INVESTING
by
Professor Arnold Meltzer
March 2010
1
TOPICS
•
•
•
•
•
GROWTH OF INVESTMENTS
TRADITIONAL IRA
ROTH IRA
401(k) PLAN
TAXES
2
TOPICS
• BUY A HOUSE
• MINIMIZE PURCHASES
– CAR
– FURNITURE
– USE OF CREDIT CARDS
3
TOPICS
• STOCKS
• BONDS
• MUTUAL FUNDS
– MANAGED FUNDS
– INDEX FUNDS
– LOAD AND NO-LOAD FUNDS
• REAL ESTATE
4
GROWTH OF INVESTMENTS
• AVERAGE GROWTH OF STOCKS
OVER THE PAST 60 YEARS IS ABOUT
11%/YR.
• SAVE $10,000 IN YOUR FIRST YEAR OF
WORK AND INVEST IT IN GOOD
MUTUAL FUNDS OR STOCKS
5
GROWTH OF INVESTMENTS
• YOU WILL WORK FOR 40 YEARS BEFORE
YOU RETIRE
• $10,000 x (1.11)40 = $650,000 AFTER 40 YEARS
• DO IT AGAIN IN YOUR SECOND YEAR OF
WORK.
• $10,000 x (1.11)39 = $585,593 AFTER 39 YEARS
• TOTAL AT RETIREMENT =$1,235593
6
TRADITIONAL IRA (INDIVIDUAL
RETIRMENT ACCOUNT)
• INVESTMENT GROWS TAX FREE UNTIL
YOU RETIRE
• YOU PAY TAXES ON MONEY REMOVED AS
INCOME AFTER AGE 59.5
• YOU CAN INVEST $5,000 PER YEAR in 2010
• YOU MUST START TO REMOVE MONEY AT
AGE 70.5 YRS.
7
ROTH IRA
• YEARLY CONTRIBUTION IS NOT TAX FREE
• INVESTMENT GROWS TAX FREE
• YOU PAY NO TAXES WHEN YOU REMOVE
MONEY AFTER AGE 59.5
• YOU CAN CONTRIBUTE $5000/YR in 2010
• YOU ARE NOT REQUIRED TO REMOVE
MONEY
• YOU PAY A PENALY OF 10% IF YOU
REMOVE MONEY EARLY, I.E. BEFORE AGE
59.5
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TRADITIONAL IRA
• YOU PAY A PENALTY OF 10% IF YOU
REMOVE MONEY BEFORE AGE 59.5.
• IF YOUR TAXABLE INCOME IS
BELOW $55K PER YEAR, YOUR
CONTRIBUTION TO THE IRA IS TAX
DEDUCTABLE.
9
401(k) PLAN
•
•
•
•
TAX FREE CONTRIBUTIONS UP TO $16.5K
USUALLY MATCHED BY YOUR EMPLOYER
YOU PAY NO TAXES ON THE INVESTMENT
YOU PAY TAXES WHEN YOU REMOVE
MONEY AFTER AGE 59.5 YEARS
• YOU MUST REMOVE MONEY BY 70.5
YEARS
• YOUR PAY A 10% PENALTY IF MONEY IS
REMOVED BEFORE AGE 59.5.
10
TAXES
• IF YOU ARE SINGLE, TAXES WILL EAT
YOU ALIVE.
• 2010 CURRENT FEDERAL TAX RATES
TAXABLE INCOME
$0 - $8,375K
$8375 - $34,000
$34,000 - $82,400
$82,400 - $171,850
TAX RATE
10%
15%
25%
28%
11
TAXES
• QUICK TAX CALCULATION (SINGLE):
• TAXABLE INCOME = INCOME EXEMPTION - DEDUCTIONS
• EXEMPTION (2010) = $3,650
• STANDARD DEDUCTION (2010) = $5,700
• IF YOU MAKE $60K YOUR TAXABLE
INCOME IS $60K - $3,650 - $5,700 = $50,650
12
TAXES
• YOUR FEDERAL TAXES (SINGLE)
$4,681 + 25% X ($50,650 - $32,550) =
$4,681 + 25% X $18,100 = $4,681 + $4525
TOTAL FEDERAL TAXES =
$9,206
ADD STATE AND LOCAL TAXES @ 9%
• TAXES PAID = $9206 + $4558 = $13,764
13
TAXES
• YOUR INCOME IS $60,000
• YOUR INCOME AFTER TAXES IS
$60,000 - $13,764 = $ 46,236
• PERCENTAGE TAXES ARE 23%
14
Deductions
• YOU NEED DEDUCTIONS TO LOWER
YOUR TAXABLE INCOME
– INTEREST ON A HOUSE IS DEDUCTABLE
– REAL ESTATE TAXES ARE DEDUCTABLE
– CONTRIBUTIONS TO CHARITY ARE
DEDUCTABLE
15
Deductions
- INTEREST ON SCHOOL LOANS
– STATE AND LOCAL TAXES ARE
DEDUCTABLE
16
BUYING A HOUSE
• YOU NEED TO STAY IN THE AREA FOR AT
LEAST 3 YEARS TO OVERCOME THE
CLOSING COSTS OF BUYING THE HOUSE
• YOUR HOUSE WILL BE A GOOD
INVESTMENT AND CAN APPRECIATE
• YOU PAY NO CAPITAL GAINS ON THE SALE
OF A HOUSE WORTH LESS THAN $500K
(married), $250K (single)
• YOU CAN SELL YOUR HOUSE EVERY 2
YEARS AND PAY NO CAPITAL GAINS
17
BUYING A HOUSE
• 3 IMPORTANT CONCEPTS IN BUYING
A HOUSE ARE:
– 1) LOCATION
– 2) LOCATION
– 3) LOCATION
• BUY A HOUSE AND RENT OUT
ROOMS. MAKE OTHERS PAY FOR
YOUR HOUSE.
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MINIMIZE PURCHASES
• DO NOT BUY A NEW CAR
– BUY A USED CAR
– USE MASS TRANSPORTION
• DO NOT BUY EXPENSIVE FURNITURE
– BUY USED FURNITURE
– SHARE THE EXPENSE WITH
HOUSEMATES
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MINIMIZE EXPENSES
• DO NOT BUY ANYTHING ON CREDIT
– ALWAYS HAVE THE MONEY IN YOUR
BANK ACCOUNT BEFORE YOU USE A
CREDIT CARD
– INTEREST ON CREDIT CARDS IS 18%
– SAVE FOR A RAINY DAY - IT WILL COME
(3 months income)
20
STOCKS
• YOU BUY A PART OF A COMPANY
(EQUITY)
– THE STOCK INCREASES IN VALUE OVER
TIME (HOPEFULLY)
– THE COMPANY PAYS YOU DIVIDENDS
EACH QUARTER
– THE INVESTMENT IS FAIRLY LIQUID
(EASY TO SELL AND OBTAIN MONEY)
21
STOCKS
• IF YOU SELL A STOCK AT A PROFIT
AND YOU OWNED THE STOCK FOR A
YEAR OR MORE, THE CURRENT TAX
RATE IS 15% ON THE CAPITAL GAIN
• CAPITAL GAIN = SALE PRICE PURCHASE PRICE.
22
BONDS
• YOU BUY THE DEBT OF THE COMPANY OR
GOVERNMENT
• PAYS A FIXED RATE, I.E. 4% OF THE PURCHASE
PRICE
• VALUE OF THE BOND FLUCTUATES BASED ON
THE VALUE OF MONEY
• IF BOND PRICE INCREASES - THE PERCENTAGE
INTEREST PAID DECREASES
• IF BOND PRICE DECREASES - THE PERCENTAGE
INTEREST PAID INCREASES
23
BONDS
• BONDS PRICES DO NOT INCREASE AT THE SAME
AVERAGE RATE AS STOCK PRICES
• BONDS ARE A CONSERVATIVE INVESTMENT
• INTEREST OF STATE AND CITY BONDS (MUNI) ARE
FEDERAL TAX FREE
• INTEREST RATE FOR MUNI BONDS ARE LESS
THAN FOR US GOVERNMENT BONDS OR
CORPORATE BONDS
– MUNI - 3%
– FEDERAL BOND - 5%
– CORPORATE BOND - 7%
24
BONDS
• CORPORATE BONDS ARE RISKIER
THAN FEDERAL OR MUNI BONDS,
HENCE THEY USUALLY PAY A
HIGHER INTEREST RATE.
• JUNK BONDS ARE HIGH INTEREST
PAYING BONDS OF COMPANIES THAT
DO NOT HAVE ENOUGH EQUITY TO
PAY THE BONDS
25
MUTUAL FUNDS
• COMPANIES THAT OFFER SHARES IN A
GROUP OF STOCKS CALLED A FUND
• PAY THE DIVIDENDS OF THE STOCKS THEY
HOLD IN THE FUND TO YOU
• PAY THE INTEREST OF THE BONDS THEY
HOLD IN THE FUND TO YOU
• THE VALUE OF A SHARE OF THE FUND IS
THE AVERAGE OF THE VALUE OF THE
STOCKS OR BONDS THEY HOLD IN THE
FUND
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MUTUAL FUNDS
• MUTUAL FUNDS TEND TO GROW
SIMILAR TO STOCKS
• IF THE FUND PICKS FAST GROWING
STOCKS THEIR PRICE WILL
INCREASE RAPIDLY
• FAST GROWING STOCKS ARE
USUALLY RISKY AND THEIR PRICE
FLUCTUATES OVER A LARGE RANGE
27
MUTUAL FUNDS
• THERE ARE MORE MUTUAL FUNDS
THAN STOCKS
• TYPES OF MUTUAL FUNDS
– MANAGEMENT STYLE
• HIGHLY MANAGED
• INDEXED
• COMBINATION
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MUTUAL FUNDS
– TYPES OF STOCKS IN FUND
•
•
•
•
GROWTH
VALUE
BONDS
BLEND
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MUTUAL FUNDS
– LOCATION OF COMPANIES
•
•
•
•
US ONLY
INTERNATIONAL = NON US
GLOBAL = US + INTERNATIONAL
INDIVIDUAL COUNTRIES, I.E. JAPAN,
RUSSIA, TURKEY, BAZIL, ETC.
• REGIONAL FUNDS, I.E. ASIA, ASIA- JAPAN,
BRIC, EUROPE, EASTERN EUROPE
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MUTUAL FUNDS
– SIZE OF THE COMPANIES IN THE FUND
•
•
•
•
•
LARGE CAP
MID-CAP
SMALL-CAP
BLEND
SMALL TO MID-CAP
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MUTUAL FUNDS
– COST OF FUNDS
• LOAD FUND = PAY A PERCENTAGE OF THE
SHARES YOU BUY TO JOIN THE FUND,
TYPICALLY 4.5% IN ADDITION TO THE PRICE
OF THE SHARES
• NO-LOAD FUND = ONLY PAY FOR THE
SHARES
• REAR END FUNDS = PAY A PERCENTAGE OF
THE PRICE OF THE SHARES THAT YOU SELL.
PAY AT THE END
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MUTUAL FUNDS
• EXAMPLE OF FUNDS
– MANAGED, LOADED,GLOBAL, GROWTH
FUND
– INDEXED, NO-LOAD, MID-CAP, US FUND
• QQQ - NASDAQ 100 (highest capitalization)
• DIA - DOW JONES 30 INDUSTIAL STOCKS
• SPY - STANDARD & POORS 500 STOCKS
(top 500 stocks by capitalization)
33
BUYING STOCKS, BONDS OR
MUTUAL FUNDS
• BUY STOCKS AND CORPORATE BONDS THROUGH
A STOCK BROKER
– ONLY PEOPLE LISENCED BY THE STOCK
EXCHANGES CAN SELL STOCKS AND
CORPORATE BONDS
• BUY GOVERNMENT BONDS THROUGH BROKERS
OR FROM THE GOVERMENTS
• BUY MUTUAL FUNDS THROUGH BROKERS OR
DIRECTLY FROM THE FUNDS.
34
COST OF BUYING STOCKS AND
MUTUAL FUNDS
• THE MORE STOCK YOU BUY AT A GIVEN
TRANSACTION THE LESS YOU PAY THE BROKER
FEE ($/SHARE)
• NOT ALL BROKERS CHARGE THE SAME FEES
• YOU PAY A BROKER FEE WHEN YOU BUY OR
WHEN YOU SELL
• BUYING MUTUAL FUNDS THROUGH A BROKER IS
JUST LIKE BUYING STOCKS.
• BUYING NO LOAD FUNDS WITHOUT A BROKER IS
VERY COST EFFECTIVE.
35
COSTS OF HOLDING MUTUAL
FUNDS
• MUTUAL FUNDS CHARGE A YEARLY
FEE FOR RUNNING THE FUND
• FEES VARY WITH EACH FUND
• HIGHLY MANAGED FUNDS CHARGE
MORE THAN INDEX FUNDS
• CHARGES VARY FROM 0.5% TO 2.5%
OF YOUR HOLDINGS
36
REAL ESTATE
• REAL ESTATE CAN BE A GOOD
INVESTMENT
– BUY A HOUSE TO RENT
– RENT IT- YOUR RENTERS PAY FOR THE
HOUSE
– TAKE DEPRECIATION OFF YOUR TAXES
– WHEN YOU SELL IT - IT’S A CAPITAL
GAIN
37
REAL ESTATE
• BEING A LANDLORD CAN BE A PAIN
– YOU MUST MAINTAIN THE PROPERTY
– RENTERS DO NOT ALWAYS PAY THE
RENT
– RENTERS CAN RUIN THE PROPERTY
– FINDING NEW GOOD RENTERS IS
DIFFICULT
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CONCLUSION
• INVEST FOR YOUR RETIREMENT
• INVEST FOR YOUR INCOME
• INVEST FOR YOUR FUTURE
•
INVEST
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