Growing Dollars and $ense 5. Selecting the Right Investments

Size: px

Start display at page:

Download "Growing Dollars and $ense 5. Selecting the Right Investments"

Ambrose Barnett
8 years ago
Views:

1 Growing Dollars and $ense 5. Selecting the Right Investments Carol O Rourke The Coalition for Debtor Education Sam McPhearson Certified Financial Planner This program is made possible by a grant from the FINRA Investor Education Foundation through Smart investing@your library, a partnership with the American Library Association.

Sam McPhearson Certified Financial Planner This program is made possible by a

2 Investor Knowledge Quiz 1. If you buy a company's stock A. You own a part of the company B. You have lent money to the company C. You are liable for the company's debts D. The company will return your original investment to you with interest E. Don't know/not sure

3 Investor Knowledge Quiz 2. If you buy a company's bond... A. You own a part of the company B. You have lent money to the company are liable for the company's debts D. You can vote on shareholder resolutions E. Don t know/not sure

4 Investor Knowledge Quiz 3. Which type of bond is the safest? A.U.S. Treasury bond B. Municipal bond C. Corporate bond D. Don't know/not sure

5 Investor Knowledge Quiz 3. Which type of bond is the safest? A.U.S. Treasury bond B. Municipal bond C. Corporate bond D. Don't know/not sure

6 Investor Knowledge Quiz 4. In general, if interest rates go down, then bond prices A.Go down B. Go up C. Are not affected D. Don't know/not sure

7 Investor Knowledge Quiz 5. A "no-load" mutual fund is one that A.Carries no fees Carries no sales charges B.Does not contain high-risk securities C.Has no limits on the period of time in which it can be bought and sold A.Don't know/not sure

8 Your Financial Plan Keep a liquid emergency fund Open a tax-deferred retirement plan Consider whether you need insurance Set goals for saving/investing (While you re at it, make a will)

9 5. Selecting the Right Investments WHAT DOES RIGHT MEAN???

10 Investing Factors to consider 1. Your age 2. Your goals, or what you want to accomplish by investing 3. The time frames for your various goals 4. Your attitude toward risk or what s called your risk tolerance 5. The amount available for investment

11 Investing : A very short course 1. Start with a Plan 2. Be sure you have a base of emergency liquid savings. 3. Open an Individual Retirement Account (IRA) 3. Investigate before you invest 4. Diversify ( Don t put all your eggs in one basket! ) 5. Know the risks and your risk tolerance 6. Consider short term/long term needs 7. Monitor your account(s)

Open an Individual Retirement Account (IRA) 3. Investigate before you invest 4.

12 Investment Pyramid Stocks/Stock Mutual Funds Conservative stocks/bond mutual funds/ ETFs RISK Retirement Accounts: IRA, Roth IRA, 410(k) etc. / CDs Emergency Funds/ Savings Amount invested

13 Stocks, Bonds and Mutual Funds A REVIEW OF THE BASICS

14 Stocks You own shares of a company Liquid (you can buy/sell easily) Some risk involved. Market price fluctuates with supply and demand so no guarantee of return of investment Objective is growth and/or income. Some stocks pay a dividend

15 Dividends Income potential to help offset inflation Opportunity for compounded earnings if dividends are reinvested Invest for total return

16 Looking at a Stock Ticker symbol/ Recent price 52-week price range Earnings per Share (EPS) Annual Dividends/ Dividend Yield Suitability P/E Ratio

17 Bulls & Bears Emotional market factors: The herd mentality Fear & Greed

18 Bonds -You lend your money to a corporation or a government agency - In return, you are paid interest (so you are creditor) -Interest is usually paid twice a year - If you hold the bold until maturity, your principal is returned at maturity - If you need or want to sell before maturity, there is no guarantee of return of investment. Bond prices fluctuate with interest rates

until maturity, your principal is returned at maturity - If you need or want to sell before

19 Bond yield Example: 10 yr bond $1000 (par) with a coupon of 6% 1.Buy and Hold ( own the bond until maturity) Owner receives $60 per year for 10 years Bond is redeemed at $1000 in 2020 Coupon Rate: Annual payout as a percentage of the bond's par value

$60 per year for 10 years Bond is redeemed at $1000 in 2020

20 Bond Yields 2. Sell before maturity IF interest rate goes up to 7% Bond trades at a Discount Market Price = $900 IF Interest rate goes down to 5% Bond trades at a Premium Market Price = $1100 Current Yield: Annual payout as a percentage of the current market price you'll actually pay Yield-to-Maturity: Composite rate of return off all payouts, coupon and capital gain (or loss) *** Numbers are approximations

Interest rate goes down to 5% Bond trades at a Premium Market Price = $1100 Current Yield: Annual

21 Federal Government Treasury Government Agency Types of Bonds Municipal Issued by Cities or States Interest income is federally tax-exempt Corporate Usually pay higher interest rate than Government of Municipal bonds but all interest is taxable Considerations: tax status security income potential

22 Mutual Funds A basket of investments, rather than a single one Growth is reflected in increased number of shares rather than share price Market price: no guarantee of return of investment Active professional management Fees and expenses vary

23 Investor Knowledge Quiz 4. The principal difference between mutual fund share classes (Class A, Class B, Class C, etc.) is: A. The different investments each class makes B. The different fees and expenses each class charges C. The different investment advisers in charge of managing each class D. Don't know/not sure

27 Exchange-Traded Funds Passive management Reflects all holdings in a specific index Market price: no guarantee of return of investment Offers diversity Liquid- Can be bought and sold like a stock

28 Matching your investments to your goals Target your goals by time frame: Short term Mid term Long term

29 Making your goals/dreams a reality Make it real -- write it down! Goal Time frame On hand Needed Amount or Rate of Return Needed to Reach Goal Replace my car 12 months $4,900 $5,200 for 20% down on $26,000 car $300 (save $25 per month), or 6.12% annual rate of return Account/Inve stment 12-month CD plus savings account

30 Short term goals: stay liquid Investments Choices Savings account Money Market account CDs US Treasury Bills Short term bonds/bond funds

31 Mid-term goalsyour longer term investment plan Stock and/or bond mutual funds Exchange-traded funds (ETFs) Zero-coupon bonds with target maturities

32 Long term goals: diversify & monitor Individual Stocks, ETFs and mutual funds Bonds and bond mutual funds Lifestyle Target funds

33 Investment Pyramid Stocks/Stock Mutual Funds Conservative stocks/bond mutual funds/ ETFs RISK Retirement Accounts: IRA, Roth IRA, 410(k) etc. / CDs Emergency Funds/ Savings Amount invested

34 Dollar Cost Averaging January (Market high) February March April (Market low) Amount invested $200 $200 $200 $200 Average share price $35 $28 $24 $20 Number of shares purchased Total number of shares Average share $25.68 cost

35 The language of Investing ASSET CLASS CASH EQUIVALENTS DIVERSIFICATION EXCHANGE-TRADED FUNDS MONEY MARKET ACCOUNTS PORTFOLIO RETURN THE DOW DIVIDENDS

36 The Language of Investing Asset Class Cash Equivalents Diversification Managed Account Money Market account Portfolio Return The Dow Dividends

37 Growing Dollars and $ense 5. Selecting the Right Investments Carol O Rourke The Coalition for Debtor Education Sam McPhearson Certified Financial Planner This program is made possible by a grant from the FINRA Investor Education Foundation through Smart investing@your library, a partnership with the American Library Association.

Q&A s. Would it be better to contribute to my Roth or traditional IRA this year? I have $5,000 which I could contribute.

Q&A s. Would it be better to contribute to my Roth or traditional IRA this year? I have $5,000 which I could contribute. Q&A s Question & Answer Categories: IRA IRA Investing Misc. Mutual funds & ETFs Other investments Would it be better to contribute to my Roth or traditional IRA this year? I have $5,000 which I could contribute.