Personal Investing

Jamie HarmonVice President

Fidelity Investments

smartwomansecurities

2006 Smart Woman Securities. All materials are for SWS

members’ use only

December 13, 2006

Section 1: INTRODUCTION

My Story

• Personal investing – Alan Abelson

• From Gov concentrator to Fidelity– Internship

• Fidelity– Associate to Portfolio Manager

• I am always growing as an investor– You should be, too

Overview

• Intro• Investing Basics• Open a Roth IRA• Asset Classes• What to Buy?• Stocks• Bonus

Section 2: INVESTING

BASICS

• Beat CPI• Make tons of money• Learn about investing• Have experience to discuss in

interviews– Note: Don’t say you are interested in

personal investing unless you really are!

Investing Goals?

• Expensive shoes• Car• “12” on roulette• College education • Savings account• Art • House

What Is an Investment?

• An asset with an expected return that is strong on a real basis

• “Expected Return” is key– Current income– Capital appreciation

o Growtho Valuation

– NPV of cash flows

An Investment Is…

Problem 1: Inflation

Value of $1 After Inflation

$0.07

$0.00

$0.20

$0.40

$0.60

$0.80

$1.00

$1.20

$1.40

$1.60

1925

1927

1929

1931

1933

1935

1937

1939

1941

1943

1945

1947

1949

1951

1953

1955

1957

1959

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

CAGR = - 3.22%

Problem 2: Growth

The S&P 500 - Street EPS Growth ForecastsEstimates from 5 Years Ago versus Actual Results

(data from 12/31/00-12/31/05)

0

5

10

15

20

25

LT (20)

(15) (10) (5) (3) 0 3 5 8 10 13 15 20 25 30 40 50 GT 50

Compound Annual Growth Rates

Per

cen

tag

e o

f C

om

pan

ies

Ob

serv

ed

Predicted IBES Growth

Actual Results 5 Years Later

Source: FMR; FactSet; S&P 500

Problem 3: Valuation

Item Price Value vs. Price

Harvard education $160,000 Cheap!

Timeshare presentation -$30 Expensive!

You get a free TV (but it stinks)

What You Need

• Temperament• Research

– Spend more time buying stocks than shoes

• Savings

Section 3:OPEN A ROTH IRA

• Earned income equal to your IRA contribution (or greater)

• But less than $95k– Regular IRA has no max on income

• Parents can fund– But you still need earned income

Requirements

Advantages

• Compounds tax free • Can be withdrawn tax free

– What is this worth?

• Up to $4k per year• If possible, invest in 06 and

on 1/1/07

– Is it worth borrowing to do this?

How Much Can You Put In?

Where?

• Fidelity Investments– Local branches– $2500 minimum– I use Fidelity, and it seems

good to me

• E*Trade or Ameritrade– No branches (?)– No Minimum

• Save money from age 20 to 65 – 4k per year for 45 years at 8% = $1,669,704

• What if you wait 1 year?– 4k per year for 44 years at 8% = $1,542,022– You lose $127,682 !!!

When? NOW!!

• Web• Phone• In person

How?

Section 4: ASSET CLASSES

• Financial assets– Fixed income– Equity

• Hard assets– Residential real estate– Commercial real estate– Other

Asset Classes

• Short term– T bills– Savings accounts, etc.

• Long Term– Government bonds

o Government, Sovereign, Municipal Relation to national debt

– Corporate debto Corporates, High yield

– Asset-backed securities

Fixed Income

• Stocks

• Mutual funds

• Private companies

Equity

Stocks

• Pieces of businesses• Why do they exist?

– To help companieso Raise moneyo Compensate employeeso Buy other companieso Estate planningo Etc.

Types

• Large, small• Fast growing, slow growing• Low PE, high PE• IPO’s• Specialty

– REITs, biotech, international

Mutual Funds

• A group of stocks (or bonds)– Diversified– Strategy

o Growth, emerging markets, big cap

• Types– Actively managed funds– Index funds– ETF’s

Mutual Funds (more)

• Want– Lower fees– Higher performance

• Minimum investment – Often $1k or $2.5k

• Vs. hedge funds

Private Companies

• A mature business– Local 7-11– Leverage Buyouts

• A start up business– Friend with an idea– Venture Capital

• Similar to stocks in some ways…

Hard Assets

• Residential real estate

• Commercial real estate

• Other– Gold, art

Section 5: WHAT TO BUY?

Long Term Real Returns

$2

$7

$1,399

$271

0.1

1

10

100

1000

10000

1925

1930

1935

1940

1945

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

T-bills Bonds Small Stocks Large Stocks

Source: Prudential Securities; Ibbotson data

Cash Equivalents

• Expected return?• Sample rates

– 0% checking– 2.5% savings– 4.5% money market

• 3 months of expenses in cash– Or less

Bonds

• Expected return?• Sample rates:

– 10 year = 4.5%– Mexican 10 year = 5.5%– High yield = 8.0%

• No growth• Credit risk• Interest rate risk

Bond Yields Are Low

0

2

4

6

8

10

12

14

16

18

Ap

r-1

95

3

Jul-

19

54

Oct

-19

55

Jan

-

Ap

r-1

95

8

Jul-

19

59

Oct

-19

60

Jan

-

Ap

r-1

96

3

Jul-

19

64

Oct

-19

65

Jan

-

Ap

r-1

96

8

Jul-

19

69

Oct

-19

70

Jan

-

Ap

r-1

97

3

Jul-

19

74

Oct

-19

75

Jan

-

Ap

r-1

97

8

Jul-

19

79

Oct

-19

80

Jan

-

Ap

r-1

98

3

Jul-

19

84

Oct

-19

85

Jan

-

Ap

r-1

98

8

Jul-

19

89

Oct

-19

90

Jan

-

Ap

r-1

99

3

Jul-

19

94

Oct

-19

95

Jan

-

Ap

r-1

99

8

Jul-

19

99

Oct

-20

00

Jan

-

Ap

r-2

00

3

Jul-

20

04

Oct

-20

05

10-Year Treasury Note Yield at Constant Maturity (% p.a.) Average

Source: Haver Analytics; FMR

Baa Spread is Low

Source: Merrill Lynch

High Yield Spread is Low

Source: Merrill Lynch US High Yield Master II Index

EM Spreads Are Low

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

Dec

-93

Jun-

94

Dec

-94

Jun-

95

Dec

-95

Jun-

96

Dec

-96

Jun-

97

Dec

-97

Jun-

98

Dec

-98

Jun-

99

Dec

-99

Jun-

00

Dec

-00

Jun-

01

Dec

-01

Jun-

02

Dec

-02

Jun-

03

Dec

-03

Jun-

04

Dec

-04

Jun-

05

Dec

-05

Jun-

06

EM

BIG

Strip

ped

Spre

ads

Ove

r U

S T

reas

urys

.

Source: JP Morgan EMBI Global Index

Paying Down Your Debt

• Expected return?• Credit card rates average 14%• Better types of debt

– Student loans– Mortgage

o Tax advantages

Gold

• Expected return?

• Carrying cost

• Good inflation hedge

• Supply and demand– Never gets used up

Other Collectables

• On Nov 30, 2006, a bottle of Scotch whiskey from 1856 sold for $28,820 – This seems extraordinary for a collectable– What was the return?

Residential Real Estate

• Has been good longer term

• More complex than most people think– Still a good place to look

Conventional Wisdom

• Median existing home price has increased at about 6% per year since WWII

• No down years– Might go down 4% in 07?

• With 20% down, that is 30% a year, right?

Dig Deeper

• High end real estate vs. the median home• Think about expected return

– Cash costs of owning vs. renting– Growth in rent– Capital appreciation– Leverage

• Rent vs. Buy example

House Price vs. Income

200%

250%

300%

350%

400%

450%

19

81

19

83

19

85

19

87

19

89

19

91

19

93

19

95

19

97

19

99

20

01

20

03

20

05

Home price/income ratio Average

Source: FMR Real Estate

Affordability is Mixed

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

19

81

19

82

19

83

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

Housing affordability index* Long-term average 1991-2005 average

Affordability = percentage of median household income needed to pay the mortgage of the median priced home

Source: FMR Real Estate

Residential Rent Growth

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

1999 2000 2001 2002 2003 2004 2005 2006

% c

han

ge

Source: FMR Real Estate

Commercial Real Estate

• Has also been good longer term• Easy to leverage• Different from residential real estate• Expected Return

– NOI yield– Growth in rents

• REITs as a way to get exposure

Commercial RE is good LT

$0.00

$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

1971

1976

1981

1986

1991

1996

2001

NAREIT TR S&P 500

Source: FMR;Prudential

Office Rent Growth

-10

-5

0

5

10

15

1999 2000 2001 2002 2003 2004 2005 2006

% c

han

ge

Source: FMR Real Estate

REIT’s Pricey vs. Bonds?

(800)

(600)

(400)

(200)

0

200

400

600

800Ja

n-7

2

Jan

-73

Jan

-74

Jan

-75

Jan

-76

Jan

-77

Jan

-78

Jan

-79

Jan

-80

Jan

-81

Jan

-82

Jan

-83

Jan

-84

Jan

-85

Jan

-86

Jan

-87

Jan

-88

Jan

-89

Jan

-90

Jan

-91

Jan

-92

Jan

-93

Jan

-94

Jan

-95

Jan

-96

Jan

-97

Jan

-98

Jan

-99

Jan

-00

Jan

-01

Jan

-02

Jan

-03

Jan

-04

Jan

-05

Jan

-06

basi

s po

int

spre

ad

Source: FMR Real Estate

Section 6: STOCKS

Stocks Have Been Great

$1,318

$18

0

200

400

600

800

1000

1200

1400

1600

1946

- Q

1

1949

- Q

1

1952

- Q

1

1955

- Q

1

1958

- Q

1

1961

- Q

1

1964

- Q

1

1967

- Q

1

1970

- Q

1

1973

- Q

1

1976

- Q

1

1979

- Q

1

1982

- Q

1

1985

- Q

1

1988

- Q

1

1991

- Q

1

1994

- Q

1

1997

- Q

1

2000

- Q

1

2003

- Q

1

2006

- Q

1

CAGR = 8.84%

Source: Standard & Poors 500; Ibbotson data

Stocks Aren’t Expensive

17.0

0

5

10

15

20

25

30

35

40

45

50

19

46

- Q

1

19

48

- Q

3

19

51

- Q

1

19

53

- Q

3

19

56

- Q

1

19

58

- Q

3

19

61

- Q

1

19

63

- Q

3

19

66

- Q

1

19

68

- Q

3

19

71

- Q

1

19

73

- Q

3

19

76

- Q

1

19

78

- Q

3

19

81

- Q

1

19

83

- Q

3

19

86

- Q

1

19

88

- Q

3

19

91

- Q

1

19

93

- Q

3

19

96

- Q

1

19

98

- Q

3

20

01

- Q

1

20

03

- Q

3

20

06

- Q

1

Source: FMR; S&P 500 PE

Earnings Growth is Key

12.42

75.86

0

10

20

30

40

50

60

70

80

Ma

r-8

3

De

c-8

3

Se

p-8

4

Ju

n-8

5

Ma

r-8

6

De

c-8

6

Se

p-8

7

Ju

n-8

8

Ma

r-8

9

De

c-8

9

Se

p-9

0

Ju

n-9

1

Ma

r-9

2

De

c-9

2

Se

p-9

3

Ju

n-9

4

Ma

r-9

5

De

c-9

5

Se

p-9

6

Ju

n-9

7

Ma

r-9

8

De

c-9

8

Se

p-9

9

Ju

n-0

0

Ma

r-0

1

De

c-0

1

Se

p-0

2

Ju

n-0

3

Ma

r-0

4

De

c-0

4

Se

p-0

5

Ju

n-0

6

Source: S&P 500 EPS; FactSet; FMR

Stocks

• Expected Return?

• Growth

• Valuation

• Dividends

How To Find Stocks

• Student oriented companies– Apple, Under Armor, Crocs, Urban

Outfitters, Sallie Mae, Budweiser

• Local companies– Staples, TJX, Bright Horizons, Smith and

Wesson, Boston Beer

Fun Shoes

iPod

Daycare

Beer - Of Course!

Right in Harvard Square!

Started by a Harvard Grad

How To Pick Stocks

• This was covered pretty well by the last speaker

• More ideas:– Research a few ideas in depth– Focus on small stocks– What is your edge?

How To Invest Your IRA

• My Thoughts:– Concentrated– Stocks– Lower risk with

o Knowledgeo Stable businesses

– Mutual funds run by people I respect

• Others Say– Diversification– Cash, bonds,

etc.– Lower risk with:

o Cash, bonds, etc.

– Index funds

More on Your IRA

• Find a strategy that is right for you

• If you already have an investment advisor, learn from him/her

Section 7: BONUS - INTERVIEW INFO

Getting a Job in Finance

• Join SWS !• Read the Wall Street Journal, Forbes, etc.• Read some books on investing• Buy some stocks, and be able to talk about them.• Get an internship• Take an accounting course• Take CFA level 1• Learn new things everyday

Fidelity

• Manages mutual funds

• $1 Trillion in assets

• Based in Boston

Fidelity SWS Activities

• “Fidelity Day on the Job” – likely in Feb 07• Summer internships

– Applications due 1/31/07– On campus interviews 2/14/07

• Full Time Hires– Interviews fall 07

• Sarah Jackson - Recruiting Manager– Sarah.jackson@fmr.com– 617-563-3151

Q&A