FIN 352 - Professor Dow Basic Investing Principles: Be diversified. Hold a portfolio with the appropriate level of risk. Asset.
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Transcript FIN 352 - Professor Dow Basic Investing Principles: Be diversified. Hold a portfolio with the appropriate level of risk. Asset.
FIN 352 - Professor Dow
Basic Investing Principles:
Be diversified.
Hold a portfolio with the appropriate level of risk.
Asset allocation determines risk and expected
return.
Tax laws can change the relative returns of
different assets.
This might affect how you invest.
Some types of income are taxed differently.
Some assets are taxed differently.
Some accounts are taxed differently.
Capital gains vs. ordinary income.
Taxes on dividends.
Short-term vs. long-term capital gains.
Mutual Funds
Municipal Bonds
Treasury Bonds
Mutual Funds:
Mutual funds that realize capital gains through
selling shares must distribute these gains
(typically towards the end of the year).
Shareholders must pay taxes on these gains even
if they did not sell any shares and the distributions
are reinvested in the fund.
Municipal Bonds:
Income from Municipal Bonds are exempt from
Federal taxes and from state taxes if issued by that
state.
Compare with similar corporate bonds by comparing
after-tax yields.
Best for high-income (high-tax-rate) investors.
Treasury Bonds:
Interest earned on Treasury bonds is exempt from
state and local taxes.
Taxes still owed on capital gains.
Interest is not exempt from Federal taxes.
Retirement Accounts
401k
Traditional IRA
Roth IRA
Other retirement accounts
Health and Education Accounts
401(k)
Accounts are set up with employer.
Employer may contribute matching funds.
Individuals can contribute to their account each year
with pre-tax money.
Taxes are not paid until the money is withdrawn.
Individually directed and can invest in most types of
assets, although options may be limited by employer.
Limits on contributions plus various other restrictions.
Traditional IRA:
Individuals can contribute to their account each
year with before-tax money.
Taxes are not paid until the money is withdrawn.
Individually directed and can invest in most types
of assets.
Limits on contributions along with various other
restrictions.
Roth IRA:
Contributions are made with after-tax dollars.
Income is not taxed.
Individually directed and can invest in most types
of assets.
Limits on contributions along with various other
restrictions.
Roth vs. Traditional:
Roth is taxed now while a traditional IRA is taxed
at retirement.
Since tax rates at retirement are usually lower
than while working, this is an advantage for the
traditional IRA.
Roth vs. Traditional:
However, if you contribute the maximum, the
Roth may be more valuable since the limit is in
post-tax dollars.
There are other differences that can be important.
The Asset Location Decision:
Determining what assets go in which account is
called the asset location decision.
Ideally, assets generating income subject to the
highest tax rate should go in tax-sheltered
accounts.
Tax laws can significantly affect your
investment returns.
However, the rules can be complicated and
can change each year, so be sure to do your
homework.