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Financial Investing Presentation to USF Graduate & Professional Student Council 05/21/10 Delroy M Hunter . The Investment Process. What is INVESTING? Is it different from SAVING? Saving requires the consumption of only a part of your income

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Financial Investing Presentation to USF Graduate & Professional Student Council

05/21/10

Delroy M Hunter


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The Investment Process

What is INVESTING? Is it different from SAVING?

  • Saving requires the consumption of only a part of your income

  • Investing requires a decision to allocate the savings to one or more asset classes, typically with a given objective(s) in mind


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The Investment Process

What are the implications of “investing”?

1. Requires conscious, active (not passive) decisions

2. A crucial decision is the allocation across asset classes

3. Investing is goal oriented


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Essential Nature of Investing

1. Reduce current consumption (save)

2. Invest using a two-step, “top-down” process

  • Asset allocation

  • Security selection

    3. Enjoy higher (real) consumption at end of investment horizon


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Doing the “Two Steps”

What is Asset Allocation?

  • The process of deciding the relative proportions of the investment budget that is invested in various asset classes

  • The “top” of the “top-down” approach to investing

  • Different from security selection, which is the identification of individual securities or even sub-classes of assets, once the asset allocation decision has been made

  • Studies and life experiences show that asset allocation is the dominant determinant of an investor’s terminal wealth


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ALLOCATION! What Allocation?

Essentials of Asset Allocation

  • Investor-specific – though investors can be broadly grouped and offered a similar allocation (e.g., Lifestyle Funds)

  • Is influenced by age, risk tolerance, investment objective, investment horizon

  • Not a science, although there are some “rules”:

  • e.g., % equity allocation = (100 – AGE)%

  • Should be the cornerstone of local and international DIVERSIFICATION


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Asset Classes

Main asset classes

  • Equities (stocks) – issued by private sector firms

  • Bonds (medium to long-term fixed-income securities) – issued by private and public sectors

  • Real estate (through investment companies or owner-managed)

  • Cash equivalents (short-term, fixed income securities) – issued by private and public sectors

  • Commodities (typically through investment companies)


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Asset Classes

There is a risk-return trade-off to investing in risky securities

  • What is return?

  • What is risk?

  • Where is the trade-off?

    Higher risk securities are priced to offer higher returns


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Investing in Equities

  • Using investment companies for a fee

  • Equity mutual funds

  • Morningstar (http://screen.morningstar.com/FundSelector.html?fsection=ToolScreener)

  • Yahoo (http://www.finance.yahoo.com/funds)

  • Investment Co. Institute (http://www.ici.org/stats/index.html)

  • Exchange traded funds (http://screen.morningstar.com/ETFScreener/Selector.html)

    • SPDRS (Standard & Poors Depositary Receipts)

    • VIPERS (Vanguard Index Participation Equity Receipts)

    • DIAMONDS (DJIA index)


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Investing in Equities

  • Using investment companies for a fee

  • Closed end funds (http://www.cefconnect.com/Screener/FundScreener.aspx)

  • Selecting individual stocks (http://finance.yahoo.com/)

  • Beware of following the hype

  • Choose stocks that are not highly correlated

  • Limit the proportion of your portfolio invested in individual stocks


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Investing in Fixed Income

  • Using investment companies for a fee

  • Bond mutual funds

  • Morningstar (http://screen.morningstar.com/FundSelector.html?fsection=ToolScreener)

    • Selecting individual bonds –

    • U.S. government bonds (http://www.treasurydirect.gov/indiv/myaccount/myaccount_treasurydirect.htm)

    • Corporate bonds (local and foreign) and foreign sovereigns

      – see a broker


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Investing in Other Asset Classes

  • Using investment companies for a fee

  • Real Estate mutual funds (REITs)

  • (http://finance.yahoo.com/))

  • Money Market Funds

    - through mutual fund families

  • Commodities

    - through sector-focused ETFs