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Basics of Investing

Basics of Investing. Erica Abbott & Jean Lown, FCHD Dept., USU with assistance from Advanced Family Finance students Information Credits to: Dr. Barbara O'Neill Rutgers Cooperative Extension. Welcome. Please ask questions or ask for clarification as we go along.

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Basics of Investing

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  1. Basics of Investing Erica Abbott & Jean Lown, FCHD Dept., USU with assistance from Advanced Family Finance students Information Credits to: Dr. Barbara O'Neill Rutgers Cooperative Extension

  2. Welcome • Please ask questions or ask for clarification as we go along. • I may defer some Q that require a detailed answer to the end

  3. Things To Do Before Investing • Pay off credit card debt! • No investment pays as much as credit card companies charge • Build an emergency fund • Consider your goals • Timeline • How soon will you need the $?

  4. Consider your Goals • Vehicle purchase/replacement • Down payment on a home • Child’s education • To build wealth • For retirement • What are your financial goals? • How much $ will you need?

  5. Determine your Risk Tolerance • How much risk can you stand? • If you have trouble sleeping at night because you are worried about your investments then pick a more conservative mix • For experienced investors: • How did you react to 2008-2009 losses? • Risk tolerance scale-worksheet

  6. Relationship Between Risk and Return High Int’l Stocks Stocks Real Estate Expected Return Int’l Bonds Bonds Cash Equivalents Low Low Risk High

  7. Before you Invest • Is your budget balanced? • Do you save every month? • Do you pay credit cards in full every month? • Do you carry adequate insurance to protect against major catastrophes?

  8. Potential Risks • Being too conservative (Savings accounts, CDs, etc.) • Keeps principal safe but… • Inflation reduces purchasing power • Inflation averages about 3.1% • Risk not reaching your goal(s)

  9. Risks • Being too aggressive (too much in stocks) • Higher potential for growth but… • More market volatility • No guarantee or insurance • Potential to lose some or all of the principal

  10. Managing Risks • Consider your goal • Emergency fund- be conservative • Retirement- be more aggressive • Match your goals with your risk tolerance • Can you handle the market volatility?

  11. Managing the risks continued • Consider your time frame • Short Term – months to 3 years • Stick with safe savings options • Mid Term – 3 to 10 years • Take some risk to grow your $ & beat inflation • Long Term – 10 or more years • Take more risk to grow your $ & beat inflation

  12. Saving Terminology • Cash Equivalents • Usually low risk • Savings, CDs, cash on hand • Also called liquid assets • Use for short term goals or if you have you have low risk tolerance

  13. Investing Terminology • Stock – ownership in a company • Bond – loan money to issuer • Mutual fund – A diversified portfolio of stocks and/or bonds • Opposite of putting all your eggs in one basket

  14. Retirement Funds • 401(k) retirement plan offered by employer • $ grows tax deferred • Some employers will match (~3%) • Need to invest > just the match • IRA: individual retirement account • Invest on your own • $ grows tax deferred

  15. Retirement Funds • Roth IRA • Pay taxes now • No taxes when you withdraw = no taxes on the growth! • Traditional IRA • Upfront tax deduction • Pay taxes at withdrawal

  16. Retirement Funds • Retirement accounts are NOT an investment • How the government treats that money for tax purposes • Where you put that money is up to you

  17. IRA Criteria • Must have an earned income • If married, non-earning spouse can use a spousal IRA • $5,500 annual limit • You can contribute less • Age 50+: $6,500

  18. 401(k), Roth, or traditional IRA? • Invest in 401(k) up to full match • Instant 100% rate of return!! • Possible downsides • employer picks the funds • May charge heavy fees • If no employer match, consider an IRA

  19. 401(k), Roth, or traditional IRA? • Use a traditional IRA if • Your employer doesn’t match or you’ve already invested up to the match • You expect to be in a lower tax bracket at retirement • Take the tax break now

  20. 401k, Roth, or traditional IRA? • Use a Roth IRA if • You expect taxes to rise • You expect to be in a higher tax bracket at retirement • Offers tax diversification • If most of your retirement income will be taxable… invest in a Roth

  21. Establish Your Long-Term Investment Strategy • Strategy 1: Buy and hold anticipates long-term economic growth. • Stock market has offered a positive return over every 15 year period • Past returns no guarantee, but long-term buying and holding is a great strategy

  22. Long-Term Investment Strategy 2 • Dollar-cost averaging buys at “below-average” costs • Invest same amount every month • Avoid following the crowd • Jumping in when the market is high • Pulling out when it drops • Set up automatic deposit

  23. Long-Term Investment Strategy 3 & 4 • Portfolio diversification reduces volatility • Money is like manure.  Left in a pile, it stinks.  If you spread it around, it'll grow some stuff. – Dave Ramsey • Asset allocation keeps you in the right investment categories at the right time

  24. Determinants of Portfolio Performance Source: “Determinants of Portfolio Performance II, An Update” by Gary Brinston, Brian D. Singer and Gilbert L. Beebower, Financial Analysts Journal May-June 1991.

  25. Investing Made Easy • Set up Automatic Investing • Payroll deduction or • Automatic transfer from checking to: • Individual Retirement Account • Mutual fund • Other investment

  26. Mutual Funds • Advantages • Professional management • Reduce risk through diversification • Own small part of lots of different investments • Monitoring investments is easy • Disadvantages • Funds charge fees • Be aware • follow market performance (down & up) • No guaranteed rate of return

  27. Successful Investing • Educate yourself • Determine your risk tolerance • Decide on asset allocation • Stick to your plan • Monitor investment performance • If you need help, consult a professional advisor • (N.B. most are salespeople) • Avoid fraud!

  28. More Successful Strategies • Ask questions about… • Expenses • Historical performance: 3, 5, 10 yrs. • Investment goal (e.g., capital appreciation) • “Rule of Three” comparison • Compare at least 3 investments • “Core and Explore” approach • For more adventurous

  29. Low-Maintenance Strategies • Target maturity date mutual funds for retirement • Index funds • Automatic deposits • Annual financial check-up

  30. Ideas on where to invest • Fidelity (800) 343-3548 • Vanguard (877) 662-7447 • T. Rowe Price (855) 389-9464 • Charles Schwab (866) 855-9102 • Russell (800) 426-7969 • *This is not a comprehensive list or an endorsement

  31. Remember Never invest in something you don’t understand

  32. Investing Resources • Risk tolerance quiz: http://njaes.rutgers.edu/money/riskquiz/ • Investing for Your Future http://www.extension.org/pages/10984/investing-for-your-future • Money 101 #4: Investing basics: http://money.cnn.com/magazines/moneymag/money101/lesson4/index.htm

  33. Questions? Comments? Experiences?

  34. Where to Find FPW • http://usu.edu/fpw/ • http://fpwusu.blogspot.com/ • https://www.facebook.com/FinancialPlanningforWomen • Second Wednesday of the month TSC room 336 11:30-12:30 • Family Life Center 493 North 700 East. 7:00 to 8:30

  35. Financial Planning for Womenwww.usu.edu/fpw • April 10th: Social Security with SSA expert Mickie Douglas • 11:30 only; no evening program • May 8th: Great Mutual Funds for your IRA • June 12th: Get your house in order before you buy • July 10th: Investing for College

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