Chapter 13: Investment Fundamentals and
Portfolio Management
Objectives
Summarize reasons why people invest, what is required before beginning, how returns are earned, and some ways to obtain funds to invest.
Determine your own investment philosophy. Recognize the variety of investments available. Identify the major factors that affect the return on
investment. Specify some strategies of portfolio management for
long-term investors. List three guidelines to use when deciding the best
time to sell investments.
Establishing Investment Goals Financial goals should be specific and
measurable. Why are you accumulating these funds? How much do you need? How will you get it? How long will it take you to reach your goal? How much risk are you willing to assume? Are you willing to sacrifice current consumption
to invest for the future? Is it realistic to try and save this amount?
Steps to Create a Personal Investing PlanStep 1
My investment goals are:________________________________________
Step 2By ___________, I will
have obtained $_______.
Step 3I have $__________available to invest.
Date _____________
Step 4Possible investment alternatives:
1._________________2._________________3._________________4._________________
Step 5Risk factors for each alternative
1.____________________2.____________________3.____________________4.____________________
Step 6Projected return on each alternative
1.__________2.__________3.__________4.__________
Step 7Investment decision1._______________2._______________3._______________
Step 8Final decision
1._______________2._______________
Step 9Continue evaluating choices.
Investment Fundamentals
Difference in return is a major distinction between savings and investing.
Successful investors begin to live off earnings, without spending wealth itself.
ATTENTION!
Preparations for Investing
Achieve financial goals
Increase current income
Gain wealth and financial security
Have funds available for retirement
WHY PEOPLE INVEST:
Preparations for Investing
Live within means
Continue savings program
Establish lines of credit
Carry adequate insurance
Establish investment goals
PREREQUISITES TO INVESTING:
Interest
Dividends
Rent
Capital gain/loss
Rate of return or yield
Preparations for Investing
INVESTMENT RETURNS:
Performing a Financial Checkup
Learn to live within your means pay off high interest credit card debt
Provide adequate insurance protection Start an emergency fund
three to nine months of living expenses Have other sources of cash for emergencies
line of credit cash advance
Getting Money to Start an Investing Program Pay yourself first Participate in elective savings programs
Payroll deduction electronic transfer
Make a special effort to save one or two months a year
Take advantage of windfalls Invest half of
your tax refund
Value of Having a Long-Term Investing Program Many people don’t start investing because
they only have a small amount to invest
but....
Small amounts invested regularly become large amounts over time
Handling risk
Ultraconservative strategies
Conservative
Moderate
Aggressive
Personal Investment Philosophy
Investment Selection
Lend or own
Short-term or long-term
Choose a vehicle
Factors That Affect Investment Decisions
Safety - minimal risk of loss Risk - uncertainty about the outcome
inflation risk interest rate risk business failure risk market risk
Income From Investments Safest
CDs savings bonds T-bills
Higher potential income municipal bonds corporate bonds preferred stocks mutual funds real estate
Investment Growth and Liquidity
Growth increase in value common stock growth stocks retain earnings bonds, mutual funds and real estate
Liquidity ease and speed to convert an asset to cash
Investment Pyramid
CommoditiesJunk bonds
Options
Rentalproperty
Utility stocks
GovernmentSecurities
Corporatebonds
CDsMoneyMarket
Savings Accounts Cash
High QualityStocks
Mutual funds
High risk
Lowrisk
Pure
Speculative
Risk pyramid
INVESTMENT RISK:
Major Factors That Affect Rate of Return
Inflation
Deflation
Interest rate
Financial
Market volatility
Political
INVESTMENT RISK TYPES:
Major Factors That Affect Rate of Return
Random or unsystematic
Diversification
Market or systematic
INVESTMENT RISK:
Major Factors That Affect Rate of Return
Leverage
Taxes Marginal tax rate Taxable vs. tax-free income
Buying and selling costs/commissions
Inflation
Major Factors That Affect Rate of Return
Identify before-tax return
Subtract marginal tax rate
Obtain net return after taxes
Subtract estimate of inflation
Obtain real rate
Major Factors that Affect Rate of Return CALCULATE REAL RATE OF RETURN:
Business-cycle timing
Dollar-cost averaging
Portfolio diversification
Asset allocation
Management Strategies — Long-Term Investors
Investment Alternatives
What is stock? part ownership in a
company the money you pay for
shares of stock provides equity capital for the business
Investment Alternatives
What is a bond? a loan to a corporation, the
federal government, or a municipality
The interest is paid twice a year, and the principal isrepaid at maturity (1-30 years)
You can keep the bond until maturity or sell it to another investor
(continued)
Investment Alternatives
What is a mutual fund? investors’ money is pooled and invested by a
professional fund manager you buy shares in the fund provides diversification to reduce risk funds range from conservative
to extremely speculative match your needs with
a fund’s objective
(continued)
Monitor Your Investments
Read your account statements Chart the value of your investments Maintain accurate and current records Calculate the current yield %
annual income from investment
market value of the investment
Sources of Investment Information
Newspapers Business Periodicals Government Publications Corporate Reports Statistical Averages Investor Services and newsletters
Standard and Poor’s stock reports Value Line Moody’s investment service
Investment Philosophies
Best Time to Sell
Take profits
Cut losses
“If wouldn’t buy it now, sell it”
