Investing Fundamental and Principles
Mr. Shaw (shawd@wou.edu)
“General Class Description” and “List of Likely Specific Topics”
General Class Description
Increasingly, we are all responsible for making important decisions on how to invest our
money to achieve goals such as owning a home, paying for education, or building a
retirement fund. Unfortunately, research has shown that many people do not have a good
grasp of important investing concepts, and many small investors continue to make
common mistakes.
Some individuals may think “I don’t really see myself as an investor, either now or in the
future.” Perhaps not, but the vast majority of us will eventually become investors,
whether we want to or not. One reason for this is a major change in how pensions and
retirement programs are now managed. Due to this change, most of us will become our
own “pension manager” – even if we would prefer that someone else do this job!
This class will cover core concepts that every potential investor should understand. It
will be taught in a non-technical manner, and students without any finance or business
background are welcome. The class does not assume that students have any prior
knowledge of finance or investing. The emphasis will be on concrete, practical
information that students will be able to easily act upon.
The class will also provide numerous references to other resources (books, videos,
websites, etc.) that investors may find useful.
The amount of material covered in the class will depend in part on the number of
questions that students ask, the kind of questions that are raised, and similar factors. We
will address the following topics, in approximately the order they are listed below, until
time runs out. If any student has a special interest in a particular topic, a special effort
will be made to address that topic if at all feasible. (Note that it is possible there will be
future “versions” of this class to cover topics not addressed in the initial class.)
It should be noted that this class is not designed to cover highly advanced topics. So, for
example, students who want to explore in-depth topics like “The capital asset pricing
model’s Beta vs. other measures of risk” will probably find their needs better met by
another class. (However, if I am asked a question like this, I will try to respond, while
keeping the technical content to a level where other students can understand the answer.)
List of Likely Specific Topics
* The “magic of compounded returns” and why the “magic of compounding” compels
investors to start early. Why the goal of virtually every investor is to get as much of the
benefit of compounding as possible, so “your money works for you.”
* The importance of managing your financial affairs effectively, so the magic of
compounding works for you, not against you.
* The different between financially-oriented education (this class) and specific
investment advice.
* Concept of “net net net” return, and why proponents claim this is the “true bottom line”
that an investor should care about.
* Concept of risk in context of investing and how this differs from everyday notion of
risk. (For investors, risk is not “bad” per se, but must be understood and managed to the
best of one’s ability.)
* The risk-return tradeoff and the idea that when inflation is factored in, investors cannot
avoid risk: they can only choose what types of risk they most comfortable with. Different
strategies for helping to manage risk.
* The major investment asset classes (stocks, bonds, cash, insurance, real estate,
annuities, commodities, collectibles).
* Discussion of the tradeoffs investors face in choosing between major asset classes. For
example, what are the tradeoffs between bonds and stocks? When would an investor be
more likely to consider bonds than stocks, and visa-versa. What are the possible roles for
real estate and annuities?
* Specific discussion of bonds vs. stocks, as these are often the most common investment
assets. Specific discussion of the risks in bond investing.
* Picking stocks: issues here include doing it yourself vs. “hiring” someone (e.g. mutual
funds) to do it for you.
* Mutual funds as a practical tool to achieve diversification and invest internationally.
Why many investors choose mutual funds as a key investment vehicle.
* Various types of mutual funds:
o Stock (i.e. equity) – actively managed.
o Stock (i.e. equity) – passively managed/index
o Bond – (Treasury, Muni, Corporate, Junk, etc.)
o Bond – Actively managed
o Bond – passively managed (index)
o Various “mixed” funds.
o Target Retirement Funds and “Lifestyle Funds.”
o Broad International and Global Funds.
o Regional Funds (e.g. Latin American, Asia, Europe, etc.)
o Sector-Specific Funds (e.g. Technology, Energy, etc.)
o Socially Responsible Investment Funds.
o ETFs (compared and contrasted with index funds).
* Concept of the “efficient market theory,” and why this theory is important to the
average investor.
* How the “efficient market theory” argues against market timing and spending resources
in an effort to “beat the market.” How the “efficient market theory” can argue for a “buy
and hold” strategy.
* Importance of managing your investment costs and commissions: these can eat into
your returns!
* Taxes, IRAs, and 401(k)s. How using tax-advantaged investing programs can help
increase an investor’s true bottom line.
* Roth IRAs vs. Traditional IRAs, and the tradeoffs between the two.