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
2
Things To Do Before Investing
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Pay off credit card debt!
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No investment pays as much as
credit card companies charge
Build an emergency fund
Consider your goals
Timeline
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How soon will you need the $?
3
Consider your Goals
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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?
4
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:
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How did you react to 2008-2009
losses?
Risk tolerance scale-worksheet
5
Relationship Between Risk and Return
High
Int’l Stocks
Stocks
Real Estate
Expected
Return
Int’l Bonds
Bonds
Cash
Equivalents
Low
Low
Risk
High
Before you Invest
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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?
7
Potential Risks
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Being too conservative (Savings
accounts, CDs, etc.)
Keeps principal safe but…
 Inflation reduces purchasing
power
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Inflation averages about 3.1%
Risk not reaching your goal(s)
8
Risks
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Being too aggressive (too much
in stocks)
Higher potential for growth but…
 More market volatility
 No guarantee or insurance
 Potential to lose some or all of the
principal

9
Managing Risks
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Consider your goal
Emergency fund- be conservative
 Retirement- be more aggressive

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Match your goals with your risk
tolerance
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Can you handle the market
volatility?
11
Managing the risks continued
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Consider your time frame
Short Term – months to 3 years
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Mid Term – 3 to 10 years
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Stick with safe savings options
Take some risk to grow your $ &
beat inflation
Long Term – 10 or more years
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Take more risk to grow your $ &
beat inflation
12
Saving Terminology
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Cash Equivalents
Usually low risk
 Savings, CDs, cash on hand
 Also called liquid assets
 Use for short term goals or if you
have you have low risk tolerance
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13
Investing Terminology
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Stock – ownership in a company
Bond – loan money to issuer
Mutual fund – A diversified
portfolio of stocks and/or bonds
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Opposite of putting all your eggs
in one basket
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15
Retirement Funds
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401(k) retirement plan offered by
employer
 $ grows tax deferred
 Some employers will match (~3%)

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Need to invest > just the match
IRA: individual retirement account
 Invest on your own
 $ grows tax deferred
16
Retirement Funds
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Roth IRA
 Pay
taxes now
 No taxes when you withdraw
= no taxes on the growth!
 Traditional
IRA
 Upfront
tax deduction
 Pay taxes at withdrawal
17
Retirement Funds
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Retirement accounts are NOT
an investment
How the government treats that
money for tax purposes
 Where you put that money is up to
you
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18
IRA Criteria
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Must have an earned income
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If married, non-earning spouse
can use a spousal IRA
$5,500 annual limit
You can contribute less
 Age 50+: $6,500
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401(k), Roth, or traditional IRA?
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Invest in 401(k) up to full match
Instant 100% rate of return!!
 Possible downsides
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employer picks the funds
 May charge heavy fees
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If no employer match, consider
an IRA
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401(k), Roth, or traditional IRA?
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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 retirement
 Take the tax break now
21
401k, Roth, or traditional IRA?
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Use a Roth IRA if
 You expect taxes to rise
 You expect to be in a higher
tax bracket at retirement
 Offers tax diversification
 If
most of your retirement
income will be taxable… invest
in a Roth
22
Establish Your Long-Term
Investment Strategy
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Strategy 1: Buy and hold
anticipates long-term economic
growth.
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Stock market has offered a
positive return over every 15 year
period
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Past returns no guarantee, but longterm 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
25
Determinants of Portfolio Performance
Security
Selection
4.6%
Market
Timing
1.8%
Other
2.1%
Asset
Allocation
91.5%
Source: “Determinants of Portfolio Performance II, An Update” by Gary Brinston, Brian D. Singer and Gilbert L. Beebower,
Financial Analysts Journal May-June 1991.
Investing Made Easy
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Set up Automatic Investing
Payroll deduction or
 Automatic transfer from checking
to:
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Individual Retirement Account
 Mutual fund
 Other investment
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27
Mutual Funds
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Advantages
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Professional management
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Reduce risk through diversification
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Monitoring investments is easy
Disadvantages
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Own small part of lots of different investments
Funds charge fees
Be aware
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follow market performance (down & up)
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No guaranteed rate of return
28
Successful Investing
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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
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(N.B. most are salespeople)
Avoid fraud!
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More Successful Strategies
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Ask questions about…
Expenses
 Historical performance: 3, 5, 10 yrs.
 Investment goal (e.g., capital
appreciation)
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“Rule of Three” comparison
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Compare at least 3 investments
“Core and Explore” approach
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For more adventurous
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Low-Maintenance Strategies
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Target maturity date mutual
funds for retirement
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Index funds
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Automatic deposits
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Annual financial check-up
31
Ideas on where to invest
Fidelity
(800) 343-3548
Vanguard (877) 662-7447
T. Rowe Price (855) 389-9464
Charles Schwab (866) 855-9102
Russell (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
33
Investing Resources
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Risk tolerance quiz:
http://njaes.rutgers.edu/money/riskquiz/
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Investing for Your Future
http://www.extension.org/pages/
10984/investing-for-your-future
Money 101 #4: Investing basics:
http://money.cnn.com/magazines/moneym
ag/money101/lesson4/index.htm
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Questions? Comments?
Experiences?
Where to Find FPW
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http://usu.edu/fpw/
http://fpwusu.blogspot.com/
https://www.facebook.com/Finan
cialPlanningforWomen
Second Wednesday of the
month TSC room 336 11:3012:30
Family Life Center 493 North
700 East. 7:00 to 8:30
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Financial Planning for Women
www.usu.edu/fpw

April 10th: Social Security with
SSA expert Mickie Douglas
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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
37