Chapter 13 Investing Fundamentals
Chapter 13 Learning Objectives
Describe why you should establish an investment program
Assess how safety, risk, income, growth and liquidity affect your investment decisions
Investments range from very safe to very risky
Annual Rates of Return 1926-2002
Standard Deviation
Small-
33.2%
Stock
Large-
20.5
Stock
Long-term
8.7
Corp-bond
Long-term
Use various sources of financial information that can reduce risks and increase investment returns
2
Preparing for an Investment Program
Objective 1: Describe why you should establish an investment program
Cash advance on your credit card
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Preparing for an Investment Program (continued)
GETTING THE MONEY NEEDED TO START AN INVESTMENT PROGRAM
How badly do you want to achieve your investment goals Are you willing to sacrifice some purchases to provide
financing for your investments What do you value Participate in elective savings programs
Payroll deduction or electronic transfer Make extra effort to save one or two months each year Take advantage of gifts, inheritances, and windfalls
13
Factors Affecting the Choice of Investments
Company A
ห้องสมุดไป่ตู้
Company B
0.5 0.45 0.4 0.35 0.3 0.25 0.2 0.15 0.1 0.05
0 4
8
12
0.2 0.18 0.16 0.14 0.12 0.1 0.08 0.06 0.04 0.02
5
Preparing for an Investment Program
(continued)
PERFORMING A FINANCIAL CHECKUP Work to balance your budget
Do your regularly spend more than you make Pay off high interest credit card debt first Start an emergency fund you can access quickly
3
Preparing for an Investment Program
(continued)
What possible economic or personal conditions could alter your investment goals?
Given your economic circumstances, are your investment goals reasonable?
Three to nine months of living expenses Have access to other sources of cash for emergencies
Line of credit is a short-term loan approved before the money is needed
ESTABLISHING INVESTMENT GOALS -- accumulating retirement funds -- enhancing current income -- saving for major expenditures -- sheltering income from taxes
12
Factors Affecting the Choice of Investments
Objective 2: Assess how safety, risk, income, growth, and liquidity affect your investment decisions
Safety and risk Safety in any investment means minimal risk of loss Risk means a measure of uncertainty about the outcome
8
Preparing for an Investment Program (continued)
The value of long term investment program After graduation, you plan to invest $400 per month in
the stock market. If you earn 6% per year on your stocks, how much will you have accumulated after 15 years? Use time value of money calculation: pmt = 400, I = 6/12 = 0.5, n = 15*12 = 180 FV = ? FV = $116,327
9.4
Gov-bond
U.S. Tre-bill
3.2
Real Average Return 13.8%
9.1
3.1
2.7
0.7
16
Factors Affecting the Choice of Investments
The potential return on any investment should be directly related to the risk the investor assumes
Calculate return on an investment Rate of return: income you receive on an investment over a
9
Preparing for an Investment Program (continued)
The value of long term investment program After graduation, you plan to invest $400 per month in
the stock market. If you earn 12% per year on your stocks, how much will you have accumulated after 15 years? Use time value of money calculation: pmt = 400, I = 12/12 = 1, n = 15*12 = 180 FV = ? FV = $199,832
10
Preparing for an Investment Program (continued)
The value of long term investment program After graduation, you plan to invest $400 per month in
the stock market. If you earn 12% per year on your stocks, how much will you have accumulated when you retire in 30 years? Use time value of money calculation: pmt = 400, I = 12/12 = 1, n = 30*12 = 360 FV = ? FV = $1,397,985
11
Preparing for an Investment Program (continued)
Comparison: $200, 6%, 10 years 32,775 $400, 6%, 15 years 116,327 $400, 12%, 15 years 199,832 $400, 12%, 30 years 1,397,985
Speculative investments are high risk The Risk-Return Trade-Off
17
Factors Affecting the Choice of Investments (continued)
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Factors Affecting the Choice of Investments (continued)
0 -10 -5 0 5 10 15 20 25 30
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Factors Affecting the Choice of Investments