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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

the investment process
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
the investment process3
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

essential nature of investing
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

doing the two steps
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
allocation what allocation
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
asset classes
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)
asset classes8
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

investing in equities
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)
investing in equities10
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
investing in fixed income
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

investing in other asset classes
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