Chapter 13:
Investment Fundamentals and
Portfolio Management
Objectives
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Summarize reasons why people invest, what is
required before beginning, how returns are earned,
and some ways to obtain funds to invest.
Determine your own investment philosophy.
Recognize the variety of investments available.
Identify the major factors that affect the return on
investment.
Specify some strategies of portfolio management for
long-term investors.
List three guidelines to use when deciding the best
time to sell investments.
Establishing Investment Goals
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Financial goals should be specific and
measurable.
Why are you accumulating these funds?
How much do you need?
How will you get it?
How long will it take you to reach your goal?
How much risk are you willing to assume?
Are you willing to sacrifice current consumption
to invest for the future?
Is it realistic to try and save this amount?
Steps to Create a Personal Investing Plan
Step 1
My investment goals are:
____________________
____________________
Step 2
By ___________, I will
have obtained $_______.
Step 3
I have $__________
available to invest.
Date _____________
Step 9
Continue evaluating choices.
Step 4
Possible investment alternatives:
1._________________
2._________________
3._________________
4._________________
Step 8
Final decision
1._______________
2._______________
Step 7
Investment decision
1._______________
2._______________
3._______________
Step 6
Projected return on each alternative
1.__________
2.__________
3.__________
4.__________
Step 5
Risk factors for each alternative
1.____________________
2.____________________
3.____________________
4.____________________
Investment Fundamentals
ATTENTION!
Difference
in return is a major distinction
between savings and investing.
Successful
investors begin to live off
earnings, without spending wealth itself.
Preparations for Investing
WHY PEOPLE INVEST:
 Achieve financial goals
 Increase current income
 Gain wealth and financial security
 Have funds available for retirement
Preparations for Investing
PREREQUISITES TO INVESTING:
 Live within means
 Continue savings program
 Establish lines of credit
 Carry adequate insurance
 Establish investment goals
Preparations for Investing
INVESTMENT RETURNS:
 Interest
 Dividends
 Rent
 Capital gain/loss
 Rate of return or yield
Performing a Financial Checkup
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Learn to live within your means
 pay off high interest credit card debt
Provide adequate insurance protection
Start an emergency fund
 three to nine months of living expenses
Have other sources of cash for emergencies
 line of credit
 cash advance
Getting Money to
Start an Investing Program
 Pay yourself first
 Participate in elective savings programs
 Payroll deduction
 electronic transfer
 Make a special effort to save one or two months
a year
 Take advantage of windfalls
 Invest half of
your tax refund
Value of Having a
Long-Term Investing Program
 Many people don’t start investing because
they only have a small amount to invest
but....
 Small amounts invested regularly
become large amounts over time
Personal Investment Philosophy
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Handling risk
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Ultraconservative strategies
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Conservative
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Moderate
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Aggressive
Investment Selection
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Lend or own
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Short-term or long-term
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Choose a vehicle
Factors That Affect
Investment Decisions
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Safety - minimal risk of loss
Risk - uncertainty about the outcome
 inflation risk
 interest rate risk
 business failure risk
 market risk
Income From Investments
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Safest
 CDs
 savings bonds
 T-bills
 Higher potential income
 municipal bonds
 corporate bonds
 preferred stocks
 mutual funds
 real estate
Investment Growth and Liquidity
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Growth
 increase in value
 common stock
 growth stocks retain earnings
 bonds, mutual funds and real estate
Liquidity
 ease and speed to convert an asset to cash
Investment Pyramid
High risk
Commodities
Junk bonds
Options
High Quality
Stocks
Mutual funds
Utility
stocks
CDs
Rental
property
Government
Securities
Money
Market
Corporate
bonds
Savings
Accounts
Cash
Low
risk
Major Factors That Affect Rate of Return
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INVESTMENT RISK:
 Pure
 Speculative
 Risk pyramid
Major Factors That Affect Rate of Return
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INVESTMENT RISK TYPES:
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Inflation
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Financial
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Deflation
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Market volatility
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Interest rate
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Political
Major Factors That Affect Rate of Return
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INVESTMENT RISK:
 Random or unsystematic
 Diversification
 Market or systematic
Major Factors That Affect Rate of Return
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Leverage
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Taxes
 Marginal tax rate
 Taxable vs. tax-free income
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Buying and selling costs/commissions
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Inflation
Major Factors that Affect Rate of
Return
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CALCULATE REAL RATE OF RETURN:
 Identify before-tax return
 Subtract marginal tax rate
 Obtain net return after taxes
 Subtract estimate of inflation
 Obtain real rate
Management Strategies — Long-Term
Investors
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Business-cycle timing
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Dollar-cost averaging
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Portfolio diversification
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Asset allocation
Investment Alternatives
 What is stock?
 part ownership in a
company
 the money you pay for
shares of stock provides
equity capital for the
business
Investment Alternatives
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(continued)
What is a bond?
 a loan to a corporation, the
federal government, or a
municipality
The interest is paid twice a
year, and the principal is
repaid at maturity (1-30 years)
You can keep the bond until maturity
or sell it to another investor
Investment Alternatives
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(continued)
What is a mutual fund?
 investors’ money is pooled and invested by a
professional fund manager
 you buy shares in the fund
 provides diversification to reduce risk
 funds range from conservative
to extremely speculative
 match your needs with
a fund’s objective
Monitor Your Investments
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Read your account statements
 Chart the value of your investments
 Maintain accurate and current records
 Calculate the current yield %
annual income from investment
market value of the investment
Sources of Investment Information
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Newspapers
Business Periodicals
Government Publications
Corporate Reports
Statistical Averages
Investor Services and newsletters
 Standard and Poor’s stock reports
 Value Line
 Moody’s investment service
Investment Philosophies
Best Time to Sell
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Take profits
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Cut losses
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“If wouldn’t buy it now, sell it”