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Rate of Return

Rate of Return . Nominal Rate of Return. Real Rate of Return. Return prior to correction for inflation Top Grossing Movies correct for inflation. Return after being corrected for inflation. Affecting Growth. Time. Money. Rate of Return. Rule of 72.

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Rate of Return

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  1. Rate of Return Nominal Rate of Return Real Rate of Return Return prior to correction for inflation Top Grossing Movies correct for inflation Return after being corrected for inflation

  2. Affecting Growth Time Money Rate of Return

  3. Rule of 72 Money doubles at a point in time determined by dividing 72 by the interest rate you earn 72 / % RR= time double money 72 / 2% = 36 years 72/ 4% =18 years 72/ 6% = 12 years 72/ 8% = 9 years

  4. Personal Savings Rate 12% 10 8 6 4 2 0 –1 1946 1951 1956 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006

  5. What is a stock? • A share of ownership in a corporation. • IPO – initial public offering- first time a stock is offered to the public for purchase.

  6. The Golden Rule of Investing The greater the risk the greater the reward or failure Silver Rule of Investing Buy low Sell high

  7. Bonds Corporate, Municipal, Federal Loan Corporate T-bills T-Notes T-Bonds Municipal

  8. The Golden Rule Of Investing The greater the risk, the greater the chance of reward or failure

  9. 5 Types of Risk 1. Financial 2. Market Price Value loss on Market Loss of value or loss of that investment all together

  10. 5 Types of Risk Liquidity Ability to Turn Investment to Cash

  11. Inflation Risk • The risk that money invested today will lose value due to higher inflation • You want Investment to have Rate of Return Higher • than Inflation

  12. Fraud Risk • Misrepresented investment. • Scam artists take your money

  13. Markets • NYSE (1792) Co. with $40 mill. in assets • $2 mill. In earnings • AMEX (1950) small and mid cap. • Too Small to be on the NYSE • NASDAQ (1971) Same requirements as • NYSE, but mostly technology • OTC Risky penny stock Check Yo Self • Regional Philadelphia, Chicago, Cincinnati, Boston, Pacific (L.A. & San Francisco)

  14. Indexes(Tell us the health of the economy)Dow Jones Industrial Average • An average of 30 industrial stock prices used to indicate the general level of stock prices in the New York Stock Exchange.

  15. IndexesThe S&P 500 • An average of 500 popular stock prices used to indicate the general level of stock prices in the New York Stock Exchange.

  16. Prudent Strategies to Deal with Risk 2. Diversify • Diversify across asset classes • Stocks and bonds • Diversify within asset class • Stock from different industries Don’t Put All Your Eggs in One Basket

  17. There is no such thing as a free lunch in investing The greater the risk the higher the expected return. Investors are paid to take risk “High Risk , High Return, Low Risk, Low Return”

  18. Investment Risk • Financial Risk: not getting your money back at all. • Market Price Risk: the price of an investment will go down • Liquidity Risk: Ability to turn your investment into cash • Inflation Risk: the value of your investment decreases due to inflation. • Fraud Risk: losing investment due to misrepresentation 

  19. What is a stock? • A share of ownership in a corporation. • IPO – initial public offering- first time a stock is offered to the public for purchase.

  20. $15,922 Small stocks 12.7% $3,077 Large stocks 10.4% Gov’t Bonds 5.4% T-Bills 3.7% Inflation 3.0% $72 $19 $11 81-Year Horizon: 1926 – 2006 $10,000 $1,000 $100 $10 $1 $0.10 1926 1936 1946 1956 1966 1976 1986 1996 2006

  21. 2 Ways to make money on stocks Capital Appreciation • An increase in the stock price • 100 shares @ $10=$1,000 Total Market Value • 100 shares @ $20= $2,000 TMV • Gain Dividends • Profits are issued to stock holders • 1 million in profit • 1 million shares outstanding • Each share is issued a $1 dividend

  22. Stock Market Exchange • NYSE- 3,000 mainly large to mid size co • NASDAQ-5, 000 small size co • National Association of Securities Dealers Automated Quotation System

  23. Bonds • Bonds- lending an entity money for Specific • length of time • Interest rates • Amount (usually $1,000 increments) • Corporate Bonds – to lending to firms • Municipal Bonds- State and local governments (munis) • Federal Government Bonds- backed by the US Treasury dept. • T-Bills 3-6 months • T-Notes 1-7 years • T-Bonds- Long term ($10,000) • US Saving Bonds- variety

  24. Immediate Gratification! • Many people are “hardwired” for now consumption • Experiments: • Choice: $100 today or $120 in three days • majority of people choose $100 today! • forego annualized 2,400% rate of return

  25. Truth or Consequences • Average adult – • $6,000 outstanding credit card debt. • Few can afford to pay in full, so….. • they make minimum payment each month • they pay interest at very high rates on balance. • Immediate gratification is a powerful force!

  26. Why Plan, Save and Invest? • Create an emergency fund • Achieve goals • Build wealth

  27. Personal Savings Rate 12% 10 8 6 4 2 0 –1 1946 1951 1956 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006

  28. Tale of Two Savers Ana Shawn How much did each save initially? $24,000 or $2,000 a year for 12 years $64,000 or $2,000 a year for 32 years How much did each have in the end? $993,306.59 $442,503.09 Started saving at age 22 Started saving at age 34 Why? Save Early and Save Often!

  29. 3 factors that effect the growth of savings and investing Time: the earlier you save, the more savings you will have. Investment Size: the more you save each year from your income, the more savings you will have. Rate of Return: the higher the rate of return, the more savings you will have.

  30. Simple Interest $1,000 in savings at 5% interest

  31. Compound Interest Interest Earned on Interest $1,000 savings @ 5% interest

  32. Rule of 72 a rule for determining how long it may take for money to double at a particular rate of return. 72/ R= years it takes for money to double

  33. Vocabulary Rate of return- (ROR)the additional money earned on an investment in percentage terms for a given time period. Real rate of return-(RROR)the ROR adjusted for inflation Real Interest Rate- is the rate adjusted for inflation at which interest is paid by a borrower for the use of money that they borrow from a lender. Nominal Interest Rate- is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender.

  34. Prudent Strategies to Deal with Risk Don’t Put All Your Eggs in One Basket • All money in one stock? • Could spill all the eggs

  35. It Can Be Tempting! • All Your Eggs in One Basket? • Great if you “hit it big” • Wal-Mart • If you had purchased $1,000 of Wal-Mart stock in 1970 at its IPO • held it through 1999, would have grown to: • Over 6,000,000 • Not so great if things go south • Enron

  36. Prudent Strategies to Deal with Risk 2. Diversify Don’t Put All Your Eggs in One Basket • Diversify across asset classes • Asset Allocation • Stocks, bonds, CDs • Diversify within asset class • Stock from different industries

  37. Asset Allocation • Asset allocation refers to the process of dividing an investment amongst various assets or asset classes (fixed income, equity, commodities, etc.) in order to diversify and subsequently reduce investment risk.

  38. The Bulls, The Bears, and The Pigs • Bulls–a stock market with rising prices. • Buying on margin can increase gains in a bull market. • Bears–a stock market with falling prices • Selling short can increase gains in a bear market.

  39. Investing Do’s Invest in something you don’t understand Expect too much too soon Be greedy Trade too often Time the market Invest beyond your risk tolerance. Don'ts • Start early and often • Diversify your investments • Invest for the Long Term • Know your objectives and risk tolerance • Be aware of broker fees • Be skeptical of rumors and fads

  40. Individual Retirement Accounts (IRA) • Retirement account that gives you a tax incentive for participating. • Benefits: • Reduces taxable income • Tax deferred growth • No penalty for withdrawing if you are 59 ½ • Rules vary for withdraws for first time home buyer, paying for college, medical expenses or disabled. • Drawbacks: • Early withdrawal penalties 10% plus taxes • Contributions stop after you are 70 ½ yrs old • Withdrawals are taxed • Forced withdrawals after you reach 70 ½ years

  41. Roth IRA • Similar to IRA; except you pay taxes on the money now (not tax deductible) • Benefits: • No penalty for withdrawing if you are 59 ½ • Rules vary for withdraws for first time home buyer, paying for college, medical expenses or disabled. • May not be required to withdraw funds at any age • May contribute forever • Drawbacks : • Not deductible • Early withdrawal penalties 10% • Account must be open five years to qualify for tax-free provisions

  42. 401K • A tax deferred retirement fund, sometimes matched by employers. • Benefits: • Tax deferred growth • Reduces taxable income • Borrow against your fund • No penalty for withdrawing if you are 59 ½ • Withdraws for medical expenses, disability • Drawbacks: • Early withdrawal penalties 10% plus taxes • Limits on contributions • Withdrawals are taxed • Forced withdrawals after you reach 70 ½ years • Roth 401K-new

  43. “Assets” “Liabilities” What Is Wealth? • Wealth = (What you own) minus  (What you owe)

  44. Balance Sheet Total Liab + Net Worth $100,000 Net Worth Statement(as of: January 12th, 2008) • Assets • Current Assets • Check/savings accounts • Securities • Stock, bonds, mutual funds • Real estate • House value • Long-term Assets • Individual Retirement Acct. • Personal property • Automobile • Furniture, Jewelry _________ • Total Assets: $100,000 • Liabilities • Unpaid bills • Utilities, medical bills • Insurance premiums • Loans • Credit card balance • Automobile loan • Mortgage loan bal. • Total Liabilities: $40,000 Net Worth $60,000 (or one’s “wealth”)

  45. What builds wealth? Increase your assets or reduce your liabilities How ? Create a Plan

  46. Where do you start? Create a Financial Plan

  47. SMART Goals

  48. Goals • Short Term Goals – next 3 months • Intermediate Goals – 3 months to 1 year • Long term Goals - more than a year

  49. We don’t plan to fail, we fail to plan! Smart Goals Dumb Goals Dreamy Unrealistic Motivating Bold • Specific • Measurable • Attainable • Realistic • Timely

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