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Personal Finance
FIN 235
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A. Reasons for Establishing Investment Plans/Programs
B. Funding investment programs
C. Understanding the relationships between; risk, return,
liquidity, income, and growth
D. How to manage risk
E. Considering bonds as part of your portfolio
1. Government
2. Corporate
F. How to evaluate bond investments
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A. Systematic savings plans
1.
2.
3.
Many start with a savings account
Regular weekly or monthly deposits
Regular payroll deductions
B. Participation in 401(k) plan at work
1.
2.
Many employers make contributions or add based on employee
contribution.
Setting aside a small percentage of pay (3 to 5%)
C. The most important factors:
1.
2.
3.
Start early
Don’t use funds during accumulation period except for emergencies
Early withdrawals subject to penalties and taxes
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A. Establishing Investment Goals
B. Performing a Financial Checkup
1.
2.
3.
4.
Work to Balance Your Budget
Obtain Adequate Insurance Protection
Start an Emergency Fund
Have Access to Other Sources of Cash for Emergency Needs
C. Getting the Money Needed to Start an Investment Program
1.
2.
Priority of Investment Goals
Employer-Sponsored Retirement Plans
D. The Value of Long-Term Investment Programs
1.
2.
Financial Independence
Maintaining your lifestyle in retirement
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A. Safety and Risk; run in opposite directions
B. Components of the Risk Factor
1. Inflation Risk (maintain purchasing power)
2. Interest Rate Risk (change in values as rates change)
3. Business Failure Risk (investment goes sour)
4. Market Risk (ups and downs of the market)
C. Investment Income (interest, dividends)
D. Investment Growth (capital gains)
E. Investment Liquidity (sell quickly and cheaply)
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A. Portfolio Management and Asset Allocation
1. Asset Allocation (stocks, bonds, international, cash)
2. The Time Factor (short or long term)
3. Your Age (get more risk averse as you get older)
B. Your Role in the Investment Process
1. Evaluate Potential Investments
2. Monitor the Value of Your Investments
3. Keep Accurate Records
4. Do some research before you commit to a course of action
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A. Advantages
1.
2.
Known payouts (interest payments, principal at maturity)
Risk a function of credit ratings (AAA – D)
B. Disadvantages
1.
2.
3.
Interest Rate risk
Default risk
Costly to trade (liquidity may be a problem)
C. Government Bonds
1.
2.
3.
4.
No defaults
Lower rates
Semi-annual coupons
Municipal bond interest exempt from federal taxation
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D. Corporate Bonds
1. Better yields
2. Increased chance of default (especially lower rated bonds)
3. Quarterly coupons
4. Secured and unsecured categories as well convertibles
E. Basic Bond Strategies (if trading)
1. If rates expected to rise, keep maturities short
2. If rates expected to fall, go long maturities
3. Inflation expectations is major factor in forming rates
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A. Returns: Stocks vs. Bonds
1. Since 1926: Bonds average 5.6% per year, Stocks 10.4%
2. Over a 30 or 40 year investment period, the roughly 5%
difference in returns can add up to s significant amount
3. Example: Invest $200 per month for 30 years
a. Bond Portfolio = $186,198
b. Stock Portfolio = $492,554
4. Annuity Example: Payout the above accumulation for 25 years
a. Bond ($186,198); monthly check = $1,154.56
b. Stock ($492,554); monthly check = $4,615.47
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A. Bonds may be safer than stocks, but the returns are
significantly lower.
B. Government Bonds are safer than Corporate Bonds but the
returns are slightly lower.
C. Timing is important when adding bonds or bond funds to
your portfolio.
1. Expectations about future inflation is a key decision criterion
2. Global economic conditions are also a factor.
A. Do The Math: 1, 4, 6
B. Be Your Own Personal Financial Planner
1. 2 – Readiness to invest (w/s 49)
2. 4 – Your long-term investment strategy (w/s 51)