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Roadmap for Investing Wisely for a Lifetime Leslie Lum Bellevue Community College

Roadmap for Investing Wisely for a Lifetime Leslie Lum Bellevue Community College. The Roadmap. Save Focus on financial goals Understand returns Understand risk Asset allocation Monitor your investments.

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Roadmap for Investing Wisely for a Lifetime Leslie Lum Bellevue Community College

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  1. Roadmap for Investing Wisely for a Lifetime Leslie Lum Bellevue Community College 1

  2. The Roadmap • Save • Focus on financial goals • Understand returns • Understand risk • Asset allocation • Monitor your investments 2

  3. Rule #1: You can make more money saving aggressively than you can investing aggressively 3

  4. How much does a typical family make? 4

  5. What happens to your income over your life? 5

  6. How are we doing at savings? 6

  7. Could we save more? 7

  8. Rule #2: If you don’t have goals, you won’t achieve them. 8

  9. Annual Budget vs Long-Term Financial Goals • Trade off between spending money now and setting aside money for long-term goals • How do you make your decision? • What are the costs? 9

  10. Lay out your goals • Down payment on house • Wedding • College tuition • Starting your own business • Retirement • Estate (Inheritance or charity) 10

  11. Rule #3: Know how to measure returns. 11

  12. Returns Always calculate returns on an annualized basis 12

  13. Calculate the annualized return • You have an outstanding balance of $500 on your credit card. You are late in paying and were only able to pay the minimum $10. Your APR on the card is 22% above prime. The late payment charge is $35. Assume the prime rate is 7% now. 13

  14. Calculating returns – time value of money 14

  15. Calculating lost return • You want to buy a HDTV set for $1500. What is this (future) costing you? (Use 20 years and 8% return. We use 8% because it’s historically the rate of return on investments over a long period of time.) • $1785 • $3393 • $4837 • $6991 15

  16. Calculating lost return You are a typical employee in your 20s who when you left your job in 2005 cashed out (66% do) your 401K account of less than $10,000. What is the cost of cashing out your account if your balance was $8000? 16

  17. Which is more? • Saving $4000 a year from 25 to 45 years old and then no more savings but hold in account • Saving $8000 (double) a year from 45 to 65 years old 17

  18. House in 10 years. Today’s price $200,000 Kid’s college education in 18 years. Today’s price $50,000 2% inflation 3% inflation? It’s a moving target 18

  19. $800,000 retirement goal in 30 years At 8% returns? At 10% returns? That’s not the only uncertainty 19

  20. The financial plan Katie is 25 and trying to plan her financial future. Here are her financial goals in today’s dollars (black) and inflated to when they are due (red). 20

  21. Katie does her plan and knows that her heaviest savings will happen in her 30s and 40s. She also does sensitivity analysis on various inflation and return rates. She knows that she should save as much as she can when she is younger. 21

  22. Rule #4: Understand risk 22

  23. Investment Risks • Market risk • Business risk • Interest rate • Inflation risk • Political risk • Fraud risk 23

  24. Major asset classes 24

  25. Bonds 25

  26. Stocks 26

  27. Return versus Risk Lessons to learn: If you want a higher return, you need to invest in riskier assets (stocks) The more return, the more risk. 322% gain guaranteed? Only if 322% loss guaranteed! 27

  28. Given the same return, the investment with less risk is better 28

  29. The Northwest is the best. 29

  30. Bonds – Risk Return 30

  31. Stock – Risk Return 31

  32. Sectors – Risk Return 32

  33. International – Risk Return 33

  34. Combined – Risk Return Rank the categories in order of return Rank the asset classes in order of risk 34

  35. How do you get both a good return and low risk? 35

  36. Risk of loss in stocks is high year to year 36

  37. Over 5 years, risk of loss is lower 37

  38. Over 10 years, risk of loss is small 38

  39. Lesson? • Buy and hold market index funds (doesn’t work for individual stocks) • Have an emergency fund (3 to 6 months) to tide you over • Have other sources of income so you don’t have to cash out during down markets 39

  40. Rule #5: Asset allocate 40

  41. All eggs in one basket? • 34.6 percent of families had stock in only one company • 59.5 percent had stock in three or fewer companies • 9.5 percent had stock in fifteen or more companies Source: 2004 Consumer Finance Survey 41

  42. Can you predict the best return? 42

  43. Does the risk double with two investments? The key is having two investments which aren’t correlated. 43

  44. Adding a riskier investment to your portfolio decreases overall risk. 44

  45. If you allocate the right amount you reduce risk and increase return! 45

  46. Pension Fund Portfolio 46

  47. “Millionaires” Portfolio 47

  48. 401K Allocations by Age Source: Investment Company Institute 48

  49. Rule # 6: Always watch your money. 49

  50. Investment Advice • Take care in choosing your advisor • Experienced • Relevant education • Certified by professional body • Check for disciplinary actions (www.dfi.wa.gov) • Don’t invest in anything you don’t understand • Watch what your advisor does 50

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