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 $? 2
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? 3
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? Risk tolerance scale-worksheet 4
Relationship Between Risk and Return High Int l Stocks Stocks Expected Return Int l Bonds Real Estate Bonds Low Cash Equivalents Low Risk High
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? 6
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) 7
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 8
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? 10
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 11
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 12
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 13
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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 15
Retirement Funds Roth IRA Pay taxes now No taxes when you withdraw = no taxes on the growth! Traditional IRA Upfront tax deduction Pay taxes at withdrawal 16
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 17
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 18
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 19
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 20
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 21
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 longterm buying and holding is a great strategy 22
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 23
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 the right investment categories at the right time 24
Determinants of Portfolio Performance Security Selection 4.6% Market Timing 1.8% Other 2.1% Asset Allocation 91.5% 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 26
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 27
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) Avoid fraud! 28
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 29
Low-Maintenance Strategies Target maturity date mutual funds for retirement Index funds Automatic deposits Annual financial check-up 30
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 31
Remember Never invest in something you don t understand 32
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 33
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 10 th : Social Security with SSA expert Mickie Douglas 11:30 only; no evening program May 8 th : Great Mutual Funds for your IRA June 12 th: Get your house in order before you buy July 10 th : Investing for College 36