Chapter 13
Investment plan- accomplishing goals
-retirement
-housing
-education
-wealth transfer
-net worth
Why invest? For income (dividends) or appreciation
Emergency Funds
-6-12 months to live if you lose your job
-Most ppl don’t have enough and borrow (HELOC/credit cards)
Safe Investment vs Risky Investments
Safe
Risky
Cd’s, bonds, money markets, saving…… stocks, real estate, options, commodities, etfs mutual funds
Calculating Rate of Return: Bought 3000 Sold 3275 Dividend 50
325/3000=10.8% *but you don’t know how long you have had
Annualizing: 3 months 10.8% X 4= 43.2%
6 months 10.8% X 2= 21.6%
Business failure risk- Ames corp goes under, you lose everything, individual stocks risky
Market failure risk- Greece/turkey fails
Inflation risk
Interest rate risk
Global investment risk
Investments- asset allocation: different investment types in your portfolio
Investment mix:
Allocations
1. Stocks
2. Bonds
3. Short term
4. Real estate
80-90%
------5 -10% free to roll the dice with----------10%
Stocks (investing)
-govt
-savings
-residental
-large cap
-municipal
-cd’s
-land
-mid cap
-corporate
-money markets
-commerical
Small cap
Emerging market
International/global
Sectors
Maximum capital gains tax 15 % or as low as 0 % (long term gains, qualified dividends)
* Unfair net loss isn’t counted, not like corporations
Chapter 14 (1,2,10-14)
Why stocks? Dividends and growth 9appreciation)
-preferred shareholders get dividends b4 common share holders
Stock Split- to attract investors
Buy 1000 X $20 = $20,000
2:1 split
Get 2000 shares X $10 = $20,000
Types of Stocks: Blue chip, cyclical, defensive, growth, income, large cap etc pg 452
Google/apple= growth stock
Large cap>$10 billion mid cap $2-10 billion
small cap $250- $2billion
EPS= net income/ #shares outstanding
Yield= dividend/ price
PE ratio= Price/eps
25/2.34 microsoft pe= 10.7 (selling for 10x earnings)
**Invest in basket of stocks not individual stocks; growth is factored in todays current price
Market orders-buy and takes 30 seconds could change (don’t do it)
Limit Order- Price= $50 buy limit $45 never goes down but goes up to 200 but you never bought it
Sell limit- $55 stock goes from .10 to 50, never goes to 55 you may never end up selling it
Stop limit- $50 price of stock… buy stop $55 you can do $5 over market price
**once it goes through the stop it can be like a market order so$25  limit of $27
Sell stop- $50 sell stop at $45 or stock at 60 sell stop at 55
**investopedia good investing site
Short term vs long term investing
Long Term
1. Buy/hold- buying and holding stocks for 20 years
2. Dollar cost average
$2000 $20
100
$2000 $25
80
$2000 10
200
$6000 15.80 380
3. Direct Investing- commission fees are nothing now (you pay around 5 dollars)
^^commission free trade
4. Dividend Reinvest Plan- put mutual fund dividend back in
Short term (1-3 bad things very risky)
1. day trade- never own stock overnight, lose a lot gain a lot (don’t day trade)
2. buy on margin –double edge sword—x 2 what your up/down
Ex. 1,000,000 cash
1,000,000 stocks
1,500,000 end
50 %
1,000,000 cash
1,000,000 margin
2,000,000 stocks
3,000,000 end 100% gain
Down market- had to deposit money by certain time to meet fed margin rate(pay off $10,000)
3. selling short- your bet is stock goes down (don’t do this) selling stock you buy back make profit your
loss is limitless
4. Options- 1 contract= 100,000 shares
* call= right to buy stock (at a certain price) your betting stock goes up
* putt= right to sell stock (price goes down) betting stock goes down
****currently a lot of pppl playin options volatile market
Price= $20
 At the money option (strike price= $20) –intrinsically =0 time= $1.50
(your betting that the stock sells for more than $20 +1.50 =1.50 then you make money)
 In the money option ($15) –intrisnsically $5 time .20
 Out of the money option ($25) – intrinsically = 0
time .20
ADVantages options: control a lot of shares
DISadvantages options: time expiring on your
1000 shares @ 20 = 20000
1000 shares @ 30 = 30000
10,000 (50%) gain
1000 contracts X 20 =20,000
1000 contracts x 50= 500,000
480,000 profit (2400% if GE going up 50 %)
Chapter 15 (1,3,4,5,8,9,12)
Bond is debt
-Invest in bonds for income, some are non taxable
Interests rates go up bonds go down
Interests rates go down bonds go up
-market rate < stated rate
8% <
10% = Premium bond so it yields higher amount
Market rate > stated rate
10 %
>
8%
=Discount bond yield is lower amt
Value= interest income/ market rate (80/.1)= $800 value of bond
-Bonds are less risky than stocks
-Typical bond holder near/ or in retirement, primarily invested for income
3 types of bonds
fed tax
state tax
Corporate
yes
yes
Municipal
no
no(if same state)
Treasury
yes
no
Municipal bond
B4 tax 6%
Taxes After tax 6%
vs
corporate bond
7%
2.8%
4.2 %
Chapter 16 (1,2,10-14)
Mutual funds over 15000
More than 15000 ETF (exchanged traded funds) tracks an index
Mutual funds=diverse
Load fund-you pay a fee to get into the fund (3-5%)
No load fund- no fee most are no load funds
Sector fund- invest in particular industry
Closed funds- not many (less than 10%) traded during the day market
Open ended fund- most common: you don’t buy /sell during trading day. Not bought on the market its
transaction btwn you and mutual fund.
**traded by its net asset value ---Net asset value= (value –liability) / # of shares
Chapter 17
Direct/ Indirect real estate investments
(note * non recall state (cant go after people who defaulted and foreclose the difference is just wrote
off as a lost to the bank) no shortfalls
Direct
-Home
-Vacation home
-Investment property (land/residential property/ commercial property)
Indirect
-Partnerships : General/ Limited- no say in mgt if your in a limited partnership
-LLC (cant shelter yourself from everything malpractice)
-Stocks
-Mutual funds
stocks/mutual (you only lose what you put in)
Real estate Advantages/Disadvantages
Advantages
-hedge against inflation
-easy entry (indirect)
-limited liability (indirect)
-No mgt concerns (indirect)
-financial leverage ******************
-home ownership- tax benefits
cash
margin
stocks
5yrs
100,000
100,000
200,000
240,000 profit 40 %
Cash5yrs
200,000 real estate
10,000
240,000 profit 400%
Disadvantages
-illiquidity (direct)
-declining property value
-lack of diversification
-lack of tax shelter ( cant deduct passive losses except deduct 25K real estate rental loss) *******
-Long depreciation period (27.5 yrs residential// 39 commerical)
-management problems
***** 1986 rule
W2
500,000
Limt part <500,000>
TI
0
Tax
0
QUALIFIED PERSONAL RESIDENT TRUST – 5/30 lawyers know this
Parent---------transfer home--qualified personal
10-25yr term (live atleast 10) <---resident trust
-------remainder--children
^^if you die within term (10yrs) FMV (DOD)= Gross estate
Ex.$300,000 FMV residence
10 yr remainder interest, $117,000 gift
-if you out live the term FMV (DOD) =/= Gross Estate
Chapter 10 (1,2,3,5,6,7)
*** always fight speeding tickets
***Gasoline summer= $5.00 currently 4.30 premium 2 weeks gonna be 4.50
INSURANCE
Your Personal Insurance Program
1. Set insurance goals
2. Develop a plan to reach your goals
3. Put your plan into action
4. Check your results
Life Insurance- if your asset go down, get more life insurance
2011
500,000
<500,000>
0
150,000 (30%)
Home Owner Insurance
House and other structures: garage/shed/gazebo
Personal Property: 55-70% of insurance
Rider/Personal Property floater-jewelry/computers
Additional Living expenses- if damage house, pays for the cost of living expense temporarily
Liability Insurance- incase ppl get hurt at your house
Umbrella Policy- supplementary personal liability coverage (additional money)
Renters Insurance:
Personal property/liability Insurance
***CONSIDER group insurance ( homeowners/automobiles/life insurance through groups (Bryant))
Significantly less group 16k single 24 K
AUTO INSURANCE
Pg326 Automobile chart- You cant buy enough automobile insurance that you need, get umbrella policy
Bodily injury liability- when you hurt someone in car accident etc 3 #s X/X/X
100/300/50------ 100-most 1 single person can get from you…300-most the group can get from you…
property damnage liability(damage car)…. However if the judgement is 600 for 4 ppl… everyone gets 75K
then have to go after you personally to sue you.
Property damage liability- someones elses property is damaged
Collision insurance-pays for damage to your car whether at fault or not
Comprehensive physical insurance- hailstorm, tree fall etc
Health Insurance
Employers will give plans, A/B/C a being the best b good c average you pick how much you wnana pay
Itemize deduction tax deduction
Medical exp 3000
-AGI (7.5%) 4000
=deduction 0 you’re never going to get a medical deduction
Self Employed people- 100% premium (don’t need to itemize) subtract 24K deduction for AGI (congress
helps them out, cuz if they worked for corp theyd pay 4K)
2 Plans: HMO or PPO
HMO Health Maintenance Organization need to see primary care physican for referral to see specialist
PPO Preferred Provided organization- directly go to a specialist
Long term Health care Insurance –Nursing home/ long term nurse needed around 24 hrs a day
-Most states cost above 100K for 1 year in nursing home, ct 160K ri 100K
Insurance cost 10X amount for someone in their 60’s compared to 20’s
-statistically if you go into nursing home you will die quick
NEED TO GET—DISABILITY INSURANCE ***
Tax free if you pay the premium * you need to pay premium
If company pays premium its not taxed free money
Self employed costpremium cost 20 yr old 5K a month 240 a yr cost for insurance
*50 yr old more than 50% men have been disabled for 1 year continuous
*1/3 working Americans will have ST disability by 65
*once person is disable for 90 days they can be out for 2.5 yrs
Chapter 12 Life Insurance
**bear etf going up 21% last 4 days
Life Insurance has 100 products only 2 types
1. Term- pure insurance ( 1 year term if you die w/in year you get 1,000,000)
30 yr old= 1,000,000 life insurance @ 350 bucks a year
55-59
@ 3500 bucks a year
65-69
@ 11,000 bucks
2. Permanent/ whole life insurancePay Premium
life insurance ^ ^cash surrender value (saving account)
Estimating Life insurance requirements
Easy method- (yearly income X 7 X .7) terrible doesn’t take into account anything
DINK method- (debt X .50) dual income no kids doesn’t take into account savings
“Non working” spouse- ($40,000 yr X # of yrs till youngest reaches 18)
“Family need” method- income replacement (10-20yrs) ie. 200K x 15 yrs= 3 million
Funeral exp
20,000
Debt payoff
500,000 mortgage
Nondaily exp (college) 500,000
=4,020,000
Subtract net worth
-3,000,000
Need life insurance 1,020,000
Beneficiary (tax free no income tax)
-primary----spouse
Contingent----children