Investing
(Or…some beginning thoughts on how to build wealth since I can’t
sing like…well, somebody who is crazy-rich because they CAN sing)
Think about these 3 separate ideas for a moment…
1.What are your GOALS/OBJECTIVES ?
2.What is your tolerance for RISK?
3.Patience! short-term V. long-term
• make a “bucket
list” of some of
important things
you think you
might want at
different points
of your life
Goal
Timeframe
Cost
Thinking about your objectives
• What would you like to do at different points in your life? How much will you
need to make those things happen? WHY are you investing?
Now ask yourself…
ONE:
When I think about these kind of things, how
much will I need to make it happen?
TWO:
How much time do I have to make each happen ?
Laying the Groundwork for Success
1. Identify your Goal(s):
• be as specific as you can
• is the goal measurable? How will you know if/when
you reach it?
• are always subject to revision!
2. Identify/assign a deadline
3. How much $ will it require?
4. Does it expose you to an unacceptable
level of risk?
Risk and Reward
There’s a clear relationship between
risk and reward:
Higher returns = higher risk
As your life circumstances change,
re- assess your tolerance for risk!
To reduce your risk: Diversify
Increasing potential
for higher returns
AND
Increasing risk
Moderate
Aggressive
Speculation
Wealth
Accumulation &
Growth
“Safer” Investments…
Conservative
Lower Returns
The Investment Pyramid
Investment Choices
There are lots of things that you can invest in….
• Real estate
• Precious metals (gold, silver, etc.)
• Commodities (generally they are farm
products)
Take notes on
• Oil and gas
what you hear
• Art
about these
• Collectables
• we will focus on the 2 most common:
Stocks and Bonds
BONDS
1. Are debts…like an I.O.U.
The issuer/borrower/seller must repay the bond
PLUS interest
2. Who issues bonds?
• Gov’ts (federal, state, county & local)
• Corporations
Bonds have 3 components:
• Principal – the amount borrowed
• Interest Rate – the % paid by the borrower for using
the money
• Maturity – the date by which the borrower must pay
off the bond
Who invests in bonds?
• People looking to generate an “income stream”
(Investors collect the interest and then get their principal back
when the bond matures)
• Those looking for lower-risk investments
• Bonds are rated by 2 major ratings agencies for safety
• Bondholders get higher priority in a bankruptcy
• B/C they are relatively safer than many other investments, they
are popular with senior citizens and conservative investors
Stocks
A common method for companies to raise large sums
of cash is to sell stock in the company… if you own a
share of stock, you own a piece of the company
When a company sells stock for the 1st time:
“Initial Public Offering” (an “IPO”)
How do I make money investing in stocks?
• Capital Appreciation: “buy low….sell high”
• Dividends : cash payment to shareholders
by the company from its profits
(dividends are not automatic…the Board
of Directors decides IF and HOW MUCH
the dividend will be)
Where do shares of stock “trade”?
(where are they bought / sold?)
• The New York Stock Exchange (NYSE)
- generally, well-established companies
• Nat’l Assoc. of Securities Dealers Automated
Quote System…or just NASDAQ
Reading a stock quote
http://finance.yahoo.com/marketupdate/overview
Stock Indexes
•What are they?
Quick way to measure how “the market
is doing”:
The Dow-Jones Industrial Average (the “Dow”)
Group of 30 stocks
representing the major
sectors of the US
Economy
*
*
*
*
*
Microsoft
Ford and GM
General Electric
Coca Cola
25 others
• The Dow is a weighted average of the 30
stocks prices
• In theory, if the average goes up, “the
Market” in general has moved higher
• Weakness of the DJIA: not a very large
sample (can just 30 stocks really reflect
accurately what the overall market is
doing?)
The Standard & Poor’s 500 Index
•S+P 500 for short
• Same concept as the Dow, but uses
500 companies
•S + P 500 is generally the preferred
index to measure market performance
Why do stock prices go up or down?
• Supply and demand!
We want to own
shares in companies with growing profits. Above
all else: a company’s stock price is tied to its
future earnings (“profitability”)
If investors believe that earnings will grow,
demand for shares of stock in that company grows
& it’s price will rise (opposite if investors think
earnings will decline)
Be Advised!
A company’s earnings (and stock price) are
subject to many currents in the economy
•
•
•
•
Events specific to that company
Events in that company’s industry
Events of the overall economy
National and/or World events
What could change a company’s earnings?
1. An event or news specific to that company:
• A new and exciting product
• A new contract
• A change of management
• Cost-cutting measures such as:
• closing unprofitable stores or divisions
• Laying off workers
What could change a company’s earnings (continued)
• The industry the company is in could be changing
• would you now invest in video rental companies?
• Is there an emerging industry that might produce the next Microsoft?
• Maybe the company & the industry are fine but the entire
economy is struggling?
Types of Stock
•“Growth” stocks:
grows in value faster than the S+P
500 Index
•“Blue Chip” stocks:
stock in companies that are wellestablished…often household names…leaders in their
industry
•“Income” stocks:
those that pay high dividends
• “Cyclical” stocks: react to the business cycle…tend
to rise when the economy is strong….fall when the
economy struggles
• “Defensive” stocks: tend to hold value in poor
economic cycles, but do not rise as fast in up cycles
• “Speculative” stocks: high risk stocks that offer the
promise of spectacular returns… usually doesn’t
happen!
“Stock-picking” isn’t very easy
•You might have the right industry…but the
wrong company
•Negative unforeseen events may occur
AFTER you own it
•A “solution”? Spread your risk over many
stocks… DIVERSIFY your portfolio
Index Funds
• Mirrors one of the indexes…if the index rises
18% (for ex.), your investment rises 18%
• b/c they buy every stock in an index, no need to
be professionally managed…(lower fees)
• Removes the necessity to be a “stock-picker”
Diversify with Mutual Funds
• Pools investors’ monies
• Professionally managed
• Buys 100’s…1,000’s of different stocks and/or bonds
• DIVERSIFIES your investment $ automatically
• Hundreds of “families of funds” to choose from
To summarize:
1. Build wealth thru thoughtful investing
(goals, timeframe, risk-tolerance, education)
2.
3.
4.
5.
Life-long process to meet changing goals
Hands-off
Hands-on, you decide
Diversify: different investments have different objectives
Patience! Not a “get rich quick” scheme