Investing Basics: Investing Basics: 10 Steps for Beginners10 Steps for Beginners

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Investing Basics

Seminar objectivesSeminar objectives

Learn how to: Set investment goals Determine your attitude toward risk Choose among types of investments Use tools to minimize risk Build your own investment portfolio Avoid investment mistakes Select an investment professional Get help if you need it

Investing Basics

Step 1:Step 1:

Get finances in orderGet finances in order

Liquidity Establish emergency fund

Security Manage credit cards and loans; live within your

means; establish and maintain spending plan Protection

Have adequate insurance Tax-sheltered retirement plan

Participate in employer-sponsored plan Contribute to IRA

Investing Basics

What’s the difference…What’s the difference…

…between saving and investing?

Budget for short-term goals

Save for intermediate goals

Invest for long-term goals

Investing Basics

Step 2:Step 2:

Identify investment goalsIdentify investment goals

Examples: Learn more about investing Invest $_______ by the year ____ Pay for child’s college education Retire comfortably at age 62 Buy an acreage in the country in 15 years

Investing Basics

Step 3:Step 3:

Determine your attitude Determine your attitude toward risk toward risk

Determine if you’re…

Conservative Moderately conservative Moderately aggressive Aggressive

Investing Basics

When you invest…When you invest…

Money is less liquid No guarantee value will increase Most products aren’t insured Therefore, you accept more risk in

exchange for potentially higher returns

Investing Basics

Types of riskTypes of risk

Market Interest rate Inflation Liquidity

Investing Basics

Step 4:Step 4:

Take steps to reduce taxesTake steps to reduce taxes

Contribute to: 401(k), 403(b) Roth IRA (after-tax dollars) Traditional IRA (pre-tax dollars) Education plans

• Coverdell

• 529 plans

• Custodial accounts

Investing Basics

TaxesTaxes

Investment earnings may be:

Taxable Tax-deferred Tax-exempt

Investing Basics

Step 5:Step 5:

Put time on your sidePut time on your side

Benefits: Longer time horizon offers more investment choices Higher returns over time* Build wealth and financial security Tools: Magic of compounding Rule of 72

* It is possible to lose money, including your principal investment, when investing. Talk to a professional before you invest.

Investing Basics

The magic of compoundingThe magic of compounding

Invest $50 a month at 8% average rate of return*

Over 10 years: $ 9,147 Over 20 years: $29,451 Over 30 years: $74,518

* Hypothetical example. Does not represent an investment in any specific product. No fees, charges, or expenses—which would decrease the return of the investment—are reflected in the example. Also, it is possible to lose money, including your principal investment, when investing. Talk to a professional before you invest.

Investing Basics

Rule of 72Rule of 72

How long will it take

your money to double?

72____ = Years to double

Interest rate investment

Investing Basics

Step 6: Step 6:

Choose investment vehicles Choose investment vehicles right for youright for you

Three basic types of investments: Cash Bonds Stocks

Investing Basics

Cash-related investmentsCash-related investments

Advantages: Safety

Guarantee principal

Liquidity Quickly convert to cash Emergency reserve Good for short-term goals Good for gifts

Investing Basics

Types of cash investmentsTypes of cash investments

Share/savings Money market funds

Treasury bills Certificates of deposit

Savings bonds Cash value—life insurance

Investing Basics

BondsBonds

You lend money to a company, government, or municipality, in return for interest income

Advantages: Higher returns than cash Relatively safe, but not insured Help diversify a portfolio of stocks Produce steady stream of income

Disadvantages: Lower average returns than riskier investments If interest rates increase, value of bond decreases

Investing Basics

Types of bondsTypes of bonds

Treasuries: T-bills—one year or less T-notes—one to 10 years T-bonds—10 to 30 years

Government agency bonds Municipal bonds (munis) Corporate bonds Mortgage-backed (MBS) and asset-backed

securities (ABS)

Investing Basics

StocksStocks

Stockholders are owners Size of company affects risk Methods of categorizing:

Growth and value Large cap, mid cap, small cap

Advantage: Higher historical returns

Investing Basics

Mutual fundsMutual funds

Pool resources of many individual investors Involves mix of stocks, bonds, or money

market securities Advantages:

Diversification Professionally managed Convenient Invest in small amounts

Disadvantage: More risky than savings accounts and CDs Not federally insured

Investing Basics

Mutual fund feesMutual fund fees

Load fee Annual management fee Marketing fee

Investing Basics

Step 7:Step 7:

Use tools to minimize riskUse tools to minimize risk

Dollar-cost averaging Dividend reinvestment plans (DRIPs) Diversification Asset allocation

Investing Basics

Dollar-cost averagingDollar-cost averaging

Invest set amount regularly, over time Takes emotion out of market uncertainty Softens impact of market fluctuations Buy more when prices are low

Buy fewer when prices are high Profits ↑ when market prices ↑ …

Losses limited when market prices ↓ Convenient, and reduces risk Caution: Doesn’t assure profit, and doesn’t

protect against loss in declining markets

Investing Basics

DRIPsDRIPs

Dividend reinvestment plans are…

Offered to shareholders A way to buy company stock directly For reinvesting dividends paid Forced savings on a regular basis

Investing Basics

Diversify among…Diversify among…

Asset classes A variety of funds or securities within

one asset class A variety of industries A variety of maturity dates for fixed-

income investments

NOTE: Diversification does not ensure a profit or guarantee against a loss.

Investing Basics

Don’t put all your eggs…Don’t put all your eggs…

Major asset classes:

• Cash• Domestic bonds• Domestic stocks• International bonds• International stocks• Real estate (for investment purposes)• Commodities

Investing Basics

Asset allocationAsset allocation

A form of diversification: Mix of growth, income, and stability

How much of your portfolio is devoted to various categories of assets Stocks/stock mutual funds (equity) Bonds (fixed income) Cash or cash equivalents

Decide percentages; stick with your plan!

Investing Basics

DisclosureDisclosure

Mutual funds that invest in bonds are subject to certain risks, including interest-rate risk, credit risk, and inflation risk. As interest rates rise, the prices of bonds fall. Long-term bonds are more exposed to interest rate risk than short-term bonds. Unlike bonds, bond funds have ongoing fees and expenses. Bond funds will fluctuate, and when redeemed, may be worth more or less than their original cost.

International securities have additional risks, including exchange rate changes, political and economic unrest, relative low market liquidity, and the potential difference in financial and accounting controls and standards. Investing in small, mid-size, or emerging growth companies involves greater risks not associated with investing in more established companies, such as business risk, significant stock price fluctuations, and illiquidity.

Investing Basics

Building a portfolioBuilding a portfolio

Early Good High Investing Earning Income

Years Years Years

Aggressive growth 5 - 15% 5 - 15% 5 - 15%Growth 30 - 40 20 - 30 15 - 25Growth & income 30 - 40 35 - 45 35 - 45Income 10 - 20 15 - 25 20 - 30Cash 0 - 10% 0 - 10% 0 - 10%

Source: Edwardjones.com

Investing Basics

Step 8:Step 8:

Don’t make common Don’t make common investment mistakesinvestment mistakes

Not doing research Not diversifying Not understanding the power of

compounding Not knowing risk tolerance Not taking any risk at all Not taking advantage of 401(k)

Investing Basics

Step 9: Step 9:

Know how to select an Know how to select an investment professionalinvestment professional Get referrals, make calls, check references Meet face-to-face, ask questions, check comfort

level Professional credentials, affiliations? Sell products? Clients in same income bracket as you? Preference for how to communicate? How often? Attitude toward risk? Cost? How are you paid?

Source: Investing For Your Future

Investing Basics

How is an adviser paid?How is an adviser paid?

Salary – paid by company

Fee-only – compensated with agreed-upon fee (no commissions)

Commissions – paid when clients purchase recommended financial products

Combination of fees, commissions

Investing Basics

Find local advisersFind local advisers

Financial Planning Association800-282-PLAN fpanet.org

National Assoc. of Personal Financial Advisors888-FEE-ONLY napfa.org

American Institute of Certified Public AccountantsPersonal Financial Planning Division888-777-7077 aicpa.org

Society of Financial Service Professionals800-392-6900 financialpro.org

Investing Basics

Step 10:Step 10: Know where to find helpKnow where to find help

Investment clubs Magazines Government (SEC) Professional organizations Newspapers, newsletters, home study Books, local library Internet

Investing Basics

Checklist: Are you ready?Checklist: Are you ready?

My finances are in order; I pay bills on time I have an emergency fund I’ve budgeted for short-term goals I’ve set goals for long-term investing I know my attitude toward risk I’ve identified investment products right for me I plan to invest small amounts of money regularly I participate in my employer’s retirement savings plan I plan to diversify my portfolio, and know how I know the common investment mistakes I know where to go for help

Investing Basics

Remember … your credit union can help you with all your financial challenges.

Investing Basics

© 2007 Credit Union National Association Inc., the trade association for credit unions in the U.S.

Revised 2009.

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