Basics of Investing

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Things To Do Before InvestingThings To Do Before Investing

Pay off credit card debt!Pay off credit card debt! No investment pays as much as credit card No investment pays as much as credit card

companies chargecompanies charge Build an emergency fundBuild an emergency fund Consider your goalsConsider your goals Timeline Timeline

How soon will you need the $?How soon will you need the $?

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Consider your GoalsConsider your Goals Vehicle purchase/replacementVehicle purchase/replacement Down payment on a homeDown payment on a home Child’s educationChild’s education To build wealth To build wealth For retirementFor retirement

What are your financial goals?What are your financial goals? How much $ will you need?How much $ will you need?

Determine your Risk ToleranceDetermine your Risk Tolerance

How much risk can you How much risk can you stand?stand?If you have trouble sleeping at If you have trouble sleeping at

night because you are worried night because you are worried about your investments then about your investments then pick a more conservative mixpick a more conservative mix

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Relationship Between Risk and ReturnRelationship Between Risk and Return

Risk HighLow

Expected Return

High

Low

CashEquivalents

Bonds

Int’l Bonds

Real Estate

Stocks

Int’l Stocks

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Before you InvestBefore you Invest

Is your budget balanced?Is your budget balanced? Do you save every month?Do you save every month? Do you pay credit cards in full every Do you pay credit cards in full every

month?month? Do you carry adequate insurance to Do you carry adequate insurance to

protect against major catastrophes?protect against major catastrophes?

Potential RisksPotential Risks

Being too conservative (Savings Being too conservative (Savings accounts, CDs, etc.)accounts, CDs, etc.)Keeps principal safe but…Keeps principal safe but…Inflation reduces purchasing powerInflation reduces purchasing power

Inflation averages about 3.1%Inflation averages about 3.1%Risk not reaching your goal(s)Risk not reaching your goal(s)

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RisksRisks

Being too aggressive (too much in Being too aggressive (too much in stocks)stocks) Higher potential for growth but…Higher potential for growth but… More market volatilityMore market volatility No guarantee or insuranceNo guarantee or insurance Potential to lose some or all of the principalPotential to lose some or all of the principal

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Managing RisksManaging Risks

Consider your goalConsider your goal Emergency fund- be conservativeEmergency fund- be conservative Retirement- be more aggressiveRetirement- be more aggressive

Match your goals with your risk Match your goals with your risk tolerancetolerance Can you handle the market volatility? Can you handle the market volatility?

Managing the risks continued Consider your time frameConsider your time frame Short Term – months to 3 yearsShort Term – months to 3 years

Stick with safe savings optionsStick with safe savings options Mid Term – 3 to 10 yearsMid Term – 3 to 10 years

Take Take somesome risk to grow your $ & beat risk to grow your $ & beat inflationinflation

Long Term – 10 or more yearsLong Term – 10 or more years Take Take moremore risk to grow your $ & beat risk to grow your $ & beat

inflationinflation

Saving TerminologySaving Terminology

Cash Equivalents Cash Equivalents Usually low riskUsually low risk Savings, CDs, cash on hand Savings, CDs, cash on hand Also called liquid assetsAlso called liquid assets Use for short term goals or if you have you Use for short term goals or if you have you

have low risk tolerancehave low risk tolerance

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Investing TerminologyInvesting Terminology

StockStock – ownership in a company – ownership in a company BondBond – loan money to issuer – loan money to issuer Mutual fund Mutual fund – A – A diversified diversified

portfolioportfolio of stocks and/or bonds of stocks and/or bondsOpposite of putting all your eggs in Opposite of putting all your eggs in

one basketone basket

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Retirement Funds

401(k) retirement plan offered by employer $ grows tax deferredSome employers will match (~3%)

Need to invest > just the match IRA: individual retirement account

Invest on your own$ grows tax deferred

Retirement FundsRetirement Funds Roth IRARoth IRA

Pay taxes nowPay taxes nowNo taxes when you withdraw = no No taxes when you withdraw = no

taxes on the growth!taxes on the growth!

Traditional IRATraditional IRAUpfront tax deductionUpfront tax deductionPay taxes at withdrawalPay taxes at withdrawal

Retirement FundsRetirement Funds

Retirement accounts are Retirement accounts are NOTNOT an investmentan investmentHow the government treats that How the government treats that

money for tax purposesmoney for tax purposesWhere you put that money is up Where you put that money is up

to youto you

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IRA CriteriaIRA Criteria

Must have an earned incomeMust have an earned incomeIf married, non-earning spouse can If married, non-earning spouse can

use a spousal IRAuse a spousal IRA $5,500 annual limit $5,500 annual limit

You can contribute lessYou can contribute lessAge 50+: $6,500Age 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 fundsMay charge heavy fees

If no employer match, consider an IRA

401(k), Roth, or traditional IRA?401(k), Roth, or traditional IRA? Use a traditional IRA ifUse a traditional IRA if

Your employer doesn’t match or Your employer doesn’t match or you’ve already invested up to the you’ve already invested up to the matchmatch

You expect to be in a lower tax You expect to be in a lower tax bracket at retirementbracket at retirementTake the tax break nowTake the tax break now

401k, Roth, or traditional IRA?401k, Roth, or traditional IRA? Use a Roth IRA ifUse a Roth IRA if

You expect taxes to riseYou expect taxes to riseYou expect to be in a higher tax You expect to be in a higher tax

bracket at retirementbracket at retirementOffers tax diversificationOffers tax diversification

If most of your retirement income will be If most of your retirement income will be taxable… invest in a Rothtaxable… invest in a Roth

Establish Your Long-Term Investment Establish Your Long-Term Investment StrategyStrategy

Strategy 1: Buy and hold Strategy 1: Buy and hold anticipates long-term economic anticipates long-term economic growth.growth.Stock market has offered a positive Stock market has offered a positive

return over every 15 year periodreturn over every 15 year period Past returns no guarantee, but long-term Past returns no guarantee, but long-term

buying and holding is a great strategybuying and holding is a great strategy

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

Long-Term Investment Strategy 3 & 4Long-Term Investment Strategy 3 & 4

• Portfolio diversification reduces Portfolio diversification reduces volatilityvolatility

• 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 Asset allocation keeps you in the right investment categories at the right timeinvestment categories at the right time

Investing Made Easy Set up Automatic Investing

Payroll deduction orAutomatic transfer from checking

to: Individual Retirement AccountMutual fundOther investment

Mutual FundsMutual Funds AdvantagesAdvantages

Professional management Professional management

Reduce risk through diversification Reduce risk through diversification Own small part of lots of different investmentsOwn small part of lots of different investments

Monitoring investments is easyMonitoring investments is easy

DisadvantagesDisadvantages Funds charge feesFunds charge fees

Be awareBe aware follow market performance (down & up)follow market performance (down & up)

No guaranteed rate of returnNo guaranteed rate of return

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!

Remember

Never invest in something you don’t

understand

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QUESTIONS?