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Chapter 13: Investment Fundamentals and Portfolio Management

Chapter 13: Investment Fundamentals and Portfolio Management. Summarize reasons why people invest, what is required before beginning, how returns are earned, and some ways to obtain funds to invest. Determine your own investment philosophy. Recognize the variety of investments available.

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Chapter 13: Investment Fundamentals and Portfolio Management

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  1. Chapter 13: Investment Fundamentals andPortfolio Management

  2. Summarize reasons why people invest, what is required before beginning, how returns are earned, and some ways to obtain funds to invest. Determine your own investment philosophy. Recognize the variety of investments available. Identify the major factors that affect the return on investment. Specify some strategies of portfolio management for long-term investors. List three guidelines to use when deciding the best time to sell investments. Objectives

  3. Establishing Investment Goals • Financial goals should be specific and measurable. • Why are you accumulating these funds? • How much do you need? • How will you get it? • How long will it take you to reach your goal? • How much risk are you willing to assume? • Are you willing to sacrifice current consumption to invest for the future? • Is it realistic to try and save this amount?

  4. Steps to Create a Personal Investing Plan Step 1 My investment goals are: ____________________ ____________________ Step 2 By ___________, I will have obtained $_______. Step 3 I have $__________ available to invest. Date _____________ Step 9 Continue evaluating choices. Step 4 Possible investment alternatives: 1._________________ 2._________________ 3._________________ 4._________________ Step 8 Final decision 1._______________ 2._______________ Step 6 Projected return on each alternative 1.__________ 2.__________ 3.__________ 4.__________ Step 5 Risk factors for each alternative 1.____________________ 2.____________________ 3.____________________ 4.____________________ Step 7 Investment decision 1._______________ 2._______________ 3._______________

  5. Difference in return is a major distinction between savings and investing. Successful investors begin to live off earnings, without spending wealth itself. Investment Fundamentals ATTENTION!

  6. Achieve financial goals Increase current income Gain wealth and financial security Have funds available for retirement Preparations for Investing WHY PEOPLE INVEST:

  7. Live within means Continue savings program Establish lines of credit Carry adequate insurance Establish investment goals Preparations for Investing PREREQUISITES TO INVESTING:

  8. Interest Dividends Rent Capital gain/loss Rate of return or yield Preparations for Investing INVESTMENT RETURNS:

  9. Performing a Financial Checkup • Learn to live within your means • pay off high interest credit card debt • Provide adequate insurance protection • Start an emergency fund • three to nine months of living expenses • Have other sources of cash for emergencies • line of credit • cash advance

  10. Getting Money to Start an Investing Program • Pay yourself first • Participate in elective savings programs • Payroll deduction • electronic transfer • Make a special effort to save one or two months a year • Take advantage of windfalls • Invest half of your tax refund

  11. Value of Having a Long-Term Investing Program • Many people don’t start investing because they only have a small amount to investbut.... • Small amounts invested regularly become large amounts over time

  12. Personal Investment Philosophy • Handling risk • Ultraconservative strategies • Conservative • Moderate • Aggressive

  13. Investment Selection • Lend or own • Short-term or long-term • Choose a vehicle

  14. Factors That Affect Investment Decisions • Safety - minimal risk of loss • Risk - uncertainty about the outcome • inflation risk • interest rate risk • business failure risk • market risk

  15. Income From Investments • Safest • CDs • savings bonds • T-bills • Higher potential income • municipal bonds • corporate bonds • preferred stocks • mutual funds • real estate

  16. Investment Growth and Liquidity • Growth • increase in value • common stock • growth stocks retain earnings • bonds, mutual funds and real estate • Liquidity • ease and speed to convert an asset to cash

  17. CommoditiesJunk bondsOptions High Quality Rentalproperty Stocks Mutual funds Government Corporatebonds Utility stocks Securities MoneyMarket Savings Accounts CDs Cash Investment Pyramid High risk Lowrisk

  18. Major Factors That Affect Rate of Return • INVESTMENT RISK: • Pure • Speculative • Risk pyramid

  19. Major Factors That Affect Rate of Return • INVESTMENT RISK TYPES: • Financial • Market volatility • Political • Inflation • Deflation • Interest rate

  20. Major Factors That Affect Rate of Return • INVESTMENT RISK: • Random or unsystematic • Diversification • Market or systematic

  21. Major Factors That Affect Rate of Return • Leverage • Taxes • Marginal tax rate • Taxable vs. tax-free income • Buying and selling costs/commissions • Inflation

  22. Major Factors that Affect Rate of Return • CALCULATE REAL RATE OF RETURN: • Identify before-tax return • Subtract marginal tax rate • Obtain net return after taxes • Subtract estimate of inflation • Obtain real rate

  23. Management Strategies — Long-Term Investors • Business-cycle timing • Dollar-cost averaging • Portfolio diversification • Asset allocation

  24. Investment Alternatives • What is stock? • part ownership in a company • the money you pay for shares of stock provides equity capital for the business

  25. Investment Alternatives (continued) • What is a bond? • a loan to a corporation, the federal government, or a municipality • The interest is paid twice a year, and the principal isrepaid at maturity (1-30 years) • You can keep the bond until maturity or sell it to another investor

  26. Investment Alternatives (continued) • What is a mutual fund? • investors’ money is pooled and invested by a professional fund manager • you buy shares in the fund • provides diversification to reduce risk • funds range from conservative to extremely speculative • match your needs with a fund’s objective

  27. annual income from investment market value of the investment Monitor Your Investments • Read your account statements • Chart the value of your investments • Maintain accurate and current records • Calculate the current yield %

  28. Sources of Investment Information • Newspapers • Business Periodicals • Government Publications • Corporate Reports • Statistical Averages • Investor Services and newsletters • Standard and Poor’s stock reports • Value Line • Moody’s investment service

  29. Investment Philosophies

  30. Best Time to Sell • Take profits • Cut losses • “If wouldn’t buy it now, sell it”

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