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Basics of Investing
Erica Abbott & Jean Lown, FCHD Dept., USU
with assistance from Advanced Family Finance students
Information Credits to:Dr. Barbara O'Neill
Rutgers Cooperative Extension
Welcome
Please ask questions or ask for clarification as we go along. I may defer some Q that require a
detailed answer to the end
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Things To Do Before Investing
Pay off credit card debt!No investment pays as much as
credit card companies charge Build an emergency fund Consider your goals Timeline
How soon will you need the $?
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Consider your Goals
Vehicle purchase/replacement Down payment on a home Child’s education To build wealth For retirement
What are your financial goals? How much $ will you need?
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Determine your Risk Tolerance
How much risk can you stand? If you have trouble sleeping at
night because you are worried about your investments then pick a more conservative mix
For experienced investors: How did you react to 2008-2009
losses?
Risk tolerance scale-worksheet
Relationship 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 Invest
Is your budget balanced? Do you save every month? Do you pay credit cards in full
every month? Do you carry adequate insurance
to protect against major catastrophes?
Potential Risks
Being too conservative (Savings accounts, CDs, etc.)Keeps principal safe but… Inflation reduces purchasing
power Inflation averages about 3.1%
Risk not reaching your goal(s)
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Risks
Being too aggressive (too much in stocks)Higher potential for growth but…More market volatilityNo guarantee or insurancePotential to lose some or all of the
principal
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Managing Risks
Consider your goalEmergency fund- be conservativeRetirement- be more aggressive
Match your goals with your risk toleranceCan you handle the market
volatility?
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Managing the risks continued
Consider your time frame Short Term – months to 3 years
Stick with safe savings options Mid Term – 3 to 10 years
Take some risk to grow your $ & beat inflation
Long Term – 10 or more yearsTake more risk to grow your $ &
beat inflation
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Saving Terminology
Cash Equivalents Usually low riskSavings, CDs, cash on hand Also called liquid assetsUse for short term goals or if you
have you have low risk tolerance
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Investing Terminology
Stock – ownership in a company Bond – loan money to issuer Mutual fund – A diversified
portfolio of stocks and/or bondsOpposite of putting all your eggs
in one 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 Funds
Roth IRAPay taxes nowNo taxes when you withdraw
= no taxes on the growth!
Traditional IRAUpfront tax deductionPay taxes at withdrawal
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Retirement Funds
Retirement accounts are NOT an investmentHow the government treats that
money for tax purposesWhere you put that money is up to
you
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IRA Criteria
Must have an earned income If married, non-earning spouse
can use a spousal IRA $5,500 annual limit
You can contribute lessAge 50+: $6,500
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401(k), Roth, or traditional IRA?
Invest in 401(k) up to full match Instant 100% rate of return!!Possible downsides
employer picks the funds May charge heavy fees
If no employer match, consider an IRA
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401(k), Roth, or traditional IRA? Use a traditional IRA if
Your employer doesn’t match or you’ve already invested up to the match
You expect to be in a lower tax bracket at retirementTake the tax break now
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401k, Roth, or traditional IRA? Use a Roth IRA if
You expect taxes to riseYou expect to be in a higher
tax bracket at retirementOffers tax diversification
If most of your retirement income will be taxable… invest in a Roth
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Establish Your Long-Term Investment Strategy
Strategy 1: Buy and hold anticipates long-term economic growth.Stock market has offered a
positive return over every 15 year period
Past returns no guarantee, but long-term buying and holding is a great strategy
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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
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Long-Term Investment Strategy 3 & 4
• Portfolio diversification reduces volatility
• 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 investment categories at the right time
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Determinants of Portfolio Performance
Asset Allocation
91.5%
Other2.1%
Market Timing1.8%
Security Selection
4.6%
Source: “Determinants of Portfolio Performance II, An Update” by Gary Brinston, Brian D. Singer and Gilbert L. Beebower, Financial Analysts Journal May-June 1991.
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Investing Made Easy
Set up Automatic InvestingPayroll deduction orAutomatic transfer from checking
to: Individual Retirement Account Mutual fund Other investment
Mutual Funds Advantages
Professional management Reduce risk through diversification
Own small part of lots of different investments
Monitoring investments is easy
Disadvantages Funds charge fees
Be aware follow market performance (down & up) No guaranteed rate of return
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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! 29
More Successful Strategies
Ask questions about…Expenses Historical performance: 3, 5, 10 yrs. Investment goal (e.g., capital
appreciation) “Rule of Three” comparison
Compare at least 3 investments “Core and Explore” approach
For more adventurous30
Low-Maintenance Strategies
Target maturity date mutual funds for retirement
Index funds
Automatic deposits
Annual financial check-up
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Ideas on where to invest
Fidelity (800) 343-3548Vanguard (877) 662-7447T. Rowe Price (855) 389-9464Charles Schwab (866) 855-9102Russell (800) 426-7969
*This is not a comprehensive list or an endorsement
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Remember
Never invest in something you don’t understand
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Investing Resources
Risk tolerance quiz: http://njaes.rutgers.edu/money/riskquiz/
Investing for Your Future http://www.extension.org/pages/10984/investing-for-your-future
Money 101 #4: Investing basics: http://money.cnn.com/magazines/moneymag/money101/lesson4/index.htm
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Questions? Comments? Experiences?
Where to Find FPW
http://usu.edu/fpw/ http://fpwusu.blogspot.com/ https://www.facebook.com/Finan
cialPlanningforWomen Second Wednesday of the
month TSC room 336 11:30-12:30
Family Life Center 493 North 700 East. 7:00 to 8:30
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Financial Planning for Womenwww.usu.edu/fpw
April 10th: Social Security with SSA expert Mickie Douglas 11:30 only; no evening program
May 8th: Great Mutual Funds for your IRA
June 12th: Get your house in order before you buy
July 10th: Investing for College