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”