Personal Finance Strategies
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week6personalfinance.pptManaging Investments
BA250 - Personal Finance
Week 6
How Do I Get Started?
- Regularly allocate a portion of earnings for investing
- Take advantage of automatic investment and dividend reinvestment programs
- Learn about investments and "play" trading
- Determine financial objectives
PAY YOURSELF FIRST!
What Are Your
Investment Objectives?
- Current Income
- appropriate for retired persons
- Major Expenditures
- college education, down payment on a home, or starting a business
Retirement
live comfortably in "golden years"
Shelter from Taxes
preserve more of your earnings
Coming Up With the Capital
- How much money will it take?
- Do you have a lump sum to invest now, or will you systematically save toward your goal?
Investment plan provides direction to help attain goal
Different Ways to Invest
1. Common Stock
2. Bonds
3. Preferreds and Convertibles
4. Mutual Funds and Exchange Traded Funds
5. Real Estate
Market Trends
Bear Market
- Falling securities prices for extended time period
- Investor pessimism
- Economic downturn
Bull Market
Rising securities prices for extended time period
Investor optimism
Favorable economy
Becoming an Informed Investor
- Annual Reports
- Financial Press
- Industry Data
- Stock Quotes
- Advisory Services
Online Investing
- Online services
- Educational material
Investment tools
Investment planning Research and screening
Portfolio tracking
Managing Your
Investment Holdings
- Build a diversified portfolio based on goals and personal situation
- Allocate assets according to objectives
- Track investments, rebalance portfolio as needed
The Risks Of Investing
- Business
- Financial
- Market
- Purchasing Power
- Interest Rate
- Liquidity
- Event
Returns from Investing
- Current income bond interest, stock dividends, rent on real estate
- Capital gains increase in market value
- Interest-on-interest returns must be reinvested for compounding
The Risk-Return Trade-Off
If you want greater return you will most likely have to accept greater risk
Amount of risk is directly related to expected return
Investing in Common Stock
Each share represents equity or part ownership in the company
- Investor participates in firm’s profits
- Stock ownership is residual
- firm’s obligations paid first
Investing in Common Stock
Advantages
- Potential returns
- Actively traded and highly liquid
- Involve no direct management
Disadvantages
Risk
Timing of sales and purchases
Uncertainty of dividends
Investing in Bonds
- Fixed income security
- Interest rates and bond prices move in opposite directions
- Versatile
- Preservation and long-term accumulation of capital
- Lower risk and return than stock
Mutual Fund: Some Basics
Financial services organization that receives money from shareholders and invests it on their behalf
Investors become part owners in a securities portfolio
More people invest in mutual funds than any other financial product
The Mutual Fund Concept
Pooled diversification
- Investors buy into a diversified portfolio of securities for the collective benefit of individual investors
Why Invest in Mutual Funds
- Diversification
- Professional Management
- Financial Returns
- Convenience
But remember - No choice in securities selection
No control over sale of securities within fund
Investing in Real Estate
- Provides greater diversification than does holding just stocks or bonds
- Less volatility than stocks
- Doesn’t move in tandem with stocks
References
Gitman, L. J., Joehnk, M. D., & Billingsley, R. S. (2011). PFIN. Mason, OH: South-Western Cengage Learning.
