I. Introduction to I. Introduction to InvestingInvesting

A. Reasons to InvestA. Reasons to Invest

1.1. Achieve financial goalsAchieve financial goals

2.2. Increase incomeIncrease income

3.3. Prepare for retirementPrepare for retirement

4.4. Gain wealth and feeling of financial Gain wealth and feeling of financial securitysecurity

InvestingInvesting Investing is putting your money to Investing is putting your money to

work.work. SecuritiesSecurities = stocks, bonds, mutual = stocks, bonds, mutual

funds, real estate, etc.funds, real estate, etc. StocksStocks = shares of ownership in a = shares of ownership in a

corporationcorporation BondsBonds = loans to corporations and = loans to corporations and

governmentsgovernments PortfolioPortfolio = collection of investment = collection of investment

assetsassets

B. How do you make money on B. How do you make money on investments?investments?

1.1. Return = total income from an Return = total income from an investmentinvestment

Current income (interest or dividends)Current income (interest or dividends) Capital gain (or loss) (increase in stock Capital gain (or loss) (increase in stock

price)price) Return = Capital gain + current income Return = Capital gain + current income

- fees- fees Return on Investment (%)= return/initial Return on Investment (%)= return/initial

investment X 100investment X 100

Example:Example:

Ashley purchased 100 shares of Ashley purchased 100 shares of IBM stock for $100 per share and IBM stock for $100 per share and sold this same stock one year later sold this same stock one year later for $125 per share. Dividends of for $125 per share. Dividends of $5 per share were paid during the $5 per share were paid during the year. The return on this stock year. The return on this stock transaction was ? What was the transaction was ? What was the ROI?ROI?

C. C. Important to discover your Important to discover your investment philosophyinvestment philosophy

The greater the risk, the greater the The greater the risk, the greater the potential yield OR potential losspotential yield OR potential loss

a.a. Ultraconservative: takes no risk, Ultraconservative: takes no risk, little yield.little yield.

b.b. Conservative: accepts little risks & Conservative: accepts little risks & rewarded w/ low yield: diversified rewarded w/ low yield: diversified investmentsinvestments

C. C. Important to discover your own Important to discover your own investment philosophyinvestment philosophy

c. Moderate: slow & steady growth in c. Moderate: slow & steady growth in investmentsinvestments

Invests for long-term Invests for long-term Comfortable with rising & falling Comfortable with rising & falling

market conditions (bull and bear market conditions (bull and bear markets)markets)

d. Aggressive: invests for quick $, d. Aggressive: invests for quick $, willing to take high risk, not much willing to take high risk, not much diversificationdiversification

Investment Pyramid

Investment StrategiesInvestment Strategies

1.1. Business cycle approachBusiness cycle approach• Buy when stocks low, sell when highBuy when stocks low, sell when high

Buy investments during recession/bear Buy investments during recession/bear market, sell during expansion marketmarket, sell during expansion market

2. Portfolio diversification2. Portfolio diversification• Range of investment asset typesRange of investment asset types• Choose collection of investments Choose collection of investments

with different degrees of risk OR with different degrees of risk OR diversify within an investment vehicle diversify within an investment vehicle

(mutual funds)(mutual funds)

Investment StrategiesInvestment Strategies

3. Asset allocation3. Asset allocation• Determine portion of investment portfolio devote Determine portion of investment portfolio devote

to various types of assetsto various types of assets• Must re-allocate when one type grows too large Must re-allocate when one type grows too large

or too small or too small Rebalancing Rebalancing

4. Dollar cost averaging4. Dollar cost averaging• Invest equals sums of money at regular intervalsInvest equals sums of money at regular intervals

Buy more stocks when price is lowBuy more stocks when price is low Buy less when price is highBuy less when price is high

Stocks 70%

Bonds 20%

Cash Inv. 10%

Stocks 40%

Bonds 40%

Cash Inv. 20%

Stocks 10%

Bonds 20%

Cash Inv. 70%