investment fundamentals and portfolio management

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Investment Fundamentals and Portfolio Management

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Page 1: Investment Fundamentals and Portfolio Management

Investment Fundamentals andPortfolio Management

Page 2: 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.

Page 3: Investment Fundamentals and Portfolio Management

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?

Page 4: Investment Fundamentals and Portfolio Management

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.

Page 5: Investment Fundamentals and Portfolio Management

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!

Page 6: Investment Fundamentals and Portfolio Management

Preparations for Investing

Achieve financial goals

Increase current income

Gain wealth and financial security

Have funds available for retirement

WHY PEOPLE INVEST:

Page 7: Investment Fundamentals and Portfolio Management

Preparations for Investing

Live within means

Continue savings program

Establish lines of credit

Carry adequate insurance

Establish investment goals

PREREQUISITES TO INVESTING:

Page 8: Investment Fundamentals and Portfolio Management

Interest

Dividends

Rent

Capital gain/loss

Rate of return or yield

Preparations for Investing

INVESTMENT RETURNS:

Page 9: Investment Fundamentals and Portfolio Management

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

Page 10: Investment Fundamentals and Portfolio Management

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

Page 11: Investment Fundamentals and Portfolio Management

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

Page 12: Investment Fundamentals and Portfolio Management

Handling risk

Ultraconservative strategies

Conservative

Moderate

Aggressive

Personal Investment Philosophy

Page 13: Investment Fundamentals and Portfolio Management

Investment Selection

Lend or own

Short-term or long-term

Choose a vehicle

Page 14: Investment Fundamentals and Portfolio Management

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

Page 15: Investment Fundamentals and Portfolio Management

Income From Investments Safest

CDs savings bonds T-bills

Higher potential income municipal bonds corporate bonds preferred stocks mutual funds real estate

Page 16: Investment Fundamentals and Portfolio Management

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

Page 17: Investment Fundamentals and Portfolio Management

Investment Pyramid

CommoditiesJunk bonds

Options

Rentalproperty

Utility stocks

GovernmentSecurities

Corporatebonds

CDsMoneyMarket

Savings Accounts Cash

High QualityStocks

Mutual funds

High risk

Lowrisk

Page 18: Investment Fundamentals and Portfolio Management

Pure

Speculative

Risk pyramid

INVESTMENT RISK:

Major Factors That Affect Rate of Return

Page 19: Investment Fundamentals and Portfolio Management

Inflation

Deflation

Interest rate

Financial

Market volatility

Political

INVESTMENT RISK TYPES:

Major Factors That Affect Rate of Return

Page 20: Investment Fundamentals and Portfolio Management

Random or unsystematic

Diversification

Market or systematic

INVESTMENT RISK:

Major Factors That Affect Rate of Return

Page 21: Investment Fundamentals and Portfolio Management

Leverage

Taxes Marginal tax rate Taxable vs. tax-free income

Buying and selling costs/commissions

Inflation

Major Factors That Affect Rate of Return

Page 22: Investment Fundamentals and Portfolio Management

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:

Page 23: Investment Fundamentals and Portfolio Management

Business-cycle timing

Dollar-cost averaging

Portfolio diversification

Asset allocation

Management Strategies — Long-Term Investors

Page 24: Investment Fundamentals and Portfolio Management

Investment Alternatives

What is stock? part ownership in a

company the money you pay for

shares of stock provides equity capital for the business

Page 25: Investment Fundamentals and Portfolio Management

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)

Page 26: Investment Fundamentals and Portfolio Management

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)

Page 27: Investment Fundamentals and Portfolio Management

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

Page 28: Investment Fundamentals and Portfolio Management

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

Page 29: Investment Fundamentals and Portfolio Management

Calculating Return on InvestmentAssume you invest $3,000 in a mutual fund. Also assume the mutual fund

pays you $50 dividends this year and that the mutual fund is worth $3,275 at the end of one year. Your rate of return is 10.8%, as illustrated below:

Step 1 Subtract the investment’s initial value form the investment’s value at year end

$3,275 - $3,000 = $275

Step 2 Add the annual income to the amount calculated in step 1.$50 + $275 = $325

Step 3 Divide the total dollar amount of return in Step 2 by the original investment.

$325/$3,000 = 0.108 = 10.8%

Page 30: Investment Fundamentals and Portfolio Management

Components of the Risk Factor

Inflation Risk Assume you deposited $10,000 in a bank at

3% interest. At the end of year one, your money will have earned $300 in interest. Assuming an inflation rate of 4%, it will cost you an additional $400, or a total of $10,400 to purchase the same amount of goods you could have purchased for $10,000 a year earlier.

Page 31: Investment Fundamentals and Portfolio Management

Components of the Risk Factor

Interest Rate Risk

Suppose you purchase a corporate bond with a face value of $1,000 issued by AMR Corp, that matures in 2016 and pays 9% interest until maturity. Using the following formula, you can calculate the dollar amount of annual interest for the AMR bond:

Dollar amount of annual interest = Face value x Interest rate

$1,000 x 9% = $90

Page 32: Investment Fundamentals and Portfolio Management

Components of the Risk Factor

Interest Rate Risk

If bond interest rates for comparable bonds increase to 10%, the market value of your 9% bond will decrease as follows:

Approximate market value = Dollar amount of annual interest

Comparable Interest Rate

$90 = $900

10%

Page 33: Investment Fundamentals and Portfolio Management

Components of the Risk Factor

Market Risk Global Investment Risk

Page 34: Investment Fundamentals and Portfolio Management

Investment Philosophies

Page 35: Investment Fundamentals and Portfolio Management

Best Time to Sell

Take profits

Cut losses

“If wouldn’t buy it now, sell it”