Presented By

1. Presented By Capital Markets Program Investing

2. A little can really add up! Save $ per weekat % interestin 10 years you’ll have $7.00 5% $4,720 14.00 5% $9,440 21.00 5% $14,160 28.00 5% $18,880 35.00 5% $23,600 You can buy … a fast food meal or one movie ticket or … You can save $7.00 this week. You can buy … one large pepperoni pizza, delivered or one new CD or … You can save $14.00 this week. What will you give up to attain your financial goals? Saving Must Be a Priority 2

3. The Rule of 72 How many years will it take to double my money? 72 DIVIDED BY = YEARS TO DOUBLE MONEY INTEREST RATE • A 6% rate of return will double my money every 12 years (72 / 6) At what interest rate will my money double in a set number of years? 72 DIVIDED BY = INTEREST RATE REQUIRED YEARS TO DOUBLE A SUM OF MONEY • To double my money in 9 years requires a rate of return of 8% (72 / 9) 3

4. Types of Savings Accounts Passbook Account • Depositor receives a booklet in which deposits, withdrawals, and interest are recorded. • Funds are easily accessible. Statement Account • Basically the same as a passbook account, except depositor receives monthly statements instead of a passbook. • Accounts accessible through 24-hour automated teller machines (ATMs). • Interest rates are the same as passbook account. • Funds are easily accessible. Interest-Earning Checking Account • Combines benefits of checking and savings. • Depositor earns interest on any balances in his/her account. • Interest rates are typically lower than passbook and statement savings accounts 4

5. Money-Market Accounts What they are and how they work • Checking/savings account, where bank invests funds in high-quality, liquid, short-term debt securities (i.e. money market securities). • Interest rate varies with size of balance and current level of market interest rates. • Can access your money from an ATM, a teller, or by writing up to three checks a month. Benefits • Immediate access to your money. • Average yield (rate of return) higher than regular savings accounts. Trade-offs • Usually requires a minimum balance of $1,000 to $2,500. • Limited number of checks can be written each month. 5

6. Certificates of Deposit (CDs) What they are and how they work • Bank pays a fixed interest rate for a fixed amount of time. Benefits • No risk (FDIC/FSLIC insured). • No fees. • Offers higher interest rates than savings and money market accounts. Trade-offs • Restricted access to your money. • Withdrawal penalty if cashed before expiration date. Special certificates of deposit • Indexed CDs – e.g.earnings based on stock market performance. • Promotional CDs – attempt to attract savers with gifts or special rates. 6

7. Bonds (Debt) What they are and how they work • A bond is an “IOU,” certifying that you loaned money to a government or corporation and outlining the terms of repayment. • Bond generally pay a fixed rate of interest (coupon) paid periodically (e.g. semiannually) for a stated period of time (bond maturity). • When the time is up and the bond has “matured”, the bond is redeemed for the full face (par) value (investor receives coupon and par amount). Benefits • Senior claim on the issuer, often secured by assets (i.e. collateralized) • Potentially stable source of income Trade-offs • Limited upside • Potential market risk (bond prices and market rates are inversely related) 7

8. Bonds (Debt) Corporate • Sold by private companies to raise money. • If company goes bankrupt, bondholders have first claim on the assets, before stockholders and even the IRS. Claims may be secured by specific assets of the firm. Municipal • Issued by any non-federal government entity (e.g. state and local governments, school districts, transportation authorities, etc). • Interest paid comes from taxes or from revenues from special projects. • Earned interest is exempt from federal income tax. Federal government • The safest investment you can make. Default risk-free securities. 8

9. Stocks (Equity) What they are and how they work • Stock represents ownership of a corporation. Stockholders are entitled to a share of the profits as well as to a vote in how the company is run. • Company profits may be divided among shareholders in the form of dividends. Dividends are usually paid quarterly. • Larger profits can be made through an increase in the value of the stock on the open market (i.e. capital appreciation). Advantages • If the market value goes up, the gain can be considerable. • Money is easily accessible (assuming publicly-traded shares). Trade-offs • If market value goes down, the loss can be considerable. • Selecting and managing stock often requires study and the help of a good brokerage firm or fund manager. 9

10. Stocks (Equity) 10

11. Mutual Funds What they are and how they work • Professionally managed portfolios of stocks, bonds, and other investments. • Individuals buy shares, and the fund uses the money to purchase stocks, bonds, and other investments. • Profits returned to shareholders monthly, quarterly, or semi-annually in the form of dividends and capital gains. Advantages • Allows small investors access to professional account management, and • Broad portfolio diversification, normally only available to large investors. Trade-offs • Management fees can be high • Liquidity may be limited (i.e. penalties for early withdrawal) 11

12. Mutual Funds • Balanced Fund includes a variety of stocks and bonds. • Indexed Fund includes a variety of stocks designed to track the market. • Global Bond Fund has corporate bonds from around the world. • Global Stock Fund has stocks from companies in many parts of the world. • Growth Fund emphasizes companies that are expected to increase in value (i.e. capital appreciation); also has higher risk. • Income Fund features stock and bonds with high dividends and interest. • Industry Fund invests in stocks of companies in a single industry (such as technology, health care, banking). • Municipal Bond Fund features debt instruments of state and local governments; generates tax-exempt income. • Regional Stock Fund involves stocks of companies from one geographic region of the world (e.g. Asia, Latin America, emerging markets, etc). 12

13. Real Estate What it is and how it works • Buy a house, live in it, and sell it later at a profit. • Buy income property (such as an apartment house or a commercial building) and rent it. • Buy land and hold it until it rises in value. Advantages • Provides protection against inflation. • Interest expenses are tax deductible. • Excellent means of investment portfolio diversification. Trade-offs • Can be difficult to convert into cash (i.e. illiquid asset). • A specialized investment requiring study and knowledge of business. • Financing is critical. 13

14. Taxes • Interest earned on savings accounts, CDs, bonds and any other debt securities is taxed as ordinary income (i.e. taxed at the personal marginal tax rate of up to 35.9%). • Dividends earned on stock are taxed as ordinary income. • Realized price appreciation of securities (i.e. when a security or real estate investment increases in market value and the investor sells) is called capital gains. • If the security or real estate investment is held by the investor for at least 1 year prior to the sale, capital gains are taxed at the long-term capital gains rate of only 15%. 14

15. Retirement Plans What they are and how they work • Tax-advantaged plans that help individuals save for retirement. • Corporate pensions are largely a thing of the past. • Today, corporations tend to encourage personal retirement savings by matching the employee’s contributions to their retirement plan (up to some limit). • The individual saves while employed and self-directs the investments within the plan. • Penalty charges apply if money is withdrawn before retirement age (usually 59.5 years old), except under certain circumstances, including: • account owner becomes disabled • educational expenses • purchase of a first home 15

16. Retirement Plans Individual Retirement Account (IRA) • Allows a person to contribute up to $4,000 of “pre-tax” earnings per year. • Funds are taxable when withdrawn from account at retirement. Roth IRA • While the $4,000 maximum annual contribution to this plan is not “tax deductible”, the earnings on the account are tax-free after five years. 401(k) • Allows a person to contribute up to $15,000 to a savings plan from his or her “pre-tax” earnings, reducing the amount of tax that must be paid. • Employer matches employee contributions up to a certain level. • Roth 401(k) plans are now available. Keogh Plan • Allows a self-employed person to save up to 20% of “pre-tax” income (but not more than $44,000 per year). 16

17. Retirement Plans – Example Q: How do you make a small fortune in the market? A: Start with a large fortune. Day traders are in and out of investments very quickly. They look for one-off opportunities to make significant profits. While some prosper, most do not. Day trading is effectively gambling. Investing, on the other hand, is a disciplined, long-term strategy built upon strong fundamentals. So a more serious answer to our question: Q: How do you make a small fortune in the stock market? A: Commit to a disciplined, long-term investment strategy. Let’s look at an example of such a strategy: Personal Wealth Calculator 17

18. Strategy Diversification • Investors can maintain their expected returns but eliminate about 40% of their risk via diversification. • All rational investors diversify their portfolios. Risk 40 # of Stocks 18

19. Strategy Management • Efficient Market Hypothesis. • Generating above market returns generally requires taking above market risks (the risk / return trade-off). There are no free lunches. • Over 40,000 PhD, MBA and CFA finance professionals worldwide. • Managed funds generally do not outperform the market over the long-run. • Basic balanced funds can be an exception. • Consequently, practical advice and guidance can be valuable, but paying large management fees does not usually lead to above market returns. 19

20. Strategy Conclusion • Invest in mutual funds to attain diversification. • Specifically, invest in index funds and “basic” balanced funds (low management fees). • Include international stocks and bonds in your portfolio. • Some portion of your portfolio should be in cash as well (e.g. T-bills, money market accounts, CDs, etc.). • Moreover, you should consider including real estate in your investment portfolio (increased diversification). • Do not make investment decisions driven primary by taxes, but understand the tax implications. • Take advantage of all opportunities to save for retirement. 20

21. Appendix: Comparing Plans 21