Transcript Diversification

What is your financial goal?
 Financial Independence
 Just starting your own financial life apart from your
parent(s)/guardian(s)
 Financial Stability
 Managing all of your financial resources effectively, but
unprepared to meet financial emergencies
 Financial Security
 The ability to manage and absorb financial
emergencies
 IMO, one of the best and easiest ways to attain
Financial Security is to create passive income
through investments
Ways To Earn $1,000,000
 Invest $1 a day at 5% for 100 years
 Invest $1 a day at 10% for 56 years
 Invest $1 a day at 15% for 40 years
 Invest $1 a day at 20% for 32 years
 Invest $10 a day at 20% for 20 years
(approximately $300 a month)
 Invest $850 a month at 20% for 10 years
A Primer on Financial Investment Options
1. Federal Government Securities


Treasury Securities
U.S. Savings Bonds
 What are the costs/benefits of investing your money in
the federal government from a household’s cost-benefit
perspective?

Low risk




no default risk
Highly liquid
Earnings are exempt from state and local taxes
Relatively low rates of return

price of safety
2. Bonds (non-Federal govt) - issued by municipal
governments and corporations to raise money
needed for a long period of time. Once you
purchase them, you earn a fixed, simple interest
income for the life of the bond or until you sell it.
 Costs and benefits




default risk varies (2.25% junk bonds to 0.15%
all bonds)
very liquid
inflation risk is high because bonds are purchased
at a fixed interest rate
Municipal bonds are federal tax-free
Effective Yield of a Tax-Free
Investment
 Not paying tax effectively increases your rate of
return
 you get to keep all of your profits, instead of only
a portion


r
 1  taxbracket 100


 Example: 28% tax bracket, 5% rate of return
 .05 
 1  .28 100


= 6.94%
3. Certificates of Deposit - long-term deposits with
institutions


purchased from banks, S&L’s, credit unions
purchased from a stock broker
 Costs and benefits



low default risk (marginally greater with stock
broker)
some liquidity risk (less with stock broker)
sometimes inflation risk (less w/ variable rates)
4. Precious Metals typically viewed as a major
alternative to holding currencies. Thus, in
inflationary times (when money is losing value)
the demand for precious metals rises, bidding up
their prices.



gold
silver
platinum
 Costs and Benefits


high market volatility risk
very low inflation risk
20 Year Gold Price History
http://lynncoins.com/historical-gold-charts.htm
5. Stock Market investing
 2 types of people
 Investing in the stock market = gambling
 I know I should invest in the stock market, but I’m not sure
where to start
 The nature of business
 Businesses sell stock to raise capital
 Investing in the stock market is simply investing in
companies
 Stocks are a claim on the net earnings of a
company after the claims of creditors are satisfied.
Returns of investment in stocks can take the form
of:


interest income (dividends)
capital gains (appreciation or growth)
 Costs and benefits


higher default risk (can be reduced through
diversification)
somewhat illiquid (can always sell, but perhaps not
at the price you’d like)
Stocks - Costs and benefits continued:


little inflation risk
high time/money costs associated with managing
stock investments unless one diversifies.
Playing the Stock Market
February 2008
COMPANY / INDUSTRY
SHARE PRICE
COMPANY / INDUSTRY
SHARE PRICE
Exxon / Oil & Gas
$81.44
Hawaiian Airlines / Airline
$4.82
Chevron / Oil & Gas
$92.32
Idenix Pharmaceuticals /
Health Care
$4.94
Fairfax Financial Holding/
Property Insurance
$308.15
Maxwell Technologies /
Hybrid Vehicles
$7.78
Landauer Inc. /
Healthcare
$49.84
Hasbro / Recreational
Products
$24.75
Colgate-Palmolive /
Consumer Goods
$74.46
Disney / Entertainment
$31.50
Rangold Resources/
Gold
$42.60
Wal-Mart / Retail
$48.83
Amgen / Biotechnology
$46.31
Gilead Sciences Inc /
Biopharmaceuticals
$44.87
Halliburton / Engineering
& Construction
$34.09
Fred’s / Retail
$8.63
Ross Stores / Retail
$27.09
Wells Fargo / banking
$30.08
Micron / Computer
Hardware
$7.84
The Finish Line / Youth
Foundation
$2.47
Playing the Stock Market
February 2009/September 2010
COMPANY / INDUSTRY
SHARE PRICE
COMPANY / INDUSTRY
Exxon / Oil & Gas (XOM)
$78.12/$61.59
Hawaiian Airlines / Airline (HA)
$4.82/$5.89
Chevron / Oil & Gas (CVX)
$71.64/$81.20
Idenix Pharmaceuticals / Health
Care (IDIX)
$6.08/$3.13
$321.00/$418.71
Maxwell Technologies / Hybrid
Vehicles (MXWL)
$4.95/$14.66
Landauer Inc. / Healthcare (LDR)
$71.50/$62.15
Hasbro / Recreational Products
(HAS)
$26.62/$45.04
Colgate-Palmolive / Consumer
Goods (CL)
$64.34/$78.31
Disney / Entertainment (DIS)
$18.81/$33.01
Rangold Resources/ Gold
$45.75/$102.82
Wal-Mart / Retail (WMT)
$46.57/$53.35
Amgen / Biotechnology (AMGN)
$56.66/$54.94
Gilead Sciences Inc /
Biopharmaceuticals (GILD)
$51.87/$35.87
Halliburton / Engineering &
Construction (HAL)
$18.46/$33.40
Fred’s / Retail (FRED)
$10.20/$12.01
Ross Stores / Retail (ROST)
$29.23/$55.66
Wells Fargo / banking (WFC)
$17.45/$25.04
The Finish Line / Youth Foundation
(FINL)
$4.49/$14.26
Fairfax Financial Holding/
Insurance (FFH)
Micron / Computer Hardware (MU)
Harley Davidson (HOG)
$3.76/$7.30
$28.63
Jones Soda (JSDA)
SHARE PRICE
$1.22
What is the Yield or Rate of Return on a
Financial Investment?
Percentage Change:
 new  old  

100


old

Find the percentage change of each of your 3
stocks, and then find your average rate of return
(assuming 1 share of each stock)
What is the Yield or Rate of Return on a
Financial Investment?
 Annualized Percentage Change:


  new  old 

  1  100
1  
old





1
n
Example: original price=$20/share, current
price=$100/share, stock held for 9 years
Rate of Return (cont.)
1


9


 100  20 
  1  100
1  
20






=19.58%
Compound AnnualReturn of the
S&P 500
http://www.moneychimp.com/features/market_cagr.htm
2009
27.11
2008
-37.11
2007
5.46
2006
15.74
2005
4.79
2004
10.82
2003
28.72
2002
-22.27
2001
-11.98
2000
-9.11
1999
21.11
1998
28.73
1997
33.67
Stock Market Average Returns
by decade (not adjusted for inflation)
1900s
1910s
1920s
1930s
1940s
1950s
1960s
1970s
1980s
1990s
9.96%
4.20%
14.95%
-0.63%
8.72%
19.28%
7.78%
5.82%
17.57%
18.17%
 How would $1 invested in 1872 grow, with the interest and






dividends reinvested, if held until 2000?
A $1 investment in a portfolio comprised entirely of stocks
would grow to $6,410.
Invested in a portfolio comprised of 75 percent stocks and
25 percent bonds, the $1 would grow to $2,706.
A 60 percent stock and 40 percent bond portfolio would
grow to $1,484.
A portfolio weighted with 75 percent bonds would grow to
$289.
For the period 1871 to 1996, stocks outperformed bonds
59.5% of the time over a one-year holding period, but
when the holding period was 10 years, stocks
outperformed bonds 82.1% of the time
When the holding period was 30 years, stocks always
outperformed bonds.
How to research an investment
 Talk to your broker


Traditional brokerage house
Discount brokerage house
 Research online


Most brokerage firms have research pages you can
search
Can use the finance sections of yahoo.com,
moneycentral.msn.com, and etc.
Stock Market investing
 Some terms:
 Bear market = general time of falling prices
 Bull market = general time of rising prices
 Margin = borrowing money from your broker to purchase
securities
 Dollar Cost Averaging (DCA)
 Committing a set amount of money per month, and always
purchasing securities with that money
 ‘Averaging’ means that you purchase more shares when the
price is down and fewer shares when the price is high.
 Caution: DCA may not be all it is purported to be
 http://moneycentral.msn.com/content/P104966.asp
Stock Market investing, cont.
 Really good information available at
http://beginnersinvest.about.com/ especially under
the “Investing 101” and “Investing Lessons” links
 Bottom line  commit to do it, and then just do
it!
Lessons from
Warren Buffet
We care because he is one of
the wealthiest Americans
Why listen to him?
 He is the single most successful stock market
investor in history.
 If you had put $10,000 in his investment
company Berkshire Hathaway when it was
created in 1965, you would have about
$51,000,000 today. The S&P stock index for
the same amount and length of time you
would only have $500,000.
Starting young
 He bought his first share of stock at age 11
and he now regrets that he
started too late!
 He bought a small farm at age 14 with
savings from delivering
newspapers.
His advice to young people:
 Stay away from credit cards and invest in yourself
 Money doesn't create man, but it is the man who





created money.
Live your life as simple as you are.
Don't do what others say. Just listen to them, but do
what makes you feel good.
Don't go on brand names. Wear those things in
which you feel comfortable.
Don't waste your money on unnecessary
things. Spend on those who really are in need.
After all, it's your life. Why give others the chance to
rule your life?
6. Mutual Funds - pool of resources created by
investing organization. Resources are invested in
a wide array of financial instruments including:





precious metals
stocks
bonds
real estate
government securities
 Mutual funds are distinguished by what they
invest in.
 Costs and Benefits




Broad diversification
Less time spent in financial management (benefit
from professional manager)
Tax implications (capital gains)
Fees
A basic mutual fund that has no or low
fees is a ….
 No-Load Index Fund

Dow Jones Industrial Average



Comprised of 30 stocks
More expensive stocks influence the avg
S&P 500



Index, so the value itself is meaningless; must
compare to other years
Base = 1941-1943 = 10
If the index = 1000, the average stock price has
increased 100 times
What are some of Heather’s objections
to mutual funds?
 80% of mutual funds underperform the stock
market in general because of FEES
 Too many stocks dilute returns

Warren Buffett says not to have more than 12
 The average actively managed fund returns
2% less per year than the market in general
 Over 50 years, $10,000 grows to


$1,173,908 at 10%
$469,016 at 8%
So, what drives households’
investment choices?
 Very little active investment on the part of
households -- why?




High time costs
Risk averse nature
Time horizons
View financial investment as “residual” category of
household expenditures
Do people really own FC investments?
 52% of Americans own stocks or stock-based
mutual funds
 Financial assets represent 42% of people’s assets

Stocks/stock funds = 34% of assets
Retirement accounts = another 28% of assets

2001 SCF – cited in Azicorbe & Kennickell (2003)
