalancing). Account Name Institution Current Balance Last Rebalanced Action Assess Your Risk Tolerance 1. When it comes to investing, I m a. Just learning the ropes b. Somewhat knowledgeable c. Extremely knowledgeable 2. When investing, I m primarily concerned with a. t losing money b. Keeping the money I have, but also making some more c. aking as much money as possible from what I ve invested 3. Which of these investments would you be happiest to own? a. Average return of 6%, worst return of -7%, best return of 13% b. Average return of 8%, worst return of -15%, best return of 26% c. Average return of 12%, worst return of -31%, best return of 48% 4. When will you need access to your money? a. 5 years or less b years c. 11+ years 5. The primary goal of your investing account is a. Purchasing a house or similar big-ticket item (one-time use) b. Going back to school (you ll need the money over the course of a few years) c. Retirement (you ll need the money over many, many years) 5

7 6. Your current age is a. 45+ b c. Under When do you think you ll make your next big purchase? a. 5 years or less b years c. 11+ years How Did You Score? ostly A s: You re Cautious You re likely to be careful with your investments. For this type of investor, LearnVest generally recommends buying ETFs and mutual funds with: A lot of large-cap stocks Some bonds and international stocks Fewer small and mid-cap stocks And you should diversify with a little cash in your brokerage account, too. ostly B s: You re Assertive You may be able to afford to take on some more risk to try to reap potentially larger returns. For this type of investor, LearnVest generally recommends buying ETFs and mutual funds with: A lot of large-cap stocks Some international and mid-cap stocks Fewer bonds And you should diversify with a little cash in your brokerage account, too. ostly C s: You re Aggressive Looks like you may have some time to kill and may be able to afford to take on risk to potentially grow your portfolio a lot. For this type of investor, LearnVest generally recommends buying ETFs and mutual funds with: A lot of large-cap stocks Some international and mid-cap stocks bonds And you should diversify with a little cash in your brokerage account, too. Information in this quiz shown is for illustrative purposes only and is not intended as investment advice. Please consult a financial adviser for advice specific to your financial situation. 6

8 Research Brokerage Firms Decide whether you want to go full-service or discount. Do you want someone to hold your hand through the process? (And do you have the money to pay for it?) Or are you simply looking for a place to open an IRA and put some money in a target date or index fund? Keep in mind, too, that while a full-service broker offers, well, full service, the typically higher fees may directly affect your investment returns every additional 1% in fees that you pay is 1% less that you earn that year in that specific account. Check the minimums. How much does the brokerage firm require you to invest in order to open an account there? $1,000? ore? Can you meet that minimum? Check the fees. Does the brokerage firm charge a fee if your balance falls below a certain amount? What are the charges for trades? Is there an annual maintenance fee? anagement fee? Browse the website. You might be doing a lot of your account maintenance online, so it s important that you like the feel of the site. Is it easy to navigate? Can you easily figure out how to open an account? Can you quickly locate a way to contact customer service? Compare services. What does the broker offer? This will vary widely if you re comparing full-service firms with discount firms, and even among companies in the same category. Check the website for a What We Offer or Our Services kind of heading you ll probably find this kind of info there. Think about fund choices. If you re mostly thinking of investing in low-fee index funds or target date funds with one company, you might want to consider opening an account with a brokerage that sells a variety of them. You ll likely pay less to buy and sell shares with that company, since they re in-house funds. 7

9 START INVESTING BROKERAGE COPARISON Brokerage Comparison Brokerage Full service or discount? inimum to open Account minimum Commissions aintenance fees anagement fees Other fees Services Good website?

10 You ade It! Next Steps to Consider: Retirement Accounts If you haven t signed up for your work retirement account, think about doing so. Roll over your previous 401(k)s If you need a brokerage account for additional investing or an IRA, open one. If you have an investment portfolio, check it to see if it s time to rebalance. Set a quarterly calendar reminder to review your investments, to see if they need rebalancing. Every few years, assess whether this allocation continues to serve your time frame as you get nearer to retirement. If you aren t maxing out your work retirement account contributions, create a calendar alert to boost them by 1% every six months until you do, if you can afford it. Your Other Investment Goals If you haven t opened your brokerage account, think about doing so. Select a mix of investments that fits your time frame for each investing goal. Set a quarterly calendar reminder to review your investments to see if they need rebalancing. Every year, as you approach your goal, assess whether this allocation continues to serve your time frame. Work With Your Own Planner You ve earned a $ credit* to get a custom program for your money, designed by a dedicated LearnVest Planner. *$24.99 will be credited to the cost of the set-up fee for the 5-Year Planner or the Portfolio Builder. Enter code: 094FBC399Z at checkout to redeem. Cannot be combined with other offers. LearnVest Planning Services is a registered investment adviser and subsidiary of LearnVest, Inc. that provides financial plans for its clients. Information shown is for illustrative purposes only and is not intended as investment, legal or tax planning advice. Please consult a financial adviser, attorney or tax specialist for advice specific to your financial situation. Past performance is not indicative of future results. LearnVest Planning Services and any third-parties listed, discussed, identified or otherwise appearing herein are separate and unaffiliated and are not responsible for each other s products, services or policies. 9