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INVESTINGby

Professor Arnold MeltzerMarch 2010

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TOPICS

• GROWTH OF INVESTMENTS

• TRADITIONAL IRA

• ROTH IRA

• 401(k) PLAN

• TAXES

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TOPICS

• BUY A HOUSE

• MINIMIZE PURCHASES– CAR– FURNITURE– USE OF CREDIT CARDS

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TOPICS

• STOCKS

• BONDS

• MUTUAL FUNDS– MANAGED FUNDS– INDEX FUNDS– LOAD AND NO-LOAD FUNDS

• REAL ESTATE

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GROWTH OF INVESTMENTS

• AVERAGE GROWTH OF STOCKS OVER THE PAST 60 YEARS IS ABOUT 11%/YR.

• SAVE $10,000 IN YOUR FIRST YEAR OF WORK AND INVEST IT IN GOOD MUTUAL FUNDS OR STOCKS

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GROWTH OF INVESTMENTS

• YOU WILL WORK FOR 40 YEARS BEFORE YOU RETIRE

• $10,000 x (1.11)40 = $650,000 AFTER 40 YEARS• DO IT AGAIN IN YOUR SECOND YEAR OF

WORK.• $10,000 x (1.11)39 = $585,593 AFTER 39 YEARS• TOTAL AT RETIREMENT =$1,235593

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TRADITIONAL IRA (INDIVIDUAL RETIRMENT ACCOUNT)

• INVESTMENT GROWS TAX FREE UNTIL YOU RETIRE

• YOU PAY TAXES ON MONEY REMOVED AS INCOME AFTER AGE 59.5

• YOU CAN INVEST $5,000 PER YEAR in 2010• YOU MUST START TO REMOVE MONEY AT

AGE 70.5 YRS.

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ROTH IRA

• YEARLY CONTRIBUTION IS NOT TAX FREE• INVESTMENT GROWS TAX FREE• YOU PAY NO TAXES WHEN YOU REMOVE

MONEY AFTER AGE 59.5• YOU CAN CONTRIBUTE $5000/YR in 2010• YOU ARE NOT REQUIRED TO REMOVE

MONEY• YOU PAY A PENALY OF 10% IF YOU

REMOVE MONEY EARLY, I.E. BEFORE AGE 59.5

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TRADITIONAL IRA

• YOU PAY A PENALTY OF 10% IF YOU REMOVE MONEY BEFORE AGE 59.5.

• IF YOUR TAXABLE INCOME IS BELOW $55K PER YEAR, YOUR CONTRIBUTION TO THE IRA IS TAX DEDUCTABLE.

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401(k) PLAN

• TAX FREE CONTRIBUTIONS UP TO $16.5K• USUALLY MATCHED BY YOUR EMPLOYER• YOU PAY NO TAXES ON THE INVESTMENT• YOU PAY TAXES WHEN YOU REMOVE

MONEY AFTER AGE 59.5 YEARS• YOU MUST REMOVE MONEY BY 70.5

YEARS• YOUR PAY A 10% PENALTY IF MONEY IS

REMOVED BEFORE AGE 59.5.

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TAXES

• IF YOU ARE SINGLE, TAXES WILL EAT YOU ALIVE.

• 2010 CURRENT FEDERAL TAX RATESTAXABLE INCOME TAX RATE$0 - $8,375K 10%$8375 - $34,000 15%$34,000 - $82,400 25%$82,400 - $171,850 28%

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TAXES

• QUICK TAX CALCULATION (SINGLE):• TAXABLE INCOME = INCOME -

EXEMPTION - DEDUCTIONS• EXEMPTION (2010) = $3,650• STANDARD DEDUCTION (2010) = $5,700• IF YOU MAKE $60K YOUR TAXABLE

INCOME IS $60K - $3,650 - $5,700 = $50,650

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TAXES

• YOUR FEDERAL TAXES (SINGLE)$4,681 + 25% X ($50,650 - $32,550) =

$4,681 + 25% X $18,100 = $4,681 + $4525

TOTAL FEDERAL TAXES = $9,206

ADD STATE AND LOCAL TAXES @ 9%

• TAXES PAID = $9206 + $4558 = $13,764

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TAXES

• YOUR INCOME IS $60,000

• YOUR INCOME AFTER TAXES IS

$60,000 - $13,764 = $ 46,236

• PERCENTAGE TAXES ARE 23%

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Deductions

• YOU NEED DEDUCTIONS TO LOWER YOUR TAXABLE INCOME– INTEREST ON A HOUSE IS DEDUCTABLE– REAL ESTATE TAXES ARE DEDUCTABLE– CONTRIBUTIONS TO CHARITY ARE

DEDUCTABLE

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Deductions

- INTEREST ON SCHOOL LOANS– STATE AND LOCAL TAXES ARE

DEDUCTABLE

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BUYING A HOUSE• YOU NEED TO STAY IN THE AREA FOR AT

LEAST 3 YEARS TO OVERCOME THE CLOSING COSTS OF BUYING THE HOUSE

• YOUR HOUSE WILL BE A GOOD INVESTMENT AND CAN APPRECIATE

• YOU PAY NO CAPITAL GAINS ON THE SALE OF A HOUSE WORTH LESS THAN $500K (married), $250K (single)

• YOU CAN SELL YOUR HOUSE EVERY 2 YEARS AND PAY NO CAPITAL GAINS

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BUYING A HOUSE

• 3 IMPORTANT CONCEPTS IN BUYING A HOUSE ARE:– 1) LOCATION– 2) LOCATION– 3) LOCATION

• BUY A HOUSE AND RENT OUT ROOMS. MAKE OTHERS PAY FOR YOUR HOUSE.

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MINIMIZE PURCHASES

• DO NOT BUY A NEW CAR – BUY A USED CAR – USE MASS TRANSPORTION

• DO NOT BUY EXPENSIVE FURNITURE– BUY USED FURNITURE– SHARE THE EXPENSE WITH

HOUSEMATES

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MINIMIZE EXPENSES

• DO NOT BUY ANYTHING ON CREDIT– ALWAYS HAVE THE MONEY IN YOUR

BANK ACCOUNT BEFORE YOU USE A CREDIT CARD

– INTEREST ON CREDIT CARDS IS 18%– SAVE FOR A RAINY DAY - IT WILL COME

(3 months income)

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STOCKS

• YOU BUY A PART OF A COMPANY (EQUITY)– THE STOCK INCREASES IN VALUE OVER

TIME (HOPEFULLY)– THE COMPANY PAYS YOU DIVIDENDS

EACH QUARTER– THE INVESTMENT IS FAIRLY LIQUID

(EASY TO SELL AND OBTAIN MONEY)

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STOCKS

• IF YOU SELL A STOCK AT A PROFIT AND YOU OWNED THE STOCK FOR A YEAR OR MORE, THE CURRENT TAX RATE IS 15% ON THE CAPITAL GAIN

• CAPITAL GAIN = SALE PRICE - PURCHASE PRICE.

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BONDS

• YOU BUY THE DEBT OF THE COMPANY OR GOVERNMENT

• PAYS A FIXED RATE, I.E. 4% OF THE PURCHASE PRICE

• VALUE OF THE BOND FLUCTUATES BASED ON THE VALUE OF MONEY

• IF BOND PRICE INCREASES - THE PERCENTAGE INTEREST PAID DECREASES

• IF BOND PRICE DECREASES - THE PERCENTAGE INTEREST PAID INCREASES

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BONDS

• BONDS PRICES DO NOT INCREASE AT THE SAME AVERAGE RATE AS STOCK PRICES

• BONDS ARE A CONSERVATIVE INVESTMENT

• INTEREST OF STATE AND CITY BONDS (MUNI) ARE FEDERAL TAX FREE

• INTEREST RATE FOR MUNI BONDS ARE LESS THAN FOR US GOVERNMENT BONDS OR CORPORATE BONDS– MUNI - 3%

– FEDERAL BOND - 5%

– CORPORATE BOND - 7%

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BONDS

• CORPORATE BONDS ARE RISKIER THAN FEDERAL OR MUNI BONDS, HENCE THEY USUALLY PAY A HIGHER INTEREST RATE.

• JUNK BONDS ARE HIGH INTEREST PAYING BONDS OF COMPANIES THAT DO NOT HAVE ENOUGH EQUITY TO PAY THE BONDS

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MUTUAL FUNDS

• COMPANIES THAT OFFER SHARES IN A GROUP OF STOCKS CALLED A FUND

• PAY THE DIVIDENDS OF THE STOCKS THEY HOLD IN THE FUND TO YOU

• PAY THE INTEREST OF THE BONDS THEY HOLD IN THE FUND TO YOU

• THE VALUE OF A SHARE OF THE FUND IS THE AVERAGE OF THE VALUE OF THE STOCKS OR BONDS THEY HOLD IN THE FUND

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MUTUAL FUNDS

• MUTUAL FUNDS TEND TO GROW SIMILAR TO STOCKS

• IF THE FUND PICKS FAST GROWING STOCKS THEIR PRICE WILL INCREASE RAPIDLY

• FAST GROWING STOCKS ARE USUALLY RISKY AND THEIR PRICE FLUCTUATES OVER A LARGE RANGE

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MUTUAL FUNDS

• THERE ARE MORE MUTUAL FUNDS THAN STOCKS

• TYPES OF MUTUAL FUNDS– MANAGEMENT STYLE

• HIGHLY MANAGED

• INDEXED

• COMBINATION

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MUTUAL FUNDS

– TYPES OF STOCKS IN FUND• GROWTH

• VALUE

• BONDS

• BLEND

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MUTUAL FUNDS

– LOCATION OF COMPANIES• US ONLY

• INTERNATIONAL = NON US

• GLOBAL = US + INTERNATIONAL

• INDIVIDUAL COUNTRIES, I.E. JAPAN, RUSSIA, TURKEY, BAZIL, ETC.

• REGIONAL FUNDS, I.E. ASIA, ASIA- JAPAN, BRIC, EUROPE, EASTERN EUROPE

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MUTUAL FUNDS

– SIZE OF THE COMPANIES IN THE FUND• LARGE CAP

• MID-CAP

• SMALL-CAP

• BLEND

• SMALL TO MID-CAP

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MUTUAL FUNDS

– COST OF FUNDS• LOAD FUND = PAY A PERCENTAGE OF THE

SHARES YOU BUY TO JOIN THE FUND, TYPICALLY 4.5% IN ADDITION TO THE PRICE OF THE SHARES

• NO-LOAD FUND = ONLY PAY FOR THE SHARES

• REAR END FUNDS = PAY A PERCENTAGE OF THE PRICE OF THE SHARES THAT YOU SELL. PAY AT THE END

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MUTUAL FUNDS

• EXAMPLE OF FUNDS– MANAGED, LOADED,GLOBAL, GROWTH

FUND– INDEXED, NO-LOAD, MID-CAP, US FUND

• QQQ - NASDAQ 100 (highest capitalization)

• DIA - DOW JONES 30 INDUSTIAL STOCKS

• SPY - STANDARD & POORS 500 STOCKS

(top 500 stocks by capitalization)

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BUYING STOCKS, BONDS OR MUTUAL FUNDS

• BUY STOCKS AND CORPORATE BONDS THROUGH A STOCK BROKER

– ONLY PEOPLE LISENCED BY THE STOCK EXCHANGES CAN SELL STOCKS AND CORPORATE BONDS

• BUY GOVERNMENT BONDS THROUGH BROKERS OR FROM THE GOVERMENTS

• BUY MUTUAL FUNDS THROUGH BROKERS OR DIRECTLY FROM THE FUNDS.

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COST OF BUYING STOCKS AND MUTUAL FUNDS

• THE MORE STOCK YOU BUY AT A GIVEN TRANSACTION THE LESS YOU PAY THE BROKER FEE ($/SHARE)

• NOT ALL BROKERS CHARGE THE SAME FEES

• YOU PAY A BROKER FEE WHEN YOU BUY OR WHEN YOU SELL

• BUYING MUTUAL FUNDS THROUGH A BROKER IS JUST LIKE BUYING STOCKS.

• BUYING NO LOAD FUNDS WITHOUT A BROKER IS VERY COST EFFECTIVE.

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COSTS OF HOLDING MUTUAL FUNDS

• MUTUAL FUNDS CHARGE A YEARLY FEE FOR RUNNING THE FUND

• FEES VARY WITH EACH FUND

• HIGHLY MANAGED FUNDS CHARGE MORE THAN INDEX FUNDS

• CHARGES VARY FROM 0.5% TO 2.5% OF YOUR HOLDINGS

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REAL ESTATE

• REAL ESTATE CAN BE A GOOD INVESTMENT– BUY A HOUSE TO RENT– RENT IT- YOUR RENTERS PAY FOR THE

HOUSE – TAKE DEPRECIATION OFF YOUR TAXES– WHEN YOU SELL IT - IT’S A CAPITAL

GAIN

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REAL ESTATE

• BEING A LANDLORD CAN BE A PAIN– YOU MUST MAINTAIN THE PROPERTY– RENTERS DO NOT ALWAYS PAY THE

RENT– RENTERS CAN RUIN THE PROPERTY– FINDING NEW GOOD RENTERS IS

DIFFICULT

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CONCLUSION

• INVEST FOR YOUR RETIREMENT

• INVEST FOR YOUR INCOME

• INVEST FOR YOUR FUTURE

• INVEST